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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2001
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-29175
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AVANEX CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 94-3285348
(State or other
jurisdiction of
incorporation or (I.R.S. Employer
organization) Identification No.)
409l9 Encyclopedia Circle
Fremont, California 94538
(510) 897-4188
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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 preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $296,348,171 as of Friday, August 31, 2001, based
upon the closing price on the Nasdaq National Market reported for such date.
66,422,843 shares of the Registrant's Common Stock, $.001 par value, were
outstanding as of September 1, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement which will be filed with the
Commission pursuant to Section 14(a) in connection with the 2001 Annual Meeting
of Stockholders are incorporated herein by reference in Part III of this
Report.
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AVANEX CORPORATION
FORM 10-K
Year Ended June 30, 2001
TABLE OF CONTENTS
Page
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PART I
Item 1: Business.............................................................................. 1
Item 2. Properties............................................................................ 30
Item 3. Legal Proceedings..................................................................... 31
Item 4. Submission of Matters to a Vote of Security Holders................................... 31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 32
Item 6. Selected Financial Data............................................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 45
Item 8. Financial Statements and Supplementary Data........................................... 46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. 69
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 70
Item 11. Executive Compensation................................................................ 70
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 70
Item 13. Certain Relationships and Related Transactions........................................ 70
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 70
Schedule II--AVANEX Corporation Valuation and Qualifying Accounts............................... 70
Signatures...................................................................................... 74
EXHIBITS
3.2 Amended and Restated Bylaws
4.2 Preferred Stock Rights Agreement, dates as of July 26, 2001, between the Registrant and the EquiServe
Trust Company, N.A.
10.38 Third Amendment to Amended and Restated Revolving Credit and Security Agreement dated July 19,
2001 between the Registrant and Comerica Bank--California
21.1 List of subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
PART I
Item 1: Business
Overview
Avanex Corporation is a leading global provider of cost-effective,
high-performance photonic processing solutions that enable optical
communications networks to achieve next-generation performance.
We were incorporated in October 1997 as a California corporation, and in
January 2000, were reincorporated as a Delaware corporation. As of September 1,
2001, we had 433 employees.
We are headquartered in Fremont, California. In addition to our facilities
in Fremont, we also maintain a dedicated facility, The Photonics Center(TM), in
Richardson, Texas for customer-oriented optical network design, network
modeling, network testing, and application engineering. Additionally, we
maintain in Hudson, Massachusetts, the Hudson Development Center which
specializes in the design and production of holographic diffraction gratings
and related technology for use in our product offerings.
Our photonic processing solutions are used by fiber optic transmission
systems providers and their network carrier customers to enhance system
performance and increase network speed and efficiency.
Communications network carriers are deploying fiber optic transmission
systems to improve the networks' ability to transmit and manage the high volume
of voice, video and data traffic generated by the growth of the Internet. Our
photonic processing technologies are designed to increase the performance of
these optical transmission systems.
Fundamentally, photonic processing technologies increase the speed and
capacity of fiber optic networks. More specifically, they directly increase the
number of wavelengths of light that can travel on optical networks, and they
extend the distance an optical signal can travel without electrical
regeneration, which adds expense and complexity to network transmission
systems.
Unlike optical system components, photonic processing solutions from Avanex
perform optical signal processing and influence systems architecture. The
company's photonic processor solutions are micro-optics based devices, modules
or sub-systems with built-in optical processing algorithms.
We are currently providing photonic processing solutions of five product
families: PowerFilter(TM) wavelength separators, PowerMux(TM) wavelength
channel processors, PowerExchanger(TM) wavelength processors, PowerExpress(TM)
wavelength processors, and PowerShaper(TM) dispersion management processors.
The PowerFilter(TM) was Avanex's initial product and provided the majority
of our early revenue. Shipments of our PowerMux(TM) product family, which
incorporates our PowerFilter(TM) and adds functionality, began in March 2000
and are now the primary source for revenue to the company.
The PowerMux(TM) has begun to replace the PowerFilter(TM) in most DWDM
(dense wavelength division multiplexing) applications. Further, we expect
increased market acceptance and revenue generation from shipments of our
recently introduced next generation PowerExchanger(TM) and PowerExpress(TM)
solutions.
The PowerShaper(TM) Dispersion Management Processor is expected to begin
commercial shipments during the later part of fiscal 2002. Additional new
photonic processing solutions under development include the PowerMux(TM) NxG
and the PowerExpress(TM) Raman Amplifier.
During the fiscal year ended June 30, 2001, major customers for Avanex
photonic processors included Alcatel, Cisco Systems, Inc., Cogent
Communications, Fujitsu Limited, Nortel Networks Corporation, Sorrento Networks
Corp. (Osicom), and WorldCom, Inc.
Avanex experienced rapid revenue growth during the past fiscal year, with
revenue in fiscal 2001 equaling $131 million, compared with $41 million in
fiscal 2000. This growth was impacted negatively over the last two quarters of
fiscal 2001 by the substantial downturn in capital spending in the
telecommunications industry.
Our headquarters and manufacturing facility is located in Fremont,
California, and occupies 145,000 square feet. In addition, The Photonics
Center(TM), which was moved to a new location in Richardson, Texas in fiscal
2001, occupies 22,000 square feet. The Photonics Center(TM) is a customer
demonstration and training center and product development center that houses
our own, dedicated 3,000-kilometer simulated optical network.
On July 25, 2000, we acquired substantially all of the assets and certain
liabilities of Holographix, Inc. of Hudson, Massachusetts, a developer and
manufacturer of holographic diffraction gratings that are a key element of our
next generation PowerMux(TM) (PowerMux NxG(TM)) line of photonic processing
solutions.
We currently purchase several key components used in our products and
equipment from single or limited sources of supply, including Nippon Sheet
Glass, Mitsubishi Corporation, Wave Precision, Inc., REO, Inc., VLOC, Inc.,
Ericsson Corporation, Browave Corporation, Foxconn Optical Technology and
Agilent Technologies Inc. These key components include filters, lenses,
specialty glass, and test and measurement equipment. We have no guaranteed
supply arrangements with any of these suppliers and we typically purchase our
components and equipment through purchase orders.
We also currently outsource the production of certain limited subcomponents
to two third-party contract manufacturers based in Asia. It is the company's
intent to use outsourced manufacturing to an increasing degree with commercial
volume products, while retaining key integration processes, prototype
development and pilot run operations in our Fremont and Richardson facilities.
Industry
A rapid increase in bandwidth demand has overwhelmed the traditional, legacy
global communications infrastructure. The proliferation of the Internet,
broadband systems, and high-bandwidth applications, including the concurrent
demand for voice, video and data transmission, has significantly increased
network traffic.
Data transmissions are characterized by large, relatively short-duration
bursts of traffic followed by relatively long periods of silence. Furthermore,
data traffic is asymmetrical and occurs among multiple geographic locations.
Video transmissions are characterized by highly vacillating data bursts that
require a high degree of transmission capability and clarity. The imbedded
infrastructure was built to accommodate voice traffic. It is unable to
adequately or efficiently handle the complex demands of concurrent voice, video
and data transmission. Its circuit-switched, symmetrical, dedicated
point-to-point design is sufficient only for low bit-rate, low data-rate
transmissions among fixed geographic locations.
A reinvention of the global communications infrastructure is underway.
Responding to growing bandwidth demand, service providers are deploying new or
upgraded networks. In addition to advances in switching technology that
overcome the limitations of circuit-switched networks, service providers are
upgrading the transport medium from copper-based electrical transmission to
fiber-based optical transmission. Because of its inherent superiority in
capacity, signal quality, and transmission speed, optical transmission has
become the intended medium of voice, video and data communication.
Paradoxically, the increase in performance of communications networks
attracts new users, more applications, and an even greater demand for
bandwidth. This results in a business environment in which network improvements
are continuously matched by increasing bandwidth demand of newly enabled
applications and services.
2
Optical transmission technology transfers voice and data in the form of
light pulses along optical fibers. Optical systems convert electrical signals
into specific wavelengths of laser-generated light. The light pulses transmit
through glass fibers, which are bundled to create fiber optic cable. Beyond
lasers, many other optical components and subsystems work to generate, clean,
amplify, isolate, channel, or otherwise enhance the signal.
Meeting the demand for bandwidth by deploying additional fiber optic cable
is both costly and complicated. When deployed in metropolitan areas,
especially, the costs associated with laying underground cable and purchasing
rights of way increase significantly.
Therefore, additional enhancements to the communications infrastructure have
been developed, including dense wavelength division multiplexing, or DWDM, to
greatly increase the capacity of the existing fiber optic infrastructure. DWDM
obviates the need to deploy additional fiber optic cable. It allows numerous
light signals, or wavelength channels, to travel down a single optical fiber as
a composite optical signal.
While optical transmission technology offers tremendous promise, it also
faces challenges. As data-carrying light travels over long fiber distances, it
begins to lose definition and intensity. One solution is periodic electrical
regeneration, in which the signal is converted from optical to electrical,
boosted and converted back to optical for continued transmission. Electrical
regeneration, however, is costly and adds complexity to network operations.
At a more fundamental level, today's networks are being managed within the
constraints of the traditional, circuit-switched architecture. We believe a
transition to a next-generation optical architecture relying on increasing the
number of available light wavelengths must occur as the only effective solution
to meet the increasing bandwidth demand.
Technological challenges of the transition to an all-optical network
The advent of all-optical networks is widely believed to be the solution to
increasing the ability to transmit voice, data and video across the Internet
quickly, efficiently and cost-effectively. The technical challenges to
achieving an all-optical network encompass the following requirements:
. solutions that integrate effectively with existing deployments;
. bandwidth that is virtually unlimited, with clear transmission of signals
across long distances;
. the ability to simply and economically pick-up or drop-off specific
messages along a network route.
High cost and under-utilization of available bandwidth
In order to optimize their investments in the existing fiber optic
infrastructure, service providers require a low-cost solution that allows a
large number of wavelength channels carrying data to travel simultaneously over
the same optical fiber. Although current competing DWDM commercial offerings
provide a partial solution, this technology is expensive and the number of
wavelength channels that can be transmitted simultaneously is relatively low.
Additionally, DWDM technology currently offered by the majority of our
competitors requires that wavelength channels be transmitted with a large space
between each channel. Therefore, as depicted in the following diagram,
bandwidth is under-utilized because wavelength channels are not densely packed.
3
[Graphic]
By spacing optical channels closer together and thereby utilizing a greater
portion of the available bandwidth for data transmission, communications
service providers can increase the efficiency of their optical networks by
placing a greater number of wavelength channels into a single optical fiber.
The Necessity of Optical-Electrical Conversion. Another technological
limitation of the current optical transmission system is the pervasiveness of
the process known as optical-electrical conversion, more commonly referred to
as opto-electrical conversion. Opto-electrical conversion is the conversion of
the incoming optical signal into an electrical signal and back into an outgoing
optical signal. This conversion is required in order to regenerate the signal
to overcome the limitations due to chromatic dispersion and attenuation and in
order to drop data from or add data to the composite optical signal.
Chromatic Dispersion. Chromatic dispersion occurs because different
wavelengths of optical signals transmitted over a single optical fiber travel
at different velocities. Because these wavelengths travel at different
velocities, the resulting wavelength delays distort the signal quality. This
signal distortion traditionally can only be avoided by spacing the individual
optical signals far apart and by regenerating the signal after it has traveled
a short distance.
Attenuation. As optical signals travel over fiber, the signals degenerate
and are eventually lost because of a phenomenon known as attenuation. As
communications service providers attempt to send signals over even longer
distances, the attenuation worsens, and the signal requires regeneration.
Adding or Dropping of Data. As multiple optical signals (composite signals)
are transmitted across the network, it is often necessary to have some data
dropped off or added at a given location. This process is known as add/drop
multiplexing and is required because composite optical signals contain data
with different geographic destinations. In order to remove data from or add
data to a composite optical signal using conventional technology, that signal
must be converted to an electrical signal and then reconverted back to a
composite optical signal, even if that signal does not otherwise require
regeneration at that location. Opto-electrical conversion currently occurs at
multiple points in the network, and in different types of network equipment.
This process is costly for the following reasons:
. The equipment is specific to a particular bit rate, protocol and signal
format and therefore is neither scalable nor flexible enough to handle
other transmission speeds, protocols or signal formats;
. It requires expensive equipment throughout the network;
4
. The equipment occupies valuable space;
. The equipment consumes significant electrical power and generates excess
heat.
These costs increase as more wavelength channels are added to a single
optical fiber in DWDM systems because each channel of a DWDM system must
undergo this conversion process. Thus, opto-electrical conversion presents one
of the most significant technological limitations of the current communications
infrastructure.
Cost challenges of the transition to an all-optical network
The cost of developing optical technology and products is high because of
the infancy of the technology and its related industry. Because of the emerging
nature of the industry, manufacturing yields are low, which also results in
additional costs. Furthermore, once a product is developed and manufactured, it
is often too bulky, complex and inflexible to be cost-effective.
Deployment challenges of the transition to an all-optical network
Users of optical systems require miniaturized products because their systems
are often deployed in locations where space is limited. Few optical product
manufacturers have the ability to manufacture miniaturized, or micro-optic,
products that consistently meet standard specifications. In order to develop an
all-optical network, an optical solutions provider must understand not only the
optical systems, but also the network in which these optical systems are to be
deployed.
Traditionally, the optical component manufacturers have focused on
developing optical packaging expertise while systems manufacturers and service
providers have focused on developing network deployment and optical design
expertise.
Despite the advances in optical technology, several challenges still exist
that prevent the widespread deployment of existing optical solutions. As a
result of these limitations, the current network is a patchwork of various
solutions placed throughout the network operating on multiple protocols over
multiple layers on both optical and electrical signals.
We believe that these challenges create a significant market opportunity for
developers of fiber-optic solutions.
The Avanex Solution
Avanex designs, manufactures and markets optical communications solutions
based on our photonic processing technologies. Avanex's photonic processors are
designed to deliver the "Wavelengths in Abundance"(TM) required to overcome
limitations in today's network architectures and to improve the networks'
speed, carrying capacity and efficiency. Avanex's photonic processors also are
designed for scalability, reduced complexity and lower cost as compared with
current alternatives, and feature miniaturized packaging to save valuable
central office space.
Avanex solutions bring photonic processing capabilities to the transport
layer of the network and significantly reduce the need for
optical-to-electrical (opto-electrical) conversion. Unlike existing component
technologies, our photonic processors perform optical signal processing, or
change the signal according to predetermined algorithms. We believe our
photonic processors enable service providers and optical systems manufacturers
to cost-effectively maximize the capacity of optical networks.
Our solutions provide the following key benefits:
Optimize Optical Network Performance. Our photonic processors are
designed to maximize the capacity of optical fiber and the efficiency and
reliability of optical transmission. Our photonic processors
5
are designed to significantly increase the number of data-carrying
fiber-optic wavelengths by employing smaller spacing between wavelength
channels. They also are designed to enable higher bit rates than currently
available solutions. Avanex photonic processors also enable variable
chromatic dispersion compensation, which minimizes fiber optic transmission
errors and directly increases the distance an optical signal can travel
before requiring electrical regeneration.
Provide a Flexible and Scalable Solution. Applying our expertise in
networking design, we have developed solutions that are flexible, modular
and designed to be easily deployed into existing and future networks. Our
solution is scalable because our photonic processors are designed to enable
easy upgrading of an optical system to a higher number of channels. Our
photonic processors provide functionality that accommodates existing
protocols, including synchronous optical networks, or SONET, Internet
protocol, or IP and asynchronous transfer mode, or ATM. Our photonic
processors are designed to meet the demands placed on today's network.
Provide a Cost-Effective Optical Transport Solution. Our solutions are
designed to enable the transition to the next-generation, all-optical
network without the large capital investments or complex system design
challenges typically encountered in network deployment. Through our
micro-optic packaging, or miniaturization and integration, or the
combination of multiple optical components in a single package, our
customers can use our products to optimize the utilization of limited
networking equipment space. Our photonic processors also reduce the need for
expensive opto-electrical conversion at numerous points along the
transmission path. In addition, our products are designed to be used within
the existing communications infrastructure as well as in the
next-generation, all-optical network, which protects existing infrastructure
investments and facilitates network development efforts.
Facilitate the Deployment of Next-Generation Services and Applications.
Our solutions bring processing capabilities to the transport layer of the
network. We believe these capabilities will enable our customers to offer a
new set of services and applications, including video-on-demand, voice over
Internet, virtual private network, or VPN and business-to-business, or B2B
e-commerce. These new offerings could provide our customers with potential
new revenue streams and opportunities for further competitive
differentiation.
The Avanex Strategy
Our objective is to be the leading provider of innovative, fiber optic-based
solutions that enable our customers to deploy and optimize fiber optic
networks. Key elements of our strategy include:
Leverage Technology Leadership and Expertise. We believe that we have a
technical leadership position in our segment of the industry resulting from
a unique combination of advanced optical technologies and system
architecture knowledge as well as advanced optical packaging technologies.
We intend to continue to focus our product development efforts on providing
photonic processing solutions that address the need for a virtually
unlimited number of low-cost wavelengths, transported at very high data
rates, for both metropolitan and long haul markets.
In developing new solutions, we intend to leverage our expertise with
designs that are cost-effective, scalable, and flexible. To deliver greater
value and cost-effectiveness for our customers, we plan to leverage our
systems development expertise to deliver not only components, but also
subsystem solutions with inherently higher levels of component integration.
We continue to increase our focus on research and development efforts as
well as to evaluate externally developed technology opportunities as they
become available.
Expand Existing and Develop New Customer Relationships. We currently
provide our photonic processors to customers in the communications industry,
including communications service providers such as WorldCom and Cogent
Communications, and optical systems manufacturers such as Alcatel, Cisco
Systems, Fujitsu Ltd., Nortel Networks Corporation and Sorrento Networks
(Osicom). We intend to leverage our relationships with these and other
customers and develop new relationships with potential
6
customers in the service provider and optical systems manufacturer markets.
We also intend to provide a range of optical solutions that meet the demands
of our target markets.
Expand Sales and Marketing Efforts. Our marketing strategy is based on a
pull-push approach. With our pull approach, we target communications service
providers who can create demand for our products by either influencing their
systems providers to incorporate our products or by purchasing our products
directly. With our push approach, we target optical systems providers who
can buy our products and then resell them as a part of their optical
solutions. We plan to enhance our North American direct sales team which
includes direct sales and customer representatives, a technical sales force
and application engineers. We also intend to increase our international
presence as market conditions warrant by increasing both our direct sales
force and establishing relationships with additional international
distributors and representatives.
Streamline Manufacturing Capabilities. We have streamlined our
manufacturing operations to facilitate outsourcing and automation. We intend
to continue to increase our manufacturing and packaging expertise to enable
us to consistently design, develop and manufacture miniaturized, reliable
and cost-effective products. We intend to continue to expand our ability to
outsource manufacturing. To date we have selected two outsourcing contract
manufacturers to which we will transition the manufacturing of a portion of
our products. New products will continue to be manufactured at our existing
facilities to lower costs and increase manufacturing yields before
transferring production to our contract manufacturers. Our manufacturing is
cell-based, or partitioned according to similarities in responsibilities. We
believe this type of manufacturing organization allows us to utilize our
facilities more efficiently, both in terms of cost and time.
Enhance the Avanex Brand. We plan to enhance the Avanex brand throughout
the communications industry by engaging in a range of marketing programs to
position us as the leading global provider of photonic processing solutions
that enable next generation performance for optical communications networks.
These activities will include participation in industry conferences and
trade shows, advertisements in print publications, direct marketing and
Internet-based marketing. We also plan to build awareness through product
demonstrations and customer education and training at The Photonics
Center(TM).
Technologies
Our optical technology platforms are used in products designed to
cost-effectively increase the efficiency, speed, and transmission distance of
metropolitan and long haul optical networks. Our products incorporate several
core optical technologies that we believe will enable the next-generation
optical networks. These include:
Integrated/Tuned Dielectric Filter Technology. Integrated/tuned
dielectric filter technology is the key enabler of our PowerFilter(TM)
Channel Separators, PowerMux(TM) Wavelength Channel Processors, and
PowerExchanger(TM) Optical Add/Drop Processors. This technology allows
certain wavelength channels, or optical signals, to pass through certain
respective filters while other optical signals are reflected. These filters
are used in DWDM systems to separate, or demultiplex, incoming optical
signals and combine, or multiplex, outgoing optical signals. During
manufacturing, these filters can be adjusted to different frequencies, which
increases yields and reduces the number of types of filters needed in a DWDM
system, which reduces the costs associated with maintaining inventory. In
addition, our PowerFilter(TM) products are configured so that individual
channels do not have to pass through multiple filters within a DWDM system
thus keeping signal loss to a minimum.
Spectral Segmentation Technology. Traditional DWDM technology multiplexes
and demultiplexes wavelength channels individually. Our proprietary spectral
segmentation solutions enable the multiplexing and demultiplexing of
wavelength channels in groups. This allows for more efficient and flexible
packaging and less degradation of the optical signal because of the reduced
number of cascaded subcomponents in the DWDM system. Our PowerMux(TM) and
PowerExchanger(TM) products incorporate this technology in the dense
multiplexing, demultiplexing, and add/drop processing of wavelength channels
in a DWDM system.
Virtually Imaged Phased Array (VIPA) Technology. Chromatic dispersion
deteriorates the quality of signals in optical networks. The farther the
signal travels, the more it is distorted. Dispersion typically limits
7
high bit-rate optical signal transmission such as 10 Gigabit to about 100
kilometers. Our VIPA technology, utilized in our PowerShaper(TM) product
line and based upon patents held by Avanex and Fujitsu, corrects for
chromatic dispersion. Our technology allows one single product to function
across multiple wavelength channels and to be dynamically tuned,
functionality necessary for very high bit-rate systems, to compensate for
chromatic dispersion. The VIPA technology incorporated in Avanex's
PowerShaper(TM) Dispersion Management Processors can extend optical
transmission distance while avoiding costly electrical regeneration of the
signal.
Asymmetric Nonlinear Interferometer Technology. Asymmetric nonlinear
interferometer technology enables Avanex photonic processors to multiplex
virtually any number of channels, at any channel spacing and at any bit
rate. Frequency/phase nonlinearity also enables "square-shaped" passbands
that produce a crisp, clear optical signal with low insertion loss and high
channel isolation. Avanex is also in the process of introducing a next
generation implementation of this technology for use in the PowerMux NxG(TM)
Channel Processor line. This version will offer increased performance as
well as a smaller device footprint.
Micro-Optic Array Router Technology. The micro-optic array router
technology incorporated in Avanex's PowerMux NxG(TM) Channel Processors is
designed to significantly reduce cost per channel of DWDM, making it
practical for metropolitan networks requiring high channel counts. In
combination with Avanex's Asymmetric Nonlinear Interferometer technology,
array routing enables the transmission of multiple channels at low costs and
enables high-speed signal processing. Array technology also enhances
manufacturability.
Electro-strictive, Electro-optic, and Magneto-optic Technologies.
Combined with Avanex's Integrated/Tuned Dielectric Filter and Spectral
Segmentation technologies, these technologies form the basis of two new
functions within the PowerExchanger(TM) Optical Add/Drop Processor line. The
first function is power balancing optical signals as they are added to a
composite signal, and the second function is reconfigurability. Power
balancing is critical to maintaining optimal performance of the amplifiers
in an optical system and reconfigurability enables carriers to dynamically
allocate bandwidth in their networks.
Product Development
We have a team of engineers and prototype production operators with
significant experience in optics, data networking and communications. We
believe our engineering team possesses expertise in the areas of optics,
micro-optic design, network system design and system-level software design. Our
product development efforts focus on enhancing our first generation of photonic
processors, developing additional optical network products and continuing to
develop next-generation technology to support the growth in network bandwidth
requirements.
As of September 1, 2001, we had 104 people in our product development group,
including research and product management employees, and 37 pilot line
operations personnel in Fremont, California. We have made, and will continue to
make, a substantial investment in research and development. Our research and
development expenses totaled $4.1 million for the fiscal year ended June 30,
1999, $15.6 million for the fiscal year ended June 30, 2000, and $37.9 million
for the fiscal year ended June 30, 2001.
Our industry is characterized by very rapid technological change, frequent
new product introductions and enhancements, changes in customer demands and
evolving industry standards. While we have developed, and expect to continue to
develop, most new products and enhancements to existing products internally,
from time to time we may be required to license technology from third parties
to develop new products or product enhancements.
8
Products
Our product offerings consist of passive optical processors, reconfigurable
optical processors, and active optical processors. The following describes our
major current products and their capabilities as well as some of our products
in development:
PowerFilter(TM). The PowerFilter(TM) product family is designed to
improve overall performance and reduce the costs of thin-film dielectric
filter-based WDM multiplexers. The PowerFilter's(TM) unique integrated
device configuration enables low insertion loss and high isolation which
improves overall system performance and higher spectral utilization. In
addition, PowerFilter's(TM) modular design enables system scalability and
ease of migration to higher channel counts. It is in production and shipping
to customers.
PowerMux(TM). The PowerMux(TM) product family is a next-generation dense
wavelength division multiplexer that enables optical networks to meet
escalating bandwidth demands. The PowerMux(TM) is ideal for systems
requiring high channel counts and scalability. The PowerMux(TM) is capable
of processing virtually any number of optical signals at any channel
spacing, at any bit rate. PowerMux's(TM) modular design enables system
scalability and ease of migration to higher channel modules. It is in
production and shipping to customers.
PowerShaper(TM). PowerShaper(TM) is a broadband chromatic dispersion
compensation processor and is specifically designed to correct the inherent
bandwidth and distance limitations in optical transmission systems resulting
from chromatic dispersion. Chromatic dispersion refers to variations in the
speeds of different wavelengths of light transmitted over optical fiber.
Chromatic dispersion limits the distance of optical transmission without
signal regeneration. The PowerShaper(TM) is designed to restore the
integrity of the light signals, allowing signals to travel longer distances
without electrical regeneration. The PowerShaper(TM) can act as a fixed or
variable dispersion compensator, which will permit system providers to
optimize their network for improved network performance. It is in early
stage production and is a part of the PowerExpress(TM) module which is in
production and shipping to customers.
PowerExchanger(TM). The PowerExchanger(TM) family of optical add/drop
processors allows channels to be added to or dropped from a fiber optic
network. The PowerExchanger(TM) utilizes a combination of our PowerMux(TM)
and PowerFilter(TM) products combined with our proprietary
Electro-strictive, Electro-optic and Magneto-optic technologies that enable
signal redirection in real time. Because this redirection happens in the
optical domain, signal quality and integrity is maintained throughout the
transmission. It is in production and shipping to customers.
PowerExpress(TM) Integrated Long Haul Processor. The PowerExpress(TM) is
an optical amplifier for DWDM transport systems. The PowerExpress(TM) is an
Erbium Doped Fiber Amplifier (EDFA) designed to provide high optical power
and low noise. Innovative features include integrated dispersion
compensation and Optical Add/Drop Multiplexing (OADM) via our
PowerShaper(TM) and PowerExchanger(TM) products. It is in beta testing.
PowerExpress(TM) Metro Amplifier. The PowerExpress(TM) Metro Amplifier
allows a user to add and drop wavelengths in service without reconfiguring
units. It supports bi-directional (16x16) transmission at the highest bit
rate in the metro market (OC-192). It is in production and shipping to
customers.
Due to the inherent complexities involved in product development and
manufacturing, we cannot be certain when, or if, our products that are
currently under development will begin shipping.
Sales and Marketing
We employ a marketing strategy that is based on a pull-push approach. Using
the pull approach, we target communications service providers, who can create
demand for our products by purchasing our products directly or by influencing
their optical systems providers to incorporate our products. Using the push
approach, we target optical systems providers, who can buy our products and
then resell them as a part of their optical solutions.
9
Our marketing efforts are centered on demonstration of and education about
our products' performance at trade shows and The Photonics Center(TM),
continued publicity through paid advertising and direct mail and Internet-based
communication and promotion. We sell and market our products through a
combination of direct sales and international distributors and representatives.
As of September 1, 2001, our direct sales organization consisted of five
sales account managers in the United States, one supplier manufacturer
representative in Italy, one supplier manufacturer representative in Israel,
and two distributors in Japan.
We focus our direct sales efforts on service providers and optical systems
manufacturers. The direct sales account managers cover the market on an
assigned-account basis and work as a team with account-oriented systems
engineers. We also have application engineers who provide our customers with
assistance on the evolution of their networks as it relates to the deployment
of our products. These engineers help in defining the features that are
required for our products to be successful in specific applications.
In order to further our international sales objectives, we have established
relationships with two distributors in Japan. These distributors have expertise
in deploying complex telecommunications equipment in their markets and provide
basic support required by our international customers. We believe that support
services are essential to the successful installation and ongoing support of
our products. We deliver these services directly to major customers and
indirectly through our international distributors.
During fiscal 2001, Fujitsu Limited, Nortel Networks Corporation, and
WorldCom, Inc. each accounted for at least 10% or more of Avanex's net revenue
during any particular quarter, and all three combined accounted for 77% of
Avanex's fiscal 2001 net revenue. This compared to fiscal 2000, in which
WorldCom, Inc. was the only 10% customer and accounted for 92% of Avanex's
total fiscal 2000 net revenue. During fiscal 1999, Hitachi, Sorrento Networks
Corp. (Osicom) and WorldCom, Inc. each accounted for at least 10% or more of
Avanex's net revenue and all three combined accounted for 94% of Avanex's
fiscal 1999 net revenue.
As of September 1, 2001, we had four people in customer service and support,
located in our Fremont, California corporate headquarters.
The Photonics Center(TM)
To help market our technology and product performance and enable our
pull-push marketing strategy, we have established The Photonics Center(TM) in
Richardson, Texas, which is a leading-edge customer testing, demonstration and
training facility that enables deployment of our products in a simulated
network. As a result, we benefit from immediate feedback from our current and
potential customers about our photonic processors.
The Photonics Center(TM) also provides testing capabilities for the
development of products and prototypes. In addition, we believe that The
Photonics Center(TM) shortens our products' evaluation cycle with potential
customers because they receive initial evaluation information on our products
before these products are shipped to the customer location for full testing and
evaluation. This initial information gives the potential customer a better
understanding of the product before delivery to their location, which we
believe gives us an advantage in the sales process.
Recently The Photonics Center(TM) has started to develop new subsystem
products such as PowerExpress(TM) Metro amplifier subsystem and the just
recently demonstrated PowerExpress(TM) Raman amplifier subsystem that is in
early prototype alpha testing.
During the fiscal year ended June 30, 2001, The Photonics Center(TM) moved
to a new location in Richardson, Texas, that contains about three times the
space of its previous site.
10
Competition
The markets we are targeting are new and rapidly evolving. We expect these
markets to continue to be highly competitive in the future. We design, develop
and market photonic processor components, modules and sub-systems. Companies
with other technologies present increasing competition for us in the markets we
serve. Further, we expect that even more companies will expand into our market
in the future, introduce competitive products, and increase the overall
competitive environment.
We face indirect competition from public and private companies providing
products that address the same optical network problems that our products
address. Additionally, the development of alternative solutions to optical
transmission problems by these and other competitors, particularly systems
companies who also manufacture components, could significantly limit our
growth.
Some companies in the industry that might compete with us in the future
include Agere, Alcatel, Bookham, Chorum Technologies, Corning, Fujitsu,
Hitachi, JDS Uniphase, Lucent Technologies, New Focus, Nortel Networks, Oplink
and Wavesplitter, and some compete with us now using different technologies.
Existing and potential customers are also our potential competitors. These
customers may develop or acquire additional competitive products or
technologies in the future, which may cause them to reduce or cease their
purchases from us.
Manufacturing
We currently perform optical sub-assembly, and final integration, and ship
all of our products from our 145,000 square-foot Fremont, California facility.
Our in-house manufacturing capabilities include product design, optical
assembly, optical, mechanical, and electronic integration of final products,
and thorough testing of all final components, sub-assemblies and products.
In order to lower our labor costs, expand our capacity and increase our
flexibility in manufacturing, during fiscal 2001 we began working with two
contract manufacturers in China to manufacture and sub-assemble select
components and devices for us. We expect to increase the amount of contract
manufacturing we use in the future.
Currently, the manufacturing of photonic processors requires the use of a
highly skilled manual workforce performing critical functions such as optical
assembly, optical alignment, soldering and component integration. During fiscal
2001, we invested significant resources in training and maintaining the quality
of our employee workforce, and we invested in a variety of automation
initiatives focused on improving cycle time, data collection, and production
yields.
We emphasize quality assurance throughout the entire supply-chain and
manufacturing processes. We also install stringent internal quality control
processes and procedures, including incoming material inspection, in-process
testing and outgoing inspection.
Although we are aggressively pursuing our manufacturing strategy to
outsource many of our high volume key components and subassemblies, it is clear
that outsourced manufacturing requires considerable attention of management and
is expensive. As a result, to date we still retain the expertise, and much of
the capacity, to manage any interruption in supply from these foreign sources.
The materials and equipment we require for our manufacturing process are
supplied, and are generally available, from a variety of suppliers both foreign
and domestic. The recent downturn in the fiber optics market has greatly
increased available capacity at our suppliers and in many cases has reduced
lead times. However, we currently purchase several key components used in our
products and equipment from single or limited sources of supply, including
Nippon Sheet Glass, Mitsubishi Corporation, Wave Precision, Inc., REO, Inc.,
VLOC, Inc., Ericsson Corporation, Browave Corporation, Foxconn Optical
Technology and Agilent Technologies Inc. These
11
key components include filters, lenses, specialty glass, and test and
measurement equipment. We have no guaranteed supply arrangements with any of
these suppliers and we typically purchase our components and equipment through
purchase orders.
Quality
We have established a quality assurance system to continuously improve
Avanex's ability to ensure that our customers' requirements are consistently
met. Our Fremont corporate headquarters and manufacturing facility have been in
compliance with the International Standard ISO 9001: 1994 Edition for the past
year, as certified by Det Norske Veritas (DNV).
Patents and Intellectual Property
Our success and ability to compete depend substantially upon our internally
developed technology. As of June 30, 2001, we had 92 patents issued or applied
for in the U.S., of which 11 are jointly filed with Fujitsu Ltd., and of which
four have been assigned to us as a result of our acquisition of substantially
all of the assets of Holographix, Inc. Further, as of the same date, we had 24
patents issued or applied for outside of the U.S., of which three are jointly
filed with Fujitsu Ltd. and of which one has been assigned to us because of our
Holographix acquisition.
Our engineering teams have significant expertise in photonic, micro-optic
and systems-level design and manufacturing. While we rely on patent, copyright,
trade secret and trademark law to protect our technology, we also believe that
factors such as the technological and creative skills of our personnel, new
product developments, frequent product enhancements and reliable product
maintenance are essential to establishing and maintaining a technology
leadership position.
We license technology from Fujitsu Ltd. that is critical to our
PowerShaper(TM) product. The license agreement is subject to termination upon
the acquisition of more than a 50% interest in us by certain major
communications system suppliers. Thus, if we are acquired by any of these
specified companies, we will lose this important license. The existence of this
license termination provision may have an anti-takeover effect in that it would
discourage those specified companies from making a bid to acquire us.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our proprietary information.
Employees
As of June 30, 2001, we employed 740 people, including 444 in manufacturing,
115 in engineering, research and development, 75 in pilot line manufacturing,
31 in quality, 29 in sales and marketing, and 46 in general and administrative
capacities.
In response to the substantial on-going reductions in capital spending by
carriers and system integrators in the telecommunications industry, and in
concert with our stated strategy to increase the amount of outsourced
manufacturing we use, we reduced our workforce, mostly in manufacturing, in
both the fourth quarter of fiscal 2001 and in the first quarter of fiscal 2002.
As of September 1, 2001, we employed 433 people, including 251 in
manufacturing including our pilot line operations, 104 in engineering, research
and development, 19 in quality, 26 in sales and marketing, and 33 in general
and administrative capacities.
None of our employees is represented by a labor union. We have not
experienced any work stoppages and we consider our relations with our employees
to be good. Our future success also depends on our continuing ability to
attract, train and retain highly qualified technical, sales and managerial
personnel.
12
FACTORS THAT MAY AFFECT FUTURE RESULTS
The statements contained in this report on Form 10-K that are not purely
historical are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934, including, without limitations, statements regarding our
expectations, hopes, beliefs, anticipations, commitments, intentions and
strategies regarding the future. Forward looking statements include, but are
not limited to, statements contained in "Item 1. Business," and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Actual results could differ from those projected in any
forward-looking statements for the reasons, among others, detailed below. The
fact that some of the risk factors may be the same or similar to our past
filings means only that the risks are present in multiple periods. We believe
that many of the risks detailed here are part of doing business in the industry
in which we compete and will likely be present in all periods reported. The
fact that certain risks are characteristic to the industry does not lessen the
significance of the risk. The forward-looking statements are made as of the
date of this Form 10-K and we assume no obligation to update the
forward-looking statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
Unless we generate significant revenue growth, our expenses and negative cash
flow will significantly harm our financial position.
We have never been profitable. As of June 30, 2001, we had an accumulated
deficit of $209 million. We may incur operating losses for the foreseeable
future, and these losses may be substantial. Further, for the quarter ended
June 30, 2001, we had negative operating cash flow and for future quarters, we
may continue to incur negative operating cash flow.
We have experienced operating losses in each quarterly and annual period
since inception. The following table shows our operating losses for the periods
indicated:
Period Operating Loss
------ --------------
Fiscal year ended June 30, 2001................................. $(134,784,000)
Fiscal year ended June 30, 2000................................. (44,356,000)
Fiscal year ended June 30, 1999................................. (9,250,000)
From October 24, 1997 (inception) to June 30, 1998.............. (1,133,000)
Due to insufficient cash generated from operations, we have funded our
operations primarily through the sale of equity securities, bank borrowings and
equipment lease financings. Although we began implementation of a cost
containment program in the quarter ended June 30, 2001, we still have a large
amount of fixed expenses, and we expect to continue to incur significant
manufacturing, sales and marketing, product development and administrative
expenses. As a result, we will need to generate higher revenues while
containing costs and operating expenses if we are to achieve profitability. Our
net revenue decreased from $30.3 million in the quarter ended March 31, 2001,
to $18.2 million in the quarter ended June 30, 2001. That decrease in revenue
demonstrates that we cannot be certain that our revenues will grow or that we
will ever maintain sufficient revenue levels to achieve profitability. We will
need to generate significant revenue growth to achieve profitability and
positive operating cash flow.
Our revenues and operating results are volatile, and an unanticipated decline
in revenue may disproportionately affect our net income or loss in a quarter.
Our revenues and operating results have fluctuated significantly from
quarter-to-quarter in the past and may fluctuate significantly in the future as
a result of several factors, some of which are outside of our control. These
factors include, without limitation, the following:
. Fluctuations in demand for and sales of our products, which will depend
on, among other things, the speed and magnitude of the transition to an
all-optical network, the acceptance of our products in the marketplace and
the general level of equipment spending in the telecommunications
industry;
13
. Cancellations of orders and shipment rescheduling;
. Changes in customers' requirements in general as well as those specific to
product specifications;
. Satisfaction of contractual customer acceptance criteria and related
revenue recognition issues;
. Our ability to provide appropriate manufacturing capacity commensurate
with the volatile demand levels for our products;
. Our ability to manage outsourced manufacturing, in which we have no
previous experience;
. The ability of our outsourced manufacturers to timely produce and deliver
subcomponents, and possibly complete products, in the quantity and of the
quality we require;
. The mix of our products sold;
. The practice of companies in the communications industry to sporadically
place large orders with short lead times;
. Competitive factors, including introductions of new products and product
enhancements by potential competitors, entry of new competitors into the
photonic processor market, including Agere, Lucent Technologies, Nortel
Networks, Fujitsu, Oplink Communications, Inc., Chorum Technologies,
Wavesplitter and New Focus, Inc., and pricing pressures;
. Our ability to effectively develop, introduce, manufacture and ship new
and enhanced products in a timely manner without defects;
. Our ability to control expenses, particularly in light of our limited
operating history;
. Availability of components for our products and equipment and increases in
the price of these components and equipment;
. Our ability to meet customer product specifications and qualifications;
. Volatility of customer demand. Demand is unpredictable as to timing and
amount and it may be hard for us to prepare to meet in volume when
received;
. Difficulties in collecting accounts receivable;
. Our ability to continue to attract and retain qualified, competent and
experienced professional employees;
. Our ability to continue production operations in areas that are subject to
irregular and increasing power disruptions;
. Our ability to introduce effective automation into our production process;
. Our ability to obtain the necessary basic services for our facilities,
such as electricity, and the timing of any loss of these basic services,
which halts our operations; and
. Economic conditions in general as well as those specific to the
communications and related industries.
A high percentage of our expenses, including those related to manufacturing,
engineering, sales and marketing, research and development and general and
administrative functions, are essentially fixed in the short term. As a result,
if we experience delays in generating and recognizing revenue, our quarterly
operating results are likely to be seriously harmed. For example, our loss in
the fourth quarter of fiscal year 2001 is partially attributable to the high
level of fixed expenses in research and development. New product introductions
can result in a mismatching of research and development expenses and sales and
marketing expenses that are incurred in one quarter with revenues that are not
recognized until a subsequent quarter when the new product is introduced. In
addition, there may be significant costs relating to the introduction of new
products into volume manufacturing. If growth in our revenues does not outpace
the increase in our expenses, our results of operations could be seriously
harmed.
14
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results will not be meaningful. You should not
rely on our results for one quarter as any indication of our future
performance. It is likely that in future quarters our operating results may be
below the expectations of public market analysts or investors. If this occurs,
the price of our common stock would likely decrease.
Market conditions in the telecommunications market may significantly harm our
financial position.
We sell our products primarily to a few large customers in the
telecommunications market for use in infrastructure projects. Customers in the
telecommunications market have recently been reducing their spending for
infrastructure projects. The current economic downturn may lead to continued
reductions in such infrastructure spending, and our customers may continue to
significantly reduce their orders for our products. In addition, because we
rely on a high percentage of our sales from only a few customers, any
reductions in spending on our products by our current customers, or
unwillingness to purchase our products by future customers, could significantly
harm our financial position and results of operations. For example, declining
orders from WorldCom have contributed significantly to our sequential quarterly
revenue decline in 2001 and declining orders from Nortel and Fujitsu
contributed to our quarterly revenue decline from the March 31, 2001 quarter to
the June 30, 2001 quarter. Reduced infrastructure spending is leading to
increased price competition. If our customers and potential customers continue
to reduce their infrastructure spending, we may fall short of our revenue
expectations for future quarters or the fiscal year.
We have a limited operating history, which makes it difficult to evaluate our
prospects.
We are an early-stage company in the emerging photonic processor market. We
were first incorporated on October 24, 1997. Because of our limited operating
history, we have limited insight into trends that may emerge in our market and
affect our business. The revenue and income potential of the photonic processor
market, and our business in particular, are unproven. We began shipping our
PowerFilter(TM) products to customers for evaluation in April 1999 and our
PowerMux(TM) products for evaluation in the quarter ended December 31, 1999.
Volume shipments of PowerFilter(TM) did not commence until the quarter ended
October 1, 1999 while volume shipments of PowerMux(TM) did not commence until
the quarter ended June 30, 2000. In addition, we only began shipping our
PowerExpress(TM) product for beta testing purposes in the quarter ended
December 31, 2000 and commenced commercial shipments in the quarter ended June
30, 2001. As a result of our limited operating history, we have limited
financial data that you can use to evaluate our business. You must consider our
prospects in light of the risks, expenses and challenges we might encounter
because we are at an early stage of development in a new and rapidly evolving
market.
Our customers are not obligated to buy significant amounts of our products and
may cancel or defer purchases on short notice.
Our customers typically purchase our products under individual purchase
orders and may cancel or defer purchases on short notice without significant
penalty. While we have executed a long-term contract with one of our customers
and may enter into additional long-term contracts with other customers in the
future, these contracts do not obligate the customers to buy significant
amounts of our products, and are subject to cancellation or a slow down on
delivery with little or no advance notice and little or no penalty. We also may
enter into long-term contracts that do not guarantee orders, and may impose
harsher terms and conditions on sales than previously received from that
customer in purchase orders. Further, certain of our customers have a tendency
to purchase our products near the end of our fiscal quarter. A cancellation or
delay of such an order may therefore cause us to fail to achieve that quarter's
financial and operating goals. Accordingly, sales in a particular period are
difficult to predict. Decreases in purchases, cancellations of purchase orders
or deferrals of purchases may have a material adverse effect on us,
particularly if we do not anticipate them.
15
Sales of our PowerFilter(TM) and PowerMux(TM) products currently represent
nearly all of our revenues and if we are unsuccessful in commercially selling
our future products, our revenues will not grow significantly.
We currently offer five products, PowerFilter(TM), PowerExpress(TM),
PowerExchanger(TM), PowerShaper(TM) and PowerMux(TM). Sales of our PowerMux(TM)
currently account for substantially all of our revenues. We will continue to
substantially depend on PowerFilter(TM) and PowerMux(TM) for our near-term
revenue. Although we have begun to sell our PowerShaper(TM) product for beta
testing and our PowerExpress(TM) for commercial deployment, sales of these
products to date have not represented a significant portion of our revenue. Our
customers who have purchased PowerShaper(TM) and PowerExpress(TM) products from
us to date may not choose to purchase any additional products for commercial
use. Declines in the price of, or demand for, our PowerFilter(TM) or
PowerMux(TM) products, or their failure to achieve broad market acceptance,
would seriously harm our business. For example, the decline in demand for our
PowerFilter(TM) or PowerMux(TM) products has resulted in the significant
decrease in revenues during the 2001 fiscal year. In addition, we believe that
our future growth and a significant portion of our future revenue will depend
on the broad commercial success of our PowerExpress(TM) product and other
future products. If our target customers do not widely adopt, purchase and
successfully deploy our products, our revenues will not grow significantly and
may decline, and our business will be seriously harmed.
Our inability to introduce new products and product enhancements could prevent
us from increasing revenue.
The successful operation of our business depends on our ability to
anticipate market needs and to develop and introduce new products and product
enhancements that respond to technological changes or evolving industry
standards on a timely and cost-effective basis. Our products are complex, and
new products may take longer to develop than originally anticipated. These
products may contain defects or have unacceptable manufacturing yields when
first introduced or as new versions are released. If we do not introduce new
products in a timely manner, we will not obtain incremental revenues from these
products or be able to replace more mature products with declining revenues or
gross margins. Customers that have designed our new products into their system
could instead purchase products from our competitors, resulting in lost revenue
over a longer term. We could also incur unanticipated costs in attempting to
complete delayed new products or to fix defective products. We cannot be
certain that we will successfully develop and market these types of products
and product enhancements. In addition, our products could quickly become
obsolete as new technologies are introduced and incorporated into new and
improved products. For example, our PowerMux(TM) product, which incorporates
our PowerFilter(TM) product and additional functionality, has replaced our
PowerFilter(TM) product in most applications. We must continue to develop
state-of-the-art products and introduce them in the commercial market quickly
in order to be successful. We introduced our PowerExpress(TM) product, which is
currently in commercial deployment, during the quarter ended March 31, 2001.
Although we introduced our PowerShaper(TM) product during the quarter ended
March 31, 2000, it is still in the beta testing stage. Our experience with
PowerShaper(TM) demonstrates the substantial amount of time it may take for the
qualification and commercial deployment of a product. Our failure to produce
technologically competitive products in a cost-effective manner and on a timely
basis will seriously harm our business, financial condition and results of
operations. In particular, any failure of PowerMux(TM), PowerShaper(TM),
PowerExpress(TM), PowerExchanger(TM) or our other future products to achieve
market acceptance could significantly harm our business.
If we fail to predict our manufacturing requirements accurately, we could incur
additional costs or experience manufacturing delays, which could cause us to
lose orders or customers and result in lower revenues.
We currently use a rolling 6-month forecast based primarily on our
anticipated product orders and our limited product order history to determine
our requirements for components and materials. We provide these forecasts to
our outsourced manufacturers, and we use them internally as well. It is very
important that we accurately predict both the demand for our products and the
lead time required to obtain the necessary components and raw materials. Lead
times for materials and components that we order vary significantly and
16
depend on factors such as the specific supplier, the size of the order,
contract terms and demand for each component at a given time. If we
underestimate our requirements, we, and our third-party outsourced
manufacturers may have inadequate manufacturing capacity or inventory, which
could interrupt manufacturing of our products and result in delays in shipments
and revenues. If we overestimate our requirements, we could have excess
inventory of parts as well as over-capitalized manufacturing facilities. For
example, the inventory provision booked in the year ended June 30, 2001 is a
result of our inability to forecast the sudden decrease in demand for our
products. The provision consisted of $29.4 million reserve against current
inventory and a $5.3 million accrual for non-cancelable purchase commitments.
This provision is for inventory that is unique and we do not expect to use
based on a 6-month sales forecast. We also may experience shortages of
components from time to time, which also could delay the manufacturing of our
products and could cause us to lose orders or customers.
We will not attract orders and customers or we may lose current orders and
customers and will not be successful in our industry if we are unable to commit
to deliver sufficient quantities of our products to satisfy major customers'
needs.
Communications service providers and optical systems manufacturers typically
require that suppliers commit to provide specified quantities of products over
a given period of time. If we are unable to commit to deliver sufficient
quantities of our products to satisfy a customer's anticipated needs, we will
lose the order and the opportunity for significant sales to that customer for a
lengthy period of time. We will be unable to pursue many large orders if we do
not have sufficient manufacturing capacity to enable us to commit to provide
customers with specified quantities of products.
Our dependence on independent manufacturers may result in product delivery
delays and may have an adverse affect on our operations.
We rely on a small number of outsourced manufacturers to manufacture our
subcomponents. We intend to deepen our relationship with outsourced
manufacturers so that they will eventually manufacture all of our commercial
volume products. The qualification of these manufacturers is an expensive and
time-consuming process, and these outsourced manufacturers build optical
components for other companies, including our competitors. In addition, we do
not have contracts in place with many of these manufacturers. We have very
limited experience in working with third party manufacturers and we may not be
able to effectively manage our relationships with our manufacturers. We cannot
be certain that they will be able to fill our orders in a timely manner. If we
cannot effectively manage these manufacturers or they fail to deliver
components in a timely manner, we could experience significant delays in
shipping our product. Product delays may have an adverse effect on our business
and results of operations.
Our outsourced manufacturers have a limited history of manufacturing optical
subcomponents and have no history of manufacturing our products on a turn-key
basis. Any interruption in the operations of these outsourced manufacturers
could harm our ability to meet our scheduled product deliveries to our
customers, which could cause the loss of existing or potential customers. In
addition, the products and subcomponents that these outsourced manufacturers
build for us may be insufficient in quality or in quantity to meet our needs.
The inability of our outsourced manufacturers to provide us with adequate
supplies of high-quality products and subcomponents in the future could cause a
delay in our ability to fulfill customer orders while we obtain a replacement
manufacturer and could seriously harm our business.
To successfully meet our overall production goals, we will also have to
coordinate effectively our operations in California with those of our
outsourced manufacturers in China. We have very limited experience in
coordinating and managing production operations that are located on different
continents or in the transfer of manufacturing operations from one facility to
another. The geographic distance between our headquarters in California and
outsourced manufacturers' manufacturing facilities in China will make it
difficult for us to manage the relationship and oversee operations there to
assure product quality and timely delivery. Our failure to
17
successfully coordinate and manage multiple sites or to transfer our
manufacturing operations could seriously harm our overall production.
Because our outsourced manufacturers' production facilities are located in
China, these outsourced manufacturers will be subject to the risk of political
instability in China and the possible imposition of restrictive trade
regulations and tariffs. We will also be exposed to risks of foreign currency
exchange rate fluctuations and lack of adequate protection of intellectual
property under Chinese law.
In addition, our outsourced manufacturers may begin to integrate these
subcomponents to produce turn-key products for us, which will add to the
complexity and difficulty of obtaining sufficient quantities of these products
at acceptable quality from these outsourced manufacturers. Any failure of these
outsourced manufacturers to timely produce turn-key products for us in the
quantities and quality needed will seriously harm our business.
If we fail to effectively manage our financial and managerial controls,
reporting systems and procedures, our business may be harmed.
We have grown from revenue of $510,000 in the fiscal year ended June 30,
1999, $40.7 million in the fiscal year ended June 30, 2000, to $131.2 million
in the fiscal year ended June 30, 2001. We had 740 employees as of June 30,
2000, and at June 30, 2001, we had 740 employees, including temporary
employees. However, in April and July 2001, we had reductions-in-force which
reduced our employees by approximately 654 people, including temporary
employees. As of September 1, 2001, we have 433 employees. We currently operate
facilities in Fremont, California and in Richardson, Texas. We also have a
sales office with a regional sales manager in Newtown, Pennsylvania and a sales
manager who services our customers in Canada. In addition, in July 2000, we
acquired substantially all of the assets and certain liabilities of Holographix
Inc., a Delaware corporation located in Hudson, Massachusetts. As of June 30,
2001, this unit had eight full-time and two part-time employees. The rapidly
changing number of employees and volatile quarterly revenue, combined with the
challenges of managing geographically-dispersed operations, has placed, and
will continue to place, a significant strain on our management systems and
resources. We expect that we will need to continue to improve our financial and
managerial controls, reporting systems and procedures, and will need to
continue to manage our work force worldwide. However, we may not be able to
install adequate control systems in an efficient and timely manner, and our
current or planned operational systems, procedures and controls may not be
adequate to support our future operations. Delays in the implementation of new
systems or operational disruptions when we transition to new systems would
impair our ability to accurately forecast sales demand, manage our product
inventory and record and report financial and management information on a
timely and accurate basis.
If we do not reduce costs, introduce new products or increase sales volume, our
gross margin will decline.
Over our short operating history, the average selling prices of our products
has decreased over time and we expect this trend to continue and potentially
accelerate. Future price decreases may be due to a number of factors, including
competitive pricing pressures, rapid technological change and sales discounts.
Therefore, to maintain or increase our gross margin, we must develop and
introduce new products and product enhancements on a timely basis. We must also
continually reduce our costs of production. As our average selling prices
decline, we must increase our unit sales volume to maintain or increase our
revenue. To the extent our average selling prices decline more rapidly than our
costs of production, our gross margin will decline, which could seriously harm
our business, financial condition and results of operations.
Our products may have defects that are not detected until full deployment of a
customer's system, which could result in a loss of customers, damage to our
reputation and substantial costs.
Our products are designed to be deployed in large and complex optical
networks and must be compatible with other components of the system, both
current and future. In addition, our products may not operate as
18
expected or guaranteed over long periods of time. Our products can only be
fully tested for reliability when deployed in networks for long periods of
time. Our customers may discover errors, defects or incompatibilities in our
products after they have been fully deployed and operated under peak stress
conditions. They may also have errors, defects or incompatibilities that we
find only after a system upgrade is installed. If we are unable to fix errors
or other problems, we could experience:
. Loss of customers or customer orders;
. Loss of or delay in revenues;
. Loss of market share;
. Loss or damage to our brand and reputation;
. Inability to attract new customers or achieve market acceptance;
. Diversion of development resources;
. Increased service and warranty costs;
. Legal actions by our customers; and
. Increased insurance costs.
In some of our contracts and agreements, we have agreed to indemnify our
customers against certain liabilities arising from defects in our products.
While we carry insurance policies covering this type of liability, these
policies may not provide sufficient protection should a claim be asserted. To
date, product defects have not had a material negative affect on our results of
operations. However, we cannot be certain that product defects will not have a
material negative affect on our results of operations in the future. A material
product liability claim may have significant consequences on our ability to
compete effectively and generate positive cash flow and may seriously harm our
business, financial condition and results of operations.
If we do not achieve acceptable manufacturing yields in a cost-effective manner
or achieve sufficient product reliability, this could delay product shipments
to our customers or require us to develop new manufacturing processes, which
would impair our operating results.
Manufacturing our products involves complex, labor intensive and precise
processes. Changes in our manufacturing processes or those of our suppliers, or
the inadvertent use of defective materials by our suppliers, or us, could
significantly reduce our manufacturing yields and product reliability. Because
the majority of our manufacturing costs are relatively fixed, manufacturing
yields are critical to our results of operations. Lower than expected
production yields could delay product shipments and impair our gross margins.
We may not obtain acceptable yields in the future.
In some cases, existing manufacturing techniques, which involve substantial
manual labor, may not allow us to cost effectively meet our production goals so
that we maintain acceptable gross margins while meeting the cost targets of our
customers. We will need to develop new manufacturing processes and techniques
that will involve higher levels of automation to increase our gross margins and
achieve the targeted cost levels of our customers. We may not achieve
manufacturing cost levels that will fully satisfy customer demands.
Because we plan to introduce new products and product enhancements
regularly, we must effectively transfer production information from our product
development department and our pilot production line to our manufacturing group
or contract manufacturers and coordinate our efforts with those of our
suppliers to rapidly achieve volume production. If we fail to effectively
manage this process or if we experience delays, disruptions or quality control
problems in our manufacturing operations, our shipments of products to our
customers could be delayed.
19
We depend on key personnel to manage our business effectively in a rapidly
changing market, and if we are unable to hire and retain qualified personnel,
our ability to sell our products could be harmed.
Our future success depends, in large part, on our ability to attract and
retain highly skilled personnel. The loss of the services of any of our key
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring required personnel, particularly engineers, sales personnel
and marketing personnel, may seriously harm our business, financial condition
and results of operations. In particular, our future success depends upon the
continued services of our executive officers, particularly Paul Engle, our
President and Chief Executive Officer, and Xiaofan (Simon) Cao, our Chief
Technology Officer and Senior Vice President of Business Development, and other
key engineering, sales, marketing, manufacturing and support personnel. None of
our officers or key employees is bound by an employment agreement for any
specific term and these personnel may terminate their employment at any time.
In addition, we do not have "key person" life insurance policies covering any
of our employees.
As of June 30, 2001, we had approximately 740 employees, including temporary
employees. In April and July 2001, we had reductions-in-force which eliminated
approximately 654 positions, including temporary positions. As of September 1,
2001 we employ 433 people. Our ability to continue to attract and retain highly
skilled personnel will be a critical factor in determining whether we will be
successful in the future. 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. The current challenging environment will place a
significant demand on our management and operational resources. Many of the
members of our management team have only been with us for a relatively short
period of time. For example, our Chief Executive Officer joined us in September
2000, and six out of our ten current executive officers have joined us since
September 1999. Failure of the management team to work effectively together
could seriously harm our business.
We face risks associated with our international operations that could prevent
us from successfully manufacturing, marketing and distributing our products
internationally.
We intend to expand our international operations in the future, including
developing several contract manufacturers to produce a significant portion of
our products overseas. Further, we intend to increase our international sales
and the number of our international customers. This expansion will require
significant management attention and financial resources to develop
successfully direct and indirect international sales and support channels and
manufacturing. We may not be able to establish or maintain international market
demand for our products. We currently have little or no experience in
manufacturing, marketing and distributing our products internationally.
In addition, international operations are subject to inherent risks,
including, without limitation the following:
. Greater difficulty in accounts receivable collection and longer collection
periods;
. Difficulties and costs of staffing and managing foreign operations with
personnel who have expertise in optical network technology;
. Unexpected changes in regulatory or certification requirements for optical
systems or networks;
. Reduced protection for intellectual property rights in some countries,
including China, where some of our subcomponents and products will be
manufactured; 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 could choose to
engage in currency hedging activities. We do not currently engage in currency
hedging activities to limit the risks of exchange rate
20
fluctuations. Therefore, fluctuations in the value of foreign currencies could
have a negative impact on the profitability of our global operations, which
would seriously harm our business, financial condition and results of
operations.
Because we depend on single or limited sources of supply with long lead times
for some of the key components in our products and some of our equipment, we
could encounter difficulties in meeting scheduled product deliveries to our
customers, which could cause customers to cancel orders.
We purchase several key components used in our products and equipment from
single or limited sources of supply, including Nippon Sheet Glass, Mitsubishi
Corporation, Wave Precision, Inc., REO, Inc., VLOC, Inc., Ericsson Corporation,
Browave Corporation, Foxconn Optical Technology and Agilent Technologies. These
key components include filters, lenses, specialty glass and test and
measurement equipment. We have no guaranteed supply arrangements with any of
these suppliers, and we typically purchase our components and equipment through
purchase orders. We have experienced shortages and delays in obtaining
components and equipment in the past, which adversely impacted delivery of our
products, and we may fail to obtain these supplies in a timely manner in the
future. Any interruption or delay in the supply of any of these components or
equipment, or the inability to obtain these components or equipment from
alternate sources at acceptable prices, at acceptable quality 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. Lead
times for components and equipment vary significantly and depend on numerous
factors at any given time, including the specific supplier, specifications for
the component or item of equipment, the size of the order, contract terms and
market demand for a component or item of equipment. For substantial increases
in production levels, suppliers may need longer-than-normal lead times and some
may need at least nine months.
Furthermore, financial or other difficulties faced by these suppliers, or
significant changes in demand for these components and equipment, could limit
the availability of these components and equipment. In addition, a third party
could acquire control of one or more of our suppliers and cut off our access to
raw materials, components or equipment. For example, in 2000, JDS Uniphase
acquired Casix, Inc., which was then one of our critical suppliers of specialty
glass. Obtaining components and equipment from alternate suppliers is difficult
because we must qualify each new supplier, and this process is time-consuming
and expensive.
Because lead times for materials, components and equipment used in the
assembly of our products are long and vary significantly, we may have excess or
inadequate inventory of some materials, components and equipment if orders do
not match forecasts. For example, for the year ended June 30, 2001, we booked a
$34.7 million inventory provision, consisting of a $29.4 million reserve
against current inventory and a $5.3 million accrual for non-cancelable
purchase obligations. Furthermore, if we change suppliers, our customers may
require that our products be re-qualified by them, which is time consuming and
expensive.
We must obtain supplies and materials that are of sufficient quantity and
quality in order for us to manufacture our products in acceptable quantities
and with acceptable yields. Our inability to obtain supplies and materials in
sufficient quality or quantity will seriously harm the yield and production of
our products and could seriously harm our business.
Our facilities are vulnerable to damage from earthquakes and other natural
disasters.
Our assembly facilities are located on or near known earthquake fault zones
and are vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and similar events. If such a disaster occurs, our
ability to assemble, test and ship our products would be seriously, if not
completely, impaired, which would seriously harm our business, financial
condition and results of operations. We cannot be certain that the insurance we
maintain against fires, floods and general business interruptions will be
adequate to cover our losses in any particular case.
21
Our facilities are vulnerable to power outages.
Our assembly facilities are located in the state of California, which
presently is experiencing a severe shortage of electrical power. We have
experienced several power outages in the recent past, and we expect additional
power outages in the future. These power outages have halted our production
operations. If such future power outages occur, our ability to assemble, test
and ship our products would be seriously impaired, which could seriously harm
our business, financial condition and results of operations, particularly if
these power outages occur in the last month of our fiscal quarters. We cannot
be sure that the insurance we maintain against general business interruptions
will be adequate to cover our losses in this particular case, if at all.
We could incur costs and experience disruptions complying with environmental
regulations and other regulations.
We handle small amounts of hazardous materials as part of our manufacturing
activities, especially at our Hudson Development Center in Hudson,
Massachusetts. Although we believe that we have complied to date with all
applicable environmental regulations in connection with our operations, we may
be required to incur environmental remediation costs to comply with current or
future environmental laws.
We introduced our PowerExpress(TM) product, which is currently in commercial
deployment, during the quarter ended March 31, 2001. Our PowerExpress(TM)
product is the first product offered by us that incorporates firmware and
electronic components. In the future, we plan to introduce more products which
will incorporate firmware and electronic components. The additional level of
complexity created by combining firmware and electronic components with our
optical components require that we comply with additional regulations, both
domestically and abroad, including without limitation, environmental
compliance, power consumption, electrical emission regulations and other
regulations known as homologation. Any failure to successfully obtain the
necessary permits or comply with the necessary regulations in a timely manner
or at all could seriously harm our sales of these products and our business.
We may experience increased competition from companies in the photonic
processor market and in the optical systems and component industry, which could
cause reduced sales levels and result in price reductions, reduced gross
margins or loss of market share.
The markets we are targeting are new and rapidly evolving, and we expect
these markets to become highly competitive in the future. We anticipate that
other companies will expand into our market in the future, and introduce
competitive products. We also face indirect competition from public and private
companies providing products that address the same optical network problems
that our products address. The development of alternative solutions to optical
transmission problems by competitors, particularly systems companies who also
manufacture components, could significantly limit our growth.
We expect competition to increase.
Some companies in the optical systems and component industry may compete
with us in the future, including Lucent Technologies, Nortel Networks, Alcatel,
Fujitsu, Agere, Corning, JDS Uniphase, Oplink Communications, New Focus, Inc.,
Wavesplitter and Chorum Technologies, and some compete with us now using
different technologies. Some of these are large public companies that have
longer operating histories and significantly greater financial, technical,
marketing and other resources than we have. As a result, some of these
competitors are able to devote greater resources to the development, promotion,
sale and support of their products. In addition, our competitors that have
larger market capitalizations or cash reserves are much better positioned than
we are to acquire other companies in order to gain new technologies or products
that may displace our product lines. Any of these acquisitions could give our
competitors a strategic advantage. Many of our competitors and potential
competitors have significantly more established sales and customer support
organizations than we do. In addition, many of our competitors have much
greater name recognition and have
22
more extensive customer bases, better developed distribution channels and
broader product offerings than our company. These companies can use their
customer bases and broader product offerings and adopt aggressive pricing
policies to gain market share. 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, these potential customers
may not consider purchasing our products.
Some existing customers and potential future customers are also our
competitors. These customers may develop or acquire additional competitive
products or technologies in the future, which may cause them to reduce or cease
their purchases from us. In addition, customers who are also competitors may
unfairly disparage our products in order to gain a competitive advantage.
Further, these customers may reduce or discontinue purchasing our products if
they perceive us as a serious competitive threat in those or other products
with their customers, especially as we develop, manufacture and sell products
which incorporate higher levels of sophistication such as our PowerExpress(TM)
product.
As a result of these factors, we expect that competitive pressures will
intensify and may result in price reductions, reduced margins and loss of
market share.
As our competitors consolidate, they may offer products or pricing which we
cannot meet, which could cause our revenues to decline.
Consolidation in the fiber optic component industry could intensify the
competitive pressures that we face. For example, three of our competitors, JDS
Fitel, Uniphase and E-Tek Dynamics, Inc. merged over the past several years.
This merged company announced its intention to offer more integrated products
that could make our products less competitive, and it has since acquired SDL,
Inc. Our customers may prefer to purchase products from certain of our
competitors who offer broader product lines, which would negatively affect our
sales and operating results.
We rely on a limited number of customers, and any decrease in revenues from, or
loss of, one or more of these customers without a corresponding increase in
revenues from other customers would harm our operating results.
Our customer base is limited and highly concentrated. Three customers
accounted for an aggregate of 74% of our net revenue in the fourth quarter
ended June 30, 2001. We expect that the majority of our revenues will continue
to depend on sales of our products to a small number of customers.
If current customers do not continue to place significant orders, or cancel
or delay current orders, we may not be able to replace these orders. In
addition, any downturn in the business of existing customers could result in
significantly decreased sales to these customers, which could seriously harm
our revenues and results of operations.
Sales to any single customer may vary significantly from quarter to quarter.
Customers in the communications industry tend to order large quantities of
products on an irregular basis. They base these orders on a decision to deploy
their system in a particular geographic area and may not order additional
products until they make their next major deployment decision. This means that
customers who account for a significant portion of our net revenue in one
quarter may not place any orders in the succeeding quarter. These ordering
patterns can result in significant quarterly fluctuations in our operating
results.
If our customers do not qualify our manufacturing lines for volume shipments,
our products may be dropped from supply programs and our operating results
could suffer.
Customers generally will not purchase any of our products, other than
limited numbers of evaluation units, before they qualify our products, approve
our manufacturing process and approve our quality system. Our
23
existing manufacturing line, as well as each new manufacturing line, must pass
through various levels of approval with our customers. Customers may require
that we be registered and maintain registration under international quality
standards, such as ISO 9001. We successfully passed the ISO 9001 registration
audit and received formal registration of our Quality System in August 2000 and
passed the review in August 2001. Our products may also have to be qualified to
specific customer requirements. This customer approval process determines
whether we can consistently achieve the customers' quality, performance and
reliability standards. In order for outsourced manufacturers to manufacture
products or discrete components for us in the future, their manufacturing
process and Quality System may also need to be qualified by our customers.
Delays in product qualification or losing ISO 9001 registration by us, our
suppliers or our outsourced manufacturers may cause a product to be dropped
from a long-term supply program and result in significant lost revenue
opportunity over the term of that program.
Our lengthy and variable qualification and sales cycle makes it difficult to
predict the timing of a sale or whether a sale will be made, which may cause us
to have excess manufacturing capacity or inventory and negatively impact our
operating results.
Customers typically expend significant efforts in evaluating and qualifying
our products and manufacturing processes. This evaluation and qualification
process frequently results in a lengthy sales cycle, typically ranging from
three to nine months and sometimes longer. While our customers are evaluating
our products and before they place an order with us, we may incur substantial
sales and marketing and research and development expenses, expend significant
management efforts, increase manufacturing capacity and order long-lead-time
supplies prior to receiving an order. Even after this evaluation process, it is
possible that a potential customer will not purchase our products for
deployment. In addition, product purchases are frequently subject to unplanned
processing and other delays, particularly with respect to larger customers for
which our products represent a very small percentage of their overall purchase
activity.
If we increase capacity and order supplies in anticipation of an order that
does not materialize, our gross margins will decline and we will have to carry
or write off excess inventory. Even if we receive an order, the additional
manufacturing capacity that we add to service the customer's requirements may
be underutilized in a subsequent quarter, especially if an order is delayed or
cancelled. Either situation could cause our results of operations to be below
the expectations of investors and public market analysts, which could, in turn,
cause the price of our common stock to decline. Our long sales cycles, as well
as the practice of companies in the communications industry to sporadically
place large orders with short lead times, may cause our revenues and operating
results to vary significantly and unexpectedly from quarter to quarter.
In addition, we cannot be certain that the sales cycle for our products will
not lengthen in the future. In addition, the emerging and evolving nature of
the photonic processor market may cause prospective customers to delay their
purchase decisions as they evaluate new technologies and develop and implement
new systems. As the average order size for our products grows, the process for
approving purchases is likely to become more complex, leading to potential
delays in receipt of these orders. As a result, our long and unpredictable
sales cycle contributes to the uncertainty of our future operating results.
We will lose significant customer sales and opportunities and may not be
successful if our customers do not qualify our products to be designed into
their products and systems.
In the communications industry, service providers and optical systems
manufacturers often undertake extensive qualification processes prior to
placing orders for large quantities of products such as ours, because these
products must function as part of a larger system or network. Once they decide
to use a particular supplier's product or component, these potential customers
design the product into their system, which is known as a design-in win.
Suppliers whose products or components are not designed in are unlikely to make
sales to that company until at least the adoption of a future redesigned
system. Even then, many companies may be reluctant to design entirely new
products into their new systems, as it could involve significant additional
redesign efforts.
24
If we fail to achieve design-in wins with potential customers, we will lose the
opportunity for significant sales to such customers for a lengthy period of
time.
If carriers for new telecommunications systems deployments do not select our
systems-level customers, our shipments and revenues will be reduced.
Sales of our components depend on sales of fiber optic telecommunications
systems by our systems-level customers, which are shipped in quantity when
telecommunications service providers, or carriers, add capacity. Systems
manufacturers compete for sales in each capacity deployment. If systems
manufacturers that use our products in their systems do not win a contract,
their demand for our products will decline, reducing our future revenues.
Similarly, a carrier's delay in selecting systems manufacturers for a
deployment could delay our shipments and revenues.
Sales in the future to customers based outside the United States may account
for an increased portion of our revenue, which exposes us to risks inherent in
international operations
Our increased international operations are subject to a variety of risks
associated with conducting business internationally any of which could
seriously harm our business, financial condition and results of operations.
These risks include without limitation:
. Greater difficulty in accounts receivable collections;
. Import or export licensing and product certification requirements;
. Tariffs, duties, price controls or other restrictions on foreign
currencies or trade barriers imposed by foreign countries;
. Potential adverse tax consequences;
. Fluctuations in currency exchange rates;
. Seasonal reductions in business activity in some parts of the world;
. Unexpected changes in regulatory requirements;
. Burdens of complying with a wide variety of foreign laws, particularly
with respect to intellectual property, license requirements, environmental
requirements and homologation;
. Difficulties and costs of staffing and managing foreign operations;
. Political instability, terrorism and war;
. The impact of recessions in economies outside of the United States; and
. Limited ability to enforce agreements, intellectual property and other
rights in some foreign countries.
If we do not substantially expand our direct and indirect sales operations, we
may not be able to increase market awareness and sales of our products and our
revenues will suffer.
Our products and services require a long, involved sales effort targeted at
several departments within our prospective customers' organizations. Therefore,
our sales effort requires the prolonged efforts of executive personnel,
specialized system and application engineers and marketing personnel working
together with dedicated salespersons in making sales. Because we have a
relatively small number of dedicated salespersons and application engineers,
our sales could be significantly disrupted if we failed to retain our team.
Competition for these individuals is intense, and we might not be able to hire
the type and number of sales personnel, system and application engineers and
marketing personnel we need.
In addition, we believe that our future success depends significantly on our
ability to establish relationships successfully with a variety of distribution
partners, such as original equipment manufacturers, value-added
25
resellers and distributors, both domestically and internationally. To date, we
have entered into agreements with two distributors in Japan, and we have
entered into agreements with one supplier manufacturer sales representative in
Italy and a distributor in Israel. These distributors also sell products that
compete with our products. We cannot be certain that we will be able to reach
agreement with additional distribution partners or representatives on a timely
basis or at all, or that our distribution partners and representatives will
devote adequate resources to selling our products. Even if we enter into
agreements with additional distribution partners or representatives, they may
not result in increased product sales.
If we are unable to expand our direct and indirect sales operations, we may
not be able to increase market awareness or sales of our products, which may
prevent us from increasing our revenues.
If the Internet and other communication media do not continue to expand as a
widespread communication and commerce media, demand for our products may
decline significantly.
Our future success depends on the continued growth of the Internet as a
widely-used medium for commerce and communication and the continuing demand for
increased bandwidth over communications networks. If the Internet does not
continue to expand as a widespread communication medium and commercial
marketplace, the need for significantly increased bandwidth across networks and
the market for optical transmission products may not develop. As a result, it
would be unlikely that our products would achieve commercial success.
If the communications industry does not achieve a rapid and widespread
transition to optical networks, our business will not succeed.
The market for our products is relatively new and evolving. Future demand
for our products is uncertain and will depend to a great degree on the speed of
the widespread adoption of optical networks. If the transition occurs too
slowly or ceases altogether, the market for our products and the growth of our
business will be significantly limited.
Our market is new and is characterized by rapid technological changes and
evolving standards, and if we do not respond in a timely manner, our products
will not achieve market acceptance.
The communications market is characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. In developing our products, we have made, and will
continue to make, assumptions with respect to which standards will be adopted
within our industry. If the standards that are actually adopted are different
from those that we have chosen to support, our products may not achieve
significant market acceptance.
Our stock price is highly volatile.
The trading price of our common stock has fluctuated significantly since our
initial public offering in February 2000 and is likely to remain volatile in
the future. In addition, the trading price of our common stock could be subject
to wide fluctuations in response to many events or factors, including without
limitation, the following:
. Quarterly variations in our operating results;
. Changes in financial estimates by securities analysts;
. Changes in market valuations or financial results of
telecommunications-related companies;
. Announcements by us or our competitors of technology innovations, new
products or of significant acquisitions, strategic partnerships or joint
ventures;
. Any deviation from projected growth rates in revenues, or decreases in our
book to bill ratio;
26
. Any loss by us of a major customer or a major customer order;
. Additions or departures of key management or engineering personnel;
. Any deviations in our net revenues or in losses from levels expected by
securities analysts;
. Activities of short sellers and risk arbitrageurs;
. Future sales of our common stock; and
. Volume fluctuations, which are particularly common among highly volatile
securities of telecommunications-related companies.
In addition, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
may adversely affect the market price of our common stock. As long as we
continue to depend on a limited customer base, and particularly when a
substantial majority of their purchases consist of a limited number of types of
our products, there is substantial risk that our quarterly results will vary
widely.
Furthermore, if our stockholders sell substantial amounts of our common
stock, including shares issued upon exercise of outstanding options or
warrants, in the public market during a short period of time, our stock price
may decline significantly.
We may in the future be the target of securities class action or other
litigation, which could be costly and time consuming to defend.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be targeted for similar litigation. Our
acquisition activity may involve us in disputes from time to time. Litigation
that may arise from these disputes may lead to volatility in our stock price or
may result in our being the target of securities class action litigation.
Securities litigation may result in substantial costs and divert management's
attention and resources, which may seriously harm our business, financial
condition and results of operations.
In August 2001, two putative class action lawsuits were filed against us,
certain officers and directors, and underwriters in our initial public
offering. The lawsuits allege that the underwriters received excessive
commissions and manipulated our stock price after the initial public offering.
While we do believe we have meritorious defenses and will vigorously defend
ourselves against these charges, an unfavorable result to this litigation could
be costly to us.
If we are unable to protect our proprietary technology, this technology could
be misappropriated, which would make it difficult to compete in our industry.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. Although as of June 30, 2001, we had 24 U.S. patents issued or allowed
and 1 foreign patent issued, we cannot assure you that the remaining 68 U.S.
patent applications and 23 foreign patent applications that we have filed as of
June 30, 2001 and have not been approved will be approved. In addition, we
cannot assure you that any patents that have been issued or may issue will
protect our intellectual property or that any patents issued will not be
challenged by third parties. Much of our intellectual property has trade
secrets implications, which requires much more monitoring and control
mechanisms to protect. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Monitoring unauthorized use of our products is
difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology. Further, other parties may independently
develop similar or competing technology or design around any patents that may
27
be issued to us. We use various methods to attempt to protect our intellectual
property rights. However, we cannot be certain that the steps we have taken
will prevent the misappropriation of our intellectual property, particularly in
foreign countries, such as China, where the laws may not protect our
proprietary rights as fully as in the United States.
Our products may infringe on the intellectual property rights of third parties,
which may result in lawsuits and prohibit us from selling our products.
We believe there is a risk that third parties have filed, or will file
applications for, or have received or will receive, patents or obtain
additional intellectual property rights relating to materials or processes that
we use or propose to use. As a result, from time to time, third parties may
assert exclusive patent, copyright, trademark and other intellectual property
rights to technologies that are important to us. In addition, third parties may
assert claims or initiate litigation against us or our manufacturers, suppliers
or customers with respect to existing or future products, trademarks or other
proprietary rights. Any claims against us or customers that we indemnify
against intellectual property claims, with or without merit, may be
time-consuming, result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing technology. If a
claim is successful, we may be required to obtain a license or royalty
agreement under the intellectual property rights of those parties claiming the
infringement. If we are unable to obtain the license, we may be unable to
market our products. Limitations on our ability to market our products and
delays and costs associated with monetary damages and redesigns in compliance
with an adverse judgment or settlement could harm our business, financial
condition and results of operations.
If necessary licenses of third-party technology become unavailable to us or
become very expensive, we may become unable to develop new products and product
enhancements, which would prevent us from operating our current business.
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, if 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 prevent us from operating our business.
We license technology from Fujitsu Limited that is critical to our
PowerShaper(TM) product and other products that use their proprietary virtually
imaged phased array technology. The license agreement is subject to termination
upon the acquisition of more than a 50% interest in us by certain major
communications system suppliers. Thus, if we are acquired by any of these
specified companies, we will lose this license. The existence of this license
termination provision may have an anti-takeover effect in that it would
discourage those specified companies from acquiring us.
We could become subject to litigation regarding intellectual property rights,
which could divert management attention, cause us to incur significant costs
and prevent us from selling or using the challenged technology.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. As a result of the
proliferation of the Internet and other networking technologies, there has
been, and we expect that there will continue to be, an increasing amount of
this litigation in our industry. Many companies in the high-technology industry
aggressively use their patent portfolios to bring infringement claims against
their competitors. As a result, it is possible that we may be a party to
litigation in the future to protect our intellectual property or as a result of
an alleged infringement of others' intellectual property, or we may be subject
to litigation to defend our intellectual property against infringement claims
of others. These claims and any resulting lawsuit, if successful, could subject
us to significant liability for damages and invalidation of our proprietary
rights. These lawsuits, regardless of their success, would likely be time-
28
consuming and expensive to resolve and would divert management time and
attention. Any potential intellectual property litigation also could force us
to do one or more of the following:
. Stop selling, incorporating or using our products that use the challenged
intellectual property;
. Obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
. Redesign the products that use the technology.
If we are forced to take any of these actions, our business may be seriously
harmed. Although we carry general liability insurance, our insurance may not
cover potential claims of this type or may not be adequate to indemnify us for
all liability that may be imposed.
We may in the future initiate claims or litigation against third parties for
infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel.
If we are unable to raise any needed additional capital, we may not be able to
grow our business, which could lower the value of your investment.
We may need to raise additional funds, and additional financing may not be
available on favorable terms, if at all. We may also require additional capital
to acquire or invest in complementary businesses or products or obtain the
right to use complementary technologies. The development and marketing of new
products will require a significant commitment of resources. In addition, if
the market for photonic processors develops at a slow pace over the next few
years or if we fail to establish significant market share and achieve a
significantly increased level of revenue, we may continue to incur significant
operating losses and utilize significant amounts of capital. If cash from
available sources is insufficient, or if cash is used for acquisitions or other
unanticipated uses, we may need to raise additional capital. We cannot be
certain that additional debt or equity capital will be available to us at all,
or that, if it is available, it will be on terms favorable to us. Any inability
to raise additional capital when we require it would seriously harm our
business. Any additional issuance of equity or equity-related securities will
dilute our existing stockholders' percentage ownership in us. In addition, if
our stockholders sell substantial amounts of our common stock, including shares
issued upon exercise of outstanding options or warrants, in the public market
during a short period of time, our stock price may decline significantly, which
would make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate.
Acquisitions and investments may adversely affect our business.
We regularly review acquisition and investment prospects that would
complement our existing product offerings, augment our market coverage, secure
supplies of critical materials or enhance our technological capabilities. For
example, in July 2000, we acquired substantially all of the assets and certain
liabilities of Holographix Inc. Acquisitions or investments could result in a
number of financial consequences, including without limitation:
. Potentially dilutive issuances of equity securities;
. Large one-time write-offs;
. Reduced cash balances and related interest income;
. Higher fixed expenses which require a higher level of revenues to maintain
gross margins;
. The incurrence of debt and contingent liabilities; and
. Amortization expenses related to intangible assets.
29
Furthermore, acquisitions involve numerous operational risks, including
without limitation:
. Difficulties in the integration of operations, personnel, technologies,
products and the information systems of the acquired companies;
. Diversion of management's attention from other business concerns;
. Diversion of resources from our existing businesses, products or
technologies;
. Risks of entering geographic and business markets in which we have no or
limited prior experience; and
. Potential loss of key employees of acquired organizations.
Certain provisions could delay or prevent a change of control of us.
Certain provisions of our certificate of incorporation and bylaws and
Delaware law may discourage, delay or prevent a merger or acquisition that a
stockholder may consider favorable. These provisions allow us to issue
preferred stock with rights senior to those of our common stock and impose
various procedural and other requirements that could make it more difficult for
our stockholders to effect certain corporate actions.
In addition, our license agreement with Fujitsu Limited could discourage
certain companies from making a bid to acquire us because it terminates if
certain major communications systems suppliers acquire us.
Insiders have substantial control over and could delay or prevent a change in
our corporate control, which may negatively affect your investment.
As of June 30, 2001, our executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 20% of
our outstanding common stock. These stockholders, if acting together, would be
able to influence significantly all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combination transactions.
Item 2. Properties
We occupy approximately 145,000 square feet of office, research and
development and manufacturing space in Fremont, California. Building one, our
corporate headquarters and Research and Development building, is 54,000 square
feet. Building two, our manufacturing facility, is approximately 91,000 square
feet. The terms of the leases, signed in 1999 and 2000, are 10 years.
We leased approximately 110,000 square feet of additional space in two other
buildings in Newark, California in December 2000. Building three is
approximately 48,000 square feet. Building four is approximately 62,000 square
feet. The terms of the leases are 10 years. Given the decline in capital
spending in telecommunications, we intend to sub-lease these two facilities in
Newark as soon as practical.
In addition to our facilities in California, we also lease space in
Richardson, Texas and Hudson, Massachusetts. The current Richardson facility is
approximately 22,000 square feet. The Hudson facility is approximately 10,000
square feet.
We believe that existing facilities are adequate for our needs. We are
currently evaluating the most appropriate use of our existing space including
the use of the current space for our existing operations and subleasing the
space to a third party.
30
Item 3. Legal Proceedings
E-Tek Litigation
On December 7, 1999, before the effective date of our initial public
offering, E-Tek Dynamics, Inc. (E-Tek), now a subsidiary of JDS Uniphase, filed
a complaint with the Superior Court of California, County of Santa Clara. E-Tek
initially named us and Ma Li, a third party individual not associated with
Avanex Corporation, as defendants in the complaint. E-Tek has recently amended
its complaint to add Edward Ning, an employee of Avanex, as an additional named
defendant.
E-Tek's complaint alleges that we, through Ma Li and Edward Ning, have
participated in illegal recruitment of E-Tek employees. Specifically and
without limitation, E-Tek alleges that we worked through Edward Ning, who then
worked through Ma Li, to recruit and hire E-Tek employees in violation of Ma
Li's agreement with E-Tek. Ma Li has agreed to a permanent injunction, and
E-Tek has subsequently dismissed its case against Ma Li. E-Tek seeks a
permanent injunction, damages to be determined at trial, and costs and
attorney's fees. We believe that this allegation is without merit and intend to
vigorously defend against it. We believe that this complaint will not have a
material effect on our business.
IPO Class Action Lawsuit
On August 6, 2001, a putative securities class action, captioned Beveridge
v. Avanex Corporation et al., Civil Action No. 01-CV-7256, was filed against
us, certain company officers and directors (the "individual defendants"), and
four underwriters in our initial public offering ("IPO"), in the United States
District Court for the Southern District of New York. The complaint alleges
violations of Section 11 of the Securities Act of 1933 ("Securities Act")
against all defendants, a violation of Section 15 of the Securities Act and
Section 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") against
the individual defendants, a violation of Section 10(b) of the Exchange Act
(and Rule 10b-5, promulgated thereunder) against us and the individual
defendants, and violations of Section 12(2) of the Securities Act and Section
10(b) of the Exchange Act (and Rules 10b-3 and 10b-5, promulgated thereunder)
against the underwriters. The complaint seeks unspecified damages on behalf of
a purported class of purchasers of common stock between February 3, 2000 and
December 6, 2000 (the "class period").
On August 31, 2001, a similar complaint, captioned Blaney v. Avanex
Corporation et al., Civil Action No. 01-CV-8216, was filed against us, the
individual defendants, and several of the IPO underwriters in the Southern
District of New York. The complaint is substantially identical to the Beveridge
complaint.
Various plaintiffs have filed similar actions asserting virtually identical
allegations against more than 130 other companies. To date, there have been no
significant developments in the litigation. The lawsuit, and all other "IPO
allocation" securities class actions currently pending in the Southern District
of New York, have been assigned to Judge Shira A. Scheindlin for coordinated
pretrial proceedings. We believe that we have meritorious defenses to the
claims against us and we intend to defend ourself vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of our 2001 fiscal year.
31
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is traded on the Nasdaq National Market under the symbol
"AVNX." Public trading of our common stock commenced on February 4, 2000. Prior
to that time, there was no public market for our common stock. The following
table shows, for the periods indicated, the high and low per share closing
prices of common stock, as reported by the Nasdaq National Market for each
quarter since our initial public offering until June 30, 2001:
Fiscal Years 2000 and 2001
High Low
------- -------
Third Quarter (since February 4, 2000) 2000..................... $261.00 $145.00
Fourth Quarter 2000............................................. $135.94 $ 54.13
First Quarter 2001.............................................. $167.00 $ 98.50
Second Quarter 2001............................................. $118.77 $ 46.50
Third Quarter 2001.............................................. $ 81.87 $ 10.28
Fourth Quarter 2001............................................. $ 18.39 $ 7.15
On August 31, 2001, the last reported sale price of our common stock on the
Nasdaq National Market was $5.30 per share. As of September 1, 2001, there were
approximately 71,000 stockholders of our common stock.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and do not anticipate paying any cash dividends in the
foreseeable future.
Our Registration Statement on Form S-1 (File No. 333-92097) was declared
effective on February 3, 2000 and we commenced our initial public offering
("IPO") on February 4, 2000. In the IPO, we sold an aggregate of 6,900,000
shares of common stock (including 900,000 shares sold in connection with the
exercise of the underwriters' over-allotment option) at $36.00 per share. The
sale of the shares of common stock generated aggregate gross proceeds of
approximately $248.4 million for the company. The aggregate net proceeds were
approximately $228.2 million, after deducting underwriting discounts and
commissions of approximately $17.4 million and directly paying expenses of the
offering of approximately $2.8 million. Of the net proceeds, we used
approximately $12.1 million for general corporate purposes, including working
capital and capital expenditures. Additionally, approximately $3.4 million of
the proceeds were used to repay capital lease obligations.
32
Item 6. Selected Financial Data
Period from
October 24,
1997
Years Ended June 30, (Inception)
---------------------------- to June 30,
2001 2000 1999 1998
--------- -------- ------- -----------
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues............................................... $ 131,244 $ 40,743 $ 510 $ --
Cost of revenue............................................ 110,794 26,343 531 --
--------- -------- ------- -------
Gross profit (loss)..................................... 20,450 14,400 (21) --
Operating expenses:
Research and development................................ 37,856 15,587 4,086 515
Sales and marketing..................................... 15,493 6,047 956 125
General and administrative.............................. 11,862 5,702 723 131
Stock compensation...................................... 53,084 31,420 3,464 362
Acquired in-process research and development............ 4,700 -- -- --
Amortization of intangibles............................. 9,653 -- -- --
Restructuring charge.................................... 22,586 -- -- --
--------- -------- ------- -------
Total operating expenses............................ 155,234 58,756 9,229 1,133
--------- -------- ------- -------
Loss from operations....................................... (134,784) (44,356) (9,250) (1,133)
Other income (expense), net................................ 12,521 5,671 29 (4)
--------- -------- ------- -------
Net loss................................................... (122,263) (38,685) (9,221) (1,137)
Stock accretion............................................ -- (37,743) -- --
--------- -------- ------- -------
Net loss attributable to common stockholders............... $(122,263) $(76,428) $(9,221) $(1,137)
========= ======== ======= =======
Basic and diluted net loss per common share................ $ (2.12) $ (3.07) $ (4.97) $ (7.20)
========= ======== ======= =======
Weighted average shares used in computing basic and diluted
net loss per common share................................ 57,620 24,936 1,857 158
========= ======== ======= =======
June 30,
----------------------------------------
2001 2000 1999 1998
--------- -------- ------- -----------
(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments.......... $ 204,591 $184,321 $ 3,724 $ 2,874
Working capital............................................ 174,653 185,534 2,660 2,637
Total assets............................................... 311,589 278,141 6,816 3,339
Long-term obligations, excluding current portion........... 14,992 2,067 563 341
Redeemable convertible preferred stock..................... -- -- 10,357 3,529
Total other stockholders' equity (deficit)................. 245,354 257,157 (6,534) (805)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion and analysis of our financial
condition and results of operations together with "Selected Financial Data" and
our consolidated financial statements and related notes appearing elsewhere in
this Annual Report on Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those presented under " Factors That May Affect Future Results" and
elsewhere in this Annual Report on Form 10-K.
For ease of reference, we refer to the fiscal years ended June 30, 2001,
June 30, 2000 and June 30, 1999 as fiscal 2001, fiscal 2000 and fiscal 1999,
respectively.
33
Overview
Avanex designs, manufactures and markets fiber optic-based products, known
as photonic processors, which are designed to increase the performance of
optical networks. We were founded in October 1997, and through April 1999, we
were primarily engaged in research and development activities and in hiring
additional employees. A substantial portion of our operating expenses during
this period was related to the design and development of our photonic
processors and the testing of prototype designs. We began making volume
shipments of our products during the quarter ended October 1, 1999.
The revenues currently recognized are primarily derived from sales of our
dense wavelength division multiplexing products, PowerFilter(TM) and
PowerMux(TM), to a limited number of customers. We commenced shipments of our
PowerFilter(TM) and PowerMux(TM) in April 1999 and December 1999, respectively.
Our dense wavelength division multiplexing products accounted for 96%, 100%,
and 100% of our net revenue during fiscal 2001, 2000, and 1999, respectively.
In September 1999, we began shipping beta test units of our PowerShaper(TM)
product. In July 2000, we began shipping PowerExchanger(TM). In December 2000,
we began shipping our PowerExpress(TM) product. In fiscal 2001, sales of
PowerExchanger(TM), PowerShaper(TM) and PowerExpress(TM) together accounted for
approximately 4% of our net revenue in the year ended June 30, 2001.
To date, we have generated a substantial portion of our revenues from a
limited number of customers. We have focused our initial sales and marketing
efforts primarily on large communications service providers and optical systems
manufacturers. During fiscal 2001, Fujitsu Limited, Nortel Networks
Corporation, and WorldCom, Inc., each accounted for at least 10% or more of our
net revenue and all three combined accounted for 77% of our fiscal 2001 net
revenue. This compared to fiscal 2000, in which WorldCom, Inc. was the only 10%
customer and accounted for 92% of our total fiscal 2000 net revenue. During
fiscal 1999, Hitachi, Sorrento Networks Corp. (Osicom), and WorldCom, Inc.,
each accounted for at least 10% or more of our net revenue and all three
combined accounted for 94% of our fiscal 1999 net revenue.
While we are seeking to diversify our customer base, we anticipate that our
operating results for any given period will continue to depend on a small
number of customers.
The market for photonic processors is new and evolving and the volume and
timing of orders are difficult to predict. A customer's decision to purchase
our products typically involves a commitment of its resources and a lengthy
evaluation and product qualification process. This initial evaluation and
product qualification process typically takes several months and includes
technical evaluation, integration, testing, planning and implementation into
the equipment design. Long sales and implementation cycles for our products, as
well as the practice of customers in the communications industry to
sporadically place large orders with short lead times may cause our revenues,
gross margins and operating results to vary significantly and unexpectedly from
quarter to quarter.
We, like many of our peers in the communications equipment industry, have
been affected by the slowdown in telecommunications equipment spending. Our
revenues decreased from $47.9 million in the quarter ended December 31, 2000 to
$30.3 million in the quarter ended March 31, 2001 and further decreased to
$18.2 million in the quarter ended June 30, 2001. Due to the continued weakness
in the general economy, and the telecommunications sector in particular,
revenue in fiscal 2002 may be less than fiscal 2001, putting downward pressure
on margins and profits. We are focusing our efforts on reducing expenses and
production costs. In the fourth quarter of fiscal 2001, we implemented a
restructuring plan and, as a result, we recorded total restructuring charges of
$22.6 million.
34
We market and sell our products in North America primarily through our
direct sales and marketing organization. We also have sales and marketing
efforts internationally through an independent supplier manufacturer
representative in Italy, a distributor in Israel and two distributors in Japan.
Net sales by geographical region were:
2001 2000 1999
---- ---- ----
North America................................................... 62% 95% 70%
Asia............................................................ 31 5 30
Europe.......................................................... 7 -- --
--- --- ---
100% 100% 100%
=== === ===
During the first half of fiscal 2001, we were engaged in continuing efforts
to expand our manufacturing capabilities, but due to the downturn in the
telecommunication industry that occurred in the second half of fiscal 2001, we
downsized our manufacturing operations through restructuring programs committed
to in the fourth quarter of fiscal 2001.
On June 30, 2001 and 2000, we occupied approximately 145,000 square feet of
research and development and manufacturing space in Fremont, California.
Building one, our corporate headquarters and research and development building,
is 54,000 square feet. Building two, our manufacturing facility, is 91,000
square feet. In addition to our principal office space in Fremont, California,
we also lease space in Newark, California; Richardson, Texas; and Hudson,
Massachusetts.
We leased two buildings totaling approximately 110,416 square feet in
Newark, California in December 2000. Both buildings were leased, in advance,
for our anticipated but not realized headcount increases in manufacturing and
administration. We have never occupied these two buildings and believe them to
be permanently idle. We are attempting to sublease these two buildings.
In November 2000 we relocated our Richardson facility to its current
address. The 22,000 square feet Richardson facility houses The Photonics
Center(TM) and main sales office. Our Hudson facility is our development center
for holographix diffractive gratings.
In addition, we have entered into a contract manufacturing relationship with
two companies based in China as we increase our transition to offshore-based
manufacturing of commercial volume products. Our strategy is to manufacture new
products at our existing facilities in Fremont, California, utilizing
automation to appropriately lower costs, and then transferring production
overseas once these products have successfully completed pilot line
manufacturing and commercial deployment levels.
We recognize revenue when we ship products to our customers, title has
transferred, collectability is reasonably assured, fees are fixed and
determinable, and there are no uncertainties with respect to customer
acceptance. For evaluation units where the customer has the right of return
through the end of the evaluation period, the Company recognizes revenue on
these shipments at the end of an evaluation period, if not returned. We accrue
for estimated warranty costs and estimated returns at the time the related
revenue is recognized. Currently, all of our product sales provide for pricing
and payment in U.S. dollars.
Our cost of revenue consists of components and raw materials, direct labor,
warranty, royalty and manufacturing overhead. We rely on a single or limited
source of suppliers to manufacture some key components and raw materials used
in our products and, in the past, we relied on the outsourcing of some
subassemblies.
Our gross margins will primarily be affected by the following factors:
. Shipment levels;
. Changes in manufacturing volume;
35
. Mix of products sold;
. Changes in our pricing policies and those of our competitors;
. Mix of sales channels through which our products are sold; and
. Mix of domestic and international sales
We expect cost of revenue, as a percentage of revenue, to fluctuate from
period to period.
During the third quarter and fourth quarter of fiscal 2001, we experienced
gross loss of $9.5 million and $8.2 million, respectively. The gross loss was
primarily due to declining sales and to the $21.6 million and $13.1 million
provisions for excess inventory that were recorded in the third and the fourth
quarter respectively.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers,
non-recurring engineering charges and prototype costs related to the design,
development, testing, pre-manufacturing and enhancement of our products. We
expense our research and development costs as they are incurred. We believe
that research and development is critical to our strategic product development
objectives. We further believe that, in order to meet the changing requirements
of our customers, we will need to fund investments in several development
projects in parallel. However, due to the recent downturn in the
telecommunication equipment industry, we are prioritizing our development
projects by expected returns and other measurements. As a result, we expect our
research and development expenses to be flat or decrease in dollar amount next
year compared to fiscal 2001.
Sales and marketing expenses consist primarily of marketing, sales, customer
service and application engineering support, as well as costs associated with
promotional and other marketing expenses. We intend to maintain our direct and
indirect sales operations both domestically and internationally. We expect that
sales and marketing expenses will decrease substantially in dollar amount over
the next year as we reduce marketing programs and pay less commission to direct
sales and independent sales representatives due to the reduced revenue outlook.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, legal and human resources
personnel, allocated facilities, recruiting expenses, professional fees and
other corporate expenses. We expect general and administrative expenses to
decrease in dollar amount as we reduce personnel through our restructuring and
cost containment program in response to the reduced revenue outlook.
Stock compensation expense is a result of us selling restricted common stock
or granting stock options to our employees with purchase or exercise prices per
share determined to be below the fair values per share of our common stock for
accounting purposes at the dates of purchase or grant. Stock compensation
expense is also a result of the assumption of stock options previously granted
to employees of Holographix, Inc., and the value of options issued to
consultants. We acquired substantially all of the assets and certain
liabilities of Holographix, Inc. in fiscal 2001. We are amortizing deferred
stock compensation over the period in which our right to repurchase restricted
stock lapses or the vesting period of the applicable options, which, in each
case, is generally a maximum of four years.
In connection with the sale of Series D preferred stock in September and
October 1999 to existing preferred stockholders, we recorded a non-cash charge
of $15.0 million in the quarter ended October 1, 1999 and recorded an
additional $5.1 million in the quarter ended December 31, 1999 to accrete the
value of the Series D preferred stock to its fair value under applicable
accounting rules. A $17.7 million charge was incurred in February 2000, in
connection with the sale of 769,230 shares of common stock to Microsoft
Corporation and MCI WorldCom Venture Fund, an affiliate of WorldCom, for $13.00
per share. The charge is equal to the difference between the price of stock
sold in the initial public offering and $13, multiplied by the number of shares
issued.
36
Despite growing annual revenues, we have not been profitable for any quarter
since October 24, 1997 (inception). As of June 30, 2001, we had an accumulated
deficit of $209.0 million. These losses have resulted primarily from developing
our products, increasing manufacturing capacity, promoting brand recognition,
developing our sales channels, establishing our management team, writing off
excess inventory, restructuring operations and amortizing deferred stock
compensation. As of June 30, 2001, we had net operating loss carry forwards for
federal income tax purposes of approximately $40 million, which expire in years
2013 through 2021. We also had net operating loss carry forwards for state
income tax purpose of approximately $33 million, which expire in years 2006
through 2011, at June 30, 2001.
Because of continuing and substantial capital expenditures, research and
development, sales and marketing and general and administrative expenses, we
will need to generate significant revenue and growth to achieve profitability
and positive operating cash flow. Even if we do achieve profitability and
positive cash flow, we may not be able to sustain or increase profitability or
positive operating cash flow on a quarterly or annual basis.
Results of Operations
Comparison of Fiscal 2001 and 2000
Net Revenue
Net revenue for fiscal 2001 was $131.2 million, compared to $40.7 million
for fiscal 2000. The increase in net revenue was primarily due to our
commercial success in PowerMux(TM) and to the increased demand in
PowerFilter(TM) in the first half of fiscal 2001. Three customers, Fujitsu,
Nortel, and WorldCom each accounted for at least 10% of net revenue for an
aggregate of approximately 77% in fiscal 2001. In fiscal 2000, WorldCom alone
accounted for 92% of net revenue.
Cost of Revenue
Our cost of revenue increased to $110.8 million in fiscal 2001 from $26.3
million in fiscal 2000. As a percentage, gross profit decreased on a
year-over-year basis, from a gross profit of 35.3% for the year ended June 30,
2000 to a gross profit of 15.6% for the year ended June 30, 2001. The decrease
in gross profit percentage was primarily the result of a $34.7 million
provision for excess inventory. Excluding this charge, the gross profit
percentage improved during the first half of fiscal 2001 due to increased
economies of scale associated with substantial revenue growth in the first half
of fiscal 2001, but declined in the second half of fiscal 2001 due to excess
manufacturing capacity resulting from declining revenues reflecting the
slowdown in telecommunications spending, and to the $34.7 million provision for
excess inventory. See Note 4 of "Notes to Consolidated Financial Statements".
We make inventory purchases and commitments decisions based upon sales
forecasts. To mitigate the component supply constraints that have existed in
the past and to fill orders with non-standard configuration, we built inventory
levels for certain components with long lead times and entered into certain
longer-term commitments for certain components. Due to the sudden and
significant decrease in demand for our products, inventory levels exceeded our
requirements based on 6-month sales forecasts. We do not currently anticipate
that the excess inventory subject to this provision will be used at a later
date based on our 6-month demand forecast. $29.4 million of the provision
relates to excess inventory on-hand and $5.3 million of the provision relates
to excess inventory that will result from non-cancelable purchase obligations.
Research and Development
Research and development expenses increased to $37.9 million in fiscal 2001
from $15.6 million in fiscal 2000. The absolute dollar increase in research and
development expenses from year to year was primarily attributable to increases
in the number of research and development personnel and related costs, pilot
run expense for PowerMux(TM), PowerExchanger(TM), PowerExpress(TM) and
PowerShaper(TM) and costs of other development
37
projects. The decrease in research and development expense as a percentage of
net revenue, from 38% in fiscal 2000 to 29% in fiscal 2001, was primarily the
result of an increase in our net revenue in fiscal 2001.
Sales and Marketing
Sales and marketing expenses increased to $15.5 million in fiscal 2001 from
$6.0 million in fiscal 2000. The absolute dollar increase in sales and
marketing expenses for fiscal 2001 as compared to fiscal 2000 was primarily the
result of an increase in personnel expenses for sales and marketing staff,
increased expenses related to customer support, increased sales commissions
associated with higher net revenue, and increased promotional and product
marketing expenses. The decrease in sales and marketing expense as a percentage
of net revenue, from 15% in fiscal 2000 to 12% in fiscal 2001, was primarily
the result of an increase in our net revenue in fiscal 2001.
General and Administrative
Our general and administrative expenses increased to $11.9 million in fiscal
2001 from $5.7 million in fiscal 2000. This increase was primarily the result
of increased staffing for finance, management information systems, and human
resources, and growth in recruiting and facility related expenses. The decrease
in general and administrative expenses as a percentage of net revenue, from 14%
in fiscal 2000 to 9% in fiscal 2001, was primarily the result of an increase in
our net revenue in fiscal 2001.
Stock Compensation
Stock compensation expense increased to $53.1 million in fiscal 2001 from
$31.4 million in fiscal 2000. In fiscal 2001, we have recorded a total of $51.1
million of deferred stock compensation, with an unamortized balance of $32.8
million on our June 30, 2001 balance sheet. This increase was partially due to
the granting of stock options and stock purchase rights to additional employees
and consultants. Additionally, the increase was due to amortization of deferred
stock compensation recognized for the intrinsic value of the unvested Avanex
options granted to Holographix employees in exchange for their existing
options. The deferred stock compensation was recorded upon the closing of the
acquisition and is amortized over the remaining vesting period of the unvested
options.
Acquired in Process Research and Development
During fiscal 2001, we recorded $4.7 million of acquired in-process research
and development resulting from the acquisition of Holographix. This amount was
expensed on the acquisition date because the acquired technology had not yet
reached technological feasibility and had no future alternative uses. There can
be no assurance that acquisitions of businesses, products or technologies by us
in the future will not result in substantial charges for acquired in-process
research and development that may cause fluctuations in our quarterly or annual
operating results.
A portion of the purchase price has been allocated to developed technology
and acquired in-process research and development ("IPRD"). Developed technology
and IPRD were identified and valued through extensive interviews, analysis of
data provided by Holographix concerning developmental products, their stage of
development, the time and resources needed to complete them, if applicable,
their expected income generating ability, target markets and associated risks.
The income approach, which includes an analysis of the markets, cash flows and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing the developed technology and IPRD.
Where developmental projects had reached technological feasibility, they
were classified as developed technology, and the value assigned to developed
technology was capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPRD and
38
charged to expense upon closing of the acquisition. We estimated that a total
investment of $2.7 million in research and development over 18 months, from the
date of acquisition, would be required to complete the IPRD. To June 30, 2001,
we have spent approximately $0.8 million. The nature of the efforts required to
develop the purchased IPRD into commercially viable products principally relate
to the completion of all planning, designing, prototyping, verification and
testing activities that are necessary to establish that the products can be
produced to meet their design specifications, including functions, features and
technical performance requirements.
In valuing the IPRD, we considered, among other factors, the importance of
each project to the overall development plan, projected incremental cash flows
from the projects when completed and any associated risks. The projected
incremental cash flows were discounted back to their present value using a
discount rate of 25%. The discount rate was determined after consideration of
our weighted average cost of capital and the weighted average return on assets.
Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility,
anticipated levels of market acceptance and penetration, market growth rates
and risks related to the impact of potential changes in future target markets.
Amortization of Intangibles
Amortization of intangibles was $9.7 million for fiscal 2001 representing
the amortization of goodwill and other purchased intangible assets recorded in
connection with our acquisition of Holographix. The intangibles are being
amortized over their estimated remaining useful life of 3 to 5 years. Our
amortization of intangibles will continue to generate net losses for the
foreseeable future. Amortization of intangibles could change because of other
acquisitions or impairment of existing intangibles in future periods.
We periodically evaluate whether changes have occurred that would require
revision of the remaining estimated useful life of property, equipment, and
intangibles or render them not recoverable. We performed such an analysis as of
June 30, 2001 and the estimated undiscounted future cash flow supported the
carrying value of these assets. As a result, no revision of the estimated
useful life or impairment charge was recorded other than as discussed in the
following section.
Certain factors that the Company considers important which could trigger an
impairment review include, but not limited to, significant underperformance
relative to historical or projected future operating results, significant
changes in the manner of use of the acquired assets or the strategy for the
Company's overall business, significant negative industry or economic trends, a
significant decline in the Company's stock price for a sustained period, and
the Company's market capitalization relative to net book value.
Restructuring Charges
In the fourth quarter of fiscal year 2001, we announced a restructuring
program to downsize our organizational structure, primarily in manufacturing
and administrative functions in our Fremont facilities, in order to align
resources with the current business outlook and to lower our cost structure. As
a result, we recorded a total pre-tax restructuring charge of $22.6 million,
which includes workforce reduction cost of $3.3 million, abandonment of excess
capital equipment of $14.7 million and abandonment of excess leased facilities
of $4.6 million. See Note 2 of Notes to Consolidated Financial Statements.
Workforce Reduction
We reduced our headcount by a total of 654 through involuntary employee
separations. As of June 30, 2001, approximately 349 employee separations were
completed and 305 were completed on July 3, 2001. We recorded a charge of $3.3
million for this reduction, with a total remaining cash outlay of $2.5 million
that is expected in the first quarter of fiscal 2002.
39
Abandonment of Excess Equipment
Due to our reduced workforce and our advanced purchases of equipment for our
anticipated but not realized headcount increases in manufacturing direct labor,
we abandoned excess equipment. We recorded a charge of $14.7 million for the
restructuring.
Abandonment of Excess Leased Facilities
Due to the workforce reduction and anticipation of outsourcing certain
manufacturing activities, we expect to sublease two excess buildings in Newark,
California. The lease on these two buildings began in December 2000; however,
we never occupied these buildings. In March 2001 we engaged a real estate
broker to sublease the two buildings. Given the current real estate market
condition in the Newark area, we do not expect to be able to sublease these two
buildings before the fourth quarter of fiscal 2002 and as a result, we recorded
a charge of $4.6 million.
We realized $3.3 million cash savings from the restructuring plan in fiscal
2001. The restructuring plan is expected to yield cash savings of approximately
$22.5 million annually, beginning in fiscal 2002. These savings largely relate
to reduced employee-related costs and are expected to be realized primarily in
operating expenses.
We will continue to review our product lines and internal processes
throughout fiscal 2002, which may result in additional cost structure
improvements and associated restructuring charges.
Other Income (Expense)
Net other income increased to $12.5 million in fiscal 2001 from $5.7 million
in fiscal 2000. This increase reflects an increase in interest income generated
from higher average cash and cash equivalents balances and investments in
short-term and long-term securities in fiscal 2001, which included the proceeds
from our initial public offering completed in February 2000. This income is
offset by interest expense associated with borrowings under our line of credit
and capital lease obligations and equipment loans.
Comparison of Fiscal 2000 and 1999
Net Revenue
Net revenue for fiscal 2000 was $40.7 million. One customer, WorldCom,
accounted for 92% of net revenue in fiscal 2000. Net revenue for fiscal 1999
was $510,000. During fiscal 1999, Hitachi, Sorrento, and WorldCom each
accounted for at least 10% or more of Avanex's net revenue and all three
combined accounted for 94% of Avanex's net revenue. The increase in net
revenues was primarily due to the fact that fiscal 2000 was our first full year
of product sales, during which we established acceptance of our products with
customers and began volume shipments.
Cost of Revenue
Our cost of revenue increased to $26.3 million in fiscal 2000 from $531,000
in fiscal 1999. Gross profit (loss) percentages also increased on a
year-over-year basis, from gross loss of 4.1% for the year ended June 30, 1999
to gross profit of 35.3% for the year ended June 30, 2000. The increase in
gross profit (loss) was primarily the result of an increase in net revenue for
the period.
Research and Development
Research and development expense increased to $15.6 million in fiscal 2000
from $4.1 million in fiscal 1999. The absolute dollar increase in research and
development expenses from year to year was primarily attributable to increases
in the number of research and development personnel and related costs, pilot
run
40
expense for PowerMux(TM) and PowerShaper(TM) and cost of other development
projects. The decrease in research and development expense as a percentage of
net revenue, from 801% in fiscal 1999 to 38% in fiscal 2000, was primarily the
result of an increase in our net revenue in fiscal 2000.
Sales and Marketing
Sales and marketing expenses increased to $6.0 million in fiscal 2000 from
$1.0 million in fiscal 1999. The absolute dollar increase in sales and
marketing expenses for fiscal 2000 as compared to fiscal 1999 was primarily the
result of an increase in personnel expenses for sales and marketing staff,
increased expenses related to customer support, increased sales commissions
associated with higher net revenue, and increased promotional and product
marketing expenses. The decrease in sales and marketing expense as a percentage
of net revenue, from 187% in fiscal 1999 to 15% in fiscal 2000, was primarily
the result of an increase in our net revenue in fiscal 2000.
General and Administrative
Our general and administrative expenses increased to $5.7 million in fiscal
2000 from $0.7 million in fiscal 1999. This increase was primarily the result
of increased staffing for finance, management information systems, and human
resources, and growth in recruiting and facility related expenses. The decrease
in general and administrative expenses as a percentage of net revenue, from
142% in fiscal 1999 to 14% in fiscal 2000, was primarily the result of an
increase in our net revenue in fiscal 2000.
Stock Compensation
Stock compensation expense increased to $31.4 million in fiscal 2000 from
$3.5 million in fiscal 1999. In fiscal 2000, we recorded a total of $53.5
million of deferred stock compensation, with an unamortized balance of $36.1
million on our June 30, 2000 balance sheet. This increase was due to additional
employees and the granting of stock options and stock purchase rights.
Other Income (Expense)
Net other income increased to $5.7 million in fiscal 2000 from $29,000 in
fiscal 1999. This increase reflects an increase in interest income generated
from higher average cash and cash equivalents balances and investments in
short-term and long-term securities in fiscal 2000, which included the proceeds
from our initial public offering completed in February 2000. This income is
offset by interest expense associated with borrowings under our line of credit.
41
Unaudited Quarterly Results of Operation
The following table presents our unaudited quarterly operating results for
the eight quarters ended June 30, 2001:
Quarter Ended
------------------------------------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1999 1999 2000 2000 2000 2000 2001 2001
--------- -------- --------- -------- --------- -------- --------- --------
(In Thousand $, Unaudited)
Consolidated Statement of Operations Data:
Net revenue............................ $ 4,417 $ 6,499 $ 10,505 $ 19,322 $ 34,767 $ 47,948 $ 30,311 $ 18,218
Cost of revenue........................ 3,431 4,763 6,781 11,368 19,255 25,305 39,775 26,459
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit (loss)................... 986 1,736 3,724 7,954 15,512 22,643 (9,464) (8,241)
Operating expenses:
Research and development.............. 950 2,038 5,018 7,581 8,165 10,703 11,064 7,924
Sales and marketing................... 714 962 2,054 2,317 3,965 4,758 4,083 2,687
General and administrative............ 614 1,515 1,482 2,091 2,906 3,809 3,275 1,872
Stock compensation.................... 6,107 9,590 8,585 7,138 21,141 12,791 10,563 8,589
Acquired in-process research and
development......................... -- -- -- -- 4,700 -- -- --
Amortization of intangibles........... -- -- -- -- 1,798 2,619 2,619 2,617
Restructuring charge.................. -- -- -- -- -- -- -- 22,586
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses............ 8,385 14,105 17,139 19,127 42,675 34,680 31,604 46,275
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations................... (7,399) (12,369) (13,415) (11,173) (27,163) (12,037) (41,068) (54,516)
Other incomes (expenses), net.......... (71) 45 1,950 3,747 3,415 3,509 3,553 2,044
-------- -------- -------- -------- -------- -------- -------- --------
Loss before income taxes............... (7,470) (12,324) (11,465) (7,426) (23,748) (8,528) (37,515) (52,472)
Income taxes........................... -- -- -- -- 1,556 2,754 (1,101) (3,209)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss.............................. (7,470) (12,324) (11,465) (7,426) (25,304) (11,282) (36,414) (49,263)
Stock accretion........................ (14,961) (5,090) (17,692) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net loss attributable to common
stockholders.......................... $(22,431) $(17,414) $(29,157) $ (7,426) $(25,304) $(11,282) $(36,414) $(49,263)
======== ======== ======== ======== ======== ======== ======== ========
We believe this information reflects all adjustments (consisting only of
normal recurring adjustments) that we consider necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles in the United States.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
. Fluctuations in demand for and sales of our products;
. Cancellations of orders and shipment rescheduling;
. The ability of our outsourced manufacturing partners to timely produce and
deliver subcomponents from their facilities in China in the quantity and
the quality we require;
. The practice of companies in the communications industry to sporadically
place large orders with short lead times;
. Competitive factors, including introductions of new products and product
enhancements by potential competitors, entry of new competitors into our
market and pricing pressures;
. Our ability to develop, introduce, manufacture and ship new and enhanced
products in a timely manner without defects;
. Our ability to control expenses;
. Availability of components for our products and increases in the price of
these components;
. Mix of our products sold;
42
. Costs related to acquisitions of technology or businesses; and
. General economic conditions, as well as those specific to the
communications and related industries.
A high percentage of our expenses, including those related to manufacturing,
engineering, sales and marketing, research and development and general and
administrative functions, are essentially fixed in the short term. As a result,
if we experience delays in generating and recognizing revenue, our quarterly
operating results are likely to be seriously harmed. New product introductions
can also result in a mismatching of research and development expenses and sales
and marketing expenses that are incurred in one quarter with revenues that are
not recognized until a subsequent quarter when the new product is introduced.
If growth in our revenues does not outpace the increase in our expenses, our
results of operations could be seriously harmed.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results will not be meaningful. You should not
rely on our results for one quarter as any indication of our future
performance.
Liquidity and Capital Resources
Prior to our initial public offering, we financed our operations primarily
through private sales of approximately $30.4 million for convertible preferred
stock. We have also financed our operations through bank borrowings as well as
through equipment lease financing. In February 2000, we received proceeds of
approximately $238 million from the initial public offering of our common stock
and a concurrent sale of stock to corporate investors.
As of June 30, 2001, we had cash and cash equivalents and short-term
investments of $204.6 million and we had long-term investment holdings of $16.5
million. Cash used in operating activities was $6.7 million in fiscal 2001,
compared to cash used of $10.0 million in fiscal 2000. The decrease was
primarily due to the increase in stock compensation expense, provision for
excess inventory, and non-cash portion of the restructuring charge, offset by
an increase in our net loss and increase in inventory. We used $10.0 million in
cash in operating activities in fiscal 2000 compared to $5.4 million in fiscal
1999. The increase was primarily due to the increase in our net loss, increase
in accounts receivable and increase in inventories, offset by stock
compensation expense and accounts payable.
Cash used in investing activities was $17.3 million in fiscal 2001, compared
to cash used of $161.3 million in fiscal 2000. The decrease was primarily due
to an increase in held-to-maturity securities using the proceeds from the
initial public offering. We used $161.3 million of cash in investing activities
in fiscal 2000 compared to $2.8 million in fiscal 1999. The increase was
primarily due to an increase in held-to-maturity securities using the proceeds
from the initial public offering.
Cash generated from financing activities was $12.3 million in fiscal 2001,
compared to cash generated of $260.6 million in fiscal 2000. The decrease was
primarily due to lower net proceeds from issuance of common stock and preferred
stock. During fiscal 2000, we generated $238 million from our initial public
offering. We generated $260.6 million in cash from financing activities in
fiscal 2000, compared to $7.1 million in fiscal 1999. For fiscal 2000, cash
provided by financing activities was attributable primarily to net proceeds
from the issuance of common stock principally through our initial public
offering and through the proceeds from the issuance of preferred stock.
We financed property and equipment purchases through cash, capital leases or
equipment credit lines. We had capitalized lease obligations outstanding of
$12.7 million at June 30, 2001. In July 2000, the Company secured a revolving
line of credit from a financial institution, which allows maximum borrowings up
to $10 million. In June 2001, the line was increased to $20 million. The
revolving credit agreement terminates July 10, 2002, at which time all
outstanding principal and interest are due. The line bears interest at the
prime rate. In February 2001, the company entered into a loan and security
agreement with a financial institution
43
whereby the financial institution agreed to loan to the Company an aggregate
principal amount of $3 million to be used to finance the acquisition of
equipment, which is collateral for the outstanding loan under the agreement.
The designated interest rate for the loan is 10.4%. In February 2001, the
Company also entered into a loan agreement with another financial institution
to borrow $2.3 million to be used to finance equipment, which is collateral for
the outstanding loan under the agreement. The designated interest rate is
9.406%.
In connection with our initial expansion into a new manufacturing facility
adjacent to our headquarters in Fremont, California we spent approximately
$22.8 million for equipment and leasehold improvements, beginning in the first
quarter of fiscal 2001, through the third quarter ended March 31, 2001. We
moved our main production into this building in July 2000. Our capital
requirements depend on market acceptance of our products, the timing and extent
of new product introductions and delivery, and the need for us to develop,
market, sell and support our products on a worldwide basis.
From time to time, we may also consider the acquisition of, or evaluate
investments in, products and businesses complementary to our business. Any
acquisition or investment may require additional capital. Although we believe
that our current cash and cash equivalents, short-term and long-term investment
balance will be sufficient to fund our operations for at least the next 12
months, we cannot assure you that we will not seek additional funds through
public or private equity or debt financing or from other sources within this
time frame or that additional funding, if needed, will be available on terms
acceptable to us, or at all.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 ("SFAS 141") "Business Combinations" and
Statement of Financial Accounting Standard No. 142 ("SFAS 142") "Goodwill and
Other Intangible Assets". SFAS 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only method. Thus, amortization of goodwill, including
amortization of goodwill recorded in past business combinations, will cease
upon the adoption of this Standard, which for the Company's will be July 1,
2002. However, for any acquisition completed after June 30, 2001, goodwill and
intangibles with indefinite lives will not be amortized. The Company is
currently evaluating the impact of the provisions of SFAS 141 and SFAS 142.
44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We place our investments with high credit issuers
in short-term and long-term securities with maturities ranging from overnight
up to 24 months. The average maturity of the portfolio will not exceed 18
months. The portfolio includes only marketable securities with active secondary
or resale markets to ensure portfolio liquidity. We have no investments
denominated in foreign country currencies and therefore our investments are not
subject to foreign exchange risk.
The following table summarizes the expected maturity, average interest rate
and fair market value of the short-term and long-term securities held by the
Company as of June 30, 2001 and 2000 (in thousands).
As of June 30, 2001
Years Ended June 30, Total Fair
------------------- Amortized Market
2002 2003 Cost Value
-------- ------- --------- --------
Held-to-maturity securities...... $125,278 $16,462 $141,740 $142,144
Average interest rate............ 5.4% 5.3%
As of June 30, 2000
Years Ended June 30, Total Fair
------------------- Amortized Market
2001 2002 Cost Value
------- ------- --------- --------
Held-to-maturity securities...... $93,357 $56,943 $150,300 $148,282
Average interest rate............ 6.6% 7.1%
Exchange Rate Sensitivity
We operate primarily in the United States, and all sales to date have been
made in U.S. dollars. Accordingly, there has not been any material exposure to
foreign currency rate fluctuations.
45
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors......... 47
Consolidated Balance Sheets............................... 48
Consolidated Statements of Operations..................... 49
Consolidated Statements of Stockholders' Equity (Deficit). 50
Consolidated Statements of Cash Flows..................... 51
Notes to Consolidated Financial Statements................... 52
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts............ 70
46
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Avanex Corporation
We have audited the accompanying consolidated balance sheets of Avanex
Corporation as of June 30, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended June 30, 2001. Our audits also
include the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Avanex
Corporation at June 30, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/S/ ERNST & YOUNG LLP
San Jose, California
July 31, 2001
47
AVANEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30,
-------------------
2001 2000
--------- --------
Assets
Current assets:
Cash and cash equivalents......................................................... $ 79,313 $ 90,964
Short-term investments............................................................ 125,278 93,357
Accounts receivable (net of allowance for doubtful accounts of $1,009 at 2001 and
$452 at 2000)................................................................... 13,977 9,942
Inventories....................................................................... 6,451 8,266
Other current assets.............................................................. 877 1,922
--------- --------
Total current assets.......................................................... 225,896 204,451
Long-term investments................................................................ 16,462 56,943
Property and equipment, net.......................................................... 25,864 14,990
Intangibles, net..................................................................... 42,724 --
Other assets......................................................................... 643 1,757
--------- --------
Total assets.................................................................. $ 311,589 $278,141
========= ========
Liabilities and stockholders' equity
Current liabilities:
Short-term borrowings............................................................. $ 6,488 $ 1,525
Accounts payable.................................................................. 13,506 7,668
Current portion of accrued restructuring charge................................... 7,333 --
Other accrued expenses............................................................ 6,563 2,045
Warranty.......................................................................... 5,589 1,941
Current portion of long-term obligations.......................................... 5,060 786
Accrued compensation and related expenses......................................... 4,756 2,999
Deferred revenue.................................................................. 1,948 1,953
--------- --------
Total current liabilities..................................................... 51,243 18,917
Long-term obligations................................................................ 12,527 2,067
Accrued restructuring charge......................................................... 2,465 --
--------- --------
Total liabilities............................................................. 66,235 20,984
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued
and outstanding at June 30, 2001 and 2000....................................... -- --
Common stock, $0.001 par value, 300,000,000 shares authorized at June 30, 2001
and 2000; 65,310,883 and 64,261,593 shares issued and outstanding at June 30,
2001 and 2000, respectively..................................................... 65 64
Additional paid-in capital........................................................ 489,204 385,198
Notes receivable from stockholders................................................ (2,048) (5,173)
Deferred compensation............................................................. (32,818) (36,146)
Accumulated deficit............................................................... (209,049) (86,786)
--------- --------
Total stockholders' equity.................................................... 245,354 257,157
--------- --------
Total liabilities and stockholders' equity.................................... $ 311,589 $278,141
========= ========
See accompanying notes.
48
AVANEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended June 30,
----------------------------
2001 2000 1999
--------- -------- -------
Net revenue............................................................. $ 131,244 $ 40,743 $ 510
Cost of revenue......................................................... 110,794 26,343 531
--------- -------- -------
Gross profit (loss).................................................. 20,450 14,400 (21)
Operating expenses:
Research and development............................................. 37,856 15,587 4,086
Sales and marketing.................................................. 15,493 6,047 956
General and administrative........................................... 11,862 5,702 723
Stock compensation................................................... 53,084 31,420 3,464
Acquired in-process research and development......................... 4,700 -- --
Amortization of intangibles.......................................... 9,653 -- --
Restructuring charge................................................. 22,586 -- --
--------- -------- -------
Total operating expenses......................................... 155,234 58,756 9,229
Loss from operations.................................................... (134,784) (44,356) (9,250)
Interest and other income............................................... 14,443 6,366 148
Interest and other expense.............................................. (1,922) (695) (119)
--------- -------- -------
Net loss................................................................ (122,263) (38,685) (9,221)
Stock accretion......................................................... -- (37,743) --
--------- -------- -------
Net loss attributable to common stockholders............................ $(122,263) $(76,428) $(9,221)
========= ======== =======
Basic and diluted net loss per common share............................. $ (2.12) $ (3.07) $ (4.97)
========= ======== =======
Weighted average shares used in computing basic and diluted net loss per
common share.......................................................... 57,620 24,936 1,857
========= ======== =======
See accompanying notes.
49
AVANEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per share data)
Notes Total
Additional Receivable Deferred Stockholders'
Common Paid-in From Stock Accumulated Equity
Stock Capital Stockholders Compensation Deficit (Deficit)
------ ---------- ------------ ------------ ----------- -------------
Balance at June 30, 1998............................. $ 7 $ 2,105 $ (6) $ (1,774) $ (1,137) $ (805)
Issuance of 11,129,190 shares of common stock
upon exercise of stock options and share purchase
rights............................................ 11 350 (342) -- -- 19
Repurchase of 37,899 shares of common stock........ -- -- -- -- -- --
Issuance of common stock options to consultants.... -- 539 -- -- -- 539
Deferred stock compensation........................ -- 11,502 -- (11,502) -- --
Amortization of deferred stock compensation........ -- -- -- 2,925 -- 2,925
Net loss and comprehensive loss.................... -- -- -- -- (9,221) (9,221)
Other.............................................. -- (13) 22 -- -- 9
--- -------- ------- -------- --------- ---------
Balance at June 30, 1999............................. 18 14,483 (326) (10,351) (10,358) (6,534)
Issuance of 35,019,134 shares of common stock to
preferred stockholders upon conversion............ 35 30,373 -- -- -- 30,408
Sale of 6,900,000 shares of common stock upon the
completion of initial public offering, net of
issuance costs of $2,813.......................... 7 228,200 -- -- -- 228,207
Sale of 769,230 shares of common stock to
corporate investors, concurrent with the initial
public offering................................... 1 9,999 -- -- -- 10,000
Issuance of 5,710,062 shares of common stock upon
exercise of stock options and share purchase
rights............................................ 6 5,489 (4,880) -- -- 615
Repurchase of 2,615,624 shares of common stock..... (3) (32) 33 -- -- (2)
Issuance of warrants............................... -- 118 -- -- -- 118
Issuance of 337,500 shares of common stock upon
the exercise of warrants.......................... -- 1,349 -- -- -- 1,349
Issuance of common stock options to consultants.... -- 3,707 -- -- -- 3,707
Stock accretion.................................... -- 37,743 -- -- (37,743) --
Deferred stock compensation........................ -- 53,508 -- (53,508) -- --
Amortization of deferred stock compensation........ -- -- -- 27,713 -- 27,713
Net loss and comprehensive loss.................... -- -- -- -- (38,685) (38,685)
Other.............................................. -- 261 -- -- -- 261
--- -------- ------- -------- --------- ---------
Balance at June 30, 2000............................. 64 385,198 (5,173) (36,146) (86,786) 257,157
Issuance of 1,251,132 shares of common stock upon
exercise of stock options and share purchase
rights............................................ 1 2,918 -- -- -- 2,919
Issuance of 34,216 shares of common stock relating
to employee stock purchase plan................... -- 1,414 -- -- -- 1,414
Payments received on stockholders' notes
receivable........................................ -- -- 3,125 -- -- 3,125
Issuance of 501,880 shares of common stock and
assumption of options for 709,047 shares of
common stock upon acquisition of Holographix...... 1 96,069 -- (43,579) -- 52,491
Repurchase of 766,667 shares of common stock....... (1) (2,572) -- -- -- (2,573)
Issuance of common stock options to consultants.... 6,360 -- -- -- 6,360
Deferred compensation associated with options
canceled.......................................... -- (7,862) -- 7,862 -- --
Deferred stock compensation........................ -- 7,553 -- (7,553) -- --
Amortization of deferred stock compensation........ -- -- -- 46,598 -- 46,598
Issuance of 28,729 shares of common stock upon
exercise of warrants.............................. -- -- -- -- -- --
Other.............................................. -- 126 -- -- -- 126
Net loss and comprehensive loss.................... -- -- -- -- (122,263) (122,263)
--- -------- ------- -------- --------- ---------
Balance at June 30, 2001............................. $65 $489,204 $(2,048) $(32,818) $(209,049) $ 245,354
=== ======== ======= ======== ========= =========
See accompanying notes.
50
AVANEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
-----------------------------
2001 2000 1999
--------- --------- -------
Operating activities
Net loss................................................................... $(122,263) $ (38,685) $(9,221)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 9,622 2,545 380
Amortization of intangibles............................................. 9,653 -- --
Stock compensation expense.............................................. 53,084 31,420 3,464
Acquired in-process research and development............................ 4,700 -- --
Non-cash portion of restructuring charge................................ 14,680 -- --
Provision for excess inventory.......................................... 34,661 -- --
Provision for doubtful accounts......................................... 557 422 30
Other................................................................... -- -- 22
Changes in operating assets and liabilities:
Accounts receivable.................................................. (4,527) (10,092) (302)
Inventories.......................................................... (27,510) (7,640) (626)
Other current assets................................................. 1,048 (1,454) (431)
Other assets......................................................... 1,114 (1,702) (35)
Accounts payable..................................................... 504 6,678 893
Accrued compensation and related expenses............................ 1,744 2,757 176
Restructuring accrued................................................ 9,798 -- --
Warranty............................................................. 3,648 1,890 51
Other accrued expenses and deferred revenue.......................... 2,834 3,791 163
--------- --------- -------
Net cash used in operating activities............................. (6,653) (10,070) (5,436)
Investing activities
Purchases of available-for-sale securities................................. -- -- (3,968)
Maturities of available-for-sale securities................................ -- 1,968 2,000
Purchases of held-to-maturity securities................................... (129,420) (167,538) --
Maturities of held-to-maturity securities.................................. 137,980 17,238 --
Purchases of property and equipment........................................ (22,807) (12,985) (863)
Acquisition of subsidiary, net of cash assumed............................. (3,047) -- --
--------- --------- -------
Net cash used in investing activities............................. (17,294) (161,317) (2,831)
Financing activities
Payments on long-term debt and capital lease obligations................... (2,820) (2,036) (135)
Proceeds from short-term borrowings and long-term debt..................... 10,231 2,150 450
Net proceeds from issuance of common stock................................. 1,760 240,169 19
Proceeds from payments of stockholders notes receivable.................... 3,125 -- --
Net proceeds from issuance of preferred stock.............................. -- 20,027 6,815
Other...................................................................... -- 285 --
--------- --------- -------
Net cash provided by financing activities......................... 12,296 260,595 7,149
Net increase (decrease) in cash and cash equivalents....................... (11,651) 89,208 (1,118)
Cash and cash equivalents at beginning of year............................. 90,964 1,756 2,874
--------- --------- -------
Cash and cash equivalents at end of year................................... $ 79,313 $ 90,964 $ 1,756
========= ========= =======
Supplemental disclosures of noncash transactions
Equipment acquired under capital leases.................................... $ 15,561 $ 2,761 $ 780
========= ========= =======
Conversion of notes payable to convertible preferred stock................. $ -- $ 30,408 $ --
========= ========= =======
Common stock issued for notes receivable................................... $ -- $ 4,880 $ 342
========= ========= =======
Stock accretion............................................................ $ -- $ 37,743 $ --
========= ========= =======
Warrants issued in connection with securing a line of credit............... $ -- $ 118 $ --
========= ========= =======
Supplemental disclosures of cash flow information
Interest paid.............................................................. $ 1,299 $ 553 $ 117
========= ========= =======
See accompanying notes.
51
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
The Company manufactures and markets fiber optic-based products, known as
photonic processors, which are designed to increase the performance of optical
networks.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Avanex Cayman. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Actual results
could differ materially from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, employee receivables,
accounts payable, accrued expenses, short-term borrowings and long-term
obligations approximates fair value.
Investments
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
based upon quoted market prices of the securities, with the unrealized gains
and losses reported in a separate component of other stockholders' equity.
The cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and interest on the
securities are included in interest income. The cost of securities sold is
based on the specific identification method.
Concentration of Credit Risk
Financial instruments, which subject the Company to potential credit risk,
consist of demand deposit accounts, money market accounts, short-term and
long-term investments, employee receivables and accounts
52
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
receivable. The Company maintains its demand deposit accounts, money market
accounts and short-term and long-term investments primarily with two financial
institutions. The Company invests its excess cash principally in debt
securities.
The Company sells primarily to large communication vendors. The Company
extends reasonably short collection terms but does not require collateral. The
Company provides reserves for potential credit losses. The Company has not
experienced significant losses to date. Concentrations of credit risk, with
respect to accounts receivable, exist to the extent of amounts presented in the
financial statements.
Revenue Recognition
The Company recognizes product revenue when the product has been shipped,
title has transferred, collectibility is reasonably assured, fees are fixed and
determinable and there are no uncertainties with respect to customer
acceptance. For evaluation units where the customer has the right of return
through the end of the evaluation period, the Company recognizes revenue on
these shipments at the end of an evaluation period, if not returned.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on the straight-line method over the
useful lives of the assets, generally two to five years. Leasehold improvements
are amortized over the shorter of the lease term or the estimated useful life.
Intangible Assets
Intangible assets result from the acquisition of Holographix, Inc.
("Holographix"). Amortization of intangibles is provided on the straight-line
basis over the three to five year estimated useful life of these assets. As of
June 30, 2001, the accumulated amortization of intangibles was $9,653,000.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property, equipment and
intangibles, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. An impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. Impairment, if any, is assessed
using discounted cash flows.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-Based Compensation
Stock based awards to employees are accounted for under the intrinsic value
method. The effects of accounting for such awards under the fair value method
are disclosed in the notes to consolidated financial statements. Accordingly,
deferred stock compensation is recognized for the difference between the option
price or share purchase right exercise price at the date of grant and the fair
value of the Company's common shares at that date when the option or share
purchase right exercise price is less than the fair value of the common shares.
Such deferred stock compensation is amortized over the vesting period,
generally a maximum of four years.
53
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equity instruments granted to consultants are accounted for using the
Black-Scholes method and the equity instruments are subject to periodic
revaluations over their vesting terms. The expense is recognized as the
instruments vest.
Inventories
Inventories consist of raw materials, work-in-process and finished goods and
are stated at the lower of cost or market. Cost is computed on a currently
adjusted standard basis (which approximates actual costs on a first-in,
first-out basis).
Income Taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses for
the years ended June 30, 2001, 2000 and 1999 were $932,000, $919,000 and
$76,000, respectively, and are included in sales and marketing expenses.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 ("SFAS 141") "Business Combinations" and
Statement of Financial Accounting Standard No. 142 ("SFAS 142") "Goodwill and
Other Intangible Assets". SFAS 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only method. Thus, amortization of goodwill, including
amortization of goodwill recorded in past business combinations, will cease
upon the adoption of this Standard, which for the Company's will be July 1,
2002. However, for any acquisition completed after June 30, 2001, goodwill and
intangibles with indefinite lives will not be amortized. The Company is
currently evaluating the impact of the provisions of SFAS 141 and SFAS 142.
2. Restructuring Charge
During the fourth quarter of fiscal 2001, the Company announced a
restructuring program to downsize the Company's organizational structure,
primarily in manufacturing and administration functions in its Fremont,
California facilities, in order to align resources with the current business
outlook and to lower the Company's cost structure. As a result of the
restructuring program, the Company recorded a restructuring charge of $22.6
million.
Workforce Reduction
The Company reduced its workforce by a total of 654 employees through
involuntary employee separations through July 3, 2001. The Company recorded a
charge of $3.3 million for employee separations.
Abandonment of Excess Equipment
The Company abandoned excess equipment and recorded a charge of $14.7
million. Certain of the excess equipment is under capital lease and the
corresponding capital lease amount has been included in the
54
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
restructuring liability as of June 30, 2001. Equipment with a cost of
approximately $3.8 million included in the restructuring charge was capitalized
under capital lease. Related accumulated amortization accounted for
approximately $0.9 million.
Abandonment of Excess Leased Facilities
The Company is attempting to sublease two excess buildings in Newark,
California. The lease on these two buildings began in December 2000; however,
the Company never occupied these buildings. In March 2001, the Company engaged
a real estate broker to sublease the two buildings. Given the current real
estate market condition in the Newark area, the Company does not expect to be
able to sublease these two buildings before the fourth quarter of fiscal year
2002 and as a result, the Company recorded a charge of $4.6 million.
A summary of the restructuring charges is as follows (in thousands):
Restructuring
Total Noncash Cash Liabilities at
Charge Charges Payments June 30, 2001
------- ------- -------- --------------
Workforce reduction......................... $ 3,267 $ -- $ 753 $2,514
Abandonment of excess equipment............. 14,680 14,680 -- --
Abandonment of excess leased facilities..... 4,639 -- 630 4,009
Capital leases.............................. -- -- -- 3,275
------- ------- ------ ------
Total.................................... $22,586 $14,680 $1,383 $9,798
======= ======= ======
Less current portion........................ 7,333
------
Long-term portion........................... $2,465
======
Remaining cash expenditures relating to workforce reduction will be paid in
the first quarter of fiscal 2002. Amounts related to the abandonment of excess
leased facilities will be paid as the lease payments are due in fiscal 2002.
3. Net Loss Per Share
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):
Years Ended June 30,
-----------------------------
2001 2000 1999
--------- -------- --------
Net loss attributable to common stockholders..... $(122,263) $(76,428) $ (9,221)
========= ======== ========
Basic and diluted:
Weighted-average shares of common stock
outstanding................................. 65,181 37,396 12,851
Less: weighted-average shares subject to
repurchase.................................. (7,561) (12,460) (10,994)
--------- -------- --------
Weighted-average shares used in computing basic
and diluted net loss per common share.......... 57,620 24,936 1,857
========= ======== ========
Basic and diluted net loss per common share...... $ (2.12) $ (3.07) $ (4.97)
========= ======== ========
55
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During all periods presented, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share, as their effect
would have been antidilutive. These outstanding securities consist of the
following (in thousands):
Years Ended June 30,
--------------------
2001 2000 1999
----- ----- ------
Redeemable convertible preferred stock..................... -- -- 29,788
Outstanding options........................................ 7,288 3,989 989
Outstanding warrants....................................... -- 29 338
4. Consolidated Balance Sheet Details
Cash equivalents, Short-Term and Long-Term Investments
The Company generally invests its excess cash in debt instruments of the
U.S. Treasury, government agencies and corporations with strong credit ratings.
Such investments are made in accordance with the Company's investment policy,
which establishes guidelines relative to diversification and maturities
designed to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any significant losses on its investments.
Cash equivalents, short-term and long-term investments consist of the
following (in thousands):
June 30, 2001
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Cash Equivalents
Money Market...................... $ 14,608 $ -- $ -- $ 14,608
Commercial Paper.................. 54,418 -- (10) 54,408
United States Government Agencies. 11,938 -- -- 11,938
-------- ---- ----- --------
80,964 -- (10) 80,954
Short Term Investments
Commercial Paper.................. 38,803 -- (3) 38,800
Corporate Notes................... 15,423 36 (1) 15,458
Certificate of Deposits........... 4,832 -- -- 4,832
Market Auction Preferreds......... 6,524 -- -- 6,524
United States Government Agencies. 26,976 196 (1) 27,171
Corporate Bonds................... 13,503 135 -- 13,638
Foreign Debt Securities........... 3,089 19 -- 3,108
Medium Term Notes................. 16,128 154 -- 16,282
-------- ---- ----- --------
125,278 540 (5) 125,813
Long Term Investments--due between one year and two years
Corporate Bonds................... 5,825 2 (93) 5,734
US Agencies....................... 8,585 6 (53) 8,538
Foreign Debt Securities........... 2,052 7 -- 2,059
-------- ---- ----- --------
16,462 15 (146) 16,331
-------- ---- ----- --------
Total......................... $222,704 $555 $(161) $223,098
======== ==== ===== ========
56
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Cash Equivalents
Money Market........................ $ 6,142 $ -- $ -- $ 6,142
Commercial Paper.................... 78,207 -- (29) 78,178
Market Auction Preferreds........... 2,006 -- -- 2,006
Money Market--Comerica.............. 4,518 -- -- 4,518
Other............................... 672 -- -- 672
-------- ---- ------- --------
91,545 -- (29) 91,516
Short Term Investments
Commercial Paper.................... 21,743 -- (1) 21,742
Corporate Notes..................... 8,103 -- (123) 7,980
Certificate of Deposits............. 6,078 1 -- 6,079
Market Auction Preferreds........... 4,532 -- -- 4,532
United States Government Agencies... 39,537 -- (649) 38,888
Corporate Bonds..................... 1,439 -- (2) 1,437
Foreign Debt Securities............. 2,019 -- (43) 1,976
Medium Term Notes................... 6,838 -- (113) 6,725
US Agencies......................... 3,068 2 -- 3,070
-------- ---- ------- --------
93,357 3 (931) 92,429
Long Term Investments--due between one year and two years
Corporate Bonds..................... 16,257 -- (152) 16,105
Corporate Notes..................... 9,998 -- (333) 9,665
Medium Term Notes................... 25,627 -- (456) 25,171
Foreign Debt Securities............. 5,061 -- (149) 4,912
-------- ---- ------- --------
56,943 -- (1,090) 55,853
-------- ---- ------- --------
Total........................... $241,845 $ 3 $(2,050) $239,798
======== ==== ======= ========
Estimated fair value is based upon market prices quoted on the last day of
the fiscal year.
Inventories
Inventories consist of the following (in thousands):
June 30,
-------------
2001 2000
------ ------
Raw materials.......................... $1,963 $2,815
Work-in-process........................ 2,492 4,676
Finished goods......................... 1,996 775
------ ------
$6,451 $8,266
====== ======
Due to a sudden and significant decrease in forecasted revenue, the Company
recorded a provision for excess inventory of $34.7 million. This excess
inventory charge was calculated in accordance with the Company's policy, which
is based on inventory levels in excess of 6-months demand forecast for each
specific product, and management does not believe it will be able to sell such
inventory.
57
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment consist of the following (in thousands):
June 30,
----------------
2001 2000
------- -------
Computer hardware and software................... $ 751 $ 619
Production and engineering equipment............. 24,283 11,588
Office equipment, furniture and fixtures......... 1,559 646
Leasehold improvements........................... 5,194 391
Construction in progress......................... 8 4,586
------- -------
31,795 17,830
Accumulated depreciation......................... (5,931) (2,840)
------- -------
$25,864 $14,990
======= =======
Construction in progress primarily consists of leasehold improvements
constructed and equipment received before June 30, 2000, but not placed into
service until the completion of the Company's new facility in Fremont in July
2000.
5. Related Party Transactions
In September 2000, the Company loaned $150,000 to an officer. The promissory
note, which bears interest at 6.50% per annum, and accrued interest are payable
in full to the Company on September 24, 2001.
In November 1999, the Company loaned $125,000 to an officer. The interest
rate on the promissory note was 5.57% per annum. This promissory note was paid
in fiscal 2001.
In connection with the exercise of certain stock options and share purchase
rights granted under the Company's stock option plan, the Company has received
promissory notes equal to the total exercise price of these stock options and
share purchase rights. These full recourse promissory notes, which bear
interest at 4.99%-6.21% per annum, and accrued interest are payable in full to
the Company, generally four to five years from the date each of the promissory
notes was issued. Promissory notes for the exercise of certain stock options
and share purchase rights totaling $2,048,000, $5,173,000 and $326,000 were
outstanding as of June 30, 2001, 2000 and 1999. These notes are classified as a
reduction of stockholders' equity.
One of the Company's directors is a senior vice president of WorldCom, Inc.
WorldCom, Inc. accounted for 35%, 92%, and 32% of the Company's net revenue for
the years ended June 30, 2001, 2000 and 1999, respectively.
6. Commitments and Contingencies
In September 1999, the Company entered into an operating lease for a new
corporate headquarters and manufacturing facility. Upon the expiration of the
lease in October 2009, the Company has an option to extend the lease term for
an additional five year period. In March 2000, the Company entered into another
operating lease for a building adjacent to its corporate headquarters. Upon the
expiration of the lease in April 2010, the Company has an option to extend the
lease term for an additional five-year period.
58
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under noncancelable operating leases having
initial terms in excess of one year as of June 30, 2001 are as follows (in
thousands):
Operating
Leases
---------
Year ending June 30,
2002................................. $ 3,643
2003................................. 3,311
2004................................. 3,387
2005................................. 3,315
2006................................. 2,513
Remaining years......................... 13,696
-------
Total minimum lease payments..... $29,865
=======
The Company's rental expense under operating leases was approximately
$5,564,000, $1,799,000 and $346,000 for the years ended June 30, 2001, 2000 and
1999, respectively.
From time to time, the Company may be subject to claims which arise in the
normal course of business. Although the amount of any liability with respect to
such litigation cannot be determined, in the opinion of management, the
ultimate disposition of these claims will not have a material adverse effect on
the Company's financial position, cash flows or results of operations. However,
depending on the amount and timing, an unfavorable resolution of a matter could
materially affect the Company's future results of operations or cash flows in a
particular period.
7. Financing Arrangements
Short-Term Borrowing
In July 1999, the Company secured a revolving line of credit from a
financial institution, which allows maximum borrowings up to $3,750,000, which
was increased to $10 million in July 2000 and to $20 million in June 2001. The
revolving credit agreement terminates July 10, 2002, at which time all
outstanding principal and interest are due. The line bears interest at the
prime rate (prime rate plus 0.75% prior to July 2000). The Company has pledged
all of its assets as collateral for this line. This line of credit requires the
Company to comply with specified covenants. The Company did not meet one of
these covenants for the year ended June 30, 2001 but received a waiver from the
financial institution. At June 30, 2001 and 2000, the Company had borrowings of
$6,488,000 and $1,525,000 against this line, respectively.
Long-Term Debt
In February 2001, the Company entered into a loan and security agreement
with a financial institution whereby the financial institution agreed to loan
to the Company an aggregate principal amount of $3,000,000 to be used to
finance the acquisition of equipment, which is collateral for the outstanding
loan under the agreement. The designated interest rate for the loans is 10.4%.
As of June 30, 2001, the Company had outstanding $2,785,000.
In February 2001, the Company entered into a loan agreement with a financial
institution to borrow $2,269,000 to be used to finance equipment, which is
collateral for the outstanding loan under the agreement. The designated
interest rate is 9.406%. As of June 30, 2001, the Company had $2,129,000
outstanding.
59
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Payments due under financing arrangements as of June 30, 2001 are as follows
(in thousands):
Year ending June 30,
2002.......................................... $1,932
2003.......................................... 1,932
2004.......................................... 1,640
2005.......................................... 191
------
Total payments............................ 5,695
Amounts representing interest.................... (781)
------
Present value of net remaining payments.......... 4,914
Less current portion............................. 1,510
------
Long-term portion................................ $3,404
======
Capital Lease Obligations
The Company leases certain of its equipment and other fixed assets under
capital lease agreements. The assets and liabilities under capital leases are
recorded at the lesser of the present value of aggregate future minimum lease
payments, including estimated bargain purchase options, or the fair value of
the assets under lease. Assets under capital leases are amortized over the
shorter of the lease term or useful life of the assets.
Payments due under capital leases for certain equipment as of June 30, 2001
are as follows (in thousands):
Capital
Leases
-------
Year ending June 30,
2002.......................................... $ 4,816
2003.......................................... 4,772
2004.......................................... 3,588
2005.......................................... 2,090
-------
Total minimum lease payments.............. 15,266
Amount representing interest..................... (2,593)
-------
Present value of net minimum lease payments...... 12,673
Less current portion............................. 3,550
-------
Long-term portion................................ $ 9,123
=======
At June 30, 2001 and 2000, equipment amounting for approximately $12,164,000
and $3,681,000, respectively, was capitalized under capital leases. Related
accumulated amortization at June 30, 2001 and 2000 amounted to approximately
$1,551,000 and $848,000, respectively. The lease agreements are payable in
monthly installments through March 2005, bearing interest at rates between 8.5%
and 19.5% per annum, and are fully secured by the related equipment.
8. Acquisition of Holographix
On July 25, 2000, the Company acquired substantially all of the assets and
liabilities of Holographix, a developer and manufacturer of holographic
diffraction gratings. The transaction was accounted for as a purchase and
accordingly, the accompanying consolidated financial statements include the
results of operations of
60
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Holographix subsequent to the acquisition date. The total purchase price of
$99.1 million included consideration of 501,880 shares of Avanex common stock,
the issuance of 709,047 Avanex stock options in exchange for Holographix
options and direct transaction costs.
The total purchase cost of Holographix is as follows (in thousands):
Value of securities issued....................... $40,287
Assumption of Holographix options................ 55,783
-------
96,070
Transaction costs and expenses................... 3,077
-------
$99,147
=======
The purchase price allocation is as follows (in thousands):
Amount
-------
Purchase Price Allocation:
Tangible net assets (liabilities)............. $(1,509)
Intangible assets acquired:
Developed technology.......................... 2,400
Assembled workforce........................... 300
In-process research and development........... 4,700
Deferred compensation expense................. 43,579
Goodwill...................................... 49,677
-------
Total purchase price allocation........... $99,147
=======
Tangible net assets acquired include cash, accounts receivable, inventories
and property and equipment. Liabilities assumed principally include accounts
payable, notes payable, accrued compensation and accrued expenses. A portion of
the purchase price has been allocated to developed technology and acquired
in-process research and development ("IPRD"). Developed technology and IPRD
were identified and valued through extensive interviews, analysis of data
provided by Holographix concerning developmental products, their stage of
development, the time and resources needed to complete them, if applicable,
their expected income generating ability, target markets and associated risks.
The income approach, which includes an analysis of the markets, cash flows and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing the developed technology and IPRD.
Where developmental projects had reached technological feasibility, they
were classified as developed technology, and the value assigned to developed
technology was capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPRD and charged to expense upon closing of the transaction. The
Company estimated that a total investment of $2.7 million in research and
development over the 18 months following the acquisition would be required to
complete the IPRD. The Company has spent approximately $0.8 million in the year
ended June 30, 2001 on these projects. The nature of the efforts required to
develop the purchased IPRD into commercially viable products principally relate
to the completion of all planning, designing, prototyping, verification and
testing activities that are necessary to establish that the products can be
produced to meet their design specifications, including functions, features and
technical performance requirements.
In valuing the IPRD, the Company considered, among other factors, the
importance of each project to the overall development plan, projected
incremental cash flows from the projects when completed and any
61
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
associated risks. The projected incremental cash flows were discounted back to
their present value using a discount rate of 25%. The discount rate was
determined after consideration of the Company's weighted average cost of
capital and the weighted average return on assets. Associated risks include the
inherent difficulties and uncertainties in completing each project and thereby
achieving technological feasibility, anticipated levels of market acceptance
and penetration, market growth rates and risks related to the impact of
potential changes in future target markets.
The acquired existing technology, which is comprised of products that are
already technologically feasible, mainly includes holographic based laser
scanning systems and the recording of custom holographic master gratings. The
Company is amortizing the acquired existing technology of approximately $2.4
million on a straight-line basis over an average estimated remaining useful
life of 5 years.
The acquired assembled workforce is comprised of 9 skilled employees. The
Company is amortizing the value assigned to the assembled workforce of
approximately $300,000 on a straight-line basis over an estimated remaining
useful life of 3 years.
Deferred compensation is recognized for the intrinsic value of the unvested
Avanex options exchanged for options held by employees of Holographix. The
$43.6 million of deferred compensation is amortized over the remaining vesting
period, of approximately 4 years.
Goodwill, which represents the excess of the purchase price of an investment
in an acquired business over the fair value of the underlying net identifiable
assets and deferred compensation, is being amortized on a straight-line basis
over its estimated remaining useful life of 5 years.
The following unaudited pro forma summary presents the consolidated results
of operations of the Company, excluding the charge for acquired in-process
research and development, as if the acquisition of Holographix had occurred at
the beginning of fiscal 2000 and does not purport to be indicative of what
would have occurred had the acquisition been made as of the beginning of fiscal
2000 or of results which may occur in the future. The pro forma results of
operations combines the consolidated results of operations of the Company and
Holographix, excluding the charge for acquired in-process research and
development attributable to Holographix.
Year Ended June 30,
--------------------
2001 2000
--------- --------
(In thousands, except
per share data)
Net Revenue...................................... $ 131,246 $ 42,013
Net loss attributable to common stockholders..... (122,271) (76,465)
Loss per share................................... (2.12) (3.01)
9. Stockholders' Equity
Shares issued to Founder
The Company issued 2,700,000 shares of stock to one of its founders pursuant
to a restricted stock purchase agreement that permits the Company to repurchase
the shares at the original sales price. At June 30, 2001 and 2000, 393,750 and
1,068,750 shares remained subject to repurchase under these agreements,
respectively.
62
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Completion of Initial Public Offering
Concurrently with the completion of its initial public offering, the Company
sold to Microsoft Corporation and MCI WorldCom Venture Fund, an affiliate of
WorldCom, Inc., an aggregate of 769,230 shares of common stock for $13.00 per
share. The Company recorded an accretion charge equal to the difference between
the initial public offering price of $36 per share and $13 per share. The
non-cash charge was recorded as an increase in accumulated deficit with a
corresponding credit to additional paid-in capital and was recognized on the
date of issuance.
Upon the closing of its initial public offering, all the Company's
outstanding preferred stock automatically converted into an aggregate of
35,019,134 shares of Common Stock.
Stock Option/Rights Plans
The Company adopted the 1998 Stock Plan (the "Option Plan"), under which
officers, employees, directors, and consultants may be granted Incentive Stock
Options ("ISOs") and Nonstatutory Stock Options ("NSOs") to purchase shares of
the Company's common stock.
The Option Plan permits ISOs and NSOs to be granted at an exercise price of
not less than 100% of the fair value on the date of grant as determined by the
Board of Directors. Options that expire (generally ten years from the grant
date) or are canceled are returned to the Option Plan. The term of the Option
Plan is ten years. Options may be granted with different vesting terms as
determined by the Board of Directors. The options typically vest over four
years.
The authorized shares under the Option Plan automatically increase each July
1, equal to the lesser of (i) 6,000,000 shares, (ii) 4.9% of the Company's
outstanding shares, or (iii) a smaller amount determined by the Company's Board
of Directors.
In July 2000, the Company assumed options to purchase 709,047 shares (on a
converted basis) in connection with the acquisition of all of the assets and
some liabilities of Holographix Inc. The assumed stock options are governed by
the terms and conditions of their respective Holographix stock option
agreements and the 2000 Holographix stock plan. Options expire ten years after
the grant date or earlier upon termination of an optionee's services to the
company. Generally, the Holographix options vest 25% after the grant date and
1/48 per month thereafter.
In January 2000, the Company adopted the 1999 Director Option Plan (the
"Director Plan"). Non-employee directors are entitled to participate in the
Director Plan. A total of 300,000 shares of the Company's common stock have
been reserved for issuance under the Director Plan, plus automatic annual
increases beginning on July 1, 2000 equal to the lesser of (i) 150,000 shares,
(ii) 0.25% of the outstanding shares on that date, or (iii) a smaller amount
determined by the Company's Board of Directors. The Director Plan generally
provides for an automatic initial grant of an option to purchase 40,000 shares
of our common stock to each non-employee director on the date which the later
of the following events occur: the effective date of the Director Plan; or the
date when a person first becomes a non-employee director. After the initial
grant, each non-employee director will automatically be granted subsequent
options to purchase 10,000 shares of our common stock each year on the date of
the Company's annual stockholders' meeting. Grants generally shall have a term
of 10 years. Each initial option grant will vest as to 25% of the shares
subject to the option on each anniversary of its date of grant. Each subsequent
option grant will fully vest on the anniversary of its date of grant. The
exercise price of all options will be 100% of the fair market value per share
of our common stock on the date of grant.
63
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option activity under the Option Plan and Director Plan is as follows:
Outstanding Options
---------------------
Weighted-
Average
Number of Exercise
Shares Price
---------- ---------
Balance at June 30, 1998......................... 348,602 $ 0.01
Options granted............................... 1,297,050 0.03
Options exercised............................. (618,602) 0.02
Options canceled.............................. (38,250) 0.05
---------- ------
Balance at June 30, 1999......................... 988,800 0.05
Options granted............................... 4,109,654 10.71
Options exercised............................. (753,897) 0.82
Options canceled.............................. (355,551) 4.82
---------- ------
Balance at June 30, 2000......................... 3,989,006 10.45
Options granted............................... 4,338,608 44.76
Options assumed in Holographix acquisition.... 709,047 3.85
Options exercised............................. (1,161,132) 2.51
Options canceled.............................. (587,527) 53.67
---------- ------
Balance at June 30, 2001......................... 7,288,002 $28.02
========== ======
Outstanding Exercisable
----------------------------------- -------------------
Number Weighted- Number
of Shares Average Weighted- of Shares Weighted-
As of Remaining Average As of Average
Range of June 30, Contractual Exercise June 30, Exercise
Exercise Prices 2001 Life (in years) Price 2001 Price
--------------- --------- --------------- --------- --------- ---------
$ 0.03- 2.00 1,241,739 8.06 $ 0.57 166,007 $ 0.62
2.34- 13.00 1,701,920 8.78 7.03 402,363 7.28
13.17- 13.19 2,012,530 9.83 13.19 32,442 13.19
13.69- 85.375 1,387,413 9.33 38.20 211,728 48.87
90.00-142.00 944,400 9.22 118.57 8,390 95.94
-------------- --------- ---- ------- ------- ------
$ 0.03-142.00 7,288,002 9.11 $ 28.02 820,930 $17.80
============== ========= ==== ======= ======= ======
Under the Option Plan, the Company may also grant share purchase rights
either alone, in addition to, or in tandem with other awards granted under the
Option Plan and/or cash awards granted outside the Option Plan. Exercise of
these share purchase rights are made pursuant to restricted stock purchase
agreements containing provisions established by the Board of Directors. These
provisions give the Company the right to repurchase the shares at the original
sales price. This right expires at a rate determined by the Board of Directors,
generally at a rate of 25% after one year and 1/48 per month thereafter. During
the years ended June 30, 2001, 2000 and 1999, the Company issued 90,000,
4,956,165 and 10,510,589 shares under the Option Plan. Shares subject to
repurchase were 5,039,922 shares as of June 30, 2001, 11,929,780 shares as of
June 30, 2000, 11,730,902 shares as of June 30, 1999. For the year ended June
30, 2001, 2000 and 1999, the Company repurchased 766,667, 2,615,625 and 37,899
shares, respectively, under the Option Plan.
The weighted-average fair value of stock options and share purchase rights
granted at fair value and below fair value during fiscal 2001 was $33.70 and
$77.22, respectively. The weighted-average deemed fair value of stock options
and share purchase rights granted during fiscal 2000 and 1999 was $10.44 and
$1.51, respectively.
64
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the years ended June 30, 2001, 2000 and 1999, the Company recorded
deferred stock compensation of $51,132,000, $53,508,000, and $11,502,000,
respectively, representing the difference between the exercise price and the
fair value for accounting purposes of the Company's common stock on the date
such stock options and share purchase rights were granted. The fair value of
options and share repurchase rights granted prior to the Company's initial
public offering was based on the Company's retrospective review of the primary
business factors underlying the value of its common stock on the dates such
grants were made, viewed in light of the Company's initial public offering and
the expected initial public offering price per share. The fair value of stock
options and share purchase rights granted subsequent to the initial public
offering was based on the actual stock closing price on the day previous to the
date of grant. For the years ended June 30, 2001, 2000 and 1999, the Company
recorded amortization of deferred stock compensation of $46,598,000,
$27,713,000 and $2,925,000, respectively. At June 30, 2001, the Company had
$32,818,000 of remaining unamortized deferred compensation. Such amount is
included as a reduction of stockholders' equity and is being amortized over the
vesting period.
For the years ended June 30, 2001, 2000 and 1999, the Company recorded stock
compensation expense of $6,360,000, $3,707,000 and $539,000, respectively
related to common stock options granted to consultants. The value of the
options was estimated using the Black-Scholes option pricing model with the
following assumptions: weighted-average risk free interest rate of 5.5%,
contractual life of ten years, volatility of 0.90 (0.75 for 2000 and 1999) and
no dividend yield.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
Pro forma information regarding net loss and net loss per common share under
the fair value method for options and share repurchase rights granted prior to
the Company's initial public offering was estimated at the date of grant using
the minimum value method. The fair value of stock options and share purchase
rights granted subsequent to the initial public offering were valued using
Black-Scholes valuation model based on the actual stock closing price on the
day previous to the date of grant. The option valuation models were developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions. Because the Company's
stock-based awards have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock-based awards. The fair value of these options was
estimated at the date of grant using the following weighted-average
assumptions:
June 30,
-------------------------
2001 2000 1999
------- ------- -------
Risk-free interest rate.......................... 5.5% 5.5% 5.5%
Dividend yield................................... -- -- --
Weighted-average expected life................... 3 years 5 years 5 years
Volatility....................................... 0.90 0.90 --
For options granted after February 3, 2000, the volatility of 0.90 was used
to determine their value under the Black-Scholes method with the other
assumptions being the same as for the minimum value method.
65
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except per share data):
Years Ended June 30,
----------------------------
2001 2000 1999
--------- -------- -------
Net loss:
As reported................................... $(122,263) $(76,428) $(9,221)
Pro forma..................................... $(168,618) $(79,772) $(9,313)
Basic and diluted net loss per common share:
As reported................................... $ (2.12) $ (3.07) $ (4.97)
Pro forma..................................... $ (2.93) $ (3.20) $ (5.02)
The pro forma impact of options on the consolidated net loss attributable to
common stockholders for the years ended June 30, 2001, 2000 and 1999 is not
representative of the effects on consolidated net income (loss) attributable to
common stockholders for future years, as future years will include the effects
of additional stock option grants.
1999 Employee Stock Purchase Plan
In January 2000, the Company adopted the 1999 Employee Stock Purchase Plan
(the "Stock Purchase Plan") for its employees. A total of 525,000 shares of the
Company's common stock has been reserved for issuance under the Stock Purchase
Plan, plus automatic annual increases beginning on July 1, 2000 equal to the
lesser of (i) 750,000 shares, (ii) 1% of the outstanding shares on that date,
or (iii) a smaller amount determined by the Company's Board of Directors. The
Stock Purchase Plan permits participants to purchase the Company's common stock
through payroll deductions of up to 10% of the participant's compensation. The
maximum number of shares a participant may purchase during each offering period
is 3,000 shares. The price of common stock purchases will be 85% of the lower
of the fair market value at the beginning of the offering period and the ending
of the offering period. As of June 30, 2001, 34,216 shares have been issued
under the Stock Purchase Plan.
Warrants
In connection with the revolving line of credit, the Company issued a
warrant to the financial institution, which entitles the holder to purchase
29,347 shares of the Company's common stock with an aggregate purchase price
equal to $112,000, or approximately $3.83 per share. The warrants are
exercisable at anytime, and will expire upon the earlier of (i) the closing of
any acquisition of the Company or (ii) their expiration on July 8, 2004. The
value of the warrants was estimated using the Black-Scholes option pricing
model with the following assumptions: weighted-average risk-free interest rate
of 5.5%, contractual life of 5 years, volatility of 0.75 and no dividend yield.
The Company calculated a value of $118,000 and this amount was recorded as an
other asset and was amortized to interest expense over the term of the
agreement. This warrant was exercised in July 2000.
Shares Reserved
Common stock reserved for future issuance is as follows:
June 30, 2001
-------------
Stock options:
Options outstanding..................................... 7,288,002
Reserved for future grants.............................. 7,658,626
Employee stock purchase plan............................... 1,133,399
----------
Total common stock reserved for future issuance..... 16,080,027
==========
66
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. 401(K) Plan
The Company maintains a savings and retirement plan under Section 401(k) of
the Internal Revenue Code. All employees are eligible to participate on the
first day of the month following their hire date with the Company. Under the
plan, employees may contribute up to 15% of their pre tax salaries per year but
not more than the statutory limits. The Company has not contributed to the
plan.
11. Income Taxes
There has been no provision for U.S. federal, U.S. state or foreign income
taxes for any annual period as the Company has incurred operating losses since
inception for all jurisdictions.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets are as follows
(in thousands):
Years Ended June 30,
-------------------
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards.............. $ 20,624 $ 7,655
Stock option compensation..................... 8,172 5,640
Inventory reserves............................ 16,996 1,345
Restructuring charge.......................... 7,443 --
Other......................................... 6,947 2,364
-------- --------
Total deferred tax assets................. 60,182 17,004
Valuation allowance.............................. (52,285) (17,004)
-------- --------
Net deferred tax assets.......................... 7,897 --
-------- --------
Deferred tax liabilities:
Purchased intangibles......................... (7,897) --
-------- --------
Total deferred tax liabilities............ (7,897) --
-------- --------
Net deferred tax assets.......................... $ -- $ --
======== ========
Realization of the deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $35.3 million, $13.2 million, and $3.5 million
in the years ended June 30, 2001, 2000 and 1999 respectively.
The tax benefits associated with employee stock options provide a deferred
benefit of approximately $16.1 million as of June 30, 2001. The deferred tax
benefit associated with employee stock options will be credited to additional
paid-in capital when realized.
As of June 30, 2001, the Company has net operating loss carry-forwards for
federal income tax purposes of approximately $40 million, which expire in years
2013 through 2021. The Company also has net operating loss carry-forwards for
state income tax purposes of approximately $33.0 million expiring in the years
2006 through 2011. Utilization of the Company's net operating loss may be
subject to a substantial annual limitation due to the
67
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ownership change limitations provided by the Internal Revenue Code and similar
state provisions. Such an annual limitation could result in the expiration of
the net operating loss before utilization.
12. Market Sales, Export Sales, Significant Customers, and Concentration of
Supply
Segment Information
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews the Company's
financial information presented on a consolidated basis substantially similar
to the accompanying consolidated financial statements. Therefore, the Company
has concluded that it operates in one segment, to manufacture and market
photonic processors, and accordingly has provided only the required enterprise
wide disclosures.
The Company had net sales by geographical region as follows (in thousands):
Years Ended June 30,
---------------------
2001 2000 1999
-------- ------- ----
North America.................................... $ 81,824 $38,706 $357
Asia............................................. 40,392 2,037 153
Europe........................................... 9,028 -- --
-------- ------- ----
$131,244 $40,743 $510
======== ======= ====
Revenues are attributed to geographical regions based on the location of the
customer.
For the year ended June 30, 2001, three customers each individually
accounted for over 10% of net revenue, for an aggregate of approximately 77% of
net revenue. Outstanding receivables from these customers approximated 67% of
total gross receivables at June 30, 2001. For the year ended June 30, 2000, one
customer individually accounted for 92% of net revenue. Outstanding receivables
from this customer approximated 87% of total gross accounts receivable at June
30, 2000. For the year ended June 30, 1999, three customers each individually
accounted for over 10% of net revenue, for an aggregate of approximately 94% of
net revenue.
The Company currently purchases several key parts and components used to
manufacture its products from limited sources of supply.
13. Subsequent Events (unaudited)
In August 2001, the Company granted 1,000,000 shares of restricted common
stock to Paul Engle, president and chief executive officer of the company.
Related compensation expense equal to the fair value of these shares at the
date of grant will be charged to the operating expenses over the 4-year vesting
period.
On August 6, 2001, a putative securities class action, captioned Beveridge
v. Avanex Corporation et al., Civil Action No. 01-CV-7256, was filed against
the Company, certain company officers and directors (the "individual
defendants"), and four underwriters in the Company's initial public offering
("IPO"), in the United States District Court for the Southern District of New
York. The complaint alleges violations of Section 11 of the Securities Act of
1933 ("Securities Act") against all defendants, a violation of Section 15 of
the Securities Act and Section 20(a) of the Securities Exchange Act of 1934
("Exchange Act") against the individual defendants, a violation of Section
10(b) of the Exchange Act (and Rule 10b-5, promulgated thereunder) against the
Company and the individual defendants, and violations of Section 12(2) of the
Securities Act and Section 10(b) of the
68
AVANEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Exchange Act (and Rules 10b-3 and 10b-5, promulgated thereunder) against the
underwriters. The complaint seeks unspecified damages on behalf of a purported
class of purchasers of common stock between February 3, 2000 and December 6,
2000 (the "class period").
On August 31, 2001, a similar complaint, captioned Blaney v. Avanex
Corporation et al., Civil Action No. 01-CV-8216, was filed against the Company,
the individual defendants, and several of the IPO underwriters in the Southern
District of New York. The complaint is substantially identical to the Beveridge
complaint.
Various plaintiffs have filed similar actions asserting virtually identical
allegations against more than 130 other companies. To date, there have been no
significant developments in the litigation. The lawsuit, and all other "IPO
allocation" securities class actions currently pending in the Southern District
of New York, have been assigned to Judge Shira A. Scheindlin for coordinated
pretrial proceedings. The Company believes that it has meritorious defenses to
the claims against it and intends to defend itself vigorously.
However, the litigation process is in the preliminary stage, and the Company
cannot predict its outcome. The litigation process is inherently uncertain.
Should the outcome of the litigation be adverse to the Company and if, in
addition, the Company was required to pay significant monetary damages, the
Company's business would be significantly harmed.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
There have been none.
69
PART III
Item 10. Directors and Officers of the Registrant
The information required by this item is incorporated by reference to our
Proxy Statement with respect to our 2001 Annual Meeting of Stockholders (the
"Proxy Statement") to be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year.
Item 11. Executive Compensation
The information called for by this item is incorporated by reference to the
section entitled "Executive Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information called for by this item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements
(1) Index to Financial Statements
The Financial Statements required by this item are submitted in Part II,
Item 8 of this report.
(2) Financial Statements Schedules
The following financial statement schedule of Avanex Corporation for
each of the past three years in the period ended June 30, 2001 should be
read in conjunction with the Consolidated Financial Statements of Avanex
Corporation.
Schedule II--Valuation and Qualifying Accounts
Allowance For Doubtful Accounts:
Additions
Balance at Charged to Balance at
Beginning of Costs and Deductions End of
Period Expenses Write-Offs Period
------------ ---------- ---------- ----------
Year ended June 30, 1999..... $ -- $ 30,000 $ -- $ 30,000
Year ended June 30, 2000..... $ 30,000 $422,000 $ -- $ 452,000
Year ended June 30, 2001..... $452,000 $557,000 $ -- $1,009,000
All other schedules have been omitted because they are not applicable or are
not required or the information required to be set forth therein is included in
the Consolidated Financial Statements or Notes thereto.
70
(3) Exhibits
Exhibit
Number Description of Exhibits
----------- -----------------------
3.1+ Amended and Restated Certificate of Incorporation of the Registrant filed February 9, 2000
3.2 Amended and Restated Bylaws of the Registrant
4.1++ Specimen Common Stock Certificate
4.2+++++++ Preferred Stock Rights Agreement, dated as of July 26, 2001, between the Registrant and the
EquiServe Trust Company, N. A.
10.1++ Form of Indemnification Agreement between Registrant and each of its directors and officers
10.2++ 1998 Stock Plan, as amended, and forms of agreement thereunder
10.3++ 1999 Employee Stock Purchase Plan
10.4++ 1999 Director Option Plan
10.5++ Founder's Stock Purchase Agreement between the Registrant and Simon Xiaofan Cao dated
January 13, 1998
10.6++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Walter Alessandrini dated October 8, 1999
10.7++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Walter Alessandrini dated March 26, 1999
10.8++ Form of Restricted Stock Purchase Agreement
10.8.1++ Stock Purchase Agreement, including Security Agreement and Promissory Note, between the
Registrant and Paul Shi-Qi Jiang dated July 22, 1999
10.8.2++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Simon Xiaofan Cao dated August 4, 1999
10.8.3++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Peter Maguire dated August 4, 1999
10.8.4++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and James Pickering dated September 10, 1999
10.8.5++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Margaret Quinn dated October 8, 1999
10.8.6++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Simon Xiaofan Cao dated October 12, 1999
10.8.7++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Anthony Florence dated November 19, 1999
10.8.8++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Jessy Chao dated November 26, 1999
10.8.9++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Paul Shi-Qi Jiang dated November 26, 1999
10.8.10++ Stock Option Agreement, and accompanying exhibits, between the Registrant and Jessy Chao
dated February 3, 1998
10.8.11++ Stock Option Agreement, and accompanying exhibits, between the Registrant and Paul Shi-Qi
Jiang dated February 3, 1998
71
Exhibit
Number Description of Exhibits
----------- -----------------------
10.8.12++ Form of Stock Option Agreements between the Registrant and certain directors
10.8.13++ Schedule of directors receiving stock options of the Registrant
10.8.15++++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Brian Kinard dated October 22, 1999
10.8.16++++ Restricted Stock Purchase Agreement, including Security Agreement and Promissory Note,
between the Registrant and Brett Casebolt dated January 31, 2000
10.9++ Second Amended and Restated Shareholders Rights Agreement dated September 14, 1999
10.10++ Senior Loan and Security Agreement No. 053-6193 between Phoenix Leasing Incorporated and
the Registrant dated November 5, 1998
10.11++ Master Lease No. S7280 dated June 2, 1999, between Finova Capital Corporation and the
Registrant
10.12++ Employment Letter between the Registrant and Walter Alessandrini dated March 2, 1999
10.13++ Secured Promissory Note held by the Registrant for Walter Alessandrini dated May 20, 1999
and amendment to the Secured Promissory Note dated December 1, 1999
10.14++ Employment Letter between the Registrant and Simon Cao dated January 2, 1998
10.15++ Employment Letter between the Registrant and Paul Jiang dated January 2, 1998
10.16++ Employment Letter between the Registrant and Peter Maguire dated June 18, 1999
10.17*++ Patent License Agreement between Fujitsu Limited and the Registrant dated July 15, 1998
10.17.1*++ Letter clarifying the Patent License Agreement between Fujitsu Limited and the Registrant
dated July 1, 1998
10.18++ Lease between the Registrant and Stevenson Business Park LLC for Building B of
40919 Encyclopedia Circle, Fremont, California dated September 8, 1999
10.19++ Assignment of Sublease between Registrant and Pathnet, Inc. for 405 International Parkway,
Richardson, Texas dated September 17, 1998
10.19.1++ Sublease between KLA-Tencor Corporation and Pathnet, Inc. for 405 International Parkway,
Richardson, Texas dated October 16, 1997
10.20++ Amendment to Sublease for 405 International Parkway, Richardson, Texas dated January 1998
10.21++ Master Lease for 405 International Parkway, Richardson, Texas dated January 1, 1990
10.22*++ License and Supply Agreement between Registrant and Concord Micro-Optics, Inc. dated
May 24, 1999
10.23*++ International Distributor Agreement between the Registrant and Hakuto Co., Ltd., dated
November 1999
10.24++ Professional Services Agreement between the Registrant and AristaSoft Corporation dated
July 7, 1999
10.25++ Cost Sharing Agreement between the Registrant and Avanex Cayman dated December, 1999
10.26*++ International Distributor Agreement between the Registrant and Sun Instruments dated
December 20, 1999
10.27++ Subscription Agreement between the Registrant and Microsoft Corporation dated January 14,
2000
72
Exhibit
Number Description of Exhibits
----------- -----------------------
10.28++ Subscription Agreement between the Registrant and MCI Worldcom Venture Fund dated
January 14, 2000
10.29++ Third Amended and Restated Shareholder Rights Agreement dated January 14, 2000
10.30+ Lease Agreement between Stevenson Business Park, LLC and the Registrant for Building C of
40919 Encyclopedia Circle, Fremont, California dated March 1, 2000
10.31++ Revolving Credit and Security Agreement between Comerica Bank-California and the
Registrant dated July 10, 2000
10.32+++ Asset Purchase Agreement by and among the Registrant, Aspen Acquisition Corporation and
Holographix, Inc. dated May 22, 2000
10.33+++++ Terms of Employment between the Registrant and Paul Engle dated September 19, 2000
10.34+++++ Secured Promissory Note held by the Registrant for Paul Engle dated September 25, 2000
10.35+++++ Lease Agreement between GAL_LPC Stevenson Boulevard, LP and Avanex Corporation for
Buildings A and E of 39611 and 39630 Eureka Boulevard, Newark, California dated August 9,
2000.
10.36+++++ Lease Agreement between CFH Realty II/Glenville, L.P. and Avanex Corporation for the
building at 1801 N. Glenville Drive, Richardson, Texas dated August 9, 2000.
10.37++++++ Amendment to Revolving Credit and Security Agreement between Comerica Bank-California
and the Registrant dated January 2, 2001.
10.38 Third Amendment to Amended and Restated Revolving Credit and Security Agreement dated
July 19, 2001 between Registrant and Comerica Bank-California
21.1 List of subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (See page II-74)
--------
* Confidential treatment requested.
+ Incorporated herein by reference to Registrant's Form 10-Q file May
16, 2000
++ Incorporated herein by reference to Registrant's Registration
Statement on Form S-1 No. 333-92097
+++ Incorporated herein by reference to Registrant's Form 8-K filed June
6, 2000
++++ Incorporated herein by reference to Registrant's Form 10-K filed
September 21, 2000
+++++ Incorporated herein by reference to Registrant's Form 10-Q filed
November 15, 2000
++++++ Incorporated herein by reference to Registrant's Form 10-Q filed
February 15, 2001
+++++++ Incorporated herein by reference to Registrant's Form 8-A filed with
the Securities and Exchange Commission on August 24, 2001
(b) Reports on Form 8-K
On April 13, 2001, the Registrant filed a Current Report on Form 8-K
disclosing the Registrant's preliminary financial results for the third quarter
of fiscal 2001 and the announcement of a cost-containment plan. No financial
statements were filed with this Current Report.
On April 26, 2001, the Registrant filed a Current Report on Form 8-K
disclosing the Registrant's financial results for the third quarter of fiscal
2001 and the appointment of a new Chief Executive Officer
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Fremont, County of Alameda, State of California, on September
17, 2001.
AVANEX CORPORATION
By: /S/ JESSY CHAO
-----------------------------------
Jessy Chao
Vice President Finance and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jessy Chao and Thomas LaWer, and each of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ WALTER ALESSANDRINI Director and Chairman of the Board September 17, 2001
---------------------------------
Walter Alessandrini
/S/ PAUL ENGLE President, Chief Executive Officer and September 17, 2001
--------------------------------- Director
Paul Engle
/S/ JESSY CHAO Vice President, Finance and Chief September 17, 2001
--------------------------------- Financial Officer (principal
Jessy Chao financial officer)
/S/ SIMON CAO Director, Chief Technology Officer September 17, 2001
--------------------------------- and Senior Vice President, Business
Simon Cao Development
/S/ VINT CERF Director September 17, 2001
---------------------------------
Vint Cerf
/S/ FEDERICO FAGGIN Director September 17, 2001
---------------------------------
Federico Faggin
/S/ TODD BROOKS Director September 17, 2001
---------------------------------
Todd Brooks
/S/ JOEL A. SMITH III Director September 17, 2001
---------------------------------
Joel A. Smith III
74