##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-QSB   (Mark One) x
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2004, or
 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 0-49939
   DICON FIBEROPTICS, INC.  California
    
    94-3006185(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)1689 Regatta Blvd.Richmond, California
    
    94804(Address of Principal Executive Offices)
    
    (Zip Code)
 (510) 620-5000
(Issuers Telephone Number, Including Area Code)   Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes x       No o The number of shares outstanding of the issuers common stock as of June
30, 2004, was 111,977,745. Transitional Small Business Disclosure Format (check one): Yes o   No x    1




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DICON FIBEROPTICS, INC.  
 Table of Contents PagesPART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements.
    
    
    3 - 12Item 2.
    
    Managements Discussion and Analysis or Plan of Operation.
    
    
    13 - 20Item 3.
    
    Controls and Procedures.
    
    
    20PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    21Item 2.
    
    Changes in Securities and Small Business Issuer Purchases of Equity Securities.
    
    
    21Item 3.
    
    Defaults Upon Senior Securities.
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders.
    
    
    21Item 5.
    
    Other Information.
    
    
    21Item 6.
    
    Exhibits and Reports on Form 8-K.
    
    
    22Signatures.
    
    
    23Exhibit Index.
    
    
    24EXHIBIT 10.3.2EXHIBIT 10.3.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements. DiCon Fiberoptics, Inc. and Subsidiary
Unaudited Consolidated Balance Sheets
(in thousands) March 31,June 30,
    
    20042004
    
    (1)AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,768
    
    
    $
    1,359Marketable securities
    
    
    18,494
    
    
    
    20,250Accounts receivable, net of allowance for doubtful accounts of $83 and $78, respectively
    
    
    2,695
    
    
    
    3,155Inventories
    
    
    5,063
    
    
    
    4,506Prepaid expenses and other current assets
    
    
    226
    
    
    
    521Income tax receivable
    
    
    15
    
    
    
    16Total current assets
    
    
    29,261
    
    
    
    29,807Property, plant and equipment, net
    
    
    56,427
    
    
    
    58,750Other assets
    
    
    51
    
    
    
    64Total assets
    
    $
    85,739
    
    
    $
    88,621Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    2,678
    
    
    $
    2,914Advances received from customers
    
    
    3,566
    
    
    
    3,549Mortgage and other debt
    
    
    7,432
    
    
    
    6,059Deferred compensation payable
    
    
    124
    
    
    
    120Total current liabilities
    
    
    13,800
    
    
    
    12,642Mortgage and other debt, net of current portion
    
    
    22,243
    
    
    
    23,310Total liabilities
    
    
    36,043
    
    
    
    35,952CommitmentsShareholders equity:Common stock: no par value; 200,000 shares authorized; 111,978 and 111,992 shares issued and
outstanding, respectively
    
    
    22,265
    
    
    
    22,279Additional paid-in capital
    
    
    13,375
    
    
    
    13,217Deferred compensation
    
    
    (597
    )
    
    
    (550
    )Retained earnings
    
    
    16,014
    
    
    
    18,812Accumulated other comprehensive loss
    
    
    (1,361
    )
    
    
    (1,089
    )Total shareholders equity
    
    
    49,696
    
    
    
    52,669Total liabilities and shareholders equity
    
    $
    85,739
    
    
    $
    88,621
 The accompanying notes are an integral part of these unaudited consolidated financial statements. (1) Balances at March 31, 2004 are derived from the audited Financial Statements at that date. 3




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DiCon Fiberoptics, Inc. and Subsidiary
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data) Three Months Ended June 30,2004
    
    2003Net sales
    
    $
    4,429
    
    
    $
    3,768Cost of goods sold
    
    
    4,347
    
    
    
    4,584Gross profit/(loss)
    
    
    82
    
    
    
    (816
    )Selling, general and administrative expenses
    
    
    1,298
    
    
    
    1,454Research and development expenses
    
    
    1,414
    
    
    
    1,7382,712
    
    
    
    3,192Loss from operations
    
    
    (2,630
    )
    
    
    (4,008
    )Other (expense) income:Realized gains on sales of marketable securities
    
    
    
    
    
    
    95Interest expense
    
    
    (300
    )
    
    
    (364
    )Loss on disposal of fixed assets
    
    
    (19
    )
    
    
    (14
    )Other income, net
    
    
    151
    
    
    
    143Loss before income taxes
    
    
    (2,798
    )
    
    
    (4,148
    )Income tax provision
    
    
    
    
    
    
    (264
    )Net loss
    
    $
    (2,798
    )
    
    $
    (3,884
    )Other comprehensive loss:Foreign currency translation adjustment
    
    
    (274
    )
    
    
    85Unrealized holding gains (losses) on marketable securities
arising during the period, net of realized gains (losses)
    
    
    2
    
    
    
    (81
    )Comprehensive loss
    
    $
    (3,070
    )
    
    $
    (3,880
    )Net loss per share  basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.03
    )Average shares used in computing net loss per share  basic and diluted
    
    
    111,988
    
    
    
    112,032
 The accompanying notes are an integral part of these unaudited consolidated financial statements. 4




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DiCon Fiberoptics, Inc. and Subsidiary
Unaudited Consolidated Statement of Cash Flows
(in thousands) Three Months Ended June 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (2,798
    )
    
    $
    (3,884
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation
    
    
    2,083
    
    
    
    2,401Deferred incomes taxes
    
    
    
    
    
    
    (265
    )Write down excess and obsolete inventories
    
    
    270
    
    
    
    306Provision for bad debts
    
    
    5
    
    
    
    57Loss on disposal of property, plant and equipment
    
    
    19
    
    
    
    14Realized gain on available-for-sale marketable securities
    
    
    
    
    
    
    (95
    )Interest accretion on deferred compensation liability
    
    
    
    
    
    
    328Stock compensation expense
    
    
    111
    
    
    
    121Changes in assets and liabilities:Accounts receivable
    
    
    455
    
    
    
    (162
    )Inventories
    
    
    (891
    )
    
    
    (327
    )Prepaid expenses and other current assets
    
    
    293
    
    
    
    103Income tax receivable
    
    
    
    
    
    
    15,269Other assets
    
    
    12
    
    
    
    14Accounts payable and accrued liabilities
    
    
    (208
    )
    
    
    (697
    )Deferred compensation payable
    
    
    3
    
    
    
    (103
    )Net cash (used in) provided by operating activities
    
    
    (646
    )
    
    
    13,080Cash flows from investing activities:Purchases of marketable securities
    
    
    (426
    )
    
    
    (14,462
    )Sales of marketable securities
    
    
    2,167
    
    
    
    660Sale of property, plant and equipment
    
    
    
    
    
    
    18Purchases of property, plant and equipment
    
    
    (10
    )
    
    
    9Net cash provided by (used in) investing activities
    
    
    1,731
    
    
    
    (13,775
    )Cash flows from financing activities:Borrowings under mortgages and other debt
    
    
    869
    
    
    
    691Repayment of mortgages and other debt
    
    
    (533
    )
    
    
    (520
    )Proceeds from issuance of common stock, net of repurchases
    
    
    (14
    )
    
    
    (29
    )Net cash provided by financing activities
    
    
    322
    
    
    
    142Effect of exchange rate changes on cash and cash equivalents
    
    
    2
    
    
    
    1Net change in cash and cash equivalents
    
    
    1,409
    
    
    
    (552
    )Cash and cash equivalents, beginning of period
    
    
    1,359
    
    
    
    3,757Cash and cash equivalents, end of period
    
    $
    2,768
    
    
    $
    3,205Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    298
    
    
    $
    364
 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5




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DiCon Fiberoptics, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share data)  1.
    
    Nature of operationsThe business of DiCon Fiberoptics, Inc. and Subsidiary (DiCon or the
Company) is developing, manufacturing and marketing optical components,
modules, and test instruments for optical communications markets. DiCon
Fiberoptics, Inc. is incorporated in California. The Company has a domestic
manufacturing facility and headquarters in Richmond, California. The
Company, through Global Fiberoptics Inc. (Global Fiberoptics), its wholly
owned Taiwanese subsidiary, formed in December 1999, also operates a
manufacturing and sales facility in Kaohsiung, Taiwan, and conducts
manufacturing and Asian marketing and sales activities there.2.
    
    Basis of presentationThe Company operates and reports based on a fiscal year that ends on March
31st. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and on the same
basis of presentation as the audited financial statements included in the
Companys Annual Report on Form 10-KSB/A-1 as filed with the Securities and
Exchange Commission (SEC) on July 2, 2004 (the Companys 10-KSB/A-1).
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for audited financial
statements. In the opinion of the Companys management, the interim
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. Footnote disclosures related to the interim financial information
included herein are also unaudited. Such financial information should be
read in conjunction with the audited consolidated financial statements and
related notes thereto for the year ended March 31, 2004 as included in the
Companys 10-KSB/A-1.The preparation of financial statements in accordance with generally accepted
accounting principles in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.3.
    
    Stock-based compensationThe Company accounts for stock-based compensation issued to employees using
the intrinsic value method of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and, accordingly, presents
disclosure of pro forma information required under Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. Stock and other equity instruments
issued to non-employees are accounted for in accordance with SFAS No. 123 and
Emerging Issues Task Force Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services, and recorded at their fair
value. Expenses associated with stock-based compensation is amortized on a
straight-line basis over the vesting period of the individual award.Had compensation cost for the Companys stock option plans been determined
based on the fair value of such awards at the grant dates as prescribed by
SFAS No. 123, stock-based compensation costs would have impacted net loss and
loss per common share for the fiscal periods presented, as follows: 6




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DiCon Fiberoptics, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share data) For the three months endedJune 30,2004
    
    2003Net loss, as reported
    
    $
    (2,798
    )
    
    $
    (3,884
    )Add: Stock-based employee compensation expense
included in reported net
loss, net of tax
    
    
    111
    
    
    
    121Deduct: Compensation expense based on fair value
method, net of tax
    
    
    (135
    )
    
    
    (218
    )Pro forma net loss
    
    $
    (2,822
    )
    
    $
    (3,981
    )Reported net loss per sharebasic and diluted
    
    $
    (0.03
    )
    
    $
    (0.03
    )Pro forma net loss per sharebasic and diluted
    
    $
    (0.03
    )
    
    $
    (0.04
    )
  4.
    
    Recent accounting pronouncementsIn December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Statement of Financial Accounting Standards (SFAS) No. 132, or SFAS
132R, Employers Disclosures about Pensions and Other Postretirement
Benefits, an Amendment of FASB Statements No. 87, 88, and 106, and a Revision
of FASB Statement No. 132. This statement revises employers disclosures
about pension plans and other postretirement benefit plans. It does not
change the measurement or recognition of those plans required by FASB
Statements No. 87, Employers Accounting for Pensions, No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits and No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. The adoption of this standard
did not have a material impact on the Companys consolidated financial
position, results of operations or cash flows.In December 2003, the FASB issued a revised Interpretation No. 46, or FIN
46R, Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51, replacing the original interpretation issued in January 2003. FIN
46R requires certain entities to be consolidated by enterprises that lack
majority voting interest when equity investors of those entities have
insignificant capital at risk or they lack voting rights, the obligation to
absorb expected losses, or the right to receive expected returns. Entities
identified with these characteristics are called variable interest entities
and the interests that enterprises have in these entities are called variable
interests. These interests can derive from certain guarantees, leases, loans
or other arrangements that result in risks and rewards that are
disproportionate to the voting interests in the entities. The adoption of
this standard did not have a material impact on the Companys consolidated
financial position, results of operations or cash flows.In November 2003, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 03-01 The Meaning of Other-Than-Temporary Impairment
and its Application to Certain Investments (EITF 03-01). EITF 03-01
establishes additional disclosure requirements for each category of FAS 115
investments in a loss position. Effective for years ending after December
15, 2003, companies must disclose the aggregate amount of unrealized losses,
and the aggregate related fair value of their investments with unrealized
losses. Those investments are required to be segregated by those in a loss
position for less than twelve months and those in a loss position for
greater than twelve months. Additionally, certain qualitative disclosures
should be made to clarify a circumstance whereby an investment's fair value
that is below cost is not considered other-than-temporary. The provisions of
this consensus do not have any material effect on the Company's results of
operations or financial position. 7




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DiCon Fiberoptics, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share data)  5.
    
    LiquidityAs of June 30, 2004, DiCon had cash and cash equivalents of $2.8 million. In
addition, the Company has $18.5 million invested in certificates of
deposit and other marketable securities that in conformity with the
requirements of generally accepted accounting principles were classified as
marketable securities. The Company invests cash in excess of short-term
needs in these investments to attempt to improve yields on its total
investment portfolio.DiCon believes its current cash and cash equivalents and marketable
securities will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. There
remains some possibility that DiCon may need to raise additional capital.
For instance, it might need additional capital in order to refinance its
loans, finance unanticipated growth or to invest in new technology. There
can be no certainty that DiCon would be successful in raising the required
capital or in raising capital at acceptable rates.6.
    
    Basic net loss per shareBasic loss per share is computed by dividing the net loss (numerator) by the
weighted average number of common shares outstanding (denominator) during the
periods presented, excluding the dilutive effect of stock options. Diluted
net loss per share gives effect to all potentially dilutive common stock
equivalents outstanding during the period. In computing diluted net loss per
share, the average stock price for the period is used in determining the
number of shares assumed to be purchased from the proceeds of stock option
exercises.The following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations for the periods presented
below: For the three months endedJune 30,2004
    
    2003Numerator:Net loss
    
    $
    (2,798
    )
    
    $
    (3,884
    )Denominator:Basic and diluted weighted
average shares
    
    
    111,988
    
    
    
    112,032Basic and diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.03
    )
  As a result of the losses incurred by the Company for the three months ended
June 30, 2004, weighted average options to purchase 4,072 shares of common
stock were anti-dilutive and excluded from the net loss per share
calculations. For the three months ended June 30, 2003, weighted average
options to purchase 4,707 shares of common stock were anti-dilutive and
excluded from the net loss per share calculations.7.
    
    Marketable SecuritiesThe value of the Companys investments by major security type is as follows: Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueJune 30, 2004Foreign Mutual Fund
    
    $
    815
    
    
    $
    19
    
    
    $
    
    
    
    $
    834Certificate of Deposit
    
    
    17,660
    
    
    
    
    
    
    
    
    
    
    
    17,660Total
    
    $
    18,475
    
    
    $
    19
    
    
    $
    
    
    
    $
    18,494
 8




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DiCon Fiberoptics, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share data) Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueMarch 31, 2004Foreign Mutual Fund
    
    $
    833
    
    
    $
    17
    
    
    $
    
    
    
    $
    850Certificate of Deposit
    
    
    19,400
    
    
    
    
    
    
    
    
    
    
    
    19,400Total
    
    $
    20,233
    
    
    $
    17
    
    
    $
    
    
    
    $
    20,250
  Debt securities include certificates of deposit with original maturities
of greater than 90 days.8.
    
    InventoriesInventories consist of the following as of June 30, 2004 and March 31,
2004: June 30,
    
    March 31,2004
    
    2004Raw materials
    
    $
    1,766
    
    
    $
    1,813Work-in-process
    
    
    3,297
    
    
    
    2,693Total
    
    $
    5,063
    
    
    $
    4,506
  During the quarter ended June 30, 2004, DiCon wrote off approximately $0.3
million of obsolete inventory. During the fiscal year ended March 31, 2004,
DiCon wrote off approximately $1.1 million of obsolete inventory and wrote
down to fair value an additional $1.1 million of inventory.9.
    
    Property, Plant and Equipment, netProperty, plant and equipment consist of the following as of June 30, 2004
and March 31, 2004: June 30,
    
    March 31,2004
    
    2004Land
    
    $
    10,000
    
    
    $
    10,000Building and improvements
    
    
    37,652
    
    
    
    37,764Machinery, equipment and fixtures
    
    
    47,134
    
    
    
    47,993Property, plant and equipment
    
    
    94,786
    
    
    
    95,757Less: Accumulated depreciation
    
    
    (38,359
    )
    
    
    (37,007
    )Property, plant and equipment, net
    
    $
    56,427
    
    
    $
    58,750
  Depreciation expense was $2,083 and $9,219 for the three month period ended
June 30, 2004 and for the year ended March 31, 2004.10.
    
    Accounts Payable and Accrued LiabilitiesAccounts payable and accrued liabilities consist of the following as of June
30, 2004 and March 31, 2004: June 30,
    
    March 31,2004
    
    2004Accounts payable
    
    $
    753
    
    
    $
    1,053Accrued payroll
    
    
    783
    
    
    
    900Accrual for vacated properties
    
    
    207
    
    
    
    250Accrued liabilities
    
    
    935
    
    
    
    711$
    2,678
    
    
    $
    2,914
 -9-




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DiCon Fiberoptics, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share data)  11.
    
    Mortgage and Other DebtThe Company financed, in part, a new corporate campus by obtaining a
construction loan from a bank of $27.0 million on August 24, 2000. In
November 2001, the same bank refinanced the outstanding balance of the
construction loan with a mortgage loan maturing on November 20, 2004, with an
amortization schedule based on a 25-year loan. During the year ended March
31, 2002, the Chairman, President and Chief Executive Officer of the
institution with which the Company maintains the mortgage loan was appointed
to the Companys Board of Directors.On June 28, 2004, the bank agreed to extend the maturity date of the mortgage
loan to October 20, 2007, subject to additional terms and conditions
requiring the Company to make additional principal repayments as follows:
$1.5 million 10 days after the date of execution of the loan extension
agreement; $1.0 million on October 1, 2004; and seven installments each in
the amount of $0.5 million on the first day of each calendar quarter,
commencing on January 1, 2005 and ending on July 1, 2006.Interest on the mortgage loan is accrued at a variable interest rate based on
changes in the lenders prime rate as of the 20th of each month (4.0 percent
at June 30, 2004). Principal and interest are payable monthly. The balance of
the mortgage loan as of June 30, 2004 was $25.3 million.In April 2001, the Company obtained an equipment loan from a bank in the
amount of $7.3 million. The loan is secured by specific pieces of equipment.
The loan is repayable in equal monthly installments of principal and interest
over 60 months beginning May 30, 2001. On June 30, 2004, the loan balance was
$2.7 million. Effective April 30, 2002 and annually on April 30th of each
year thereafter, the Company may elect to fix the interest rate on the
equipment loan for a twelve month period at a rate of one-half of one
percentage point (0.5 percent) per annum in excess of the prime rate. The
Company had not elected the fixed rate option and the loan bore an interest
rate of prime plus 0.5 percent (4.5 percent on June 30, 2004). On March 31,
2003, the Company was in violation of two of the financial covenants under
this loan agreement. The bank agreed to waive the covenants, but added an
additional covenant requiring the Company to maintain a balance of cash and
marketable securities (excluding equity securities) of at least two times the
outstanding loan balance. The waiver was extended through March 31, 2005.
The Company was in compliance with the additional covenant as of June 30,
2004.In December 2002, Global Fiberoptics obtained a line of credit in Taiwan
backed by commercial paper issued by Global Fiberoptics for a maximum of 220
million New Taiwan Dollars (or approximately $6.5 million as of June 30,
2004). The line of credit will mature on January 28, 2005. The outstanding
balance of any commercial paper under this line of credit must be fully
secured by either a cash deposit or bond fund certificate. As of June 30,
2004, Global Fiberoptics had issued commercial paper in the amount of 27.5
million New Taiwan Dollars (or approximately $0.8 million as of June 30,
2004) with an interest rate of 1.0%.In January 2004, Global Fiberoptics renewed its second line of credit of 100
million New Taiwan Dollars (or approximately $3.0 million as of June 30,
2004) from a Taiwan bank. The interest rate is based on a rate set by the
bank at the time funds are drawn. The amount drawn as of June 30, 2004 was
29.0 million New Taiwan Dollars (or approximately $0.9 million as of June 30,
2004) with an interest rate of 3.25%.12.
    
    Stock Plans and Deferred Compensation LiabilityAs an incentive for employees to assist in growing the Company, prior to
March 31, 2001 the Company maintained a phantom stock plan (the Phantom
Stock Plan) under which it granted eligible employees phantom stock units
that entitled the employees to participate in the current and future value of
the Company. In addition, the Company made contingent commitments to eligible
employees to grant stock units in the future (the Contingently Promised
Stock Units). The shares under the plan were valued semiannually, typically
in May and December. These stock units vested 50 percent upon receipt and 50
percent on the first anniversary of the grant date and had an exercise price
of zero. During the service period of one-year following the date of the
grant, the vested units could be redeemed for cash on a net basis by
forfeiting additional units equal to the number of units redeemed.
Thereafter, a maximum of 60 percent of the units could be redeemed while the
holder was still an employee of the Company. The Company recorded a
liability for the value of the unredeemed vested shares at the current value
as of the financial statement date. -10-




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DiCon Fiberoptics, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share data)  On March 31, 2001, the Company offered its employees two new equity incentive
plans, an Employee Stock Option Plan (the Option Plan) and an Employee
Stock Purchase Plan (the Purchase Plan). Grants under the Phantom Stock
Plan have been discontinued. Under both the Option Plan and the Purchase
Plan, the exercise or purchase price is not to be less than 85 percent of the
fair value of Companys common stock at the time of grant under the Option
Plan or purchase under the Purchase Plan. New options granted under the
Option Plan generally vest over five years and expire after ten years.Under the terms of the Option Plan, employees who were participants in the
Phantom Stock Plan could convert their awarded phantom stock units and their
Contingently Promised Stock Units into (1) options with an exercise price of
$4.11 per share and cash payments of $4.11 per share (paid over four years);
(2) additional options with an exercise price of $4.11; or (3) a combination
of both (1) and (2). The cash payments and the options that were converted
from vested stock units vested immediately. The cash payments and the
options that were converted from Contingently Promised Units will vest in
accordance with the original vesting schedule, but not less than 20 percent
per year. At March 31, 2001, all phantom stock units for current employees
under the Phantom Stock Plan were converted to options or options and cash
payments pursuant to one of the alternatives noted above.Cash payments related to the conversion are payable in four annual
installments beginning on March 31, 2002. As of March 31, 2001, the Company
anticipated making four annual payments of $5,930 each commencing March 31,
2002 for those employees who elected to receive a cash payout in lieu of
additional options. The present value of the cash payments related to the
conversion of vested phantom stock units of $15,131 was recorded as a
liability as of March 31, 2001. The cash payments related to the conversion
of the Contingently Promised Units are subject to continuing employment and,
accordingly, the related expense and liability are accrued as earned by the
employees. The first annual installment of $5,812 to those employees electing
to receive cash in lieu of additional options was paid on March 28, 2002.As of December 31, 2002, the total remaining undiscounted future cash
payments related to the conversion of the Companys Phantom Stock Plan to its
Option Plan totaled $7,645, payable in three equal annual installments
beginning March 31, 2003. In order to reduce this liability, the Company
offered the participants an opportunity to receive an early payment in
January 2003. As a result, under the terms of the early payment program, the
Company paid $1,979 on January 10, 2003 and reduced the future liability for
Contingently Promised Units by $2,058.The second and third annual installments of $416 and $347 to those employees
electing to receive cash in lieu of additional options was paid on March 31,
2003 and 2004.The Purchase Plan was available to all eligible employees who meet certain
service requirements. Effective April 1, 2001, employees participating in
the Purchase Plan could elect to deduct up to 10 percent of gross pay to
purchase stock in the Company. Stock transactions pursuant to the Purchase
Plan occurred semiannually on December 31 and March 31. The Company could
sell up to 3,230 shares of stock under the Purchase Plan. Employees
purchased 70 shares at a price of $3.85 per share on December 31, 2001 and
174 shares at a price of $2.10 on March 31, 2002. In May 2002, the Company
issued 659 additional shares of common stock to employees under the Purchase
Plan for aggregate cash consideration of $1,384 at a price of $2.10. In
September 2002, the Company suspended the sale of shares to employees under
the Purchase Plan.Compensation expense related to the Companys stock compensation plans has
been reflected in the Unaudited Consolidated Statements of Operations and
Comprehensive Loss for the three months ended June 30, 2004 and 2003 as
follows: For the three months endedJune 30,2004
    
    2003Cost of goods sold
    
    $
    12
    
    
    $
    38Selling, general and administrative expenses
    
    
    41
    
    
    
    129Research and development expenses
    
    
    88
    
    
    
    274$
    141
    
    
    $
    441
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DiCon Fiberoptics, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share data)  13.
    
    Income TaxesThe Company had cummulative net operating loss carryforwards and tax credit
carryforwards of approximately $51.8 million as of March 31, 2004, which
consists of $9.2 million federal tax and $42.6 million state tax credit
carryforwards. The Company reported no income tax expense for the three
months ended June 30, 2004. Income tax expense/benefit for such periods was
offset by adjustment in the 100% valuation allowance maintained for all net
deferred tax assets.The Companys investment in its Taiwan subsidiary is essentially permanent in
duration and undistributed foreign earnings on June 30, 2004 amounted to $7.6
million. The Company was granted a five-year tax holiday in Taiwan, which
will expire in 2006. There is no plan to distribute these earnings to DiCon.
If at some future date all or portions of these foreign earnings are
distributed as dividends to DiCon, substantial additional taxes would be due
in Taiwan and in the United States.Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has recorded a valuation
allowance against certain deferred tax assets at June 30, 2004. Management
regularly evaluates the recoverability of the deferred tax asset and the
level of the valuation allowance. At such time as it is determined that it
is more likely than not that the deferred tax asset will be realizable, the
valuation allowance will be reduced.14.
    
    Product WarrantiesThe Company normally provides warranties for its products for one year. The
Company provides reserves for the estimated cost of product warranties at the
time revenue is recognized. Estimates of the costs of warranty obligations
are based on the Companys historical experience of known project failure
rates, use of materials and service delivery costs incurred in correcting
product failures. In addition, from time to time, specific warranty accruals
may be made if unforeseen technical problems arise. Should the Companys
accrual experience relative to these factors differ from estimates, the
Company may be required to record additional warranty reserves.
Alternatively, if the Company provides more reserves than needed, the Company
may reverse a portion of such provision in future periods.Changes in the Companys warranty accrual, which are included as a component
of accounts payable and accrued liabilities on the Unaudited Consolidated
Balance Sheets, are as follows: June 30,
    
    March 31,2004
    
    2004Balance at beginning of period
    
    $
    16
    
    
    $
    56Accruals for warranties during the period
    
    
    11
    
    
    
    74Settlements made (in cash) during the period
    
    
    (17
    )
    
    
    (114
    )Balance at closing of period
    
    $
    10
    
    
    $
    16
 -12-




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Item 2. Managements Discussion and Analysis or Plan of Operation.  Certain statements contained in this report onForm 10-QSBthat are not
purely historical are forward-looking statements within the meaning of the
federal securities laws, including, without limitation, statements regarding
DiCons expectations, beliefs, anticipations, commitments, intentions and
strategies regarding the future. Actual results could differ from those
projected in any forward-looking statements. Factors that could contribute to
such differences include, but are not limited to, those specific points
discussed under Risk Factors in the Annual ReportForm 10-KSBfiled by
DiCon with the SEC.OverviewDiCon designs and manufactures passive optical components, modules and test
instruments for current and next-generation optical communications markets.
DiCon designs and manufactures a broad portfolio of technically advanced
products that filter, split, combine, attenuate, and route light in optical
networks. DiCon also sells products used for testing optical devices and
systems. DiCons products are based on its proprietary technologies,
including thin-film coating, micro-optic design, optical element finishing,
Micro Electro-Mechanical Systems (MEMS), advanced packaging and process
automation. DiCon was founded in 1986 and first became profitable in 1988.
It remained profitable each fiscal year until the fiscal year ended March 31,
2002.Since 2001, DiCon has operations from its owned 200,000 square feet facility
in Richmond, California, which contains all of DiCons domestic
manufacturing, R&D, sales and administration operations.DiCon began its overseas manufacturing operations at its 44,000 square foot
WDM product assembly facility in Kaohsiung, Taiwan in January 2000. This
facility subsequently has been expanded through the purchase of an additional
44,000 square feet of space adjacent to the original facility. Although
DiCon owns a condominium interest in the building, it is located on a ground
lease that extends through 2011. The ground lease may be renewed
indefinitely, and there is no penalty for early cancellation, except for
forfeiture of the owned facility.DiCons communications products include Wavelength Division Multiplexers
(WDMs), amplifier components, switches and attenuators, MEMS devices and
modules. Its measurement products include variable attenuators, tunable
filters, and test instruments for telecommunication applications. DiCon
markets and sells its products worldwide through its direct sales force, its
subsidiary Global and through selected distributors.The optical networking industry is rapidly changing and the volume and timing
of orders are difficult to predict. Since the fourth quarter of 2000, the
fiberoptics industry has gone through a significant period of consolidation
following a dramatic curtailment of capital spending by most carriers faced
with substantial excess bandwidth capacity and very high levels of corporate
debt. DiCons customers are manufacturers of telecommunications equipment,
DiCon believes its customers generally view the purchase of DiCons products
as a significant and strategic decision. As a result, customers typically
commit substantial effort in evaluating DiCons technology, and testing and
qualifying its products and manufacturing processes. This customer
evaluation and qualification process frequently results in a lengthy initial
sales cycle of nine months or longer.As the industry entered its downturn and consolidation phase in 2001, various
customers cancelled existing orders. In some cases, DiCon was able to recover
a portion of its costs through subsequent transactions with these customers.
However, the Company also incurred substantial costs associated with obsolete
inventory and cancelled orders. During the fiscal year ended March 31, 2003,
DiCon wrote off $4.1 million of obsolete inventory. During the fiscal year
ended March 31, 2004, DiCon wrote off approximately $1.1 million of obsolete
inventory and wrote down to fair value an additional $1.1 million of
inventory. The Company assesses its inventory position on a monthly and
quarterly basis with its then current forecasts. During the quarter ended
June 30, 2004, DiCon wrote off approximately $0.3 million of obsolete
inventory.DiCons cost of goods sold consists primarily of the cost of direct
materials, labor and manufacturing overhead, scrap and rework associated with
products sold, as well as production start up costs. As demand changes,
DiCon attempts to manage its -13-




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manufacturing capacity to meet demand for existing and new products; however,
a certain portion of its costs are fixed and as volumes decrease, these
expenses are difficult to reduce proportionately, if at all.  Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
material and equipment costs, and other expenses related to the design,
development, testing and enhancement of DiCons products. DiCon expenses all
of its research and development costs as incurred and does not capitalize any
research and development expenditures except for equipment with a useful life
longer than one year and useful for purposes other than the current research
and development project. DiCon believes that research and development is
critical to strategic product development and expects to continue to devote
significant resources to product research and development. DiCon expects its
research and development expenses to fluctuate both in absolute dollars and
as a percentage of sales based on its perceived need for, and expected return
from, its research and development efforts.Selling, general and administrative expenses include salaries, benefits,
commissions, product promotion and administrative expenses. DiCon expects
these expenses to continue to be substantial as the Company strives to
sustain its market share in the fiberoptic component manufacturing business.Other income (expenses) consists primarily of interest income, offset by
interest expense, plus realized gains or losses on sales of investments and
fixed assets.DiCon has invested $0.5 million for a 5.45% minority interest in a private
company in Taiwan engaged in the optical coating business. This investment
is held for investment purposes and is accounted for on the cost basis of
accounting. The investment value has been fully impaired as of March 31,
2004.DiCon maintains an Employee Stock Option Plan and an Employee Stock Purchase
Plan as a means of motivating its employees to make a tangible contribution
towards achieving its corporate objectives. In September 2002, DiCon
suspended the sale of DiCon shares to employees under the Employee Stock
Purchase Plan.Critical Accounting Policies and EstimatesThe preparation of the Companys consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America requires estimates and judgments that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and liabilities,
net sales and expenses, and the related disclosures. Estimates are based on
historical experience, knowledge of economic and market factors and various
other assumptions that the Company believes to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. The following critical accounting policies are
affected by significant estimates, assumptions and judgments used in the
preparation of the Companys consolidated financial statements.Revenue recognitionThe Company derives its revenue from the sale of fiberoptic networking
components. Revenue from product sales is recognized upon shipment of the
product, provided that persuasive evidence of an arrangement exists, delivery
has occurred and no significant obligations remain, the fee is fixed or
determinable and collectibility is reasonably assured. Sales to distributors
do not include the right to return or exchange products or price protection.
A provision for returns and allowances is recorded at the time revenue is
recognized based on the Companys historical experience. -14-




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Allowances for doubtful accountsThe Company performs ongoing credit evaluations of its customers. Allowances
for doubtful accounts for estimated losses are maintained resulting from the
inability or unwillingness of customers to make required payments. When the
Company becomes aware that a specific customer is unable to meet its
financial obligations, such as the filing of a bankruptcy or deterioration in
the customers operating results or financial position, the Company records a
specific allowance to reflect the level of credit risk in the customers
outstanding receivable balance. The Company is not able to predict changes in
the financial condition of customers, and if circumstances related to the
Companys customers deteriorate, estimates of the recoverability of trade
receivables could be materially affected and the Company may be required to
record additional allowances. Alternatively, if the Company provides
allowances on receivables that are ultimately collected, the Company will
reverse such provisions in future periods based on actual collection
experience.Warranty accrualThe Company generally provides warranties for its products for one year. The
Company provides reserves for the estimated cost of product warranties at the
time revenue is recognized. Because the Companys products are manufactured,
in most cases, to customer specifications and their acceptance is based on
meeting those specifications, the Company historically has experienced
minimal warranty costs. Estimates of the costs of warranty obligations are
based on the Companys historical experience of known product failure rates
and the use of materials and service delivery costs incurred in correcting
product failures. In addition, from time to time, specific warranty accruals
may be made if unforeseen technical problems arise. Should the Companys
actual experience relative to these factors differ from its original
estimates, the Company may be required to record additional warranty
reserves. Alternatively, if the Company provides more reserves that are in
excess of its actual warranty costs, the Company will reverse a portion of
such provisions in future periods.Other long-term investmentsLong-term investments are accounted for at historical cost and are subject to
a periodic impairment review; however, for non-marketable equity securities
classified under the other long-term investments of the Company, the
impairment analysis requires significant judgment to identify events or
circumstances that would likely have a significant adverse effect on the fair
value of the investment. The indicators the Company uses to identify those
events and circumstances include the investments revenue and earnings trends
relative to predefined milestones and overall business prospects; the
technological feasibility of the investments products and technologies; the
general market conditions in the investments industry; and the investments
liquidity, debt ratios and the rate at which the investment is using cash.
Investments identified as having an indicator of impairment are subject to
further analysis to determine if the investment is other than temporarily
impaired, in which case the investment is written down to its impaired value.
When an investment is not considered viable from a financial or technological
point of view, the entire investment is written down, since the estimated
fair market value is considered to be nominal. Impairment of non-marketable
equity securities is recorded in impairment of other long-term investments in
the Consolidated Statements of Operations.Fair value of financial instrumentsThe Company has determined that the amounts reported for cash and cash
equivalents, accounts receivable, short-term borrowings, accounts payable,
accrued expenses, equipment loan and mortgage loan approximate fair value
because of their short maturities and/or variable interest rates. Marketable
securities are reported at their fair market value based on quoted market
prices.InventoriesInventories are valued at the lower of cost or market using the first-in,
first-out (FIFO) method. Cost is determined using standard cost, which
approximates actual cost. The inventory of the Company is subject to rapid
technological changes and obsolescence that could have an adverse affect on
its utilization in future periods. Accordingly, the Company writes down
excess and obsolete inventory based on the Companys estimates of inventory
to be sold or consumed. -15-




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Property, plant and equipmentThe Company evaluates the recoverability of the net carrying value of its
property, plant and equipment whenever events or changes in circumstances
indicate an impairment may exist, by comparing the carrying values to the
estimated future undiscounted cash flows. A deficiency in these cash flows
relative to the carrying values is an indication of the need for a write-down
due to impairment. The impairment write-down would then be the difference
between the carrying values and the fair value of these assets. A loss on
impairment would be recognized by a charge to earnings. The Company did not
record an impairment charge for property, plant and equipment in the three
months ended June 30, 2004 and the year ended March 31, 2004. Changes in
these estimates could have a material adverse effect on the assessment of
property, plant and equipment, thereby requiring the Company to write down
the assets.Deferred taxesDeferred income tax assets and liabilities represent the expected future tax
consequences attributable to temporary differences between corresponding
amounts stated on the Unaudited Consolidated Balance Sheets and their
respective tax bases. Deferred tax assets and liabilities are measured using
the enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be reversed. Valuation
allowances are recognized as necessary to reduce the deferred tax assets to
the amount that is more likely than not to be realized.Financial ResultsThree Months Ended June 30, 2004 Compared with Three Months Ended June 30,
2003Net SalesNet sales increased by 17.6% from $3.8 million for the quarter ended June 30,
2003 to $4.4 million for the quarter ended June 30, 2004. The increase was
primarily due to an increase in the demand for fiberoptic components and test
equipment by telecommunications equipment vendors, the Companys primary
customers. The increase in net sales associated with increased unit shipments
was partially offset by decreases in the average selling prices of the
Companys products.In the quarters ended June 30, 2004 and 2003, the Company recorded no revenue
from cancellations of prior supply agreements with customers.The fiberoptic communications industry is characterized by dynamic
technological changes. Specific products may have a relatively short product
life, even though basic product designs may have a substantial life.
Generally, customers expect prices to decline steadily. During the current
period of significant excess capacity, the pressure to reduce average selling
prices may even be greater. DiCon seeks to offset this trend through new
product introductions with higher average selling prices and through
aggressive programs to improve manufacturing yields and cost reductions.
There is no certainty that these programs will be successful to offset the
pricing pressure from customers in the future.Sales to different geographic areas may fluctuate from period to period
depending on various factors such as new system development, purchase cycle
and price. Net sales to customers outside North America represented 56% of
total net sales for the quarter ended June 30, 2004, as compared to 52% for
the quarter ended June 30, 2003.As of June 30, 2004 and 2003, the Company experienced the following
concentrations with sales. Three months endedJune 30,2004
    
    2003Percentage of revenue for 3 largest customers
    
    
    37.0
    %
    
    
    40.6
    %No. of customers accounting for over 10% of net sales
    
    
    3
    
    
    
    2
 -16-




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Sales to DiCons leading customers vary significantly from year to year and
DiCon does not have the ability to predict future sales to these customers.Cost of Goods Sold and Gross MarginCost of goods sold declined 5.2% to $4.3 million in the quarter ended June
30, 2004 from $4.6 million in the quarter ended June 30, 2003. Gross margin
as a percentage of net sales was 1.9% in the quarter ended June 30, 2004,
compared to negative 21.7% in the quarter ended June 30, 2003. The
improvement in gross margin in the quarter ended June 30, 2004 is mainly due
to expense and cost reduction along with more efficient material management.
During the quarter ended June 30, 2004, DiCon wrote off a total of $0.3
million or 6.1% of total net sales as compared to approximately $0.3 million
wrote down of obsolete inventory and an additional $0.2 million of inventory
impairment, or 13.4% of total net sales, in the quarter ended June 30, 2003.Gross margin can be affected by a number of factors, including product mix,
customer mix, applications mix, product demand, pricing pressures,
manufacturing constraints, higher costs resulting from new production
facilities, and product yield. Considering these factors, gross margin
fluctuations are difficult to predict and there can be no assurance that
DiCon will achieve or maintain gross margin percentages at historical levels
in future periods. DiCon anticipates the slight improvement in gross margin
to continue in future periods if market demand stays at the current level.Selling, General and Administrative ExpensesSelling, general and administrative (SG&A) expense was $1.3 million in the
quarter ended June 30, 2004, compared to $1.4 million in the quarter ended
June 30, 2003. The decrease in SG&A was primarily due to lower
personnel-related expenses resulting from the reductions in workforce and
operating expenses.Research and Development ExpensesResearch and development (R&D) expense was $1.4 million in the quarter
ended June 30, 2004, compared to $1.7 million in quarter ended June 30, 2003.
The decrease in R&D spending reflects the cost reductions resulting from the
elimination of certain product development programs and workforce reductions.
Future expenditures are expected to fluctuate both in absolute dollars and as
a percentage of revenue based on the need to invest in new research and
development in order to remain competitive in this rapidly changing industry.Other ExpenseOther (expense) income for the quarters ended June 30, 2004 and 2003 are
as follows: Three months ended June 30,(in thousands)
    
    2004
    
    2003Other (expense) income:Interest expense
    
    $
    (300
    )
    
    $
    (364
    )Interest income
    
    
    93
    
    
    
    78Loss on disposal of fixed assets
    
    
    (19
    )
    
    
    (14
    )Realized gain (losses) on sales of marketable securities
    
    
    
    
    
    
    95Gain (losses) on currency exchange
    
    
    
    
    
    
    (32
    )Other (expense) income, net
    
    
    58
    
    
    
    97$
    (168
    )
    
    $
    (140
    )
  Interest expense primarily represents the costs of borrowing by DiCon for its
mortgage loan on the Richmond, California, facility and its equipment loan. -17-




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Loss Before Income TaxDiCon reported a net loss before income tax of $2.8 million for the current
quarter compared to $4.1 million for the same quarter in the prior year.Income Tax ProvisionThe Company reported no income tax expense for the three months ended June
30, 2004. Income tax expense for such periods was offset by adjustment in the
100% valuation allowance maintained for all net deferred tax assets. DiCon
had sufficient income for federal income tax purposes in prior years to
carryback the anticipated losses, and to receive a refund. Thus, DiCon
accrued an income tax receivable for this amount which was received in full
in June 2003. California state income taxes may not be carried back to prior
years. The losses for California purposes may result in lower taxes paid in
the future, depending on the then current tax laws for California.Management regularly evaluates the recoverability of the deferred tax asset
and the level of the valuation allowance. At such time as it is determined
that it is more likely than not that the deferred tax asset will be
realizable, the valuation allowance will be reduced.For the three months ended June 30, 2004, the effective tax rate was 0%
compared to 6% for the same period in last year. The tax rate for each
period is the result of the consolidation of the tax provision for the US
operations with that of the Taiwan operations of Global Fiberoptics, and can
vary substantially from period to period depending on the relative
performance of each operation.Liquidity and Capital ResourcesAs of June 30, 2004, DiCon had cash and cash equivalents of $2.8 million. In
addition, the Company has $18.5 million invested in certificates of
deposit and other marketable securities that in conformity with the
requirements of generally accepted accounting principles were classified as
marketable securities. The Company invests cash in excess of short-term
needs in these investments to attempt to improve yields on its total
investment portfolio.The cash outflow from operating activities of $0.6 million for the three
months ended June 30, 2004 was primarily attributable to net loss for the
three months ended June 30, 2004 and an increase of inventories of $0.9
million due to increase in volume of sales and a decrease in accounts payable
and accrued liabilities of $0.2 million. This cash outflow is partially
offset by a 0.5 million decrease in accounts receivable and reduction of
prepaid expenses and other current assets of 0.3 million. Net cash provided
by operations for the three months ended June 30, 2003 was $13.1 million. It
was primarily attributable to an income tax refund of $15.3 million. These
amounts were partially offset by a decrease in accounts payable and accrued
liabilities of $0.7 million, and the net loss for the three months ended June
30, 2003.The increase in cash flows from investing activities for the three months
ended June 30, 2004 was primarily due to an increase in net proceeds of $2.2
million from the sale of marketable securities offset by $0.4 million in
purchases of marketable securities.Cash used in investing activities of $13.8 million for the three months ended
June 30, 2003 was primarily the efforts to increase earnings on working
capital by investing in certificates of deposits with maturities in excess of
90 days and mutual funds of $14.5 million. All certificates mature in one
year or less. Additionally, the Company sold approximately $0.7 million of
marketable securities during the quarter ended June 30, 2003.Cash flows from financing activities increased to $0.3 million for the three
months ended June 30, 2004 from $0.1 million in the three months ended June
30, 2003. This change is primarily attributable to the net increase of
borrowings. -18-




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The Company financed its new corporate campus by obtaining a construction
loan from a bank of $27.0 million on August 24, 2000. In November 2001, the
same bank refinanced the outstanding balance of the construction loan with a
mortgage loan maturing on November 20, 2004, with an amortization schedule
based on a 25-year loan. During the year ended March 31, 2002, the Chairman,
President and Chief Executive Officer of the institution with which the
Company maintains the mortgage loan was appointed to the Companys Board of
Directors.  On June 28, 2004, the bank agreed to extend the maturity date of the mortgage
loan to October 20, 2007, subject to additional terms and conditions
requiring the Company to make additional principal repayments as follows:
$1.5 million which was paid on July 1, 2004; $1.0 million on October 1, 2004;
and seven installments each in the amount of $0.5 million on the first day of
each calendar quarter, commencing on January 1, 2005 and ending on July 1,
2006.Interest on the mortgage loan is accrued at a variable interest rate based on
changes in the lenders prime rate as of the 20th of each month (4.0 percent
at June 30, 2004). Principal and interest are payable monthly. The balance of
the mortgage loan as of June 30, 2004 was $25.3 million.In April 2001, the Company obtained an equipment loan from a bank in the
amount of $7.3 million. The loan is secured by specific pieces of equipment.
The loan is repayable in equal monthly installments of principal and interest
over 60 months beginning May 30, 2001. On June 30, 2004, the loan balance was
$2.7 million. Effective April 30, 2002 and annually on April 30th of each
year thereafter, the Company may elect to fix the interest rate on the
equipment loan for a twelve month period at a rate of one-half of one
percentage point (0.5 percent) per annum in excess of the prime rate. The
Company had not elected the fixed rate option and the loan bore an interest
rate of prime plus 0.5 percent (4.5 percent on June 30, 2004). On March 31,
2003, the Company was in violation of two of the financial covenants under
this loan agreement. The bank agreed to waive the covenants, but added an
additional covenant requiring the Company to maintain a balance of cash and
marketable securities (excluding equity securities) of at least two times the
outstanding loan balance. The waiver was extended through March 31, 2005.
The Company was in compliance with the additional covenant as of June 30,
2004.In December 2002, Global Fiberoptics obtained a line of credit in Taiwan
backed by commercial paper issued by Global Fiberoptics for a maximum of 220
million New Taiwan Dollars (or approximately $6.5 million as of June 30,
2004). The line of credit will mature on January 28, 2005. The outstanding
balance of any commercial paper under this line of credit must be fully
secured by either a cash deposit or bond fund certificate. As of June 30,
2004, Global Fiberoptics had issued commercial paper in the amount of 27.5
million New Taiwan Dollars (or approximately $0.8 million as of June 30,
2004) with an interest rate of 1.0%.In January 2004, Global Fiberoptics renewed its line of credit of 100 million
New Taiwan Dollars (or approximately $3.0 million as of June 30, 2004) from
a Taiwan bank. The interest rate is based on a rate set by the bank at the
time funds are drawn. The amount drawn as of June 30, 2004 was 29.0 million
New Taiwan Dollars (or approximately $0.9 million as of June 30, 2004) with
an interest rate of 3.25%.DiCon believes its current cash and cash equivalents and marketable
securities will be sufficient to meet its anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. There
remains some possibility that DiCon may need to raise additional capital. It
might need additional capital in order to refinance its loans, finance
unanticipated growth or to invest in new technology. There can be no
certainty that DiCon would be successful in raising the required capital or
in raising capital at acceptable rates.Commitments and Off Balance Sheet InstrumentsThe Company has non-cancelable operating leases from several different
outside parties for buildings. The leases expire in different years from 2003
through 2011. The leases require the Company to pay insurance, real property
taxes in excess of the base property taxes in all tax years and maintenance
costs. Lease expense net of sublease income for the three months ended June
30, 2004 and for the year ended March 31, 2004 was $28,000 and $82,000,
respectively.The Company moved to its new facilities in Richmond, California during the
2001 fiscal year. Accordingly, certain of the leased properties were no
longer used for operating purposes and are available for sublease. -19-




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During the fiscal year ended March 31, 2004, the Company terminated all but
three leases. The Companys estimate of the liability for the remaining costs
of these leases is subject to change depending on the length of time required
to sublease the properties and the rates at which the properties may be
subleased. As of June 30, 2004, the reserve for remaining two leases
expenses, net of expected sublease income, is $0.2 million, and is included
in accounts payable and accrued liabilities in the Unaudited Consolidated
Balance Sheets.As of June 30, 2004, DiCons future gross commitments under all leases was
$0.6 million. 
 Item 3. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures. The undersigned
principal executive officer and principal financial officer of DiCon conclude
that DiCons disclosure controls and procedures are effective as of June 30,
2004 based on the evaluation of these controls and procedures required by
paragraph (b) of Exchange Act Rule 13a-15. (b) Changes in Internal Controls.There has been no change in DiCons
internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that
occurred during the quarter ended June 30, 2004, that has materially
affected, or is reasonably likely to materially affect, DiCons internal
control over financial reporting. -20-




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PART II OTHER INFORMATION 
 Item 1. Legal Proceedings.  DiCon is not a party to any material pending legal proceedings, other than
ordinary routine litigation incidental to its business. 
 Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities.  (a)
    
    Sales of Equity Securities by Small Business Issuer.None.(b)
    
    Purchases of Equity Securities by Small Business Issuer. Small Business Issuer Purchases of Equity Securities Total Number of
    
    Maximum NumberShares Purchased as
    
    of Shares that MayTotal Number
    
    
    
    
    
    Part of Publicly
    
    yet be Purchasedof Shares
    
    
    
    
    
    Announced Plans or
    
    Under the Plans orPurchased
    
    Average Price
    
    Programs
    
    ProgramsPeriod
    
    (1)
    
    Paid per Share
    
    (2)
    
    (2)April 1, 2004
through April 30,
2004
    
    
    4,643
    
    
    $
    0.96
    
    
    
    
    
    
    
    May 1, 2004 through
May 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1, 2004
through June 30,
2004
    
    
    9,737
    
    
    $
    0.96
    
    
    
    
    
    
    
    Total
    
    
    14,380
    
    
    $
    0.96
    
    
    
    
    
    
    
    
  (1)
    
    All of the shares purchased were issued under the Employee Stock
Purchase Program.  (2)
    
    DiCon does not have any publicly announced plans or programs for the
purchase of shares. 
 Item 3. Defaults Upon Senior Securities.  None. 
 Item 4. Submission of Matters to a Vote of Security Holders.  No matters were submitted to a vote of DiCons security holders during
the period covered by this report. 
 Item 5. Other Information.  None. -21-




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Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits. Exhibit No.
    
    Description10.3.2
    
    Loan Modification and Extension Agreement and Amendment to Promissory Note dated June 28, 2004, with
Cathay Bank.10.3.3
    
    Modification of Construction Trust Deed dated June 28, 2004, with Cathay Bank.31.1
    
    Certificate of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes  Oxley
Act of 2002.31.2
    
    Certificate of Vice President of Administration pursuant to Section 302 of the Sarbanes  Oxley Act
of 2002.32.1
    
    Certificate of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes  Oxley
Act of 2002.32.2
    
    Certificate of Vice President of Administration pursuant to Section 906 of the Sarbanes  Oxley Act
of 2002.
  (b)
    
    Reports on Form 8-K.None. -22-




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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. DICON FIBEROPTICS, INC.(Registrant)Date: August 13, 2004
    By:
    /s/  Ho-Shang Lee(Signature)Name:
    Ho-Shang Lee, Ph.D.Title:
    President and Chief Executive
Officer
(principal executive officer) Date: August 13, 2004
    By:
    /s/  Jannett Wang(Signature)Name:
    Jannett WangTitle:
    Vice President of Administration
(principal financial officer) -23-




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##### Table of Contents



Exhibit Index Exhibit No.
    
    Description10.3.2
    
    Loan Modification and Extension Agreement and Amendment to Promissory Note dated June 28, 2004, with
Cathay Bank.10.3.3
    
    Modification of Construction Trust Deed dated June 28, 2004, with Cathay Bank.31.1
    
    Certificate of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes  Oxley Act
of 2002.31.2
    
    Certificate of Vice President of Administration pursuant to Section 302 of the Sarbanes  Oxley Act of
2002.32.1
    
    Certificate of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes  Oxley Act
of 2002.32.2
    
    Certificate of Vice President of Administration pursuant to Section 906 of the Sarbanes  Oxley Act of
2002.
 -24-