e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2005
OR
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-30684
BOOKHAM, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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20-1303994
(I.R.S. Employer
Identification No.) |
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2584 Junction Avenue |
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San Jose, California
(Address of Principal Executive Offices)
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95134
(Zip Code) |
408-383-1400
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (check one) : Large accelerated filer o Accelerated filer
þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: As of January 31, 2006, there were 55,353,207 shares of common stock
outstanding.
BOOKHAM, INC.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BOOKHAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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December 31, |
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July 2, |
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2005 |
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2005 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
74,031 |
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$ |
24,934 |
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Restricted cash |
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3,198 |
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3,260 |
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Accounts receivable, net |
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18,697 |
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20,257 |
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Amounts due from related parties, net |
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5,186 |
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7,262 |
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Inventories |
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59,582 |
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53,192 |
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Prepaid expenses and other current assets |
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11,477 |
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11,190 |
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Assets held for resale |
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13,694 |
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Total current assets |
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172,171 |
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133,789 |
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Long-term restricted cash |
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4,119 |
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4,119 |
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Goodwill |
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6,260 |
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6,260 |
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Other intangible assets, net |
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22,227 |
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28,010 |
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Property and equipment, net |
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56,009 |
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64,156 |
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Other long-term assets |
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1,246 |
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1,552 |
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Total assets |
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$ |
262,032 |
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$ |
237,886 |
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Liabilities and stockholders equity |
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Current liabilities: |
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Accounts payable |
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$ |
25,301 |
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$ |
31,334 |
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Amounts owed to related parties |
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564 |
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722 |
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Accrued expenses and other liabilities |
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31,777 |
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38,477 |
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Current portion of notes payable |
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52 |
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52 |
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Current portion of notes payable to related party |
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25,861 |
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Total current liabilities |
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83,555 |
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70,585 |
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Non-current portion of notes payable |
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307 |
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340 |
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Notes payable to related party |
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20,000 |
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45,861 |
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Convertible debentures |
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20,126 |
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19,140 |
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Other long-term liabilities |
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8,671 |
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10,892 |
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Total liabilities |
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132,659 |
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146,818 |
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Commitments and contingencies Note 9 |
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Stockholders equity: |
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Common stock: |
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$0.01 par value; 175,000,000 authorized; 46,131,516
and 33,805,437 issued and outstanding at December
31 and July 2, 2005, respectively |
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461 |
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338 |
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Additional paid-in capital |
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978,901 |
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925,677 |
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Deferred compensation |
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(808 |
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Accumulated other comprehensive income |
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29,503 |
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32,889 |
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Accumulated deficit |
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(879,492 |
) |
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(867,028 |
) |
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Total stockholders equity |
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129,373 |
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91,068 |
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Total liabilities and stockholders equity |
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$ |
262,032 |
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$ |
237,886 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
3
BOOKHAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
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Three months ended |
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Six months ended |
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December 31, |
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January 1, |
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December 31, |
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January 1, |
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2005 |
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2005 |
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2005 |
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2005 |
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(Unaudited) |
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(Unaudited) |
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(Unaudited) |
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(Unaudited) |
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External revenues |
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$ |
26,444 |
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$ |
25,678 |
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$ |
55,333 |
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$ |
49,331 |
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Revenues from related parties |
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34,282 |
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20,073 |
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67,964 |
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39,984 |
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Total revenues |
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60,726 |
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45,751 |
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123,297 |
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89,315 |
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Cost of revenues |
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44,049 |
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49,316 |
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92,245 |
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94,978 |
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Gross profit/(loss) |
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16,677 |
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(3,565 |
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31,052 |
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(5,663 |
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Operating expenses: |
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Research and development |
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10,007 |
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12,071 |
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20,408 |
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24,457 |
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Selling, general and administrative |
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12,949 |
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14,273 |
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26,105 |
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31,829 |
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Amortization of intangible assets |
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2,491 |
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2,837 |
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5,184 |
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5,463 |
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Impairment/(Recovery) of other long lived assets |
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(1,263 |
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Restructuring charges |
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1,763 |
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7,938 |
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3,568 |
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12,251 |
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Gain on sale of property and equipment |
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(685 |
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(5 |
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(1,632 |
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(650 |
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Total costs and expenses |
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26,525 |
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37,114 |
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52,370 |
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73,350 |
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Operating loss |
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(9,848 |
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(40,679 |
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(21,318 |
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(79,013 |
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Other income/(expense): |
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Other income/(expense) |
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123 |
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134 |
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337 |
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1,256 |
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Interest income |
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454 |
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2,179 |
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580 |
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2,497 |
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Interest expense |
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(2,413 |
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(1,008 |
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(4,854 |
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(2,439 |
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Gain/(Loss) on foreign exchange |
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(243 |
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(1,734 |
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1,008 |
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(1,654 |
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Total other income/(expense), net |
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(2,079 |
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(429 |
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(2,929 |
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(340 |
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Loss before income taxes |
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(11,927 |
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(41,108 |
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(24,247 |
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(79,353 |
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Income tax (provision)/benefit |
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(2 |
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(1 |
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11,783 |
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(17 |
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Net loss |
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$ |
(11,929 |
) |
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$ |
(41,109 |
) |
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$ |
(12,464 |
) |
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$ |
(79,370 |
) |
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Net loss per share (basic and diluted) |
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$ |
(0.28 |
) |
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$ |
(1.23 |
) |
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$ |
(0.33 |
) |
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$ |
(2.39 |
) |
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Weighted average shares of common stock
outstanding (basic and diluted) |
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42,836 |
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33,535 |
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38,196 |
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33,205 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
4
BOOKHAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Six months ended |
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December 31, |
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December
31, 2005 |
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January 1, 2005 |
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(Unaudited) |
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(Unaudited) |
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Cash flows used in operating activities: |
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Net loss |
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$ |
(12,464 |
) |
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$ |
(79,370 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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15,021 |
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15,297 |
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Stock-based compensation |
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4,804 |
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243 |
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Impairment/(recovery) of long-lived assets |
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(1,263 |
) |
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Gain on sale of property and equipment |
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(1,814 |
) |
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(650 |
) |
One time tax gain |
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(11,785 |
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Unrealized gain on foreign currency contracts |
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(1,002 |
) |
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Losses on foreign currency remeasurement of notes payable |
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916 |
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(1,828 |
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Amortization of interest expense for warrants and beneficial conversion feature |
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1,293 |
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67 |
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Changes in assets and liabilities, net of effects of acquisitions: |
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Accounts receivable, net |
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2,843 |
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1,852 |
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Inventories |
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(7,497 |
) |
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1,069 |
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Prepaid expenses and other current assets |
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7,521 |
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5,043 |
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Accounts payable |
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(5,726 |
) |
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(1,553 |
) |
Accrued expenses and other liabilities |
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(11,466 |
) |
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(2,637 |
) |
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Net cash used in operating activities |
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(20,619 |
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(62,467 |
) |
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Cash flows provided by investing activities: |
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Purchase of property and equipment |
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(2,832 |
) |
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(8,540 |
) |
Proceeds from sale of property and equipment |
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1,757 |
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1,126 |
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Acquisitions, net of cash acquired |
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7,866 |
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Proceeds from sale of land held for re-sale |
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14,734 |
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Settlement of Westrick note |
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1,200 |
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Transfers (to)/from restricted cash |
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812 |
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(399 |
) |
Refund of pre-acquisition expenses |
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1,520 |
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Proceeds from disposal of subsidiaries (net of costs) |
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5,736 |
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Net cash provided by investing activities |
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22,337 |
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|
643 |
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Cash flows provided by financing activities: |
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Proceeds from issuance of common stock |
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49,344 |
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3 |
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Proceeds from exercise of common stock warrant |
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55 |
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Proceeds from issuance of convertible debentures, net |
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21,497 |
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Repayment of capital lease obligations |
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(5,124 |
) |
Repayment of loans |
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(45 |
) |
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(4,162 |
) |
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Net cash provided by financing activities |
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|
49,299 |
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|
12,269 |
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Effect of exchange rate on cash |
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(1,920 |
) |
|
|
2,378 |
|
Net increase/(decrease) in cash and cash equivalents |
|
|
49,097 |
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|
(47,177 |
) |
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Cash and cash equivalents at beginning of period |
|
|
24,934 |
|
|
|
109,682 |
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Cash and cash equivalents at end of period |
|
$ |
74,031 |
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|
$ |
62,505 |
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|
The accompanying notes form an integral part of these condensed consolidated financial statements.
5
BOOKHAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Business
Bookham Technology plc was incorporated under the laws of England and Wales on September 22, 1988.
On September 10, 2004, pursuant to a scheme of arrangement under the laws of the United Kingdom,
Bookham Technology plc became a wholly-owned subsidiary of Bookham, Inc., a Delaware corporation
(Bookham, Inc.). Bookham, Inc. principally designs, manufactures and markets optical components,
modules and subsystems for the telecommunications industry. Bookham, Inc. also manufactures
high-speed electronic components for the telecommunications, defense and aerospace industries.
References to the Company mean Bookham, Inc. and its subsidiaries consolidated business
activities since September 10, 2004 and Bookham Technology plcs consolidated business activities
prior to September 10, 2004.
Note 2. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements as of December 31, 2005 and
for the three and six months ended December 31, 2005 and January 1, 2005 have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial
statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and include the
accounts of Bookham, Inc. and all of its subsidiaries. Information and footnote disclosures
normally included in annual financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the consolidated financial position at December 31, 2005 and the
consolidated operating results and cash flows for the three and six months ended December 31, 2005
and January 1, 2005. The consolidated results of operations for the three and six months ended
December 31, 2005 are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year ending July 1, 2006.
The condensed consolidated balance sheet at July 2, 2005 has been derived from the audited
consolidated financial statements at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the United States for complete
financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with the
Companys audited financial statements and notes for the year ended July 2, 2005 included in the
Companys Annual Report on Form 10-K for the fiscal year ended July 2, 2005.
In the Companys Annual Report on Form 10-K for the fiscal year ended July 2, 2005, both in note 1
to the consolidated financial statements and more specifically in the liquidity and capital
resources section of Managements Discussion and Analysis of Financial Condition and Results of
Operations, the Company disclosed that it believed it needed to raise between $20 million and $30
million by December 31, 2005 to maintain its planned level of operations, and between $50 million
and $60 million on a cumulative basis to maintain a minimum cash balance of $25 million at August
7, 2006, as required under the notes issued to Nortel Networks UK Limited.
Prior to December 31, 2005, the Company raised a total of approximately $77 million (net of
estimated fees and including $3.7 million in proceeds which were not yet payable) from the sale of
land, the acquisition of Creekside and the sale of common stock in a public offering, which in
aggregate exceeded the targeted amounts needed to meet the Companys projected cash requirements as
of December 31, 2005 and August 7, 2006.
In
addition, subsequent to December 31, 2005, the secured promissory notes issued to Nortel Networks
UK Limited with an aggregate principal amount of $45.9 million and approximately $19.4 million of
the Companys 7% unsecured convertible debentures were retired and cancelled. The Company has also
entered into an agreement providing for the retirement and cancellation of the remaining
approximately $6.1 million principal amount of the 7% unsecured convertible debentures, subject to
stockholder approval. In total, these transactions are expected to eliminate all of the Companys
long term debt which is outstanding as of December 31, 2005 and
to eliminate the requirement to maintain a minimum cash balance of
$25 million at August 7, 2006. See Note 14.
6
Certain comparative amounts have been reclassified to conform to current period presentations,
including the reclassification of the gain/(loss)on sale of property and equipment to operating
expenses from other income/(expense), net. The reclassifications were immaterial and had no impact
on the Companys net loss or retained earnings.
Note 3. Equity and Stock-Based Compensation Expense
On October 17, 2005, the Company completed a public offering of its common stock, issuing a total
of 11,250,000 shares at a price per share of $4.75, raising $53.4 million and receiving $49.3
million net of commissions to the underwriters and the payment of offering costs and expenses.
On October 27, 2005, at the Companys annual meeting, the stockholders of the Company approved the
2004 stock incentive plan and authorization of 4,000,000 shares of common stock for issuance under
that plan, the 2004 employee stock option plan and the 2004 sharesave scheme and the authorization
of 500,000 shares of common stock for issuance under each of those plans, and the authorization of
an additional 5,000,000 shares of common stock for issuance under the 2004 stock incentive plan.
In November, 2005, the Company granted options to purchase 4,762,500 shares of common stock and
issued 1,100,000 shares of restricted stock (including 50,000 restricted stock units) under these
plans. The options have an exercise price of $4.91, a term of ten years and vest ratably over 48
months with the first 12 months of vesting deferred until the one year anniversary of the grant.
The restricted stock grants vest as to 50% ratably over 48 months, as to 25% when the Company
achieves earnings before interest, taxes, depreciation and amortization, excluding restructuring
charges, one-time items and charges for SFAS 123R stock compensation cumulatively greater than zero
for two successive quarters, and as to 25% when the Company achieves earnings before interest,
taxes, depreciation and amortization, excluding restructuring charges, one-time items and charges
for SFAS 123R stock compensation cumulatively greater than 8% of revenues for two successive
quarters.
In December 2004, the FASB issued SFAS No. 123R- Share-Based Payment which requires companies to
recognize in their statement of operations all share-based payments to employees, including grants
of employee stock options, based on their fair values. The Company adopted the new pronouncement on
July 3, 2005, using the modified-prospective-transition method. Accounting for share-based
compensation transactions using the intrinsic method supplemented by pro forma disclosures is no
longer permissible. The application of SFAS No. 123R involves significant amounts of judgment in
the determination of inputs into the Black-Scholes model which the Company uses to determine the
value of employee stock options. These inputs are based upon assumptions as to volatility, risk
free interest rates and the expected life of the options. In the three months and six months ended
December 31, 2005, the Company recorded a total of $1.9 million and $4.8 million, respectively, of
stock compensation related expenses. $1.7 million of the stock compensation related expense in the
six months ended December 31, 2005 related to certain performance based options for which the
related performance targets were met in the period.
Prior to July 3, 2005, the Company accounted for its equity-based compensation plans under the
recognition and measurement provision of APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related Interpretations, as permitted by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123).
In the course of adopting SFAS 123R, the Company evaluated the Black-Scholes-Merton pricing model
inputs previously applied to valuing its stock options and determined that certain volatility
assumptions and amortization methods had been inappropriately applied to certain of its stock
option grants in determining pro forma employee stock compensation for the pro forma disclosures
previously required under the SFAS No. 123, as amended by SFAS No. 148, disclosure only
alternative. The Company has determined that for the three months ended January 1, 2005, pro forma
compensation expense previously reported as $2.3 million should have been $1.7 million, that pro
forma net loss previously reported as $43.3 million should have been $42.7 million, and that pro
forma net loss per share (basic and diluted) previously reported as $1.29 should have been $1.27.
The previously reported pro forma data was for footnote disclosure purposes only, and had no impact
on the Companys previously reported results of operations, financial position or cashflows.
7
Note 4. Comprehensive Loss
For the three and six months ended December 31, 2005 and January 1, 2005, the Companys
comprehensive loss is comprised of its net loss, unrealized gains on currency instruments
designated as hedges, foreign currency translation adjustments and unrealized losses on restricted
cash. The components of other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net loss |
|
$ |
(11,929 |
) |
|
$ |
(41,109 |
) |
|
$ |
(12,464 |
) |
|
$ |
(79,370 |
) |
Unrealized gains on the
Companys hedging instruments |
|
|
|
|
|
|
2,118 |
|
|
|
|
|
|
|
2,099 |
|
Currency translation adjustment |
|
|
(1,250 |
) |
|
|
8,437 |
|
|
|
(3,386 |
) |
|
|
7,931 |
|
Unrealized holding losses on
short-term investments |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(13,179 |
) |
|
$ |
(30,558 |
) |
|
$ |
(15,850 |
) |
|
$ |
(69,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Note 5. Earnings Per Share
If the Company had reported net income, as opposed to a net loss, the calculation of diluted
earnings per share would have included an additional 15,608,116 and 10,564,422 common equivalent
shares related to outstanding share options and warrants (determined using the treasury stock
method) for the quarters ended December 31, 2005 and January 1, 2005, respectively.
Note 6. Inventories
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2005 |
|
|
July 2, 2005 |
|
|
|
(in thousands) |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
15,950 |
|
|
$ |
11,236 |
|
Work in process |
|
|
26,388 |
|
|
|
26,862 |
|
Finished goods |
|
|
17,244 |
|
|
|
15,094 |
|
|
|
|
|
|
|
|
|
|
$ |
59,582 |
|
|
$ |
53,192 |
|
|
|
|
|
|
|
|
In the three month and six month periods ended December 31, 2005, respectively, the Company
recorded sales of $2.9 million and $7.1 million on, and recognized profits of $0.8 million and $2.6
million from, inventories carried at zero value and sold during the quarter. This inventory was
originally purchased as part of the acquisition of the optical components business of Nortel
Networks in November 2002.
Note 7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2005 |
|
|
July 2, 2005 |
|
|
|
(in thousands) |
|
Accounts payable accruals |
|
$ |
4,826 |
|
|
$ |
6,335 |
|
Compensation and benefits related accruals |
|
|
6,818 |
|
|
|
6,408 |
|
Other accruals |
|
|
6,423 |
|
|
|
7,007 |
|
Current portion of provisions for: |
|
|
|
|
|
|
|
|
Restructuring |
|
|
10,153 |
|
|
|
14,945 |
|
Warranty |
|
|
3,557 |
|
|
|
3,782 |
|
|
|
|
|
|
|
|
|
|
$ |
31,777 |
|
|
$ |
38,477 |
|
|
|
|
|
|
|
|
Note 8. Asset Held for Resale; Sale and Recovery of Impairment
On September 11, 2005, the Company sold a parcel of land for gross proceeds of $15.5 million. The
land, which had a carrying value of $13.7 million as of July 2, 2005, had previously been disclosed
as an asset held for resale. The transaction resulted in a gain of $1.3 million net of related
costs. The book value of the land sold had previously been written down, so this gain has been
reflected as a recovery of impairment in the six months ended December 31, 2005.
Note 9. Commitments and Contingencies
Guarantees
The Company adopted the provisions of Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and
107 and a rescission of FASB Interpretation No. 34 (FIN 45) effective December 31, 2002. The
Company has the following financial guarantees:
|
|
|
In connection with the sale by New Focus, Inc. of its passive component line to Finisar,
Inc., New Focus agreed to indemnify Finisar for claims related to the intellectual property
sold to Finisar. This indemnification expires in May 2009 and has no maximum liability. In
connection with the sale by New Focus of its tunable laser technology to Intel Corporation,
New Focus has indemnified Intel against losses for certain intellectual property claims.
This indemnification expires in May 2008 and has |
9
|
|
|
a maximum liability of $7.0 million. The Company does not expect to pay out any amounts in
respect of these indemnifications, therefore no accrual has been made. |
|
|
|
|
The Company indemnifies its directors and certain employees as permitted by law, and has
entered into indemnification agreements with its directors. The Company has not recorded a
liability associated with these indemnification arrangements as the Company historically has
not incurred any costs associated with such indemnifications. Costs associated with such
indemnifications may be mitigated by insurance coverage that the Company maintains. |
|
|
|
|
The Company also has indemnification clauses in various contracts that it enters into in
the normal course of business, such as those issued by its bankers in favor of several of
its suppliers or indemnification in favor of customers in respect of liabilities they may
incur as a result of purchasing the Companys products should such products infringe the
intellectual property rights of a third party. The Company has not historically paid out any
amounts related to these indemnifications and does not expect to in the future, therefore no
accrual has been made for these indemnifications. |
Provision for warranties
The Company accrues for the estimated costs to provide warranty services at the time revenue is
recognized. The Companys estimate of costs to service its warranty obligations is based on
historical experience and expectation of future conditions. To the extent the Company experiences
increased warranty claim activity or increased costs associated with servicing those claims, the
Companys warranty costs will increase, resulting in increases to net loss.
|
|
|
|
|
|
|
Provision for |
|
|
|
warranties |
|
|
|
(in thousands) |
|
At July 2, 2005 |
|
$ |
3,782 |
|
Warranties issued |
|
|
527 |
|
Warranties utilized |
|
|
(146 |
) |
Warranties expired, and other changes in liability |
|
|
(495 |
) |
Currency translation |
|
|
(111 |
) |
|
|
|
|
At December 31, 2005 |
|
$ |
3,557 |
|
|
|
|
|
Litigation
On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al.,
Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and
directors, or the Individual Defendants, in the United States District Court for the Southern
District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase
Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp., or the Underwriter
Defendants, the underwriters in New Focuss initial public offering. Three subsequent lawsuits were
filed containing substantially similar allegations. These complaints have been consolidated. On
April 19, 2002, plaintiffs filed an Amended Class Action Complaint, described below, naming as
defendants the Individual Defendants and the Underwriter Defendants.
On November 7, 2001, a Class Action Complaint was filed against Bookham Technology plc and others
in the United States District Court for the Southern District of New York. On April 19, 2002,
plaintiffs filed an Amended Complaint. The Amended Complaint names as defendants Bookham Technology
plc, Goldman, Sachs & Co. and FleetBoston Robertson Stephens, Inc., two of the underwriters of
Bookham Technology plcs initial public offering in April 2000, and Andrew G. Rickman, Stephen J.
Cockrell and David Simpson, each of whom was an officer and/or director at the time of the initial
public offering.
The Amended Complaint asserts claims under certain provisions of the securities laws of the United
States. It alleges, among other things, that the prospectuses for Bookham Technology plcs and New
Focuss initial public offerings were materially false and misleading in describing the
compensation to be earned by the underwriters in connection with the offerings, and in not
disclosing certain alleged arrangements among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the
underwriters. The Amended Complaint seeks unspecified damages (or in the alternative rescission for
those class members who no longer hold ordinary shares, in the case of Bookham Technology plc or
common stock, in the case of New Focus), costs, attorneys fees, experts fees, interest and other
expenses. In October 2002, the individual defendants were dismissed, without prejudice,from the
action. In July 2002, all defendants filed Motions to Dismiss the Amended Complaint. The motion was
denied as to Bookham Technology plc and New Focus in February 2003. Special committees of
10
the board of directors authorized the companies to negotiate a settlement of pending claims
substantially consistent with a memorandum of understanding negotiated among class plaintiffs, all
issuer defendants and their insurers.
Plaintiffs and most of the issuer defendants and their insurers have entered into a stipulation of
settlement for the claims against the issuer defendants, including the Company. Under the
stipulation of settlement, the plaintiff will dismiss and release all claims against participating
defendants in exchange for a payment guaranty by the insurance companies collectively responsible
for insuring the issuers in the related cases, and the assignment or surrender to the plaintiffs of
certain claims the issuer defendants may have against the underwriters. On February 15, 2005, the
Court issued an Opinion and Order preliminarily approving the settlement provided that the
defendants and plaintiffs agree to a modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to the modification narrowing the scope of
the bar order, and on August 31, 2005, the court issued an order preliminarily approving the
settlement and setting a public hearing on its fairness for April 24, 2006. The Company believes
that both Bookham Technology, plc and New Focus have meritorious defenses to the claims made in the
Amended Complaint and therefore believes that such claims will not have a material effect on its
financial position, results of operations or cash flows.
On February 13, 2002, Howard Yue, the former sole shareholder of Globe Y. Technology, Inc., a
company acquired by New Focus in February 2001, filed a lawsuit against New Focus and several of
its officers and directors in Santa Clara County Superior Court. The lawsuit is captioned Howard
Yue v. New Focus, Inc. et al, Case No. CV808031, and asserts claims stemming from New Focuss
acquisition of Globe Y. Technology, Inc. The plaintiff has amended his complaint several times
following the Courts dismissal of his earlier complaints. Currently, the plaintiffs fifth amended
complaint alleges the following causes of action against New Focus: violation of §25400 and §25500
of the California Corporations Code; violation of §§1709-1710 of the California Civil Code;
violation of §25402 of the California Corporations Code; violation of §17200 and §17500 of the
California Business & Professions Code; fraud and deceit by concealment; fraud and deceit by active
concealment; fraud and deceit based upon non-disclosure of material facts; negligent
misrepresentation; and breach of contract and the duty of good faith and fair dealing. The
complaint seeks unspecified economic, punitive, and exemplary damages, prejudgment interest, costs,
and equitable and general relief. In November 2004 New Focus filed answers to the plaintiffs fifth
amended complaint denying the plaintiffs allegations and asserting various defenses.
In addition, in October 2003, New Focus filed a cross-complaint against Mr. Yue seeking damages in
connection with Mr. Yues conduct during the acquisition of Globe Y. Technology, Inc. by New Focus.
In February 2004, New Focus filed a corrected amended cross-complaint against Mr. Yue. On October
18, 2005, the Court dismissed the corrected amended cross-complaint with leave to amend. On October
28, 2005, New Focus filed a second amended cross complaint. . On January 11, 2006 the parties
reached a non-monetary settlement regarding the cross-complaint which involved dismissal of the
cross-complaint with prejudice. The trial date had been set for March 13, 2006 and the Court has
scheduled 15 days for the trial. The Company intends to conduct a vigorous defense of this lawsuit.
Note 10. Restructuring
The following table summarizes the activity related to the restructuring liability for the six
months ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
restructuring |
|
|
charged to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring |
|
|
|
costs at |
|
|
restructuring |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs at |
|
|
|
July 2, |
|
|
costs and |
|
|
Amounts |
|
|
Amounts paid |
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2005 |
|
|
other |
|
|
reversed |
|
|
or written off |
|
|
Adjustments |
|
|
2005 |
|
Lease cancellations and commitments |
|
$ |
18,533 |
|
|
$ |
763 |
|
|
$ |
|
|
|
$ |
(4,658 |
) |
|
$ |
(376 |
) |
|
$ |
14,262 |
|
Termination payments to employees
and related costs |
|
|
6,300 |
|
|
|
2,960 |
|
|
|
(155 |
) |
|
|
(6,686 |
) |
|
|
(197 |
) |
|
|
2,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructure accrual and other |
|
$ |
24,833 |
|
|
$ |
3,723 |
|
|
$ |
(155 |
) |
|
$ |
(11,344 |
) |
|
$ |
(573 |
) |
|
$ |
16,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued
restructuring charges |
|
$ |
(9,888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges
included within other accrued
liabilities |
|
$ |
14,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The following table summarizes the activity related to the restructuring liability for the three
months ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Amounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
restructuring |
|
|
charged to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring |
|
|
|
costs at |
|
|
restructuring |
|
|
|
|
|
|
Amounts |
|
|
|
|
|
|
costs at |
|
|
|
October 1, |
|
|
costs and |
|
|
Amounts |
|
|
paid |
|
|
|
|
|
|
December 31, |
|
(in thousands) |
|
2005 |
|
|
other |
|
|
reversed |
|
|
or written off |
|
|
Adjustments |
|
|
2005 |
|
Lease cancellations and commitments |
|
$ |
15,990 |
|
|
$ |
634 |
|
|
$ |
|
|
|
$ |
(2,338 |
) |
|
$ |
(24 |
) |
|
$ |
14,262 |
|
Termination payments to employees
and related costs |
|
|
5,286 |
|
|
|
1,176 |
|
|
|
(47 |
) |
|
|
(4,076 |
) |
|
|
(117 |
) |
|
|
2,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructure accrual and other |
|
$ |
21,276 |
|
|
$ |
1,810 |
|
|
$ |
(47 |
) |
|
$ |
(6,414 |
) |
|
$ |
(141 |
) |
|
$ |
16,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued
restructuring charges |
|
$ |
(7,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges
included within other accrued
liabilities |
|
$ |
13,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May 2004, the Company announced a plan of restructuring, primarily related to the transfer of
its assembly and test operations from Paignton, U.K. to Shenzhen, China, along with reductions in
research and development and selling, general and administrative expenses. In the quarter ended
December 31, 2005 the restructuring charges recorded for termination payments to employees and
related costs were primarily related to the employees in the Companys assembly and test operations
in Paignton who have been identified for termination and are being retained until the transition of
the operations to Shenzhen, China is complete. Costs of their severance and retention are being
accrued over their remaining service period. The period of transition will extend at least into the
quarter ended March 31, 2006, and is largely concurrent with the fulfilling of purchase orders and
last-time buys under the Nortel Networks supply agreement. In November 2005, the Company announced
an extension of this plan to include the transfer of its chip-on-carrier assembly from Paignton to
Shenzhen. As of December 31, 2005, the Company has not identified the personnel to be affected by
the move and, accordingly, have not recorded any retention or severance costs related to this
portion of the plan. As of December 31, 2005 the Company has spent $18 million on the plan
overall, and in total anticipates spending approximately $24 million to $30 million (approximately
90% related to personnel and 10% related to lease commitments), consistent with previous estimates.
In connection with various plans of restructuring, and the assumption of restructuring accruals
upon the acquisition of New Focus, in the quarter ended December 31, 2005 the Company continued to
make scheduled payments drawing down the lease cancellations and commitments portion of the
restructuring accrual. Remaining net payments of lease cancellation and commitments under these
actions are included in the ending accrual as of December 31, 2005.
Note 11. Segments of an Enterprise and Related Information
The Company is currently organized and operates as two operating segments: Optics, and Research and
Industrial. The Optics segment designs, develops, manufactures, markets and sells optical solutions
for telecommunications and industrial applications. The Research and Industrial segment designs,
manufactures, markets and sells photonic and microwave solutions. The Company evaluates the
performance of its segments and allocates resources based on consolidated revenues and overall
profitability.
Segment information for the three and six months ended December 31, 2005 and January 1, 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
December |
|
|
January 1, |
|
|
|
2005 |
|
|
2005 |
|
|
31, 2005 |
|
|
2005 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics |
|
$ |
54,522 |
|
|
$ |
39,565 |
|
|
$ |
110,992 |
|
|
$ |
77,022 |
|
Research and Industrial |
|
|
6,204 |
|
|
|
6,186 |
|
|
|
12,305 |
|
|
|
12,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenues |
|
$ |
60,726 |
|
|
$ |
45,751 |
|
|
$ |
123,297 |
|
|
$ |
89,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics |
|
$ |
(10,787 |
) |
|
$ |
(39,939 |
) |
|
$ |
(11,329 |
) |
|
$ |
(77,721 |
) |
Research and Industrial |
|
|
(1,142 |
) |
|
|
(1,170 |
) |
|
|
(1,135 |
) |
|
|
(1,649 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss |
|
$ |
(11,929 |
) |
|
$ |
(41,109 |
) |
|
$ |
(12,464 |
) |
|
$ |
(79,370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six month period ended January 1, 2005, the results of JCA Technology, Inc., (a former
subsidiary of the Company) consolidated in the Research and Industrial segment amounted to $77,000
of revenue and a loss of $306,000. The Company sold JCA Technology, Inc. to Endwave Corporation in
July 2004.
12
Note 12. Significant Business Combinations
On August 10, 2005, the Companys Bookham Technology plc subsidiary acquired all of the share
capital of City Leasing (Creekside) Limited for consideration of approximately $1, plus transaction
costs. The following is the purchase price allocation related to this business combination (in
thousands):
|
|
|
|
|
|
|
Purchase |
|
|
|
price |
|
|
|
allocation |
|
Purchase price: |
|
|
|
|
Cash |
|
$ |
|
|
Transaction costs |
|
|
685 |
|
|
|
|
|
|
|
$ |
685 |
|
|
|
|
|
Allocation of purchase price: |
|
|
|
|
Cash, including restricted cash |
|
$ |
8,378 |
|
Net monetary assets |
|
|
4,092 |
|
Deferred tax liabilities |
|
|
(11,785 |
) |
|
|
|
|
|
|
$ |
685 |
|
|
|
|
|
The net monetary assets acquired primarily represent lease receivables and loans payable to and
from parties related to the entity from which the Company acquired Creekside. The Company has the
right to offset these balances, and in accordance with FIN 39 Offsetting of Amounts Related to
Certain Contracts is reflecting these amounts net on its balance sheet. The contracts underlying
the receivables and loans are denominated in United Kingdom pounds sterling. These loans, in the
amounts of $32 million and $75 million based on the October 1, 2005 exchange rate of 1.76 U.S.
dollars per UK pound sterling, accrue interest at annual rates of 5.54% and 5.68%, respectively.
The first loan came due on October 14, 2005 and the second loan is due in equal installments on
July 14, 2006 and October 16, 2007, with the lease receivables substantially concurrent with this
schedule as to timing and exceeding the amounts due in magnitude. The Company anticipates applying
capital allowances of Bookham Technology plc to reduce tax liabilities assumed from Creekside.
Accordingly, as a result of the acquisition of Creekside, in the six months ended December 31, 2005
the Company has recognized a one time tax gain of $11.8 million related to the expected realization
of these tax assets. No results of Creekside have been included in our results of operations for
periods prior to August 10, 2005, after which point Creekside is included in our consolidated
results of operations.
Note 13. Significant Related Party Transactions
As of December 31, 2005, Nortel Networks had an 8.7% ownership interest in the Company. As of
December 31, 2005, Company also had outstanding notes due to Nortel Networks in the amounts of
$25.9 million due in November 2006 and $20.0 million due in November 2007, both of which were
retired and cancelled in January 2006 see Note 14. In the ordinary course of business, the
Company has entered into the following transactions for the six months ended December 31, 2005, and
has the following trade balances with Nortel as of December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
Sales to |
|
Purchases from |
|
|
from, net |
|
|
Amounts payable to |
|
$ |
67,964 |
|
$ |
|
|
|
$ |
5,186 |
|
|
$ |
564 |
|
|
|
|
|
|
|
|
|
|
|
|
Note 14. Subsequent Events
On January 13, 2006, the Company announced the following series of transactions which are expected
to eliminate all of its long term debt outstanding as of December 31, 2005.
|
|
|
On January 13, 2006, the Company paid $20 million of cash to Nortel Networks UK Limited
(NNUKL) to settle all $20 million outstanding principal of, plus all accrued interest on,
the Amended and Restated Series A-2 Senior Secured Note due 2007 (the Series A Note) that
it had previously issued to NNUKL. The Series A Note was then retired and cancelled. The
Company also paid NNUKL all of the accrued interest on the Amended and Restated Series B-1
Senior Secured Note Due 2006 (the Series B Note) which had been issued by its Bookham
Technology plc subsidiary to NNUKL. |
|
|
|
|
On January 13, 2006, NNUKL sold the Series B Note to certain accredited institutional
investors. At the same time the Company issued 5,120,793 shares of its common stock and
warrants to purchase 686,000 shares of its common stock to |
13
|
|
|
these investors in exchange for
the Series B Note, which had an outstanding principle balance of $25.9 million, and was
then retired and cancelled. The warrants have an exercise price of $7.00 per share and a
term of five years. |
|
|
|
|
On January 13, 2006, the Company issued 571,011 shares of its common stock and warrants
to purchase 304,539 shares of its common stock to the holders of its 7% Senior Unsecured
Convertible Debentures, who concurrently exercised their rights to convert an aggregate of
$19.4 million principal amount of the debentures into shares of the Companys common stock,
resulting in the issuance of an aggregate of 3,529,887 shares of common stock. The Company
also paid the debenture holders an aggregate of $1,717,663.16. The warrants have an
exercise price of $7.00 per share and a term of five years. |
|
|
|
|
On January 13, 2006, the Company, along with its Bookham Technology plc subsidiary,
entered into a Release Agreement with Nortel Networks Corporation, NNUKL and certain of
their affiliates (collectively, Nortel), pursuant to which Nortel released its security
interests in the collateral securing the obligations of the Company and Bookham Technology
plc under the Series A Note, the Series B Note and the supply agreement. |
|
|
|
|
On January 13, 2006, the holders of the debentures also agreed, subject to approval by
the Companys stockholders, to convert their remaining $6.1 million aggregate principal
amount of convertible debentures for 1,106,477 shares of common stock. The Company also
agreed that at the time of this subsequent conversion, it will pay to the debenture holders
an aggregate of $538,408.51 in cash and issue to the debenture holders an aggregate of
178,989 additional shares of its common stock and warrants to purchase an aggregate of up
to 95,461 shares of its common stock. The warrants will have an exercise price of $7.00
per share and a term of five years. The Company intends to seek the required stockholder
approval within 60 days of the date of the transaction. |
|
|
|
|
In connection with these transactions, the Company paid $1.8 million in fees to a third
party broker. |
On January 13, 2005, the Company also entered into a third addendum to an existing supply agreement
with Nortel Networks Limited. The latest addendum obligates Nortel to purchase $72 million of the
Companys product during the 2006 calendar year. The addendum also eliminated the provisions
requiring the Company to grant a license for the assembly, test, post-processing and test
intellectual property (excluding wafer technology) of certain critical products to Nortel Networks
Limited and to any designated alternative supplier if the Companys cash balance is less than $25
million and the provisions giving Nortel Networks Limited the right to buy all Nortel Networks
Limited inventory then held by the Company and requiring the Company to grant a license to Nortel
Networks Limited or any alternative supplier for the manufacture of all products covered by the
first addendum to the supply agreement if the Companys cash balance is less than $10 million.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This report and the documents incorporated in it by reference contain forward-looking statements
about our plans, objectives, expectations and intentions. You can identify these statements by
words such as expect, anticipate, intend, plan, believe, seek, estimate, may,
will and continue or similar words. You should read statements that contain these words
carefully. They discuss our future expectations, contain projections of our future results of
operations or our financial condition or state other forward-looking information, and may involve
known and unknown risks over which we have no control. You should not place undue reliance on
forward-looking statements. We cannot guarantee any future results, levels of activity, performance
or achievements. Moreover, we assume no obligation to update forward-looking statements or update
the reasons actual results could differ materially from those anticipated in forward-looking
statements, except as required by law. The factors discussed in the sections captioned
Managements Discussion and Analysis of Financial Condition and Results of Operations and
Certain Factors that May Affect Future Results in this report and the documents incorporated in
it by reference identify important factors that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements.
Overview
We design, manufacture and market optical components, modules and subsystems that generate, detect,
amplify, combine and separate light signals principally for use in high-performance fiber optics
communications networks. We principally sell our optical component products to optical systems
vendors as well as to customers in the data communications, military, aerospace, industrial and
manufacturing industries. Customers for our photonics and microwave product portfolio include
academic and governmental research institutions that engage in advanced research and development
activities. Our products typically have a long sales cycle. The period of time between our initial
contact with a customer and the receipt of a purchase order is frequently a year or more. In
addition, many
14
customers perform, and require us to perform, extensive process and product
evaluation and testing of components before entering into purchase arrangements.
We operate in two business segments: optics and research and industrial. Optics relates to the
design, development, manufacture, marketing and sale of optical solutions for telecommunications
and industrial applications. Research and industrial relates to the design, manufacture, marketing
and sale of photonics and microwave solutions.
Effective September 10, 2004, we changed our corporate domicile from the United Kingdom to the
United States and our reporting currency from pounds sterling to U.S. dollars. Our consolidated
financial statements are stated in U.S. dollars as opposed to pounds sterling, which was the
currency we previously used to present our financial statements. In addition, in connection with
the change in domicile, we changed our fiscal year end from December 31 to the Saturday closest to
June 30. Our financial statements are now prepared based on fifty-two/fifty-three week annual
cycles. Our consolidated financial statements reported in U.S. dollars depict the same trends as
would have been presented if we had continued to present financial statements in pounds sterling.
Recent Developments
On January 13, 2006, we announced the following series of transactions which are expected to
eliminate all of our long term debt outstanding as of December 31, 2005.
|
|
|
On January 13, 2006, we paid $20 million in cash to Nortel Networks UK Limited (NNUKL)
to settle all $20 million outstanding principal of, plus all accrued interest on, our
Amended and Restated Series A-2 Senior Secured Note due 2007 (the Series A Note)
that we had previously issued to NNUKL. The Series A Note was then retired and cancelled.
We also paid NNUKL all of the accrued interest on the Amended and Restated Series B-1
Senior Secured Note Due 2006 (the Series B Note) which had been issued by our Bookham
Technology plc subsidiary to NNUKL. |
|
|
|
|
On January 13, 2006, NNUKL sold the Series B Note to certain accredited institutional
investors. At the same time we issued 5,120,793 shares of our common stock and warrants to
purchase 686,000 shares of our common stock to these investors in exchange for the Series B
Note, which had an outstanding principle balance of $25.9 million, and was then retired and
cancelled. The warrants have an exercise price of $7.00 per share and a term of five
years. |
|
|
|
|
On January 13, 2006, we issued 571,011 shares of our common stock and warrants to
purchase 304,539 shares of our common stock to the holders of our 7% Senior Unsecured
Convertible Debentures, who concurrently exercised their rights to convert an aggregate of
$19.4 million principal amount of the debentures into shares of our common stock, resulting
in the issuance of an aggregate of 3,529,887 shares of common stock. We also paid the
debenture holders an aggregate of $1,717,663.16 in cash. The warrants have an exercise
price of $7.00 per share and a term of five years. |
|
|
|
|
On January 13, 2006, we, along with our Bookham Technology plc subsidiary, entered into
a Release Agreement with Nortel Networks Corporation, NNUKL and certain of their affiliates
(collectively, Nortel), pursuant to which Nortel released its security interests in the
collateral securing the obligations of ourselves and Bookham Technology plc under the
Series A Note, the Series B Note and the supply agreement. |
|
|
|
|
On January 13, 2006, the holders of the debentures also agreed, subject to approval by
our stockholders, to convert their remaining $6.1 million aggregate principal amount of
convertible debentures for 1,106,477 shares of common stock. We have also agreed that at
the time of this subsequent conversion, we will pay to the debenture holders an aggregate
of $538,408.51 in cash and issue to the debenture holders an aggregate of 178,989
additional shares of our common stock and warrants to purchase an aggregate of up to
95,461 shares of our common stock. The warrants will have an exercise price of $7.00 per
share and a term of five years. We intend to seek the required stockholder approval within
60 days of the date of the transaction. |
|
|
|
|
In connection with these transactions, we paid $1.8 million in fees to a third party
broker. |
On January 13, 2005, we also entered into a third addendum to an existing supply agreement with
Nortel Networks Limited. The addendum obligates Nortel to purchase $72 million of our product
during the 2006 calendar year. The addendum also eliminated the
provisions requiring us to grant a license for the assembly, test, post-processing and test
intellectual property (excluding wafer technology) of certain critical products to Nortel Networks
Limited and to any designated alternative supplier if our cash balance is less than $25 million and
the provisions giving Nortel Networks Limited the right to buy all Nortel Networks Limited
inventory then held by us and requiring us to grant a license to Nortel Networks Limited or any
alternative supplier for the manufacture of all products covered by the first addendum to the
supply agreement if our cash balance is less than $10 million.
15
Critical Accounting Policies
We believe that several accounting policies are important to understanding our historical and
future performance. We refer to such policies as critical because these specific areas generally
require us to make judgments and estimates about matters that are uncertain at the time we make the
estimate, and different estimateswhich also would have been reasonablecould have been used, which
if used would have resulted in different financial results.
The critical accounting policies we identified in our Annual Report on Form 10-K for the year ended
July 2, 2005 related to revenue recognition and sales returns, inventory valuation, valuing
warrants and conversion features in connection with our 7.0% senior convertible debentures,
accounting for acquisitions and goodwill, impairment of goodwill and intangibles, and accounting
for acquired in-process research and development. It is important that the discussion of our
operating results that follows be read in conjunction with the critical accounting policies
discussed in our Annual Report on Form 10-K, as filed with the SEC on September 8, 2005.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R- Share-Based Payment which requires companies to
recognize in their statement of operations all share-based payments to employees, including grants
of employee stock options, based on their fair values. We adopted the new pronouncement on July 3,
2005, using the modified-prospective-transition method. Accounting for share-based compensation
transactions using the intrinsic method supplemented by pro forma disclosures is no longer
permissible. The application of SFAS No. 123R involves significant amounts of judgment in the
determination of inputs into the Black-Scholes model which we use to determine the value of
employee stock options. These inputs are based upon assumptions as to volatility, risk free
interest rates and the expected life of the options. In the three month and six month periods ended
December 31, 2005, we recorded a total of $1.9 million and $4.8 million of stock compensation
related expenses, of which $1.7 million relates to certain performance based options for which the
related performance targets were met in the three months ended October 2, 2005.
Results of Operations
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
Six Month Period Ended |
|
|
December 31, |
|
January 1, |
|
Percentage |
|
December 31, |
|
January 1, |
|
Percentage |
$ Millions |
|
2005 |
|
2005 |
|
Change |
|
2005 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Net revenues |
|
$ |
60.7 |
|
|
$ |
45.8 |
|
|
|
33 |
% |
|
$ |
123.3 |
|
|
$ |
89.3 |
|
|
|
38 |
% |
Revenues for the three month and six month periods ended December 31, 2005 increased by $14.9
million and $34.0 million, or 33% and 38%, respectively, over revenues for the three month and six
month periods ended January 1, 2005. These increases were largely due to sales to our largest
customer, Nortel Networks, increasing to $33.4 million and $68.0 million from $20.1 million and
$40.0 million in the three and six month periods ended January 1, 2005. In percentage terms,
Nortel represented 56% and 55% of our revenue, compared to 44% and 45% in the three month and six
month periods ended January 1, 2005. These increases are largely related to the addendum to our
supply agreement with Nortel Networks Limited, in March 2005, pursuant to which Nortel issued
non-cancelable purchase orders totaling approximately $100 million for products we are
discontinuing, referred to as Last-Time-Buy products, and products we are not discontinuing, based
on revised pricing, to be delivered through March 2006. The Last-Time-Buy products represented
approximately $50 million of the $100 million of non-cancelable purchase orders we received. We
expect revenues from Last-Time-Buy products will decline in the third quarter of fiscal 2006 and
continue to decline in future quarters as we fulfill the related purchase orders. On January 13,
2006 we entered into a third addendum to this Nortel supply agreement under which Nortel is
obligated to purchase a minimum of $72 million of our products through calendar 2006.
Revenue in our Optics segment from customers other than Nortel grew by 7% and 17%, to $20.8 million
and $43.1 million in the three month and six month periods ended December 31, 2005 from $19.5
million and $36.9 million in the corresponding periods ended January 1, 2005, mostly with respect
to products sold into the metro market, particularly our 10G metro transmitters and amplifiers.
Revenues from our research and industrial segment, comprised primarily of our New Focus division
which designs, manufactures, markets and sells photonic and microwave solutions, remained
consistent at $6.2 million and $12.3 million in the three-month and six-month periods ended
December 31, 2005 as well as in the corresponding periods ended January 1, 2005.
16
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
Six Month Period Ended |
|
|
December 31, |
|
January 1, |
|
Percentage |
|
December 31, |
|
January 1, |
|
Percentage |
$ Millions |
|
2005 |
|
2005 |
|
Change |
|
2005 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Cost of revenues |
|
$ |
44.0 |
|
|
$ |
49.3 |
|
|
|
(11 |
%) |
|
$ |
92.2 |
|
|
$ |
95.0 |
|
|
|
(3 |
%) |
Our cost of revenues consists of the costs associated with manufacturing our products and includes
the purchase of raw materials, labor and related overhead, including stock compensation. It also
includes the costs associated with under-utilized production facilities and resources, as well as
the charges for the write-down of impaired manufacturing assets or
restructuring related costs. Charges for inventory obsolescence, the cost of product returns and warranty costs are also
included in cost of revenues. Costs and expenses of the manufacturing resources which relate to the
development of new products are included in research and development.
Our cost of revenues for the three-month and six-month periods ended December 31, 2005 decreased
11% and 3% compared to the corresponding periods ended January 1, 2005 in spite of our higher level
of revenues in those periods, primarily due to reductions in our manufacturing overhead costs,
lower variable product costs and the benefits of a lower cost structure of our assembly and test
operations in China. In the current quarter we produced $27.1 million of products (in revenue
terms) from the Shenzhen facility compared with $4.1 million in the quarter ended January 1, 2005.
As we are still operating our assembly and testing operations in Paignton, UK while ramping up our
facility in Shenzhen, China, these benefits were somewhat offset by some duplicate spending in
these assembly and test operations. Our cost of revenues for the three months and six months ended
December 31, 2005 also include $0.5 million and $1.4 million of stock compensation charges,
respectively.
Gross
Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
Six Month Period Ended |
|
|
December 31, |
|
January 1, |
|
Percentage |
|
December 31, |
|
January 1, |
|
Percentage |
$ Millions |
|
2005 |
|
2005 |
|
Change |
|
2005 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Gross profit (loss) |
|
$ |
16.7 |
|
|
$ |
(3.6 |
) |
|
|
|
|
|
$ |
31.1 |
|
|
$ |
(5.7 |
) |
|
|
|
|
Gross margin rate |
|
|
27.5 |
% |
|
|
(7.8 |
%) |
|
|
n/a |
|
|
|
25.2 |
% |
|
|
(6.3 |
%) |
|
|
n/a |
|
Gross margin consists of revenues less cost of sales. The gross margin rate is the resulting gross
margin as a percentage of revenues.
Our gross margin rates improved in the three months and six months ended December 31, 2005
compared to the three months and six months ended January 1, 2005, primarily because of the
positive impact of higher revenues spread across our lower fixed manufacturing costs. The volume
and favorable pricing terms under the Nortel Networks supply agreement also positively affected our
gross margin rate. We expect our gross margin rate will be subject to downwards pressure over the
next few quarters, as the rate of our cost reductions in China level out, and the favorable pricing
terms under the supply agreement expire in accordance with their terms in March 2006.
During the three months and six months ended December 31, 2005, we had revenues of $2.9 million
and $7.1 million related to, and recognized $0.8 million and $2.6 million of profits on, inventory
that had been carried on our books at zero value. In the three months
and six months ended January 1, 2005, we had revenues of $3.4 million and $7.2 million related to,
and recognized profits on, inventory that had been carried on our books at zero value. Originally,
these inventories had originally been acquired in connection with our purchase of the optical
components business of Nortel Networks. We believe we will have revenues of between $5 million and
$2 million related to this zero value inventory in the next twelve months. While this inventory is
carried on our books at zero value, and its sale generates higher margins than most of our new
products, we incur additional costs to complete the manufacturing of these products prior to sale.
17
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
|
Six Month Period Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
Percentage |
|
|
December 31, |
|
|
January 1, |
|
|
Percentage |
|
$ Millions |
|
2005 |
|
|
2005 |
|
|
Change |
|
|
2005 |
|
|
2005 |
|
|
Change |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
|
(unaudited) |
|
R&D expenses |
|
$ |
10.0 |
|
|
$ |
12.1 |
|
|
|
(21 |
%) |
|
$ |
20.4 |
|
|
$ |
24.5 |
|
|
|
(17 |
%) |
% of net revenues |
|
|
16 |
% |
|
|
26 |
% |
|
|
|
|
|
|
17 |
% |
|
|
27 |
% |
|
|
|
|
Research and development expenses consist primarily of salaries and related costs of employees
engaged in research and design activities, including stock compensation, costs of design tools and
computer hardware, and costs related to prototyping. The decreases in the three months and six
months ended December 31, 2005 from the corresponding periods ended January 1, 2005 are primarily
the result of a reduction in the number of research and development employees and the closure of
research sites and consolidation of development programs between these periods. The three months
and six months ended December 31, 2005 also included $0.4 million and $1.1 million of stock
compensation.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
Six Month Period Ended |
|
|
December 31, |
|
January 1, |
|
Percentage |
|
December 31, |
|
January 1, |
|
Percentage |
$ Millions |
|
2005 |
|
2005 |
|
Change |
|
2005 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
SG&A expenses |
|
$ |
12.9 |
|
|
$ |
14.3 |
|
|
|
(9 |
%) |
|
$ |
26.1 |
|
|
$ |
31.8 |
|
|
|
(18 |
%) |
% of net revenues |
|
|
21 |
% |
|
|
31 |
% |
|
|
|
|
|
|
21 |
% |
|
|
36 |
% |
|
|
|
|
Selling, general and administrative expenses consist primarily of personnel-related expenses,
including stock compensation, legal and professional fees, facilities expenses, insurance expenses
and information technology costs. The reductions in the three months and six months ended December
31, 2005 from the corresponding periods ended January 1, 2005 were due to a reduction in personnel
related expenses as a result of a reduction in the numbers of related personnel and other cost
savings from the consolidation of sites in the US and closure of our UK headquarters site, as well
the absence of $2.4 million of one time costs in the six months ended January 1, 2005 arising from
our September 2004 change of corporate domicile. The three months and six months ended December 31,
2005 also included $1.1 million and $2.5 million of stock compensation.
Amortization of Purchased Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
Six Month Period Ended |
|
|
December 31, |
|
January 1, |
|
Percentage |
|
December 31, |
|
January 1, |
|
Percentage |
$ Millions |
|
2005 |
|
2005 |
|
Change |
|
2005 |
|
2005 |
|
Change |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Amortization |
|
$ |
2.5 |
|
|
$ |
2.8 |
|
|
|
(12 |
%) |
|
$ |
5.2 |
|
|
$ |
5.5 |
|
|
|
(5 |
%) |
Our purchased intangible assets have generally been acquired in connection with business
combinations we have entered into in prior years. We did not complete any business combinations in
the six months ended December 31, 2005, or in the period since January 1, 2005, other than the
acquisition of Creekside from Deutsche Bank in a transaction involving no purchased intangible
assets, and, accordingly, our expenses for the amortization of purchased intangible assets have
remained relatively consistent.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
Six Month Period Ended |
|
|
December 31, |
|
January 1, |
|
December 31, |
|
January 1, |
$ Millions |
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Lease cancellation and commitments |
|
$ |
0.6 |
|
|
$ |
3.1 |
|
|
$ |
0.8 |
|
|
$ |
3.0 |
|
Termination payments to employees and related costs |
|
|
1.2 |
|
|
|
4.8 |
|
|
|
2.8 |
|
|
|
9.3 |
|
Total |
|
$ |
1.8 |
|
|
$ |
7.9 |
|
|
$ |
3.6 |
|
|
$ |
12.3 |
|
18
In May 2004, we announced a plan of restructuring, primarily related to the transfer of our
assembly and test operations from Paignton, U.K. to Shenzhen, China, along with reductions in
research and development and selling, general and administrative expenses. In September 2004, we
announced that the plan would also include the transfer of our main corporate functions, including
consolidated accounting, financial reporting, tax and treasury, from Abingdon, U.K. to our new U.S.
headquarters in San Jose, California. The charges in the quarter ended January 1, 2005 related to
termination payments to employees and related costs recorded in connection to these actions. In the
quarter ended December 31, 2005 the charges for termination payments to employees and related costs
were primarily recorded in connection with the employees in our assembly and test operations in
Paignton, who have been identified for termination and are being retained until the transition of
the operations to Shenzhen, China is complete. Costs of their severance and retention are being
accrued over their remaining service period. The period of transition will extend at least into the
quarter ended March 31, 2006, and is largely concurrent with the fulfilling of purchase orders and
last time buys under the Nortel Networks supply agreement. In November 2005, we announced an
extension of this plan to include the transfer of its chip-on-carrier assembly from Paignton to
Shenzhen. As of December 31, 2005, we have not identified the personnel to be affected by the move
and, accordingly, have not recorded any retention or severance costs related to this portion of the
plan. As of December 31, 2005, we have spent $18 million on the plan overall, and in total
anticipate spending approximately $24 million to $30 million (approximately 90% related to
personnel and 10% related to lease commitments), consistent with previous estimates.
Impairment/(Recovery) of Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
Six Month Period Ended |
|
|
December 31, |
|
January 1, |
|
December 31, |
|
January 1, |
$ Millions |
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Impairment/(recovery) of long-lived assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1.3 |
) |
|
$ |
|
|
In September, 2005, we sold a parcel of land in Swindon, U.K., which had previously been accounted
for as held for sale. The proceeds were $15.5 million, resulting in a gain of $1.3 million, net of
transaction costs. The book value of this land had previously been impaired and written-down to
fair market value, and therefore the net gain is being reflected as a recovery of this impairment
in the six month period ended December 31, 2005.
Other Income/(Expense) (Net)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended |
|
Six Month Period Ended |
|
|
December 31, |
|
January 1, |
|
December 31, |
|
January 1, |
$ Millions |
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
|
(unaudited) |
Other income/(expense), net |
|
$ |
(2.1 |
) |
|
$ |
(0.4 |
) |
|
$ |
(2.9 |
) |
|
$ |
(0.3 |
) |
Other income/(expense) primarily consists of interest expense, interest income and foreign currency
gains and losses, including unrealized gains or losses on forward contracts marked to market at the
end of the accounting period. The increases in expense in the three months and six months ended
December 31, 2005 were primarily related to increases in interest and amortization of issuance
premiums expense from our issuance of $25.5 million of 7% convertible debt in December 2004, and
decreases in interest income as cash balances acquired in the connection with the March 2004 New
Focus acquisition decreased as they were used in operations, offset by a lower level of net losses
on foreign currency forward contracts in the three months ended December 31, 2005 compared to the
three months ended January 1, 2005, and a net gain on foreign currency forward contracts in the six
months ended December 31, 2005 compared to the six months ended January 1, 2005.
Income Tax Benefit/(Provision)
In connection with our August 2005 acquisition of Creekside, in the six month period ended December
31, 2005 we recorded a one time tax gain of $11.8 million related to our anticipated use of capital
allowance carry forwards to offset deferred tax liabilities assumed.
19
Liquidity, Capital Resources and Contractual Obligations
Liquidity and Capital Resources
Operating activities
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended |
|
|
December 31, |
|
January 1, |
$ Millions |
|
2005 |
|
2005 |
|
|
(unaudited) |
|
(unaudited) |
Net loss |
|
$ |
(12,464 |
) |
|
$ |
(79,370 |
) |
Non-cash accounting charges: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
15,021 |
|
|
|
15,297 |
|
Impairment/(recovery) of long-lived assets |
|
|
(1,263 |
) |
|
|
|
|
Stock-based compensation |
|
|
4,804 |
|
|
|
243 |
|
Unrealized gain on foreign currency contracts |
|
|
(1,002 |
) |
|
|
|
|
One time tax gain |
|
|
(11,785 |
) |
|
|
|
|
Losses on currency remeasurement of notes payable |
|
|
916 |
|
|
|
(1,828 |
) |
Amortization of warrants & beneficial conversion feature |
|
|
1,293 |
|
|
|
67 |
|
Gains on sale property and equipment |
|
|
(1,814 |
) |
|
|
(650 |
) |
|
|
|
|
|
|
|
Total non-cash accounting charges |
|
|
6,170 |
|
|
|
13,129 |
|
Decrease/(increase) in working capital |
|
|
(14,324 |
) |
|
|
3,774 |
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(20,619 |
) |
|
$ |
(62,467 |
) |
|
|
|
|
|
Net cash used in operating activities for the six month period ended December 31, 2005 was $20.6
million, of which $6.3 million was due to our net loss for the period adjusted for non-cash
accounting charges. The remaining $14.3 million was due to the net change in our working capital,
which arose primarily from increases in inventories related to ramping up our Shenzhen
manufacturing facility while still operating our Paignton facility, and decreases in our accounts
payable and accrued liabilities as a result of payments of amounts owed to extended suppliers after
generating funds from our October 2005 public offering.
Net cash used in operating activities for the six month period ended January 1, 2005 was $62.5
million, primarily resulting from the loss from operations of $79.0 million, offset by non-cash
accounting charges of $13.1 million and a $3.8 million decrease in working capital. The decrease in
working capital was the result of a decrease in accounts payable and accrued expenses, principally
in connection with the payment of Onetta acquisition liabilities, offset by reductions in prepaid
expenses and other assets which generated cash of $5.0 million.
Investing activities
Investing
activities generated net cash of $22.3 million in the six month period ended December 31,
2005, primarily from $14.7 million in proceeds net of costs, from the
sale of a parcel of land in Swindon U.K. and $7.8 million of cash, excluding restricted cash, assumed in connection with
the acquisition of Creekside, all of which are described in more detail below.
Net cash provided by investing activities for the six month period ended January 1, 2005 was $0.6
million and primarily included proceeds of $5.7 million net of costs from the sale of JCA, JCA
purchase price adjustments of $1.5 million, proceeds from the Westrick loan note settlement of $1.2
million and capital expenditures of $8.5 million principally in connection with preparing for and
upgrading the Shenzhen, China facility.
On September 13, 2005, our Bookham Technology plc subsidiary entered into a contract with
Abbeymeads LLP to sell a parcel of vacant land at Haydon Wick, Blunsdon, Swindon, Wiltshire, U.K.
The transaction closed on September 13, 2005, resulting in
proceeds to us of £8.5 million
(approximately $15.5 million, before deducting costs, based on the exchange rate of £1.00 to
$1.8214, the noon buying rate on September 13, 2005 for cable transfers in foreign currencies as
certified by the Federal Reserve Bank of New York).
On August 10, 2005, Bookham Technology plc, our wholly-owned subsidiary, entered into a share
purchase agreement pursuant to which Bookham Technology plc purchased all of the issued share
capital of City Leasing (Creekside) Limited, a subsidiary of
Deutsche Bank, for consideration of £1.00 (plus professional fees of approximately £455,000). The
parties to the share purchase agreement are Bookham Technology plc, Deutsche Bank and London
Industrial Leasing Limited, a subsidiary of Deutsche Bank, which we refer to as London Industrial.
Creekside was utilized by Deutsche Bank in connection with the leasing of four aircraft to a third
party. The leasing arrangement is structured as follows: Phoebus Leasing Limited, a subsidiary of
Deutsche Bank, which we refer to as Phoebus, leases the four aircraft to Creekside under the
primary leases and Creekside in turn sub-leases the aircraft to a third party. Under the sub-lease
arrangement, the third party lessee who utilizes the aircraft, whom we refer to as the Sub-Lessee,
makes sublease payments to Creekside, who in turn must make lease payments to Phoebus under the
primary leases. To insulate
20
Creekside from any risk that the Sub-Lessee will fail to make payments under the sub-lease
arrangement, prior to the execution of the share purchase agreement, Creekside assigned its
interest in the Sub-Lessee payments to Deutsche Bank in return for predetermined deferred
consideration amounts, which we refer to as Deferred Consideration, which are paid directly from
Deutsche Bank. Additionally, on closing the transaction, Deutsche Bank loaned Creekside funds to
(i) pay substantially all of the rentals under the primary lease with Phoebus, excluding an amount
equal to £400,000, and (ii) repay an existing loan made by another wholly owned subsidiary of
Deutsche Bank to Creekside. The obligation of Creekside to repay the Deutsche Bank loans may be
fully offset against the obligation of Deutsche Bank to pay the Deferred Consideration to
Creekside.
As a result of these transactions, Bookham Technology plc will have available through Creekside
cash of approximately £6.63 million (approximately $12.2 million, based on an exchange rate of
£1.00 to $1.8403, the noon buying rate on September 2, 2005 for cable transfers in foreign
currencies as certified by the Federal Reserve Bank of New York). Under the terms of the agreement,
Bookham Technology plc received £4.2 million (approximately $7.5 million) of available cash when
the transaction closed on August 10, 2005. An additional £1 million (approximately $1.8 million)
has since been received on October 14, 2005, £1 million (approximately $1.8 million) will be
available on July 14, 2006 and the balance of approximately £431,000 (approximately $793,000) will
be available on July 16, 2007.
At the closing of this transaction, Creekside had receivables (including services and interest
charges) of £73.8 million (approximately $135.8 million) due from Deutsche Bank in connection with
certain aircraft subleases of Creekside and cash of £4.7 million (approximately $8.6 million), of
which £4.2 million was immediately available. The assignment was made in exchange for the
receivables, which are to be paid by Deutsche Bank to Creekside in three installments, with the
last payment being made on July 16, 2007. We have recorded these receivables and payables as net
assets on our balance sheet.
Creekside and Deutsche Bank entered into two facility agreements relating to a loan in the
principal amount of £18.3 million (approximately $33.7 million) and a loan in the principal amount
of £42.5 million including interest (approximately $78.2 million), which together will accrue
approximately £3.6 million (approximately $6.6 million) in interest during the term of these loans.
At the closing, Creekside used the loans to repay amounts outstanding under a loan dated April 12,
2005 between Creekside, as borrower, and City Leasing (Donside) Limited, a subsidiary of Deutsche
Bank, as lender, and to pay part of Creeksides rental obligations under the lease agreements.
At August 10, 2005, Creekside had long-term liabilities to Deutsche Bank under the loans, an
agreement to pay Deutsche Bank £8.3 million (approximately $15.3 million, including principal and
interest) to cover settlement of current Creekside tax liabilities and £0.4 million (approximately
$0.7 million) of outstanding payments due to Deutsche Bank under the lease agreements; we refer to
these collectively as the Obligations.
Creekside will use the Deferred Consideration to pay off the Obligations over a period of two
years, or the Term, such that the Obligations will be offset in full by the receivables and result
in Bookham Technology plc having excess cash of approximately £6.63 million (approximately $12.2
million) available to it during the Term. Bookham Technology plc expects to surrender certain of
its tax losses against any U.K. taxable income that may arise as a result of the Deferred
Consideration, to reduce any U.K. taxes that would otherwise be due from Creekside.
The loans issued by Deutsche Bank may be prepaid in whole at any time with 30 days prior written
notice to Deutsche Bank. The loan for £18.3 million was repayable by Creekside on October 14, 2005,
and accrued interest at a rate of 5.54% per year and the loan for £42.5 million is repayable by
Creekside in installments of £23.5 million (approximately $43.2 million) on July 14, 2006 and £22.5
million (approximately $41.4 million) on July 16, 2007. The remaining loan accrues interest a rate
of 5.68% per year. Events of default under the loan includes failure by Creekside to pay amounts
under the loans when due, material breach by Creekside of the terms of the lease agreements and
related documentation, a judgment or order made against Creekside that is not stayed or complied
with within seven days or an attachment by creditors that is not discharged within seven days,
insolvency of Creekside or failure by Creekside to make payments with respect to all or any class
of its debts, presentation of a petition for the winding up of Creekside, and appointment of any
administrative or other receiver with respect to Creekside or any material part of Creeksides
assets. While Deutsche Bank may accelerate repayment under the facility agreements upon an event of
default, the loan will be fully offset against the receivables, as described above.
Pursuant to the terms of the agreements governing this transaction, we believe that we have not
assumed any material credit risk in connection with these arrangements. The material cash flow
obligations associated with Creekside are directly related to Deutsche Banks obligations to pay
Creekside the Deferred Consideration, and Creeksides obligation to repay the loans to Deutsche
Bank. The obligations of Creekside to repay the Deutsche Bank loan can be fully offset against
Deutsche Banks obligation to pay the Deferred
21
Consideration. Any Sub-Lessee default has no impact on Deutsche Banks obligation to pay Creekside
the Deferred Consideration. Regarding the primary leases between Phoebus and Creekside, all but
£400,000 has been paid. For these reasons, we believe we do not bear a material risk and have no
substantial continuing payments or obligations.
Under the share purchase agreement and related documents, London Industrial and Deutsche Bank have
indemnified us, Bookham Technology plc and Creekside with respect to contractual obligations and
liabilities entered into by Creekside prior to the closing of the transaction and certain tax
liabilities of Creekside that may arise in taxable periods both prior to and after the closing.
Pursuant to an administration agreement between Creekside, City Leasing Limited, a subsidiary of
Deutsche Bank, and Deutsche Bank, Creekside is to be administered during the Term by City Leasing
Limited to ensure Creekside complies with its obligations under the lease agreements.
In accordance with the terms of the primary leases and the sub-leases, Phoebus is ultimately
entitled to the four aircraft in the event of default by the Sub-Lessee. An event of default will
not impact the payment obligations described above.
22
Financing activities
In the six
month period ended December 31, 2005, we generated
$49.3 million of cash from financing
activities, consisting of net proceeds from
our public offering.
On October 17, 2005, we completed a public offering of our common stock, issuing a total of
11,250,000 shares at a price per share to the public of $4.75, raising $53.4 million and receiving
$49.3 million net of commissions to the underwriters and the payment of offering costs and
expenses.
In the six months period ended January 1, 2005, the cash flow provided by financing activities was
$12.3 million, primarily the result of net proceeds of $21.5 million from the issue of 7%
convertible debentures, offset by a $4.1 million payment of principal on the $30 million promissory
note issued to NNUKL and a $5.1 million repayment of capital lease obligations acquired with
Onetta, Inc
Sources of Cash
In the past three years, we have funded our operations from several sources, including through
public offerings in 2000 and 2005, and acquisitions. As of December 31, 2005, we held $81.3
million in cash, cash equivalents and restricted cash. We do not have any bank lending facilities,
borrowings or lines of credit, except for the secured notes in the principal amount of $50.0
million we issued to Nortel Networks UK Limited, of which $45.9 million in aggregate principal was
outstanding at December 31, 2005, and the $25.5 million aggregate principal amount of the 7%
convertible notes we issued in December 2004.
On January 13, 2005 we entered into agreements which we expect to eliminate this outstanding debt
as follows:
|
|
|
On January 13, 2006, we paid $20 million in cash to Nortel Networks UK Limited (NNUKL)
to settle all $20.0 million outstanding principal of, plus all accrued interest on, our
Amended and Restated Series A-2 Senior Secured Note due 2007 (the Series A Note) that we
had previously issued to NNUKL. The Series A Note was then retired and cancelled. We also
paid NNUKL all of the accrued interest on the Amended and Restated Series B-1 Senior
Secured Note Due 2006 (the Series B Note) which had been issued by our Bookham Technology
plc subsidiary to NNUKL. |
|
|
|
|
On January 13, 2006, NNUKL sold the Series B Note to certain accredited institutional
investors. At the same time we issued 5,120,793 shares of our common stock and warrants to
purchase 686,000 shares of our common stock to these investors in exchange for Series B
Note, which had an outstanding principle balance of $25.9 million, and was then retired and
cancelled. The warrants have an exercise price of $7.00 per share and a term of five
years. |
|
|
|
|
On January 13, 2006, we issued 571,011 shares of our common stock and warrants to
purchase 304,539 shares of our common stock to the holders of our 7% Senior Unsecured
Convertible Debentures, who concurrently exercised their rights to convert an aggregate of
$19.4 million principal amount of the debentures into shares of our common stock, resulting
in the issuance of an aggregate of 3,529,887 shares of common stock. We also paid the
debenture holders an aggregate of $1,717,663.16 in cash. The warrants have an exercise
price of $7.00 per share and a term of five years. |
|
|
|
|
On January 13, 2006, we, along with our Bookham Technology plc subsidiary, entered into
a Release Agreement with Nortel Networks Corporation, NNUKL and certain of their affiliates
(collectively, Nortel), pursuant to which Nortel released its security interests in the
collateral securing the obligations of ourselves and Bookham Technology plc under the
Series A Note, the Series B Note and the supply agreement. |
|
|
|
|
On January 13, 2006, the holders of the debentures also agreed, subject to approval by
our stockholders, to convert their remaining $6.1 million aggregate principal amount of
convertible debentures for 1,106,477 shares of common stock. We have also agreed that at
the time of this subsequent conversion, we will pay to the debenture holders an aggregate
of $538,408.51 in cash and issue to the debenture holders an aggregate of 178,989
additional shares of our common stock and warrants to purchase an aggregate of up to
95,461 shares of our common stock. The warrants will have an exercise price of $7.00 per
share and a term of five years. We intend to seek the required stockholder approval within
60 days of the date of the transaction. |
|
|
|
|
In connection with these transactions, we paid $1.8 million in fees to a third party
broker. |
23
Future Cash Requirements
In our Annual Report on Form 10-K for the year ended July 2, 2005, filed on September 8, 2005, we
described our need to raise between $20 million and $30 million by December 31, 2005 in order to
continue our planned level of operations through fiscal 2006, and a need to raise $50 million to
$60 million on a cumulative basis by August 2006 to maintain a minimum $25 million cash requirement
under the notes issued to NNUKL.
As of December 31, 2005, we exceeded these targeted thresholds by raising approximately $77 million
(net of estimated fees and including $3.7 million in proceeds which are yet to be payable) from our
sale of the Swindon land, our acquisition of Creekside and the sale of 11,250,000 shares of our
common stock in a public offering.
In addition, subsequent to the December 31, 2005 quarter, on January 13, 2005, we entered into a
series of agreements which eliminated our outstanding debt with NNUKL, and $19.4 million of the
$25.5 million of our convertible debentures. We have agreed with the debenture holders to convert
the remaining portion of the debentures, subject to the approval of
our shareholders.
As of the date of the filing of this quarterly report on Form 10-Q, we believe we have sufficient
cash balances to satisfy our operating, working capital and capital expenditure requirements for at
least the next twelve months.
Nevertheless, we have a history of negative cash flow, and in the future we may require additional
financing to support our operations. In the future, other events or opportunities may also arise,
requiring us to sell additional assets or issue additional equity or debt. From time to time, we
have engaged in discussions with third parties concerning potential acquisitions of product lines,
technologies and businesses. We continue to consider potential acquisition candidates. Any of these
transactions could involve the issuance of a significant amount of new equity securities, debt,
and/or cash consideration. If we raise additional funds or acquire businesses or technologies
through the issuance of equity securities, our existing stockholders may experience significant
dilution.
Risk ManagementForeign Currency Risk
We are exposed to fluctuations in foreign currency exchange rates and interest rates. As our
business has grown and become more multinational in scope, we have become increasingly subject to
fluctuations based upon changes in the exchange rates between the currencies in which we collect
revenues and pay expenses. Despite our change in domicile from the United Kingdom to the United
States, we expect that a substantial portion of our revenues will be denominated in U.S. dollars,
while the majority of our expenses will continue to be denominated in U.K. pounds sterling until
our facility in Shenzhen, China is fully operational. Fluctuations in the exchange rate between the
U.S. dollar and the U.K. pound sterling and, to a lesser extent, other currencies in which we
collect revenues and pay expenses, could affect our operating results. We enter into foreign
currency contracts in an effort to mitigate our exposure to such fluctuations, and we may be
required to convert currencies to meet our obligations. Under certain circumstances, foreign
currency contracts can have an adverse effect on our financial condition. As of December 31, 2005,
we held two foreign currency exchange contracts with a nominal value of $37 million that include
put and call options which expired or will expire at various dates from January 2006 to September
2006.
Contractual Obligations
There have been no material changes to the contractual obligations disclosed as at July 2, 2005 in
our Annual Report on Form 10-K filed with the SEC on September 8, 2005, other than our entry into
contractual obligations related to our acquisition of Creekside, as described under investing
activities, and the cancellation of a substantial portion of our long-term debt and the third
addendum to our supply agreement with Nortel Networks Limited, both of which are described under
recent developments, within this Managements Discussion and Analysis of Financial Condition and
Results of Operations.
Off-Balance Sheet Arrangements
As of December 31, 2005, we are not currently party to any material off-balance sheet arrangements.
24
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding
forward-looking statements. In that context, the discussion in this item and other portions of this
Quarterly Report on Form 10-Q contain forward-looking statements that involve certain degrees of
risk and uncertainty, including statements relating to our business, liquidity and capital
resources. Except for the historical information contained herein, the matters discussed in this
Quarterly Report on Form 10-Q are such forward-looking statements that involve risks and
uncertainties, including:
We have a history of large operating losses and we expect to generate losses in the future unless
we achieve further cost reductions and revenue increases.
We have never been profitable. We have incurred losses and negative cash flow from operations since
our inception. As of December 31, 2005, we had an accumulated deficit of $879 million.
Our net loss for the six month period ended December 31, 2005 was $12.5 million and for the year
ended July 2, 2005 was $248 million, which included goodwill and intangibles impairment charges of
$114.2 million and restructuring charges of $21.0 million. Even though we generated positive gross
margins in each of the past four fiscal quarters we have a history of negative gross margins and we
may not be able to maintain positive gross margins if we do not continue to reduce our costs,
improve our product mix and generate sufficient revenues from new and existing customers to offset
the revenues we will lose after Nortel Networks completes its Last-Time-Buy purchases and its other
purchases pursuant to the supply agreement with Nortel, as amended by the supply agreement
addendums. We remain highly dependent on sales to Nortel Networks and we expect revenues from
Nortel Networks to decrease during the 2006 calendar year.
We remain highly dependent on sales to Nortel Networks and we expect revenues from Nortel Networks
to decrease through calendar 2006.
Historically, Nortel Networks has been our largest customer. In the six months ended December 31,
2005 and in the fiscal year ended July 2, 2005, respectively, we sold $68.0 million and $89.5
million of products and services to Nortel Networks, or 55% and 45% of our total revenues during
such periods.
In connection with the third addendum to the supply agreement with Nortel Networks we entered into
on January 13, 2006, Nortel Networks is obligated to purchase $72 million of our products through
calendar 2006. As these commitments are met over the period of the agreement, there can be no
assurance Nortel will continue to buy after the agreement is completed, or if Nortel does not
continue to buy at its current level that we can replace the loss of revenue from Nortel with
revenue from other customers.
To the extent that we may rely on Nortel Networks for revenues in the future, Nortel Networks has
experienced significant losses in the past and any future adverse change in Nortel Networks
financial condition could adversely affect their demand for our products.
We may encounter unexpected costs or delays in transferring our assembly and test operations from
the United Kingdom to Shenzhen, China.
A key element of our cost reduction program is the successful transfer of substantially all of our
assembly and test operations from Paignton, U.K. to Shenzhen, China. Accordingly, we expect that
our ability to transfer manufacturing capabilities to, and to operate effectively in, China is
critical to the overall success of our business. We began to implement the transfer of our assembly
and test operations from Paignton to Shenzhen in the fall of 2004. A substantial portion of this
endeavor has taken place, and we expect to complete the transfer in the first half of calendar
2006. Our business and results of operations would be materially adversely affected if we
experience delays in, increased costs related to, or if we are ultimately unable to:
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qualify our manufacturing lines and the products we produce in Shenzhen, as required by our customers; |
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transfer our assembly and test equipment from Paignton to Shenzhen; |
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attract qualified personnel to operate our Shenzhen facility; |
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retain employees at our Shenzhen facility; |
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achieve the requisite production levels for products manufactured at our Shenzhen facility; |
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retain employees at our Paignton facility to produce certain last-time buy products for Nortel Networks; and |
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wind down operations at our Paignton facility. |
We may not be able to satisfy customer demand in a timely and cost effective manner as we
transition our assembly and test operations from the United Kingdom to China.
We are in the process of transferring assembly and test operations previously undertaken at our
Paignton facility to our Shenzhen facility. Fluctuations in customer demand present challenges and
require us to continually assess and predict demand appropriately in order to ensure availability
and staffing of assembly and test facilities sufficient to meet that demand. For example, in the
past four quarters, we experienced increased customer demand for certain of our products that
required that we operate our Paignton facility at greater capacity than we had anticipated when we
implemented our most recent restructuring plan. This increased use of the Paignton facility to meet
customer demands constrained the planned transition of our assembly and test operations from our
facility in the U.K. to China and increased our expenses as we kept our U.K. production line
operating. In addition, if we are not able to fill customer orders on time due to our inability to
forecast customer demand, our reputation may be harmed with those customers and other potential
customers.
The market for optical components continues to be characterized by excess capacity and intense
price competition which has had, and will continue to have, a material adverse affect on our
results of operations.
By 2002, actual demand for optical communications equipment and components was dramatically less
than that forecasted by leading market researchers only two years before. Even though the market
for optical components has been recovering recently, particularly in the metro market segment,
there continues to be excess capacity, intense price competition among optical component
manufacturers and continued consolidation of the industry. As a result of this excess capacity, and
other industry factors, pricing pressure remains intense. The continued uncertainties in the
telecommunications industry and the global economy make it difficult for us to anticipate revenue
levels and therefore to make appropriate estimates and plans relating to management of costs.
Continued uncertain demand for optical components has had, and will continue to have, a material
adverse effect on our results of operations.
A default under our supply agreement with Nortel Networks would have an adverse impact on our
ability to continue the conduct of our business
We are party to a supply agreement with Nortel Networks that has been amended three times, most
recently in January 2006. The supply agreement, as amended, requires that we grant a license for
the assembly, test, post-processing and test intellectual property (but excluding wafer technology)
of certain critical products to Nortel Networks and to any designated alternative supplier, if at
any time, we: are unable to manufacture critical products for Nortel Networks in any material
respect for a continuous period of not less than six weeks, or are subject to an insolvency event,
such as a petition or assignment in bankruptcy, appointment of a trustee, custodian or receiver, or
entrance into an arrangement for the general benefit of creditors. In addition, if there is an
insolvency event, Nortel Networks will have the right to buy all Nortel Networks inventory we hold,
and we will be obligated to grant a license to Nortel Networks or any alternative supplier for the
manufacture of all products covered by the first supply agreement addendum. Our revenues and
business would be substantially harmed if we were required to license this assembly, test,
post-processing and test intellectual property to Nortel Networks or any supplier they were to
designate.
We and our customers are each dependent upon a limited number of customers.
Historically, we have generated most of our revenues from a limited number of customers. Sales to
one customer, Nortel Networks, accounted for 55% and 45% of our revenues for the six- month period
ended December 31, 2005 and the year ended July 2, 2005. In addition to the reduced outlook for
revenue from Nortel Networks after the non-cancelable purchase orders are filled, we expect that
revenue from our other major customers may decline or fluctuate significantly in fiscal 2006 and
beyond. We may not be able to offset any such decline in revenues from our existing major customers
with revenues from new customers.
Our dependence on a limited number of customers is due to the fact that the optical
telecommunications systems industry is dominated by a small number of large companies. Similarly,
our customers depend primarily on a limited number of major telecommunications carrier customers to
purchase their products that incorporate our optical components. Many major telecommunication
systems
26
companies and telecommunication carriers are experiencing losses from operations. The further
consolidation of the industry, coupled with declining revenues from our major customers, may have a
material adverse impact on our business.
As a result of our global operations, our business is subject to currency fluctuations that have
adversely affected our results of operations in recent quarters and may continue to do so in the
future.
Our financial results have been materially impacted by foreign currency fluctuations and our future
financial results may also be materially impacted by foreign currency fluctuations. Over the last
two years, the decline in the value of the U.S. dollar versus the U.K. pound sterling has had a
major negative effect on our profit margins and our cash flow. Despite our change in domicile from
the United Kingdom to the United States and the implementation of our restructuring program to move
all assembly and test operations from Paignton, U.K. to Shenzhen, China, the majority of our
expenses are still denominated in U.K. pounds sterling and substantially all of our revenues are
denominated in U.S. dollars. Fluctuations in the exchange rate between these two currencies and, to
a lesser extent, other currencies in which we collect revenues and pay expenses will continue to
have a material affect on our operating results.
We engage in currency transactions in an effort to cover any exposure to such fluctuations, and we
may be required to convert currencies to meet our obligations; however, under certain
circumstances, these transactions can have an adverse effect on our financial condition.
We are increasing manufacturing operations in China, which exposes us to risks inherent in doing
business in China.
We are taking advantage of the comparatively low manufacturing costs in China by transferring
substantially all of our assembly and test operations to our facility in Shenzhen, China.
Operations in China are subject to greater political, legal and economic risks than our operations
in other countries. In order to operate the facility, we must obtain required legal authorization
and train and hire a workforce. In particular, the political, legal and economic climate in China,
both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be
adversely affected by changes in Chinese laws and regulations such as those related to taxation,
import and export tariffs, environmental regulations, land use rights, intellectual property and
other matters. In addition, we may not obtain the requisite legal permits to continue to operate in
China and costs or operational limitations may be imposed in connection with obtaining and
complying with such permits.
We have been advised that power may be rationed in the location of our Shenzhen facility, and were
power rationing to be implemented, it could either have an adverse impact on our ability to
complete manufacturing commitments on a timely basis or, alternatively, require significant
investment in generating capacity to sustain uninterrupted operations at the facility. Our ability
to transfer certain assembly and test operations from our facilities in the U.K. to China would be
hindered by a power rationing. We may also be required to expend greater amounts than we currently
anticipate in connection with increasing production at the facility. Any one of these factors, or a
combination of them, could result in the incurrence of unanticipated costs, with the potential to
materially and adversely affect our business.
We intend to export the majority of the products manufactured at our Shenzhen facility. Under
current regulations, upon application and approval by the relevant governmental authorities, we
will not be subject to certain Chinese taxes and will be exempt from certain duties on imported
materials that are used in the manufacturing process and subsequently exported from China as
finished products. However, Chinese trade regulations are in a state of flux and we may become
subject to other forms of taxation and duties in China or may be required to pay export fees in the
future. In the event that we become subject to new forms of taxation in China, our business and
results of operation could be materially adversely affected.
Fluctuations in operating results could adversely affect the market price of our common stock.
Our revenues and operating results are likely to fluctuate significantly in the future. The timing
of order placement, size of orders and satisfaction of contractual customer acceptance criteria, as
well as order or shipment delays or deferrals, with respect to our products, may cause material
fluctuations in revenues. Our lengthy sales cycle, which may extend to more than one year, may
cause our revenues and operating results to vary from period to period and it may be difficult to
predict the timing and amount of any variation. Delays or deferrals in purchasing decisions may
increase as we develop new or enhanced products for new markets, including data communications,
aerospace, industrial and military markets. Our current and anticipated future dependence on a
small number of customers increases the revenue impact of each customers decision to delay or
defer purchases from us. Our expense levels in the future will be based, in large part, on our
expectations regarding future revenue sources and, as a result, net income for any quarterly period
in which material orders fail to occur, are delayed, or deferred could vary significantly.
27
Because of these and other factors, quarter-to-quarter comparisons of our results of operations may
not be an indication of future performance. In future periods, results of operations may differ
from the estimates of public market analysts and investors. Such a discrepancy could cause the
market price of our common stock to decline.
We may incur additional significant restructuring charges that will adversely affect our results of
operations.
In light of our restructuring and cost reduction measures in 2002, 2003 and 2004 in response to the
depressed demand for optical components and our consolidation activities, we have incurred
significant restructuring related charges. In 2004, we announced further restructuring plans, which
include moving the majority of our assembly and test operations from our site in Paignton, U.K. to
our facility in Shenzhen, China and closing our former headquarters facility in Abingdon, U.K. In
the years ended December 31, 2002 and December 31, 2003, in the six months ended July 3, 2004, in
the year ended July 2, 2005, and in the six months ended December 31, 2005, we recorded
restructuring charges of $55.0 million, $31.0 million, $(0.7) million, $20.9 million and $3.6
million respectively. In November 2005, we announced an extension of this plan to include the
transfer of our chip-on-carrier assembly from Paignton to Shenzhen. As of December 31, 2005, we
have not identified the personnel to be affected by the move and, accordingly, have not recorded
any retention or severance costs related to this portion of the plan. As of December 31, 2005, for
the total plan we have spent $18 million, and in total anticipate spending approximately $24
million to $30 million (approximately 90% related to personnel and 10% related to lease
commitments), consistent with previous estimates.
We may incur charges in excess of amounts currently estimated for these restructuring plans. We may
incur additional charges in the future in connection with future restructurings. These charges,
along with any other charges, have adversely affected, and will continue to adversely affect, our
results of operations for the periods in which such charges have been, or will be, incurred.
Our results of operations may suffer if we do not effectively manage our inventory and we may incur
inventory-related charges.
We need to manage our inventory of component parts and finished goods effectively to meet changing
customer requirements. The ability to accurately forecast customers product needs is difficult.
Some of our products and supplies have in the past, and may in the future, become obsolete while in
inventory due to rapidly changing customer specifications or a decrease in customer demand. If we
are not able to manage our inventory effectively, we may need to write down the value of some of
our existing inventory or write off unsaleable or obsolete inventory, which would adversely affect
our results of operations. We have from time to time incurred significant inventory-related
charges. Any such charges we incur in future periods could significantly adversely affect our
results of operations.
Charges to earnings resulting from the application of the purchase method of accounting may
adversely affect the market value of our common stock.
We account for our acquisitions, including the acquisition of New Focus, using the purchase method
of accounting. In accordance with GAAP, we allocate the total estimated purchase price to the
acquired companys net tangible assets, amortizable intangible assets, and in-process research and
development based on their fair values as of the date of announcement of the transaction, and
record the excess of the purchase price over those fair values as goodwill. With respect to our
acquisition of New Focus, we expensed the portion of the estimated purchase price allocated to
in-process research and development in the first quarter of 2004. We will incur an increase in the
amount of amortization expense over the estimated useful lives of certain of the intangible assets
acquired in connection with the merger on an annual basis. To the extent the value of goodwill or
intangible assets with indefinite lives becomes impaired, we may be required to incur material
charges relating to the impairment of those assets. In the year ended July 2, 2005, following a
triggering event in the third quarter and in accordance with our policy of evaluating long-lived
assets for impairment in the fourth quarter, we recorded charges totaling $114.2 million related to
the impairment of goodwill and purchased intangible assets. In addition, in the past, after the
completion of a transaction, we have amended the provisional values of assets and liabilities we
obtained as part of transactions, specifically the Nortel Networks acquisition. This amendment
resulted in the value of our inventory being increased by $20.2 million, current liabilities being
increased by approximately $1.3 million, intangible assets being decreased by approximately $9.1
million and property, plant and equipment increased by $9.8 million. We cannot assure you that we
will not incur charges in the future as a result of any such transaction, which charges may have an
adverse effect on our earnings.
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Our debt repayment obligations may affect our ability to operate our business.
On December 20, 2004, we issued senior unsecured convertible debentures in a private placement
resulting in gross proceeds of $25.5 million. These debentures bear interest at a rate of 7% per
annum payable on each March 31, June 30, September 30 and December 31, while such debentures are
outstanding, and on the maturity date. The debentures may be converted into shares of our common
stock at the option of the holder prior to the maturity of the debentures on December 20, 2007.
The conversion price of the debentures is $5.50. The debentures may also be converted into common
stock by us under certain circumstances. On January 13, 2006, $19.4 million principal amount of
the debentures was converted into shares of our common stock. The holders of the debentures have
agreed, subject to the approval of our stockholders, to convert the remaining $6.1 million
principal amount of debentures. If we are unable to obtain stockholder approval, the debentures
will remain outstanding. If we do not have adequate cash resources to repay these debentures when
they come due, our business and operations will be adversely affected.
Bookham Technology plc may not be able to utilize tax losses against the receivables that arise as
a result of its transaction with Deutsche Bank.
On August 10, 2005, Bookham Technology plc purchased all of the issued share capital of City
Leasing (Creekside) Limited, a subsidiary of Deutsche Bank. Creekside is entitled to receivables of
£73.8 million (approximately $135.8 million, based on an exchange rate of £1.00 to $1.8403, the
noon buying rate on September 2, 2005 for cable transfers in foreign currencies as certified by the
Federal Reserve Bank of New York) from Deutsche Bank in connection with certain aircraft subleases
and will in turn apply those payments over a two-year term to obligations of £73.1 million
(approximately $134.5 million) owed to Deutsche Bank. As a result of these transactions, Bookham
Technology plc will have available through Creekside cash of approximately £6.63 million
(approximately $12.2 million). We expect Bookham Technology plc to utilize certain expected tax
losses to reduce the taxes that might otherwise be due by Creekside as the receivables are paid. In
the event that Bookham Technology plc is not able to utilize these tax losses (or these tax losses
do not arise), Creekside may have to pay taxes, reducing the cash available from Creekside. In the
event there is a future change in applicable U.K. tax law, Creekside, and in turn Bookham
Technology plc, would be responsible for any resulting tax liabilities, which amounts could be
material to Bookhams financial condition or operating results.
Our success will depend on our ability to anticipate and respond to evolving technologies and
customer requirements.
The market for telecommunications equipment is characterized by substantial capital investment and
diverse and evolving technologies. For example, the market for optical components is currently
characterized by a trend toward the adoption of pluggable components that do not require the
customized interconnections of traditional gold box devices and the increased integration of
components on subsystems. Our ability to anticipate and respond to these and other changes in
technology, industry standards, customer requirements and product offerings and to develop and
introduce new and enhanced products will be significant factors in our ability to succeed. We
expect that new technologies will continue to emerge as competition in the telecommunications
industry increases and the need for higher and more cost efficient bandwidth expands. The
introduction of new products embodying new technologies or the emergence of new industry standards
could render our existing products uncompetitive from a pricing standpoint, obsolete or
unmarketable.
Our products are complex, may take longer to develop than anticipated and we may not recognize
revenues from new products until after long field testing and customer acceptance periods.
Many of our new products must be tailored to customer specifications. As a result, we are
constantly developing new products and using new technologies in those products. For example, while
we currently manufacture and sell discrete gold box technology, we expect that many of our sales
of gold box technology will soon be replaced by pluggable modules. These products often take many
quarters to develop because of their complexity and because customer specifications sometimes
change during the development cycle. We often incur substantial costs associated with the research
and development and sales and marketing activities in connection with products that may be
purchased long after we have incurred the costs associated with designing, creating and selling
such products. In addition, due to the rapid technological changes in our market, a customer may
cancel or modify a design project before we begin large-scale manufacture of the product and
receive revenue from the customer. It is unlikely that we would be able to recover the expenses for
cancelled or unutilized design projects. It is difficult to predict with any certainty,
particularly in the present economic climate, the frequency with which customers will cancel or
modify their projects, or the effect that any cancellation or modification would have on our
results of operations.
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If our customers do not qualify our manufacturing lines or the manufacturing lines of our
subcontractors for volume shipments, our operating results could suffer.
Most of our customers do not purchase products, other than limited numbers of evaluation units,
prior to qualification of the manufacturing line for volume production. Our existing manufacturing
lines, as well as each new manufacturing line, must pass through varying levels of qualification
with our customers. Our manufacturing line has passed our qualification standards, as well as our
technical standards. However, our customers may also require that we pass their specific
qualification standards and that we, and any subcontractors that we may use, be registered under
international quality standards. In addition, we have in the past, and may in the future, encounter
quality control issues as a result of relocating our manufacturing lines or introducing new
products to fill production. We may experience delays in obtaining customer qualification of our
manufacturing lines and, as a consequence, our operating results and customer relationships would
be harmed.
Delays, disruptions or quality control problems in manufacturing could result in delays in product
shipments to customers and could adversely affect our business.
We may experience delays, disruptions or quality control problems in our manufacturing operations
or the manufacturing operations of our subcontractors. As a result, we could incur additional costs
that would adversely affect gross margins, and product shipments to our customers could be delayed
beyond the shipment schedules requested by our customers, which would negatively affect our
revenues, competitive position and reputation. Furthermore, even if we are able to deliver products
to our customers on a timely basis, we may be unable to recognize revenues based on our revenue
recognition policies.
We may experience low manufacturing yields.
Manufacturing yields depend on a number of factors, including the volume of production due to
customer demand and the nature and extent of changes in specifications required by customers for
which we perform design-in work. Higher volumes due to demand for a fixed, rather than continually
changing, design generally result in higher manufacturing yields, whereas lower volume production
generally results in lower yields. In addition, lower yields may result, and have in the past
resulted, from commercial shipments of products prior to full manufacturing qualification to the
applicable specifications. Changes in manufacturing processes required as a result of changes in
product specifications, changing customer needs and the introduction of new product lines have
historically caused, and may in the future cause, significantly reduced manufacturing yields,
resulting in low or negative margins on those products. Moreover, an increase in the rejection rate
of products during the quality control process either pre, during or post manufacture, results in
lower yields and margins. Finally, manufacturing yields and margins can also be lower if we receive
or inadvertently use defective or contaminated materials from our suppliers.
We depend on a number of suppliers who could disrupt our business if they stopped, decreased or
delayed shipments.
We depend on a number of suppliers of raw materials and equipment used to manufacture our products.
Some of these suppliers are sole sources. We typically have not entered into long-term agreements
with our suppliers and, therefore, these suppliers generally may stop supplying materials and
equipment at any time. The reliance on a sole or limited number of suppliers could result in
delivery problems, reduced control over product pricing and quality, and an inability to identify
and qualify another supplier in a timely manner. Any supply deficiencies relating to the quality or
quantities of materials or equipment we use to manufacture our products could adversely affect our
ability to fulfill customer orders or our financial results of operations.
Our intellectual property rights may not be adequately protected.
Our future success will depend, in large part, upon our intellectual property rights, including
patents, design rights, trade secrets, trademarks, know-how and continuing technological
innovation. We maintain an active program of identifying technology appropriate for patent
protection. Our practice is to require employees and consultants to execute non-disclosure and
proprietary rights agreements upon commencement of employment or consulting arrangements. These
agreements acknowledge our exclusive ownership of all intellectual property developed by the
individuals during their work for us and require that all proprietary information disclosed will
remain confidential. Although such agreements may be binding, they may not be enforceable in all
jurisdictions.
Our intellectual property portfolio is an important corporate asset. The steps we have taken and
may take in the future to protect our intellectual property may not adequately prevent
misappropriation or ensure that others will not develop competitive technologies or products. We
cannot assure investors that our competitors will not successfully challenge the validity of these
patents, or design products that avoid infringement of our proprietary rights with respect to our
technology. There can be no assurance that other companies are not investigating or developing
other similar technologies, that any patents will be issued from any application pending or filed
by us or that, if patents are issued, the claims allowed will be sufficiently broad to deter or
prohibit others from marketing
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similar products. In addition, we cannot assure investors that any patents issued to us will not be
challenged, invalidated or circumvented, or that the rights under those patents will provide a
competitive advantage to us. Further, the laws of certain regions in which our products are or may
be developed, manufactured or sold, including Asia-Pacific, Southeast Asia and Latin America, may
not protect our products and intellectual property rights to the same extent as the laws of the
United States, the U.K. and continental European countries. This is especially relevant as we
transfer certain of our assembly and test operations from our facilities in the U.K. to China and
as our competitors establish manufacturing operations in China to take advantage of comparatively
low manufacturing costs.
Our products may infringe the intellectual property rights of others which could result in
expensive litigation or require us to obtain a license to use the technology from third parties.
Companies in the industry in which we operate frequently receive claims of patent infringement or
infringement of other intellectual property rights. In this regard, third parties may in the future
assert claims against us concerning our existing products or with respect to future products under
development. We have entered into and may in the future enter into indemnification obligations in
favor of some customers that could be triggered upon an allegation or finding that we are
infringing other parties proprietary rights. If we do infringe a third partys rights, we may need
to negotiate with holders of patents relevant to our business. We have from time to time received
notices from third parties alleging infringement of their intellectual property and where
appropriate have entered into license agreements with those third parties with respect to that
intellectual property. We may not in all cases be able to resolve allegations of infringement
through licensing arrangements, settlement, alternative designs or otherwise. We may take legal
action to determine the validity and scope of the third-party rights or to defend against any
allegations of infringement. In the course of pursuing any of these means or defending against any
lawsuits filed against us, we could incur significant costs and diversion of our resources. Due to
the competitive nature of our industry, it is unlikely that we could increase our prices to cover
such costs. In addition, such claims could result in significant penalties or injunctions that
could prevent us from selling some of our products in certain markets or result in settlements that
require payment of significant royalties that could adversely affect our ability to price our
products profitably.
If we fail to obtain the right to use the intellectual property rights of others necessary to
operate our business, our ability to succeed will be adversely affected.
The telecommunications and optical components markets in which we sell our products have
experienced frequent litigation regarding patent and other intellectual property rights. Numerous
patents in these industries are held by others, including academic institutions and our
competitors. Optical component suppliers may seek to gain a competitive advantage or other third
parties may seek an economic return on their intellectual property portfolios by making
infringement claims against us. In the future, we may need to obtain license rights to patents or
other intellectual property held by others to the extent necessary for our business. Unless we are
able to obtain such licenses on commercially reasonable terms, patents or other intellectual
property held by others could inhibit our development of new products for our markets. Licenses
granting us the right to use third-party technology may not be available on commercially reasonable
terms, if at all. Generally, a license, if granted, would include payments of up-front fees,
ongoing royalties or both. These payments or other terms could have a significant adverse impact on
our operating results. Our larger competitors may be able to obtain licenses or cross-license their
technology on better terms than we can, which could put us at a competitive disadvantage.
The markets in which we operate are highly competitive, which could result in lost sales and lower
revenues.
The market for fiber optic components is highly competitive and such competition could result in
our existing customers moving their orders to competitors. Certain of our competitors may be able
more quickly and effectively to:
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respond to new technologies or technical standards; |
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react to changing customer requirements and expectations; |
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devote needed resources to the development, production, promotion and sale of products; and |
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deliver competitive products at lower prices. |
Many of our current competitors, as well as a number of our potential competitors, have longer
operating histories, greater name recognition, broader customer relationships and industry
alliances and substantially greater financial, technical and marketing resources than we do. In
addition, market leaders in industries such as semiconductor and data communications, who may also
have
31
significantly more resources than we do, may in the future enter our market with competing
products. All of these risks may be increased if the market were to consolidate through mergers or
business combinations between competitors.
We cannot assure investors that we will be able to compete successfully with our competitors or
that aggressive competition in the market will not result in lower prices for our products or
decreased gross profit margins. Any such development would have a material adverse effect on our
business, financial condition and results of operations.
We generate a significant portion of our revenues internationally and therefore are subject to
additional risks associated with the extent of our international operations.
For the six months ended December 31, 2005, the year ended July 2, 2005, the six months ended July
3, 2004, and the years ended December 31, 2003 and December 31, 2002, 22%, 28%, 26%, 9% and 9% of
our revenues, respectively, were derived in the United States and 78%, 72%, 74%, 91% and 91%,
respectively, were derived outside the United States.
We are subject to additional risks related to operating in foreign countries, including:
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currency fluctuations, which could result in increased operating expenses and reduced revenues; |
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greater difficulty in accounts receivable collection and longer collection periods; |
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difficulty in enforcing or adequately protecting our intellectual property; |
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foreign taxes; |
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political, legal and economic instability in foreign markets; and |
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foreign regulations. |
Any of these risks, or any other risks related to our foreign revenues, could materially adversely
affect our business, financial condition and results of operations.
Our business will be adversely affected if we cannot manage the significant changes in the number
of our employees and the size of our operations.
In the past we have significantly reduced the number of employees and scope of our operations
because of declining demand for our products. There is a risk that, during periods of growth or
decline, management will not sufficiently coordinate the roles of individuals to ensure that all
areas receive appropriate focus and attention. If we are unable to manage our headcount,
manufacturing capacity and scope of operations effectively, the cost and quality of our products
may suffer, we may be unable to attract and retain key personnel and we may be unable to market and
develop new products. Further, the inability to successfully manage the substantially larger and
geographically more diverse organization, or any significant delay in achieving successful
management, could have a material adverse effect on us and, as a result, on the market price of our
common stock.
We may be faced with product liability claims.
Despite quality assurance measures, there remains a risk that defects may occur in our products.
The occurrence of any defects in our products could give rise to liability for damages caused by
such defects and for consequential damages. They could, moreover, impair the markets acceptance of
our products. Both could have a material adverse effect on our business and financial condition. In
addition, we may assume product warranty liabilities related to companies we acquire which could
have a material adverse effect on our business and financial condition. In order to mitigate the
risk of liability for damages, we carry product liability insurance with a $26 million aggregate
annual limit and errors and omissions insurance with a $5 million annual limit. We cannot assure
investors that this insurance could adequately cover our costs arising from defects in our products
or otherwise.
If we fail to attract and retain key personnel, our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel. Competition for
highly skilled technical people is extremely intense and we continue to face difficulty identifying
and hiring qualified engineers in many areas of our business. We may
32
not be able to hire and retain such personnel at compensation levels consistent with our existing
compensation and salary structure. Our future also depends on the continued contributions of our
executive management team and other key management and technical personnel, each of whom would be
difficult to replace. The loss of services of these or other executive officers or key personnel or
the inability to continue to attract qualified personnel could have a material adverse effect on
our business.
Similar to other technology companies, we rely upon our ability to use stock options and other
forms of equity-based compensation as key components of our executive and employee compensation
structure. Historically, these components have been critical to our ability to retain important
personnel and offer competitive compensation packages. Without these components, we would be
required to significantly increase cash compensation levels (or develop alternative compensation
structures) in order to retain our key employees. Recent proposals to modify accounting rules
relating to the expensing of equity compensation may cause us to substantially reduce, modify, or
even eliminate, all or portions of our equity compensation programs.
Our business and future operating results may be adversely affected by events outside of our
control.
Our business and operating results are vulnerable to interruption by events outside of our control,
such as earthquakes, fire, power loss, telecommunications failures, political instability, military
conflict and uncertainties arising out of terrorist attacks, including a global economic slowdown,
the economic consequences of additional military action or additional terrorist activities and
associated political instability, and the effect of heightened security concerns on domestic and
international travel and commerce.
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results, which may cause stockholders to lose confidence in the accuracy of
our financial statements.
Effective internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our
brand and operating results could be harmed. In addition, compliance with the internal control
requirements, as well as other financial reporting standards applicable to a public company,
including the Sarbanes-Oxley Act of 2002, has in the past and will in the future continue to
involve substantial cost and investment of our managements time.
As of July 2, 2005, we reported on four material weaknesses in our systems of internal control over
financial reporting. Beyond this, we will continue to spend significant time and incur significant
costs to assess and report on the effectiveness of internal controls over financial reporting as
required by Section 404 of the Sarbanes-Oxley Act. Although we believe we have remediated these
material weaknesses, finding more material weaknesses in the future could make it more difficult
for us to attract and retain qualified persons to serve on our board of directors or as executive
officers, which could harm our business. In addition, if we discover future material weaknesses,
disclosure of that fact could reduce the markets confidence in our financial statements, which
could harm our stock price and our ability to raise capital.
Our business involves the use of hazardous materials, and environmental laws and regulations may
expose us to liability and increase our costs.
We historically have handled small amounts of hazardous materials as part of our manufacturing
activities and now handle more and different hazardous materials as a result of the manufacturing
processes related to New Focus, the optical components business acquired from Nortel Networks and
the product lines we acquired from Marconi. Consequently, our operations are subject to
environmental laws and regulations governing, among other things, the use and handling of hazardous
substances and waste disposal. We may be required to incur environmental costs to comply with
current or future environmental laws. As with other companies engaged in manufacturing activities
that involve hazardous materials, a risk of environmental liability is inherent in our
manufacturing activities, as is the risk that our facilities will be shut down in the event of a
release of hazardous waste. The costs associated with environmental compliance or remediation
efforts or other environmental liabilities could adversely affect our business.
In addition, under applicable EU regulations, we, along with other electronics component
manufacturers, will be required to eliminate the use of lead, and certain other hazardous
materials, in our products by July 2006. We may incur unanticipated expenses in connection with the
related reconfiguration of our products, or loss of business if we fail to implement these
requirements on a timely basis.
33
Major litigation regarding Bookham Technology plcs initial public offering and follow-on offering
and any other litigation in which we become involved, including as a result of acquisitions, may
substantially increase our costs and harm our business.
On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al.,
Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and
directors, or the New Focus Individual Defendants, in the United States District Court for the
Southern District of New York. Also named as defendants were Credit Suisse First Boston
Corporation, Chase Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp.,
or the Underwriter Defendants, the underwriters in New Focuss initial public offering. Three
subsequent lawsuits were filed containing substantially similar allegations. These complaints have
been consolidated. On April 19, 2002, plaintiffs filed an Amended Class Action Complaint, described
below, naming as defendants the New Focus Individual Defendants and the Underwriter Defendants.
On November 7, 2001, a Class Action Complaint was filed against Bookham Technology plc and others
in the United States District Court for the Southern District of New York. On April 19, 2002,
plaintiffs filed an Amended Complaint. The Amended Complaint names as defendants Bookham Technology
plc, Goldman, Sachs & Co. and FleetBoston Robertson Stephens, Inc., two of the underwriters of
Bookham Technology plcs initial public offering in April 2000, and Andrew G. Rickman, Stephen J.
Cockrell and David Simpson, or the Bookham Individual Defendants, each of whom was an officer
and/or director at the time of the initial public offering.
The Amended Complaint asserts claims under certain provisions of the securities laws of the United
States. It alleges, among other things, that the prospectuses for Bookham Technology plcs and New
Focuss initial public offerings were materially false and misleading in describing the
compensation to be earned by the underwriters in connection with the offerings, and in not
disclosing certain alleged arrangements among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the
underwriters. The Amended Complaint seeks unspecified damages (or in the alternative rescission for
those class members who no longer hold common stock), costs, attorneys fees, experts fees,
interest and other expenses. In October 2002, the New Focus Individual Defendants and the Bookham
Individual Defendants were dismissed, without prejudice, from the action. In July 2002, all
defendants filed Motions to Dismiss the Amended Complaint. The motion was denied as to Bookham
Technology plc and New Focus in February 2003. Special committees of the board of directors
authorized the companies to negotiate a settlement of pending claims substantially consistent with
a memorandum of understanding negotiated among class plaintiffs, all issuer defendants and their
insurers.
Plaintiffs and most of the issuer defendants and their insurers have entered into a stipulation of
settlement for the claims against the issuer defendants, including Bookham. Under the stipulation
of settlement, the plaintiff will dismiss and release all claims against participating defendants
in exchange for a payment guaranty by the insurance companies collectively responsible for insuring
the issuers in the related cases, and the assignment or surrender to the plaintiffs of certain
claims the issuer defendants may have against the underwriters. On February 15, 2005, the court
issued an Opinion and Order preliminarily approving the settlement provided that the defendants and
plaintiffs agree to a modification narrowing the scope of the bar order set forth in the original
settlement agreement. The parties agreed to the modification narrowing the scope of the bar order,
and on August 31, 2005, the court issued an order preliminarily approving the settlement and
setting a public hearing on its fairness for April 24, 2006.
On February 13, 2002, Howard Yue, the former sole shareholder of Globe Y. Technology, Inc., a
company acquired by New Focus in February 2001, filed a lawsuit against New Focus and several of
its officers and directors in Santa Clara County Superior Court. The lawsuit is captioned Howard
Yue v. New Focus, Inc. et al, Case No. CV808031, and asserts claims stemming from New Focuss
acquisition of Globe Y. Technology, Inc. The plaintiff has amended his complaint several times
following the Courts dismissal of his earlier complaints. Currently, the plaintiffs fifth amended
complaint alleges the following causes of action against New Focus: violation of §25400 and §25500
of the California Corporations Code; violation of §§1709-1710 of the California Civil Code;
violation of §25402 of the California Corporations Code; violation of §17200 and §17500 of the
California Business & Professions Code; fraud and deceit by concealment; fraud and deceit by active
concealment; fraud and deceit based upon non-disclosure of material facts; negligent
misrepresentation; and breach of contract and the duty of good faith and fair dealing. The
complaint seeks unspecified economic, punitive, and exemplary damages, prejudgment interest, costs,
and equitable and general relief. In November 2004 New Focus filed answers to the plaintiffs fifth
amended complaint denying the plaintiffs allegations and asserting various defenses.
In addition, in October 2003, New Focus filed a cross-complaint against Mr. Yue seeking damages in
connection with Mr. Yues conduct during the acquisition of Globe Y. Technology, Inc., by New
Focus. In February 2004, New Focus filed a corrected amended cross-complaint against Mr. Yue. On
October 18, 2005, the Court dismissed the corrected amended cross-complaint with leave to amend. On
October 28, 2005, New Focus filed a second amended cross complaint. On January 11, 2006 the parties
reached a non-monetary settlement regarding the cross-complaint which involved dismissal of the
cross-complaint with prejudice. The trial date had been set for March 13, 2006 and the Court has
scheduled 15 days for the trial. The Company intends to conduct a vigorous defense of this lawsuit.
34
Litigation is subject to inherent uncertainties, and an adverse result in these or other matters
that may arise from time to time could have a material adverse effect on our business, results of
operations and financial condition. Any litigation to which we are subject may be costly and,
further, could require significant involvement of our senior management and may divert managements
attention from our business and operations.
A variety of factors could cause the trading price of our common stock to be volatile or decline.
The market price of our common stock has been, and is likely to continue to be, highly volatile due
to causes in addition to publication of our business results, such as:
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announcements by our competitors and customers of their historical results or technological innovations or new products; |
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developments with respect to patents or proprietary rights; |
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governmental regulatory action; and |
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general market conditions. |
Since Bookham Technology plcs initial public offering in April 2000, Bookham Technology plcs ADSs
and ordinary shares, our shares of common stock and the shares of our customers and competitors
have experienced substantial price and volume fluctuations, in many cases without any direct
relationship to the affected companys operating performance. An outgrowth of this market
volatility is the significant vulnerability of our stock price and the stock prices of our
customers and competitors to any actual or perceived fluctuation in the strength of the markets we
serve, regardless of the actual consequence of such fluctuations. As a result, the market prices
for these companies are highly volatile. These broad market and industry factors caused the market
price of Bookham Technology plcs ADSs and ordinary shares, and our common stock to fluctuate, and
may in the future cause the market price of our common stock to fluctuate, regardless of our actual
operating performance or the operating performance of our customers.
The future sale of substantial amounts of our common stock could adversely affect the price of our
common stock.
As of February 1, 2006, affiliates of Nortel Networks held approximately
3,999,999 shares of our common stock. Other stockholders or groups of stockholders also hold
significant percentages of our shares of common stock. On January 13, 2006 we issued an aggregate
of 9,221,691 shares of common stock and warrants to purchase an aggregate of 990,539 shares of
common stock in connection with the cancellation of the secured promissory notes we issued to
Nortel Networks and the conversion and cancellation of $19.4 million principal amount of our $25.5
million convertible debentures. We expect to issue an additional 1,285,466 shares of common stock
and warrants to purchase 95,461 shares of common stock, subject to the approval of our
stockholders, in connection with the conversion of the remaining $6.1 million principal amount of
the convertible debentures. Sales by Nortel Networks or other holders of substantial amounts of
our shares in the public or private market could adversely affect the market price of our common
stock by increasing the supply of shares available for sale compared to the demand in the public
and private markets to buy our common stock. These sales may also make it more difficult for us to
sell equity securities in the future at a time and price that we deem appropriate to meet our
capital needs.
Some anti-takeover provisions contained in our charter and under Delaware laws could hinder a
takeover attempt.
We are subject to the provisions of Section 203 of the General Corporation Law of the State of
Delaware prohibiting, under some circumstances, publicly-held Delaware corporations from engaging
in business combinations with some stockholders for a specified period of time without the approval
of the holders of substantially all of our outstanding voting stock. Such provisions could delay or
impede the removal of incumbent directors and could make more difficult a merger, tender offer or
proxy contest involving us, even if such events could be beneficial, in the short-term, to the
interests of the stockholders. In addition, such provisions could limit the price that some
investors might be willing to pay in the future for shares of our common stock. Our certificate of
incorporation and bylaws contain provisions relating to the limitations of liability and
indemnification of our directors and officers, dividing our board of directors into three classes
of directors serving three-year terms and providing that our stockholders can take action only at a
duly called annual or special meeting of stockholders. These provisions also may have the effect of
deterring hostile takeovers or delaying changes in control or management of us.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates
We finance our operations through a mixture of stockholders funds, loan notes, finance leases and
working capital. Throughout the three months ended December 31, 2005, we had no exposure to
interest rate fluctuations, other than exposure created by our cash deposits, our secured
promissory notes issued to Nortel Networks and our 7.0% convertible debentures. We monitor our
interest rate risk on cash balances primarily through cash flow forecasting. Cash that is surplus
to immediate requirements is invested in short-term deposits with banks accessible with one days
notice and invested in overnight money market accounts.
Foreign currency
Due to our multinational operations, we are subject to fluctuations based upon changes in the
exchange rates between the currencies in which we collect revenue and pay expenses. Our expenses
are not necessarily incurred in the currency in which revenue is generated, and, as a result, we
may from time to time have to exchange currency to meet our obligations. These currency conversions
are subject to exchange rate fluctuations, in particular, changes in the value of the U.K. pound
sterling compared to the US dollar. In an effort to mitigate exposure to those fluctuations, we
enter into foreign currency exchange contracts with respect to portions of our forecasted expenses
denominated in U.K. pound sterling. At December 31 2005, we held two foreign currency exchange
contracts, including put and call options, to purchase U.K. pound sterling with a nominal value of
$37 million. These contracts include put and call options which expired, or will expire, on dates
ranging from January 2006 to September 2006. It is estimated that a 10% fluctuation in the dollar
between December 31, 2005 and the maturity dates of the put and call instruments underlying the
contracts would lead to a profit of $3.2 million (dollar weakening), or loss of $4.6 million
(dollar strengthening) on our outstanding trades, should they be held to maturity.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and communicated to the
companys management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of December 31, 2005, our chief executive
officer and chief financial officer have concluded that as of that date our disclosure controls and
procedures were effective at the reasonable assurance level.
In our Annual Report on Form 10-K for the year ended July 2, 2005, we identified four material
weaknesses related to: 1) shortage of, and turnover in, qualified financial reporting personnel to
ensure complete application of GAAP; 2) insufficient management review of analyses and
reconciliations; 3) inaccurate updating of accounting inputs for estimates of complex non-routine
transactions; and 4) accounting for foreign currency exchange transactions. We have since
implemented the processes, procedures and personnel changes we believe are necessary to remediate
these weaknesses. These have now been in place and functioning for at least two full quarters,
including quarterly closes. We note, however, that our next
managements report on internal control over financial reporting
and the related report of our independent registered public
accounting firm is not due until our Annual Report on Form 10-K for the fiscal year ended July 1, 2006.
Except as noted above, there was no change in our internal control over financial reporting during
the fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
36
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al.,
Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and
directors, or the Individual Defendants, in the United States District Court for the Southern
District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase
Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp., or the Underwriter
Defendants, the underwriters in New Focuss initial public offering. Three subsequent lawsuits were
filed containing substantially similar allegations. These complaints have been consolidated. On
April 19, 2002, plaintiffs filed an Amended Class Action Complaint, described below, naming as
defendants the Individual Defendants and the Underwriter Defendants.
On November 7, 2001, a Class Action Complaint was filed against Bookham Technology plc and others
in the United States District Court for the Southern District of New York. On April 19, 2002,
plaintiffs filed an Amended Complaint. The Amended Complaint names as defendants Bookham Technology
plc, Goldman, Sachs & Co. and FleetBoston Robertson Stephens, Inc., two of the underwriters of
Bookham Technology plcs initial public offering in April 2000, and Andrew G. Rickman, Stephen J.
Cockrell and David Simpson, each of whom was an officer and/or director at the time of the initial
public offering.
The Amended Complaint asserts claims under certain provisions of the securities laws of the United
States. It alleges, among other things, that the prospectuses for Bookham Technology plcs and New
Focuss initial public offerings were materially false and misleading in describing the
compensation to be earned by the underwriters in connection with the offerings, and in not
disclosing certain alleged arrangements among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the
underwriters. The Amended Complaint seeks unspecified damages (or in the alternative rescission for
those class members who no longer hold ordinary shares, in the case of Bookham Technology plc or
common stock, in the case of New Focus), costs, attorneys fees, experts fees, interest and other
expenses. In October 2002, the individual defendants were dismissed, without prejudice, from the
action. In July 2002, all defendants filed Motions to Dismiss the Amended Complaint. The motion was
denied as to Bookham Technology plc and New Focus in February 2003. Special committees of the board
of directors authorized the companies to negotiate a settlement of pending claims substantially
consistent with a memorandum of understanding negotiated among class plaintiffs, all issuer
defendants and their insurers.
Plaintiffs and most of the issuer defendants and their insurers have entered into a stipulation of
settlement for the claims against the issuer defendants, including the Company. Under the
stipulation of settlement, the plaintiff will dismiss and release all claims against participating
defendants in exchange for a payment guaranty by the insurance companies collectively responsible
for insuring the issuers in the related cases, and the assignment or surrender to the plaintiffs of
certain claims the issuer defendants may have against the underwriters. On February 15, 2005, the
Court issued an Opinion and Order preliminarily approving the settlement provided that the
defendants and plaintiffs agree to a modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to the modification narrowing the scope of
the bar order, and on August 31, 2005, the court issued an order preliminarily approving the
settlement and setting a public hearing on its fairness for April 24, 2006. The Company believes
that both Bookham Technology, plc and New Focus have meritorious defenses to the claims made in the
Amended Complaint and therefore believes that such claims will not have a material effect on its
financial position, results of operations or cash flows.
On February 13, 2002, Howard Yue, the former sole shareholder of Globe Y. Technology, Inc., a
company acquired by New Focus in February 2001, filed a lawsuit against New Focus and several of
its officers and directors in Santa Clara County Superior Court. The lawsuit is captioned Howard
Yue v. New Focus, Inc. et al, Case No. CV808031, and asserts claims stemming from New Focuss
acquisition of Globe Y. Technology, Inc. The plaintiff has amended his complaint several times
following the Courts dismissal of his earlier complaints. Currently, the plaintiffs fifth amended
complaint alleges the following causes of action against New Focus: violation of §25400 and §25500
of the California Corporations Code; violation of §§1709-1710 of the California Civil Code;
violation of §25402 of the California Corporations Code; violation of §17200 and §17500 of the
California Business & Professions Code; fraud and deceit by concealment; fraud and deceit by active
concealment; fraud and deceit based upon non-disclosure of material facts; negligent
misrepresentation; and breach of contract and the duty of good faith and fair dealing. The
complaint seeks unspecified economic, punitive, and exemplary damages, prejudgment interest, costs,
and equitable and general relief. In November 2004 New Focus filed answers to the plaintiffs fifth
amended complaint denying the plaintiffs allegations and asserting various defenses.
In addition, in October 2003, New Focus filed a cross-complaint against Mr. Yue seeking damages in
connection with Mr. Yues conduct during the acquisition of Globe Y. Technology, Inc., by New
Focus. In February 2004, New Focus filed a corrected amended cross-complaint against Mr. Yue. On
October 18, 2005, the Court dismissed the corrected amended cross-complaint with leave to amend. On
October 28, 2005, New Focus filed a second amended cross complaint. On January 11, 2006 the parties
reached a non-monetary settlement regarding the cross-complaint which involved dismissal of the
cross-complaint with prejudice. The trial date had
37
been set for March 13, 2006 and the Court has scheduled 15 days for the trial. The Company intends
to conduct a vigorous defense of this lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
We held our 2005 Annual Meeting of Stockholders on October 26, 2005. The following matters
were voted upon at the annual meeting.
1. Holders of 22,185,622 shares of our common stock voted to elect Giorgio Anania to serve for
a term of three years as a Class I director. Holders of 246,178 shares of our common stock
withheld votes from such director. Holders of 22,188,211 shares of our common stock voted to elect
Joseph Cook to serve for a term of three years as a Class I director. Holders of 243,589 shares of
our common stock withheld votes from such director. Holders of 22,187,469 shares of our common
stock voted to elect W. Arthur Porter to serve for a term of three years as a Class I director.
Holders of 244,331 shares of our common stock withheld votes from such director.
2. Holders of 10,918,696 shares of our common stock voted to approve our 2004 stock incentive plan
and the authorization of 4,000,000 shares of common stock for issuance under such plan. Holders of
1,616,691 shares of our common stock voted against such plan, holders of 25,040 shares abstained
from voting and no shares were broker non-votes.
3. Holders of 12,233,659 shares of our common stock voted to approve our 2004 employee stock
purchase plan and the authorization of 500,000 shares of common stock for issuance under such plan.
Holders of 299,301 shares of our common stock voted against such plan, holders of 27,468 shares
abstained from voting and no shares were broker non-votes.
4. Holders of 12,087,949 shares of our common stock voted to approve our 2004 sharesave scheme and
the authorization of 500,000 shares of common stock for issuance under such plan. Holders of
443,359 shares of our common stock voted against such plan, holders of 29,119 shares abstained from
voting and no shares were broker non-votes.
5. Holders of 10,856,273 shares of our common stock voted to amend our 2004 stock incentive plan to
increase the number of shares reserved for issuance under the plan from 4,000,000 to 9,000,000.
Holders of 1,675,312 shares of our common stock voted against such amendment, holders of 28,842
shares abstained from voting and no shares were broker non-votes.
6. Holders of 22,294,821 shares of our common stock voted to ratify the appointment of Ernst &
Young LLP as our independent auditors for the current fiscal year. Holders of 110,037 shares of our
common stock voted against ratifying such appointment, holders of 26,942 shares abstained from
voting and no shares were broker non-votes.
Item 6. Exhibits
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed
as part of this quarterly report, which Exhibit Index is incorporated herein by reference.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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BOOKHAM, INC.
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By: |
/s/ Stephen Abely
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Stephen Abely |
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February 7, 2006 |
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Chief Financial Officer (Principal Financial and
Accounting Officer) |
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39
EXHIBIT INDEX
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Exhibit |
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Number |
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Description of Exhibit |
10.1
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2004 Stock Incentive Plan, as amended, including forms of stock option agreement for
incentive and nonstatutory stock options, forms of restricted stock unit agreement and forms
of restricted stock agreement. |
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10.2
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Restricted Stock Agreement between Bookham, Inc. and Giorgio Anania. |
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10.3
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Restricted Stock Agreement between Bookham, Inc. and Stephen Abely. |
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10.4
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Restricted Stock Agreement between Bookham, Inc. and Stephen Turley. |
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10.5
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Restricted Stock Agreement between Bookham, Inc. and Jim Haynes. |
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10.6
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Restricted Stock Agreement between Bookham, Inc. and Stephen Turley. |
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10.7
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Bookham, Inc. Cash Bonus Program. |
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10.8
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Summary of Director Compensation. |
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10.9
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Form of Indemnification Agreement, dated October 26, 2005, between Bookham, Inc. and each of
Giorgio Anania, Peter Bordui, Joseph Cook, Lori Holland, Liam Nagle, W. Arthur Porter and
David Simpson (previously filed as Exhibit 99.1 to Current Report on Form 8-K filed on
November 1, 2005). |
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31.1
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Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer. |
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31.2
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Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer. |
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32.1
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Section 1350 Certification of Chief Executive Officer. |
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32.2
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Section 1350 Certification of Chief Financial Officer. |
40