- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
MARK ONE
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
APRIL 30, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------------------
FINISAR CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 000-27999 94-3038428
(State or other jurisdiction of (Commission File No.) (I.R.S. Employer
incorporation or organization) Identification No.)
1308 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 408-548-1000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2000 was $4,186,000,000 based on the closing price of
such stock on such date of $26.188 per share.
At June 30, 2000 there were 159,862,284 shares of the registrant's common
stock, $.001 par value, issued and outstanding.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Company's Annual Meeting
of Stockholders to be held September 20, 2000 are incorporated by reference into
Part III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 30, 2000
PAGE
----
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 27
Item 3. Legal Proceedings........................................... 28
Item 4. Submission of Matters to a Vote of Security Holders and
Executive Officers of the Company......................... 28
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 29
Item 6. Selected Financial Data..................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 59
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 59
Item 11. Executive Compensation...................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 60
Item 13. Certain Relationships and Related Transactions.............. 60
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 61
2
PART I
ITEM 1. BUSINESS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. We use words like
"anticipates," "believes," "plans," "expects," "future," "intends" and similar
expressions to identify these forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including:
- uncertainty regarding the commercial acceptance of high-speed networking
and storage technologies;
- uncertainty regarding our future operating results;
- our ability to introduce new products;
- delays or losses of sales due to long sales and implementation cycles for
our products;
- the possibility of lower prices, reduced gross margins and loss of market
share due to increased competition; and
- increased demands on our resources due to anticipated growth.
Other factors that could cause actual result to differ from expectation are
discussed in FACTORS THAT COULD AFFECT OUR FUTURE PERFORMANCE.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report might not occur. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information or future events.
BUSINESS
We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over local area
networks, or LANs, and storage area networks, or SANs. Additionally, we have
recently developed products for digitizing the return path of a cable
television, or CATV, network and for aggregating data traffic in extended
networks. We are focused on providing high-performance, reliable, value-added
optical subsystems, which convert electrical signals into optical signals, for
networking and storage equipment manufacturers that develop and market systems
based on Gigabit Ethernet and Fibre Channel, which are advanced transmission
protocols used in LAN and SAN applications. Our line of optical subsystems
supports a wide range of network applications, transmission speeds, distances
and mediums. We also provide unique network performance test systems which
assist networking and storage equipment manufacturers in the efficient design of
reliable, high-speed networking systems and the testing and monitoring of the
performance of these systems. We sell our products to leading networking and
storage equipment manufacturers such as 3Com, EMC, Emulex, IBM, Newbridge
Networks and Sun Microsystems, as well as emerging manufacturers such as Brocade
Communications and Extreme Networks.
INDUSTRY BACKGROUND
The ubiquity of computing by businesses, organizations and individuals
worldwide and the need to interconnect multiple computing and storage devices to
enable widespread communications has given rise to the multi-billion dollar
computer networking and storage industries. There has been a rapid growth in the
number of corporate and residential users accessing communications networks.
This growth has resulted in large-scale equipment expenditures by enterprises
and service providers to develop and expand their network and storage
infrastructures. Networking and storage equipment expenditures are also
accelerating due to the need to upgrade equipment to reliably accommodate data
traffic which requires
3
greater transmission capacity, or bandwidth, such as e-commerce and online
transaction processing-related traffic, multimedia file transfers and movement
of large blocks of stored data across networks. The transmission and storage of
data has become increasingly mission-critical as enterprises increasingly rely
on data-intensive applications to support a wider range of functions over a
geographically dispersed employee and customer base. The continuing expansion of
the network infrastructure, the growing number of users accessing networks, the
need to accommodate higher bandwidth, and the increasingly mission-critical
nature of data networking and storage networking have created the need for a new
generation of high-speed, high-performance networking and storage systems that
rely on fiber optic transmission technology.
EVOLUTION OF NETWORKS, NETWORKING SYSTEMS AND NETWORKING PROTOCOLS
GIGABIT ETHERNET AND LOCAL AREA NETWORKS. Early LANs were implemented to
connect a limited number of users within relatively close proximity. Most of
these LANs used the Ethernet transmission protocol which was developed to allow
users to access the LAN and share basic common services such as file servers and
printers. Because these early LANs had relatively limited performance
requirements, short connection distances and low transmission speeds, systems on
these LANs were generally connected by copper cabling.
As deployment of LANs increased, Ethernet became the predominant LAN
technology, with a greater than 95% market share in 1998 in terms of port
shipments according to the Dell'Oro Group. As bandwidth needs and server
processing power increased and larger numbers of users strained the early LAN
infrastructure, Ethernet technology evolved from the original 10 megabits per
second, or Mbps, version to 100 Mbps Fast Ethernet. In response to continually
increasing bandwidth and performance requirements, Gigabit Ethernet technology,
which operates at 1,000 Mbps, was introduced in 1998. Dataquest estimates that
sales of Gigabit Ethernet switches will increase from $364 million in 1998 to
over $3.7 billion in 2002, representing a compound annual growth rate of 79%.
These switches contain varying numbers of ports which serve as the connection to
the network. According to Dataquest, the number of Gigabit Ethernet port
shipments is projected to grow from 211,000 in 1998 to over 6 million in 2002,
representing a compound annual growth rate of 130%. Most of these Gigabit
Ethernet ports will rely on fiber optic subsystems, which allow data to be
transmitted accurately, at very high speeds and over long distances. Although
the transmission speeds currently offered by Gigabit Ethernet are expected to
meet the increasing bandwidth needs of enterprise and service provider networks
for the near future, manufacturers have begun to develop networking systems with
per-port transmission speeds of 10 gigabits per second, or Gbps, ten times
faster than Gigabit Ethernet. Because of the scalability and migration capacity
built into the Gigabit Ethernet protocol, manufacturers developing these systems
are able to leverage this standard much as they did when they migrated from
100 Mbps Fast Ethernet to 1,000 Mbps Gigabit Ethernet. This next generation of
high-speed networking systems will require even higher performance fiber optic
subsystems.
FIBRE CHANNEL AND STORAGE AREA NETWORKS. Like data networking technology,
data storage technology has evolved rapidly over the past decade. Traditionally,
storage devices were connected to a single server and LAN in close proximity
using a standard interface protocol known as the Small Computer Systems
Interface, or SCSI. SCSI currently allows storage devices and servers to
communicate at a maximum speed of 80 megabytes per second, over a maximum
transmission distance of 12 meters and supports a maximum of 15 devices on a
single bus. Although these distances and speeds were sufficient for early
storage applications, SCSI has become a limiting technology for emerging storage
applications, which require networking at high speeds over long distances and
need to interconnect large numbers of users.
In recent years, demand has increased for faster, more efficient
interconnection of data storage systems with servers and LANs. Contributing to
this demand are:
- the need to connect increasing numbers of storage devices and servers to a
growing number of users;
4
- the need to interconnect servers and storage systems supplied by multiple
vendors;
- the increasingly mission-critical nature of stored data and the need for
rapid access to this data; and
- the expense and complexity associated with managing increasingly large
amounts of data storage.
Although advances in technology, including the recent development of Gigabit
Ethernet, increased LAN transmission speeds by more than 1,000 times during the
1990s, storage-to-server data transmission speeds on SCSI-based systems
increased by less than ten times during this period. This speed disparity
created a bottleneck between storage systems and servers and the LANs connected
to those servers. Recently, the Fibre Channel interconnect protocol has been
standardized to address the speed, distance and connectivity limitations of
SCSI-based storage while maintaining backward compatibility with the installed
base of SCSI-based storage systems. Fibre Channel allows up to 126 devices to
communicate at rates up to 1.062 Gbps over distances of up to 10 kilometers. The
Fibre Channel protocol has enabled the development of high-speed storage area
networks, or SANs, which provide the interconnection between storage systems and
servers.
Fibre Channel-based SANs provide many benefits, including transmission
speeds comparable to high-speed LANs and transmission distances which allow
broader sharing of resources. SANs also enable enhanced network applications
such as storage backup, and better overall storage management achievable through
centralized storage resources. IDC projects that the market for Fibre Channel
systems will grow from $2.2 billion in 1998 to over $19.6 billion in 2002,
representing a compound annual growth rate of 73%. In addition, emf Associates
forecasts the number of Fibre Channel port shipments will grow from 2.2 million
in 1998 to over 46.7 million in 2002, representing a compound annual growth rate
of 115%. Most of these ports will rely on fiber optic subsystems to transmit and
receive data at very high speeds with high accuracy, and often over long
distances. Like manufacturers of Gigabit Ethernet-based LAN systems, Fibre
Channel-based SAN system manufacturers are already developing the next
generation of SAN products with speeds of 2.125 Gbps, twice as fast as current
Fibre Channel speeds. Like Gigabit Ethernet, the Fibre Channel protocol is
scalable, allowing for the potential development of systems with speeds of over
8 Gbps. The speeds contemplated by future generation SAN systems will require
even higher performance fiber optics subsystems.
In addition to SANs, Fibre Channel technology is being used in other
high-speed data communications applications including the interconnection of
clusters of switches based on the asynchronous transfer mode, or ATM, protocol.
ATM switches are often used in service provider network cores to switch traffic
between multiple networks. In these core networks, multiple switches are often
grouped together in a service provider's central office. The interconnections
between these systems are often provided by Fibre Channel-based subsystems which
allow high-speed, cost-effective communication links between these switches.
EXTENDED LANS AND SANS. As technologies such as Gigabit Ethernet and Fibre
Channel have enabled transmission of data at higher speeds over longer distances
than previous networking technologies permitted, they have allowed the
geographic extension of LANs and SANs over installed but unused fiber optic
cable, known as "dark" fiber lines. Enterprises have recently begun to lease
dark fiber from service providers to implement these extended networks. These
extended LANs and SANs can interconnect network systems throughout a corporate
campus or metropolitan area rather than only within a single building. Extended
networks enable organizations to use their networks for enhanced applications
such as real-time backup storage at distances of up to 120 kilometers for
disaster protection. In addition, by using dark fiber lines, extended data
networks can offer organizations a potentially cost-effective way to address
increased bandwidth requirements. We believe that future extended networks will
incorporate both Fibre Channel and Gigabit Ethernet transmission protocols. As
with shorter-distance LANs and SANs, these extended networks will require
high-performance fiber optic subsystems.
5
CABLE TELEVISION NETWORKS. Cable television networks have traditionally
relied on the use of radio frequency, or RF, analog transmission to broadcast
video signals over copper cable. The initial objective of these networks was to
provide one-way broadcast of video channels to the home. These early networks
relied on multiple amplifiers in order to compensate for the loss of signal
strength over distance caused by the use of copper cable as the transmission
medium.
Since the early 1990's, CATV operators have greatly expanded their ability
to offer a growing array of entertainment services by upgrading their networks
with fiber optic technologies in order to reduce the number of amplifiers needed
to transmit signals to the home, expand capacity and enhance the reliability of
their networks. While operators realize several benefits as a result of
upgrading their networks in this manner, the fiber optic technologies deployed
to date continue to use RF analog transmission to send signals.
With the rapid growth in Internet-related services, the demand for two-way
interactive CATV services has increased dramatically. The transformation of a
one-way broadcast network to a two-way interactive network requires that the
signals originating at each home be aggregated at a node before being sent back
to the CATV network headend. This transformation, using analog signal
transmission for the return path, involves numerous technical challenges because
the electrical noise originating at each home is also aggregated before being
transmitted. This aggregation of noise limits the amount of bandwidth and
distance over which these return signals can be transmitted. For this reason, a
substantial portion of CATV networks have not been upgraded for two-way
transmission and those operators who have implemented analog return path systems
are limited with respect to their ability to carry two-way traffic.
DEMAND FOR HIGH-SPEED DATA COMMUNICATION TEST SYSTEMS
The design and development of data and storage networking systems require
extensive testing to ensure system performance and reliability. As new, highly
complex transmission protocols such as Gigabit Ethernet and Fibre Channel have
emerged, system testing has become more difficult, requiring increasingly
sophisticated and specialized test systems capable of capturing data at high
speeds, filtering the data and identifying various types of intermittent errors
and other network problems. Other new technologies are continually being
developed, such as the Infiniband transmission protocol, which is being
engineered to interconnect clusters of computer devices. In the past, many
systems manufacturers designed their own test equipment each time they developed
a new product. However, as the pace of technological change has accelerated, the
performance requirements of data communications systems have increased and
competition has afforded shorter market windows within which manufacturers can
develop and introduce new products. Thus, system manufacturers have increasingly
focused on the design and development of their own products and turned to
specialized independent suppliers for state-of-the-art test equipment. As
Ethernet and Fibre Channel-based systems reach even higher transmission speeds
and new standards like Infiniband emerge, the internal development of test
equipment by systems manufacturers will become more challenging, further
increasing the demand for high performance, easy-to-use test systems from
independent suppliers.
EVOLUTION OF FIBER OPTIC SUBSYSTEMS FOR NETWORKING
Fiber optic transmission technology was originally developed for use in long
distance telecommunications networks to increase capacity and speed. In
contrast, early LANs and storage systems, with their relatively limited
performance requirements, short connection distances and low transmission
speeds, did not require the performance capabilities of fiber optics. Systems on
these networks were generally interconnected using copper cabling.
As the bandwidth, storage capacity and transmission distance requirements of
enterprises and service providers have increased, it has become necessary to
utilize the superior transmission capabilities of fiber optics to build
practical, high-speed LANs based on Gigabit Ethernet technology and high-speed
SANs based on Fibre Channel. As these fiber optic LANs and SANs are being
deployed, fiber optics is becoming
6
the dominant transmission technology for high-speed data networking and storage
applications. Systems connected with fiber optics require optical subsystems to
convert electrical signals into optical signals and back into electrical signals
at high speeds.
The development and manufacture of high quality, cost-effective fiber optic
subsystems for LANs and SANs present a number of significant technical
challenges, including the following:
- As data rates increase, it becomes significantly more difficult to
maintain data integrity because high speed signals can be degraded unless
subsystem components such as lasers, detectors and integrated circuits are
properly integrated and packaged;
- The increasingly mission-critical nature of data transmission and storage
has magnified the impact of system failures, increasing the need for
system reliability and the importance of real-time performance monitoring;
- Manufacturers of high speed networking equipment require optical
subsystems that support a wide range of transmission distances, protocols
and applications; and
- Compliance with standards set by the Federal Communications Commission, or
FCC, for electromagnetic interference emissions, or EMI, is significantly
more difficult to achieve at higher data rates.
To date, we believe that only a limited number of companies have developed
the specialized expertise required to engineer fiber optic subsystems and test
systems which meet the requirements of manufacturers of high-speed data
networking and storage systems.
THE FINISAR SOLUTION
We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over LANs, SANs, CATV
networks and extended networks. We are focused on providing high-performance,
reliable, value-added optical subsystems for networking and storage equipment
manufacturers that develop and market systems based on Gigabit Ethernet and
Fibre Channel protocols. Our line of optical subsystems supports a wide range of
network applications, transmission speeds, distances and mediums. Our digital
return path technology overcomes many of the limitations associated with analog
components used to provide two-way interactive services over CATV networks. We
also provide unique network performance test systems which assist networking and
storage equipment manufacturers in the efficient design of reliable, high-speed
networking systems and the testing and monitoring of the performance of these
systems. Our products provide the following key benefits to manufacturers of
high-speed data networking and storage systems:
VALUE-ADDED FUNCTIONS AND INTELLIGENCE. Our high-speed fiber optic
subsystems are engineered to deliver value-added functionality and intelligence.
For example, many of our optical subsystems include a microprocessor containing
specially-developed software that allows customers to monitor the optical
performance of each port on their systems in real time. In addition, many of our
subsystems are engineered to automatically recognize different versions of the
Fibre Channel protocol and to interoperate with our customers' older, installed
networking systems, often referred to as legacy systems. Real-time monitoring
and interoperability are particularly important in the Gigabit Ethernet LAN and
Fibre Channel SAN markets where reliability and time to market are critical. Our
test systems also contain value-added software functions that permit users to
simulate and track errors.
HIGH LEVEL OF DATA INTEGRITY. Through the use of advanced packaging and
circuit design, our optical subsystems deliver data at very high speeds over
varying distances with very low error rates. We engineer our subsystems to
exceed the industry standard error rate of 1 bit per trillion bits transmitted.
This degree of data integrity allows our subsystems to operate reliably over a
wide range of temperatures and other field conditions which we believe enables
our customers to design and deliver more robust systems.
7
HIGH RELIABILITY. We design all of our subsystems to provide the high
reliability required for data networking and storage applications that are
critical to an enterprise. Using standard statistical methodology and testing,
we have been able to predict that some of our products can be expected to
operate reliably for up to 40 million hours. Our subsystems are engineered to
operate with minimal power requirements thereby increasing product life, and to
function across a wide range of temperatures and voltages. This reliability and
flexibility have allowed our subsystems to be designed into the products of
manufacturers who provide systems for a variety of mission-critical
applications. In addition, because our subsystems emit lower levels of EMI than
the standards set by the FCC, we offer manufacturers greater flexibility in the
design of their systems and integration of other components and subsystems.
BROAD OPTICAL SUBSYSTEM PRODUCT LINE. We offer a broad line of optical
subsystems which operate at varying protocols, speeds, fiber types, voltages,
wavelengths and distances and are available in a variety of industry standard
packaging configurations, or form factors. Our optical subsystems are designed
to comply with key networking protocols such as Fibre Channel and Gigabit
Ethernet and to plug directly into standard port configurations used in our
customers' products. The breadth of our optical subsystems product line is
important to many of our customers who manufacture a wide range of networking
products for diverse applications.
BROAD TEST SYSTEM PRODUCT LINE. We believe that we are a leading provider of
network performance test systems for Fiber Channel-based networks. We offer a
broad line of test systems to assist our customers in efficiently designing
reliable, high-speed networking systems and testing and monitoring the
performance of these systems. We believe our test systems enable our customers
to focus their attention on the development of new products, reduce overall
development costs and speed time to market.
STRATEGY
Our objective is to be the leading provider of fiber optic subsystems and
test systems to manufacturers of high-speed data networking and storage systems.
Key elements of our strategy include the following:
MAINTAIN TECHNOLOGY LEADERSHIP IN HIGH-SPEED FIBER OPTIC TRANSMISSION. We
have been focused on the development of fiber optic subsystems since 1988.
Current Finisar employees were actively involved in the original development of
the Fibre Channel standard and, more recently, in the development and
implementation of Gigabit Ethernet and the emerging Infiniband protocol. Our
years of engineering experience, our multi-disciplinary technical expertise and
our participation in the development of industry standards have enabled us to
become a leader in the design and development of fiber optic subsystems and test
systems. We intend to maintain our technological leadership through continual
enhancement of our existing products and the development of new products as
evolving technology permits higher speed transmission of data, with greater
capacity, over longer distances. For example, we are designing flexible hardware
and software architectures to support emerging technologies such as 10 Gbps
Ethernet, 2 Gbps Fibre Channel, wavelength division multiplexing, or WDM, and
the Infiniband protocol. We are also focusing on increased product integration
to enhance the price/performance capabilities of our products. An example of
this product integration is our new digital return path links used in broadband
CATV systems that utilize existing technology from our optical subsystems, test
equipment and extended network subsystems. Our CATV products are plug compatible
with existing systems, offer superior performance and allow various system
enhancements. This technology also has the potential to change the product
architecture of CATV systems for use as broadband metropolitan networks.
LEVERAGE CORE COMPETENCIES ACROSS MULTIPLE, HIGH-GROWTH MARKETS. We believe
that fiber optic technology will increasingly become the transmission technology
of choice for multiple high-growth data communication markets, including Gigabit
Ethernet-based LANs, Fibre Channel-based SANs and CATV and extended networks.
These markets are characterized by differentiated applications with unique
design criteria such as product function, performance, cost, in-system
monitoring, size limitations and software. We intend to target opportunities
where our core competencies in high-speed data transmission protocols
8
such as Gigabit Ethernet, Fibre Channel and Infiniband can be leveraged into
leadership positions as these technologies are extended across multiple markets
and applications. Our goal is to be the optical subsystem and network
performance test system provider of choice for multiple protocols and network
applications. Recently, we entered the broadband CATV market with a product that
leverages our core competencies in optical subsystems, test systems and WDM. Our
CATV digital return path product can emulate existing analog return links, plug
into existing sockets, provide better performance, lower cost and reduce system
level diagnostics. Furthermore, this product has traffic aggregation features
that enhance the traditional analog coaxial system.
STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. Over the past 11 years, we
have established valuable relationships and a loyal base of customers by
providing high-quality products and superior service. Our service-oriented
approach has allowed us to work closely with leading data and storage network
system manufacturers, understand and address their current needs and anticipate
their future requirements. We intend to leverage our relationships with our
existing customers as they enter new, high-speed data communications markets. We
have recently established new customer relationships with several emerging
Gigabit Ethernet and Fibre Channel networking equipment manufacturers. We intend
to expand our sales and marketing organization in order to establish new
relationships with other key data communications network manufacturers.
CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. Many manufacturers of high-speed
data networking and storage systems purchase both optical subsystems and test
systems from third-party providers. Frequently, however, different groups or
departments within a manufacturer's organization are responsible for qualifying
and purchasing subsystems and test equipment. We are increasingly able to
capitalize on our customers' satisfaction with one of our product lines and our
service-oriented approach to gain valuable introductions that lead to sales of
our other product lines. As this trend develops, we intend to leverage our
unique expertise in both optical subsystems and test systems. In particular, the
widespread acceptance of our Fibre Channel test systems is providing
opportunities to develop new customers for our optical subsystems. Our entry
into the broadband CATV market targets customers in both the direct CATV digital
return path link market and the extended network subsystems market, allowing
cable operators to offer digital services economically to businesses in their
service area.
EXPAND INTERNATIONAL OPERATIONS. Historically, substantially all of our
sales have been made to system manufacturers located in North America. In the
fiscal year ended April 30, 2000, sales to customers outside North America
represented approximately 5% of our total revenues. Recently, manufacturers in
other parts of the world have developed and introduced high-speed networking
products based on the Gigabit Ethernet and Fibre Channel protocols and
international markets for our products are beginning to expand. To better
address these expanding international markets, we have recently established
relationships with distributors in Japan, the United Kingdom and Israel. We
intend to further extend our international operations by expanding our network
of distributors and sales representatives in key international markets. As
international Fibre Channel and Gigabit Ethernet standards are substantially the
same as those in North America, we do not expect that we will require
substantial product development efforts to enter international markets.
PRODUCTS
We provide a broad line of complementary optical subsystems and test systems
for high-speed data communications over Gigabit Ethernet LANs and Fibre Channel
SANs.
OPTICAL SUBSYSTEMS
Our optical subsystems product line consists of three product
families--optical data links, optical link extenders and Opticity 3000. Our
optical data links are integrated into our customers' systems and used for
9
both short- and long-distance fiber optic communications. Our optical link
extenders are external subsystems used for fiber optic communications over long
distances. Our Opticity 3000 is an external link extender subsystem which also
includes multiplexer functionality that permits multi-channel data transmission
over long distances.
OPTICAL DATA LINKS
Our family of optical data link products consists of transmitters, receivers
and transceivers based on the Gigabit Ethernet and Fibre Channel protocols. A
transmitter converts electrical signals into optical signals for transmission
over fiber optics. A receiver converts incoming optical signals into electric
signals. A transceiver combines both transmitter and receiver functions. Our
optical data link products perform these functions with high reliability and
data integrity and support a wide range of protocols, transmission speeds, fiber
types, wavelengths, transmission distances, form factors and software
enhancements.
Our high-speed fiber optic subsystems are engineered to deliver value-added
functionality and intelligence. Most of our optical data link products include a
microprocessor with proprietary embedded software that allows customers to
monitor transmitted and received optical power, temperature, drive current and
other link parameters of each port on their systems in real time. In addition,
our intelligent optical data links are used by many enterprise networking and
storage system manufacturers to enhance the ability of their systems to diagnose
and correct abnormalities in fiber optic networks.
The following table describes our principal optical data link products:
TRANSMISSION WAVELENGTHS TRANSMISSION FORM SOFTWARE
PROTOCOLS SPEED (GBPS) FIBER TYPES (NM) DISTANCES FACTORS ENHANCEMENTS
- ------------------------- ------------ ----------- ----------- ------------ -------- ------------
TRANSMITTERS
Fibre Channel............ 1.062 Multimode 850 500 m 17-pin Built-in diagnostics
Gigabit Ethernet......... 1.25 Singlemode 1310 10 km
1550 30 km
80 km
RECEIVERS
Fibre Channel............ 1.062 Multimode 850 500 m 17-pin Reports on received
optical power levels
Gigabit Ethernet......... 1.25 Singlemode 310 10 km
1550 30 km
80 km
TRANSCEIVERS
Fibre Channel............ 1.062/2.125 Multimode 850 500 m 28-pin Built-in diagnostics
Gigabit Ethernet......... 1.25/2.5 Singlemode 1310 10 km 9-pin OFC auto-sense
1550 30 km GBIC Serial
identification
80 km SFP
SFF
CABLE TELEVISION DIGITAL RETURN PATH SYSTEMS
Over the past year, we have developed a new technical approach to the
transportation of information inside broadband cable television networks.
Traditionally, fiber optic links in CATV networks have used analog modulation to
transport signals. Our design digitizes the return path signal with performance
comparable to the best analog links. We have begun customer trials of our
digital optical return path links for CATV systems.
10
Our digital technology enables us to make links that have significant
advantages over traditional analog links. These links are more stable in varying
temperatures, show no analog variation with fiber distance and are more immune
to mishandling problems, such as poor splices and connectors, than traditional
analog links.
Digital return path links allow broadband systems to be better managed and
to support a variety of CATV architectures. Our products are used in nodes that
typically serve between 50 and 500 homes as well as in secondary hub sites and
headends. These products build on our basic optical modules and test systems to
provide our customers with a level of service, reliability and signal integrity
that is superior to the systems they are replacing at a lower cost. These
modules plug into existing nodes, hubs and headends, which facilitates market
acceptance.
OPTICAL LINK EXTENDERS
Our FLX-2000 family of optical link extenders allows enterprises to extend
the distance of fiber optic links in Gigabit Ethernet and Fibre Channel-based
networks while preserving data integrity and reliability. Using our optical link
extenders, Gigabit Ethernet networks can be extended from the maximum standard
distance of 5 kilometers to up to 120 kilometers, and Fibre Channel networks can
be extended from the maximum standard distance of 10 kilometers to up to
120 kilometers. Our optical link extenders enable new network applications such
as remote storage and real-time backup, as well as geographic extensions of a
network. In addition, our optical link extenders provide a value-added
diagnostic function by measuring the bit error rate on data links and monitoring
and reporting system status.
OPTICITY 3000
Introduced in September 1999, our Opticity 3000 is now being evaluated by
several network service providers ranging from application service providers to
competitive local exchange carriers and CATV operators. Our Opticity 3000
combines cost-effective wavelength division multiplexing with the ability to
create reliable ring network topologies. The Opticity 3000 allows enterprises
and service providers to build gigabit metropolitan data networks. The
Opticity 3000 aggregates data traffic on fiber rings. It is able to multiplex up
to 16 channels of Fibre Channel or Gigabit Ethernet traffic on a single fiber
pair, providing aggregate full-duplex bandwidth of up to 20 Gbps. The
Opticity 3000 can be remotely managed using standard network management
protocols such as the Simple Network Management Protocol. Opticity 3000 also has
features such as redundant power supply designed to maximize reliability and
uptime in case of failures.
The Opticity 3000 platform enables our customers to create complex systems
combining both networking and storage based services and to access Ethernet
service at speeds up to 100 Mbps at costs comparable to today's prices for T1 or
DSL connections provided by local telephone companies.
Currently our Opticity 3000 platform can be configured with as few as four
and as many as 16 channels. The Opticity 3000 platform manages a ring topology
matching the fiber layout in most metropolitan areas. The Opticity 3000 can
operate over a single fiber ring and still maintain the ability to provide
failover switching for redundancy and reliability in the event of a fiber
breakage. Extended networks using the Opticity 3000 are configured to remain
operational in the event of any single point of failure throughout the platform
or physical plant.
The effectiveness of the Opticity 3000 relies on a variety of bandwidth
enhancing techniques including time division multiplexing and WDM. All channels
are actively monitored, therefore service levels can be tracked and verified for
each customer served by the system. The Opticity 3000 platform can be managed
using simple network management protocol as well as a web browser. Remote
management of an entire ring system can be accomplished through a single
Internet connection to the system.
11
NETWORK PERFORMANCE TEST SYSTEMS
Our GTX, GT and GLA family of network performance test systems assist
networking and storage system manufacturers in the efficient design of reliable,
high-speed networking systems and the testing and monitoring of the performance
of these systems. We believe we are the leading supplier of test equipment for
the Fibre Channel protocol used in enterprise SANs. We also offer Gigabit
Ethernet test systems. Our test systems allow engineers, service technicians and
network managers to capture data at high speeds, filter the data and identify
various types of intermittent errors and other network problems.
Our GTX, GT and GLA family of test system products includes data generators,
data analyzers, error injector/data jammers and low-cost, real-time link
monitors. The following table describes our GTX, GT and GLA family of test
products:
INTRODUCTION PROTOCOL TRANSMISSION
PRODUCT DESCRIPTION DATE SUPPORTED SPEED APPLICATION CONFIGURATION
- ------------------- ------------ ---------- ---------------- ----------------- -------------
GIGABIT LINK ANALYZERS
GLA-3100ES............................ 10/96 ESCON 200 Mbps R&D Service PC-Hosted
GLA-3100FC............................ 1/97 Fibre 1.062 Gbps R&D Service PC-Hosted
Channel
GT-G Data Generator Module............ 1/98 Fibre 1.062 Gbps Inter-operability PC-Hosted
Channel
GT-J Error Injector Module............ 2/99 Fibre 1.062 Gbps Error Recovery PC-Hosted
Channel
GT-J22 Error Stimulus Response 2/99 Fibre 1.062 Gbps Error Recovery High
System.............................. Channel, Performance
FICON Tower PC
GT GIGABIT TRAFFIC CHECK
GT-C-FC Link Monitor.................. 5/98 Fibre 1.062 Gbps Field Service Hand Held
Channel
GT-C-GE Link Monitor.................. 5/98 Gigabit 1.25 Gbps Field Service Hand Held
Ethernet
GTX GIGABIT TRAFFIC SYSTEM
GTX-A................................. 11/99 Fibre 1.062 Gbps R&D PC-Hosted
Channel 2.125 Gbps
GTX-B bit error rate tester........... 3/00 Fibre 1.062 Gbps Hardware Test PC-Hosted
Channel, 1.25 Gbps
Gigabit 2.125 Gbps
Ethernet, 2.5 Gbps
Infiniband
GTX-J Error Injector.................. 7/00 Fibre 1.062 Gbps Error Recovery PC-Hosted
Channel, 2.125 Gbps
FICON
SANmetrics--Loop...................... 4/00 Fibre 1.062/2.125 Gbps SAN Performance NA
Channel Analysis Software
SANmetrics--Switch.................... 6/00 Fibre 1.062/2.125 Gbps SAN Performance NA
Channel Analysis Software
12
CUSTOMERS
Sales to our two principal customers, Newbridge Networks and EMC
Corporation, accounted for 25.1% and 24.1% of our revenues in fiscal 1999 and
24.5% and 24.0% in fiscal 2000.
TECHNOLOGY
The development of high quality fiber optic subsystems and test systems for
high-speed data communications requires multidisciplinary expertise in the
following six technology areas:
HIGH FREQUENCY SEMICONDUCTOR DESIGN. Our fiber optic subsystems development
efforts are supported by an engineering team that specializes in analog/digital
integrated circuit design. This group works in both silicon and gallium
arsenide, or GaAs, semiconductor technologies where circuit element frequencies
are very fast and can be as high as 60 GHz. We have designed proprietary
circuits including laser drivers and receiver pre- and post-amplifiers. Our
designs have made us early entrants in the 1.0 Gbps data communications market
and more recently in the 2.5 Gbps data communications market. These advanced
semiconductor devices provide significant cost advantages and will be critical
in the development of future products capable of even faster data rates.
OPTICAL SUBSYSTEM DESIGN. Finisar has established itself as a low-cost
design leader beginning with its initial Gbps optical subsystems in 1992. From
that base we have developed new singlemode laser alignment approaches and
low-cost, all-metal packaging techniques for improved EMI performance and
environmental tolerance. We develop our own component and packaging and designs
and integrate these designs with proprietary manufacturing processes that allow
our products to be manufactured in high volume.
COMPLEX LOGIC DESIGN. Our test equipment designs are based on field
programmable gate arrays, or FPGAs. In recent customer trials, our newest
products are being used to operate with clock frequencies of up to 125 MHz and
logic densities up to 1 million gates per chip. Our test systems use FPGAs that
are programmed by the host PC and therefore can be configured differently for
different tests. All of our logic design is done in the VHDL hardware
description language which will enable migration to ASICs as volumes warrant. We
develop VHDL code in a modular fashion for reuse in logic design which comprises
a critical portion of our intellectual property. This re-usable technology base
of logic design is available for use in both our test system and optical
subsystem product lines and allows us to reduce the time to market for our new
and enhanced products.
SOFTWARE TECHNOLOGY. We devote substantial engineering resources to the
development of software technology for use in all of our product lines. We have
developed software to control our test systems, analyze data collected by our
test systems, and monitor, maintain, test and calibrate our optical subsystems.
A majority of our software technology and expertise is focused on the use of
object-oriented development techniques to develop software subsystems that can
be reused across multiple product lines. We have created substantial
intellectual property in the area of data analysis software for our Fibre
Channel test equipment. This technology allows us to rapidly sort, filter and
analyze large amounts of data using a proprietary database format. This database
format is both hardware platform-independent and protocol-independent. This
independence allows all of the software tools developed for our existing test
products to be utilized in all of our new test products that collect data
traces. Because the database format is also protocol-independent, new protocols
can be added quickly and easily. Another important component of our intellectual
property is our graphical user interface, or GUI, design. Many years of customer
experience with our test products have enabled us to define a simple yet
effective method to display complex protocols in clear and concise GUIs for
intuitive use by engineers.
SYSTEM DESIGN. The design of all of our products requires a combination of
sophisticated technical competencies--optical engineering, high-speed digital
and analog design, ASIC design and software engineering. We have built an
organization of people with skills in all of these areas. It is the integration
of these technical competencies that enables us to produce products that meet
the needs of our customers.
13
Our combination of these technical competencies has enabled us to design and
manufacturer optical subsystems with built-in optical test multiplexing, and
network monitoring, as well as test systems that integrate optical and protocol
testing with user interface software.
MANUFACTURING SYSTEM DESIGN. The design skills gained in our test systems
group are also used in the manufacturing of our optical subsystems. We utilize
our high-speed FPGA design blocks and concepts and GUI software elements to
provide specialized manufacturing test systems for our internal use. These test
systems are optimized for test capacity and broad test coverage. We use
automated, software-controlled testing to enhance the field reliability of all
Finisar products. All of our products are subjected to temperature testing of
powered systems as well as full functional tests.
COMPETITION
The market for optical subsystems and network performance test systems for
use in LANs, SANs and extended networks are highly competitive. We believe the
principal competitive factors in the optical subsystem and test system markets
are:
- product performance, features, functionality and reliability;
- price/performance characteristics;
- timeliness of new product introductions;
- adoption of emerging industry standards;
- service and support;
- size and scope of distribution network;
- brand name;
- access to customers; and
- size of installed customer base.
We believe we compete favorably with our competitors with respect to most of
the foregoing factors. However, we cannot assure you that we will be able to
compete successfully against either current or future competitors.
SALES, MARKETING AND TECHNICAL SUPPORT
We sell our products in North America through our direct sales force and a
network of twelve independent manufacturers' representatives. Our direct sales
force maintains close contact with our customers and provides technical support
to our manufacturers' representatives. In our international markets, our direct
sales force works with local resellers who assist us in providing support and
maintenance to the territories they cover. We have recently established
relationships with distributors in Japan, the United Kingdom, Israel, Germany
and Korea.
Both our optical subsystems and our network performance test systems are
often sold to the same customer. We are increasingly able to capitalize on our
customers' satisfaction with one of our product lines and our service-oriented
approach to gain valuable introductions that can lead to sales of our other
product line. We anticipate that we will continue to benefit from these trends
in the future.
Our marketing efforts are focused on increasing awareness of our optical
subsystems and test systems product lines and our brand name. Key components of
our marketing efforts include:
- continuing our active participation in industry associations and standards
committees to promote and further enhance Gigabit Ethernet and Fibre
Channel technologies, promote standardization in the LAN and SAN markets,
and increase our visibility as industry experts; and
14
- leveraging major trade show events and LAN and SAN conferences to promote
our broad product lines.
In addition, our marketing group provides marketing support services for our
executive staff, our direct sales force and our manufacturers' representatives
and resellers. Through our marketing activities, we provide technical and
strategic sales support to our direct sales personnel and resellers including
in-depth product presentations, technical manuals, sales tools, pricing,
marketing communications, marketing research, trademark administration and other
support functions.
A high level of continuing service and support is critical to our objective
of developing long-term customer relationships. We emphasize customer service
and technical support in order to provide our customers and their end users with
the knowledge and resources necessary to successfully utilize our product line.
Our customer service utilizes a technical team of field and factory applications
engineers, technical marketing personnel and, when required, product design
engineers. We provide extensive customer support throughout the qualification
and sale process. In addition, we also provide many resources through our World
Wide Web site, including product documentation and technical information. We
intend to continue to provide our customers with comprehensive product support
and believe it is critical to remaining competitive.
MANUFACTURING
We outsource the majority of our assembly operations, and we conduct
manufacturing engineering, supply chain management, quality assurance and
documentation control operations at our facility in Sunnyvale, California. This
approach enables us to focus on our design strengths, reduce fixed costs and
capital expenditures and provide flexibility in meeting market demand.
We currently rely on three Asia based and one U.S. based contract
manufacturers for substantially all of our assembly operations. We do not have
long-term contracts with any of our contract manufacturers, and none of them are
obligated to perform assembly services for us for any specific period or at any
specified price, except as may be provided in a particular purchase order.
We design and develop a number of the key components of our products,
including ASICs, printed circuit boards and software. In addition, our
manufacturing team works closely with our engineers to manage the supply chain.
Product testing and burn-in are performed at our facility. We also use
inspection, testing and statistical process controls to assure the quality and
reliability of our products. In addition, most of our optical subsystems have an
intelligent interface that allows us to monitor product quality during the
manufacturing process.
Although we use standard parts and components for our products where
possible, we currently purchase a few key components used in the manufacture of
our products from single or limited sources. Our principal single source
components include ASICs and lasers. Generally, purchase commitments with our
single or limited source suppliers are on a purchase order basis. Any
interruption or delay in the supply of any of these components, or the inability
to procure these components from alternate sources at acceptable prices and
within a reasonable time, would substantially harm our business. In addition,
qualifying additional suppliers can be time-consuming and expensive and may
increase the likelihood of errors.
We use a rolling 12-month forecast based on anticipated product orders to
determine our material requirements. Lead times for materials and components we
order vary significantly, and depend on factors such as the specific supplier,
contract terms and demand for a component at a given time. It is our practice to
maintain a 12-month inventory of sole source components to decrease the risk of
a component shortage.
15
RESEARCH AND DEVELOPMENT
In fiscal 1999 and fiscal 2000, our research and development expenses were
$7.9 million and $13.8 million, respectively. We believe that our future success
depends on our ability to continue to enhance our existing products and to
develop new products that maintain technological competitiveness. We focus our
product development activities on addressing the evolving needs of our customers
within the LAN, SAN, CATV networks and extended network markets. We work closely
with our original equipment manufacturers and system integrators to monitor
changes in the marketplace. We design our products around current industry
standards and will continue to support emerging standards that are consistent
with our product strategy. Our research and development groups are aligned with
our different product lines and we have specific groups devoted to ASIC design
and test, gigabit per second subsystem design, test equipment hardware and
software design. In addition, our research and development also includes
manufacturing engineer efforts whereby we examine each product for its
manufacturability, predicted reliability, expected lifetime and manufacturing
costs.
We are currently undertaking development efforts for our product lines with
emphasis on increasing reliability, integrity and performance, as well as
value-added functions. Some examples of products that we are working on are
10 Gbps Ethernet and 2.125 Gbps Fibre Channel optical subsystems. We also intend
to focus on increased product integration to enhance the price/performance
capabilities of our products. We believe that our research and development
efforts are key to our ability to maintain technical competitiveness and to
deliver innovative products that address the needs of the market. However, there
can be no assurance that our product development efforts will result in
commercially successful products, or that our products will not be rendered
obsolete by changing technology or new product announcements by other companies.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part on our proprietary
technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect our proprietary rights. To date, we have relied
primarily on proprietary processes and know-how to protect our intellectual
property. Although we have filed for several patents, some of which have issued,
we cannot assure you that any patents will issue as a result of pending patent
applications or that our issued patents will be upheld. Any infringement of our
proprietary rights could result in significant litigation costs, and any failure
to adequately protect our proprietary rights could result in our competitors
offering similar products, potentially resulting in loss of a competitive
advantage and decreased revenues. Despite our efforts to protect our proprietary
rights, existing patent, copyright, trademark and trade secret laws afford only
limited protection. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States. Attempts may be made to copy or reverse engineer aspects of our products
or to obtain and use information that we regard as proprietary. Accordingly, we
may not be able to prevent misappropriation of our technology or deter others
from developing similar technology. Furthermore, policing the unauthorized use
of our products is difficult. Litigation may be necessary in the future to
enforce our intellectual property rights or to determine the validity and scope
of the proprietary rights of others. This litigation could result in substantial
costs and diversion of resources and could significantly harm our business.
The networking industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
From time to time, third parties may assert patent, copyright, trademark and
other intellectual property rights to technologies and in various jurisdictions
that are important to our business. Any claims asserting that our products
infringe or may infringe proprietary rights of third parties, if determined
adversely to us, could signifiantly harm our business. Any claims, with or
without merit, could be time-consuming, result in costly litigation, divert the
efforts of our technical and management personnel, cause product shipment delays
or require us to enter into royalty or licensing
16
agreements, any of which could significantly harm our business. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, if at all. In addition, our agreements with our customers typically require
us to indemnify our customers from any expense or liability resulting from
claimed infringement of third party intellectual property rights. In the event a
claim against us was successful and we could not obtain a license to the
relevant technology on acceptable terms or license a substitute technology or
redesign our products to avoid infringement, our business would be significantly
harmed.
EMPLOYEES
As of April 30, 2000, we employed a total of 252 full-time employees. We
also from time to time employ part-time employees and hire contractors. Our
employees are not represented by any collective bargaining agreement, and we
have never experienced a work stoppage. We believe that our employee relations
are good.
FACTORS THAT COULD AFFECT OUR FUTURE PERFORMANCE
OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER
INFORMATION CONTAINED IN THIS REPORT, INCLUDING OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES.
OUR FUTURE REVENUES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of factors,
some of which are outside of our control. Accordingly, we believe that
period-to-period comparisons of our results of operations are not meaningful and
should not be relied upon as indications of future performance. Some of the
factors that could cause our quarterly or annual operating results to fluctuate
include market acceptance of our products and the Gigabit Ethernet and Fibre
Channel standards, product development and production, competitive pressures and
customer retention.
We may experience a delay in generating or recognizing revenues for a number
of reasons. Orders at the beginning of each quarter typically do not equal
expected revenues for that quarter and are generally cancelable at any time.
Accordingly, we depend on obtaining orders during a quarter for shipment in that
quarter to achieve our revenue objectives. Failure to ship these products by the
end of a quarter may adversely affect our operating results. Furthermore, our
customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty. Because we base our operating expenses on anticipated
revenue trends and a high percentage of our expenses are fixed in the short
term, any delay in generating or recognizing forecasted revenues could
significantly harm our business.
It is likely that in some future quarters our operating results may fall
below the expectations of securities analysts and investors. In this event, the
trading price of our common stock would significantly decline.
OUR SUCCESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE EMERGING HIGH-SPEED
LAN, SAN, CATV NETWORK AND EXTENDED NETWORK MARKETS
Our optical subsystem and network performance test system products are used
exclusively in high-speed local area networks, or LANs, storage area networks,
or SANs, cable television, or CATV, networks and extended networks. Accordingly,
widespread adoption of high-speed LANs, SANs and extended
17
networks and the adoption of digital return path technology for CATV network
applications is critical to our future success. The markets for high-speed LANs,
SANs, CATV networks and extended networks have only recently begun to develop
and are rapidly evolving. Because these markets are new and evolving, it is
difficult to predict their potential size or future growth rate. Potential
end-user customers who have invested substantial resources in their existing
data storage and management systems may be reluctant or slow to adopt a new
approach, like high-speed LANs, SANs, CATV networks or extended networks. Our
success in generating revenue in these emerging markets will depend, among other
things, on the growth of these markets. There is significant uncertainty as to
whether these markets ultimately will develop or, if they do develop, that they
will develop rapidly. If the markets for high-speed LANs, SANs, CATV networks or
extended networks fail to develop or develop more slowly than expected, or if
our products do not achieve widespread market acceptance in these markets, our
business would be significantly harmed.
WE WILL FACE CHALLENGES TO OUR BUSINESS IF OUR TARGET MARKETS ADOPT ALTERNATE
STANDARDS TO FIBRE CHANNEL AND GIGABIT ETHERNET TECHNOLOGY OR IF OUR PRODUCTS
FAIL TO COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS
We have based our product offerings principally on Fibre Channel and Gigabit
Ethernet standards and our future success is substantially dependent on the
continued market acceptance of these standards. If an alternative technology is
adopted as an industry standard within our target markets, we would have to
dedicate significant time and resources to redesign our products to meet this
new industry standard. For example, manufacturers have begun to develop
networking systems with per-port transmission speeds of 10 gigabits per second,
or Gbps, ten times faster than Gigabit Ethernet. We cannot assure you that we
will be successful in redesigning our products or developing new products to
meet this new standard or any other standard that may emerge. Our products
comprise only a part of an entire networking system, and we depend on the
companies that provide other components to support industry standards as they
evolve. The failure of these companies, many of which are significantly larger
than we are, to support these industry standards could negatively impact market
acceptance of our products. Moreover, if we introduce a product before an
industry standard has become widely accepted, we may incur significant expenses
and losses due to lack of customer demand, unusable purchased components for
these products and the diversion of our engineers from future product
development efforts. In addition, because we may develop some products prior to
the adoption of industry standards, we may develop products that do not comply
with the eventual industry standard. Our failure to develop products that comply
with industry standards would limit our ability to sell our products. Finally,
if new standards evolve, we may not be able to successfully design and
manufacture new products in a timely fashion, if at all, that meet these new
standards.
In the United States, our products must comply with various regulations and
standards defined by the Federal Communications Commission and Underwriters
Laboratories. Internationally, products that we develop also will be required to
comply with standards established by local authorities in various countries.
Failure to comply with existing or evolving standards established by regulatory
authorities or to obtain timely domestic or foreign regulatory approvals or
certificates could significantly harm our business.
WE DEPEND ON LARGE PURCHASES FROM A FEW SIGNIFICANT CUSTOMERS, AND ANY LOSS,
CANCELLATION, REDUCTION OR DELAY IN PURCHASES BY THESE CUSTOMERS COULD HARM
OUR BUSINESS
A small number of customers have accounted for a significant portion of our
revenues. Our success will depend on our continued ability to develop and manage
relationships with significant customers. Sales to Newbridge Networks
Corporation and EMC Corporation represented 24.5% and 24.0% of our revenues
during fiscal 2000 and 25.1% and 24.1% of our revenues for fiscal 1999. Although
we are attempting to expand our customer base, we expect that significant
customer concentration will continue for the foreseeable future.
The markets in which we sell our products are dominated by a relatively
small number of systems manufacturers, thereby limiting the number of our
potential customers. Our dependence on large orders
18
from a relatively small number of customers makes our relationship with each
customer critically important to our business. We cannot assure you that we will
be able to retain our largest customers, that we will be able to attract
additional customers or that our customers will be successful in selling their
products that incorporate our products. We have in the past experienced delays
and reductions in orders from some of our major customers. In addition, our
customers have in the past sought price concessions from us and will continue to
do so in the future. Further, some of our customers may in the future shift
their purchases of products from us to our competitors or to joint ventures
between these customers and our competitors. The loss of one or more of our
largest customers, any reduction or delay in sales to these customers, our
inability to successfully develop relationships with additional customers or
future price concessions that we may make could significantly harm our business.
BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS, OUR CUSTOMERS MAY
CEASE PURCHASING OUR PRODUCTS AT ANY TIME IF WE FAIL TO MEET OUR CUSTOMERS'
NEEDS
We do not have long-term contracts with our customers. As a result, our
agreements with our customers do not provide any assurance of future sales.
Accordingly:
- our customers can stop purchasing our products at any time without
penalty;
- our customers are free to purchase products from our competitors; and
- our customers are not required to make minimum purchases.
Sales are typically made pursuant to individual purchase orders, often with
extremely short lead times. If we are unable to fulfill these orders in a timely
manner, we will lose sales and customers.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE EFFECTIVELY,
WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE
The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We expect that new technologies will emerge as
competition and the need for higher and more cost effective bandwidth increases.
Our future performance will depend on the successful development, introduction
and market acceptance of new and enhanced products that address these changes as
well as current and potential customer requirements. The introduction of new and
enhanced products may cause our customers to defer or cancel orders for existing
products. We have in the past experienced delays in product development and such
delays may occur in the future. Therefore, to the extent customers defer or
cancel orders in the expectation of a new product release or there is any delay
in development or introduction of our new products or enhancements of our
products, our operating results would suffer. We also may not be able to develop
the underlying core technologies necessary to create new products and
enhancements, or to license these technologies from third parties. Product
development delays may result from numerous factors, including:
- changing product specifications and customer requirements;
- difficulties in hiring and retaining necessary technical personnel;
- difficulties in reallocating engineering resources and overcoming resource
limitations;
- difficulties with contract manufacturers;
- changing market or competitive product requirements; and
- unanticipated engineering complexities.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as
19
the accurate anticipation of technological and market trends. We cannot assure
you that we will be able to identify, develop, manufacture, market or support
new or enhanced products successfully, if at all, or on a timely basis. Further,
we cannot assure you that our new products will gain market acceptance or that
we will be able to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Any failure to respond to
technological change would significantly harm our business.
CONTINUED COMPETITION IN OUR MARKETS MAY LEAD TO A REDUCTION IN OUR PRICES,
REVENUES AND MARKET SHARE
The markets for optical subsystems and network performance test systems for
use in LANs, SANs, CATV networks and extended networks are highly competitive.
Our current competitors include a number of domestic and international
companies, many of which have substantially greater financial, technical,
marketing, distribution resources and brand name recognition than we have. We
expect that more companies, including some of our customers, will enter the
market for optical subsystems and network performance test systems. We may not
be able to compete successfully against either current or future competitors.
Increased competition could result in significant price erosion, reduced
revenue, lower margins or loss of market share, any of which would significantly
harm our business. For optical subsystems, we compete primarily with Agilent
Technologies, Inc., Infineon Technologies, International Business Machines
Corporation, Stratos Lightwave (formerly Methode Electronics), Molex Premise
Networks and Vixel Corporation. For network performance test systems, we compete
primarily with Ancot Corporation, I-Tech Corporation and Xyratex International.
Our competitors continue to introduce improved products with lower prices, and
we will have to do the same to remain competitive. In addition, some of our
current and potential customers may attempt to integrate their operations by
producing their own optical subsystems and network performance test systems or
acquiring one of our competitors, thereby eliminating the need to purchase our
products. Furthermore, larger companies in other related industries, such as the
telecommunications industry, may develop or acquire technologies and apply their
significant resources, including their distribution channels and brand name
recognition, to capture significant market share.
DECREASES IN AVERAGE SELLING PRICES OF OUR PRODUCTS MAY REDUCE GROSS MARGINS
The market for optical subsystems is characterized by declining average
selling prices resulting from factors such as increased competition, the
introduction of new products and increased unit volumes as manufacturers
continue to deploy network and storage systems. We have in the past experienced,
and in the future may experience, substantial period-to-period fluctuations in
operating results due to declining average selling prices. We anticipate that
average selling prices will decrease in the future in response to product
introductions by competitors or us, or by other factors, including price
pressures from significant customers. Therefore, we must continue to develop and
introduce on a timely basis new products that incorporate features that can be
sold at higher average selling prices. Failure to do so could cause our revenues
and gross margins to decline, which would significantly harm our business.
We may be unable to reduce the cost of our products sufficiently to enable
us to compete with others. Our cost reduction efforts may not allow us to keep
pace with competitive pricing pressures or lead to improved gross margins. In
order to remain competitive, we must continually reduce the cost of
manufacturing our products through design and engineering changes. We may not be
successful in redesigning our products or delivering our products to market in a
timely manner. We cannot assure you that any redesign will result in sufficient
cost reductions to allow us to reduce the price of our products to remain
competitive or improve our gross margin.
20
SHIFTS IN OUR PRODUCT MIX MAY RESULT IN DECLINES IN GROSS MARGINS
Our gross profit margins vary among our product families, and our gross
margins are generally higher on our network performance test systems than on our
optical subsystems. Our gross margins are generally lower for newly introduced
products and improve as unit volumes increase. Our overall gross margins have
fluctuated from period to period as a result of shifts in product mix, the
introduction of new products, decreases in average selling prices for older
products and our ability to reduce product costs. As a result of a significant
growth in sales of optical subsystem products over the past several quarters,
including sales of new products to a number of new customers, we have
experienced a sustained product shift toward a greater percentage of optical
subsystem products resulting in a decline in overall gross margins. We expect
this trend to continue at least through the first quarter ended July 31, 2000.
WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING
In April 1999, Methode, a manufacturer of electronic component devices,
filed a lawsuit against us and another manufacturer alleging that our
optoelectronic products infringe four patents held by Methode. The original
complaint sought monetary damages and injunctive relief. Methode has amended its
complaint to add another manufacturer as an additional defendant, to allege
infringement of a fifth Methode patent and to allege that we breached our
obligations under a license and supply agreement with Methode by failing to
provide Methode with unspecified information regarding new technology related to
the products licensed under the agreement. The amended complaint seeks
additional compensatory damages of at least $224.3 million plus interest for the
alleged breach of this license and supply agreement. In addition, Methode has
notified us that it intends to file another amended complaint alleging
infringement of a sixth Methode patent. We believe that we have strong defenses
against Methode's lawsuit, and we have filed a counterclaim against Methode.
Portions of our counterclaim, based on principles of state law, were dismissed
in May 2000 on grounds of federal preemption; however, our basic claims of
ownership of the patents remain subject to our pending counterclaim. On June 5,
2000, Methode transferred the patents at issue in the litigation, as well as a
number of other patents, to Stratos Lightwave LLC, and on June 21, 2000, Stratos
Lightwave LLC transferred the same patents to Stratos Lightwave, Inc. Methode
has made a motion to add Stratos Lightwave, Inc. to the lawsuit as an additional
plaintiff.
We intend to defend Methode's lawsuit and pursue our counterclaim
vigorously. However, the litigation is in the preliminary stage, and we cannot
predict its outcome with certainty. The litigation process is inherently
uncertain and we may not prevail. Patent litigation is particularly complex and
can extend for a protracted time, which can substantially increase the cost of
such litigation. In connection with the Methode litigation, we have incurred,
and expect to continue to incur, substantial legal fees and expenses. The
Methode litigation has also diverted, and is expected to continue to divert, the
efforts and attention of some of our key management and technical personnel. As
a result, our defense of this litigation, regardless of its eventual outcome,
has been, and will likely continue to be, costly and time consuming. Should the
outcome of the litigation be adverse to us, we could be required to pay
significant monetary damages to Methode and could be enjoined from selling those
of our products found to infringe Methode's patents unless and until we are able
to negotiate a license from Methode. In the event that we obtain a license from
Methode, we would likely be required to make royalty payments with respect to
sales of our products covered by the license. Any such royalty payments would
increase our cost of revenues and reduce our gross profit. If we are required to
pay significant monetary damages, are enjoined from selling any of our products
or are required to make substantial royalty payments pursuant to any such
license agreement, our business would be significantly harmed. For a more
complete discussion of this litigation matter, please refer to "Item 3.--Legal
Proceedings."
21
OUR CUSTOMERS OFTEN EVALUATE OUR PRODUCTS FOR LONG AND VARIABLE PERIODS, WHICH
CAUSES THE TIMING OF OUR REVENUES AND RESULTS OF OPERATIONS TO BE
UNPREDICTABLE
The period of time between our initial contact with a customer and the
receipt of an actual purchase order may span a year or more. During this time,
customers may perform, or require us to perform, extensive and lengthy
evaluation and testing of our products before purchasing and using them in their
equipment. Our customers do not typically share information on the duration or
magnitude of these qualification procedures. The length of these qualification
processes also may vary substantially by product and customer, and, thus, cause
our results of operations to be unpredictable. While our potential customers are
qualifying our products and before they place an order with us, we may incur
substantial sales and marketing expenses and expend significant management
effort. Even after incurring such costs we ultimately may not sell any products
to such potential customers. In addition, these qualification processes often
make it difficult to obtain new customers, as customers are reluctant to expend
the resources necessary to qualify a new supplier if they have one or more
existing qualified sources. Once our products have been qualified, our
agreements with our customers have no minimum purchase commitments. Failure of
our customers to incorporate our products into their systems would significantly
harm our business.
WE DEPEND ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR ASSEMBLY
REQUIREMENTS AND IF THESE MANUFACTURERS FAIL TO PROVIDE US WITH ADEQUATE
SUPPLIES OF HIGH-QUALITY PRODUCTS, OUR COMPETITIVE POSITION, REPUTATION AND
BUSINESS COULD BE HARMED
We currently rely on four contract manufacturers for substantially all of
our assembly requirements. We do not have long term contracts with any of these
manufacturers. We have experienced delays in product shipments from contract
manufacturers in the past, which in turn delayed product shipments to our
customers. We may in the future experience similar delays or other problems,
such as inferior quality and insufficient quantity of product, any of which
could significantly harm our business. We cannot assure you that we will be able
to effectively manage our contract manufacturers or that these manufacturers
will meet our future requirements for timely delivery of products of sufficient
quality and quantity. We intend to regularly introduce new products and product
enhancements, which will require that we rapidly achieve volume production by
coordinating our efforts with those of our suppliers and contract manufacturers.
The inability of our contract manufacturers to provide us with adequate supplies
of high-quality products or the loss of any of our contract manufacturers would
cause a delay in our ability to fulfill orders while we obtain a replacement
manufacturer and would significantly harm our business.
If the demand for our products grows, we will need to increase our material
purchases, contract manufacturing capacity and internal test and quality
assurance functions. Any disruptions in product flow could limit our revenue,
adversely affect our competitive position and reputation and result in
additional costs or cancellation of orders under agreements with our customers.
In addition, we have recently begun outsourcing a portion of our contract
manufacturing internationally, and we intend to increase the use of
international contract manufacturers over time. Additional risks associated with
international contract manufacturing include:
- unexpected changes in regulatory requirements;
- legal uncertainties regarding liability, tariffs and other trade barriers;
- inadequate protection of intellectual property in some countries;
- greater incidence of shipping delays;
- limited oversight of manufacturing operations;
- potential political and economic instability; and
22
- currency fluctuations.
Any of these factors could significantly impair our ability to source our
contract manufacturing requirements internationally.
WE MAY LOSE SALES IF OUR SUPPLIERS FAIL TO MEET OUR NEEDS
We currently purchase several key components used in the manufacture of our
products from single or limited sources. We depend on these sources to meet our
needs. Moreover, we depend on the quality of the products supplied to us over
which we have limited control. We have encountered shortages and delays in
obtaining components in the past and expect to encounter shortages and delays in
the future. If we cannot supply products due to a lack of components, or are
unable to redesign products with other components in a timely manner, our
business will be significantly harmed. We have no long-term or short-term
contracts for any of our components. As a result, a supplier can discontinue
supplying components to us without penalty. If a supplier discontinued supplying
a component, our business may be harmed by the resulting product manufacturing
and delivery delays.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for particular
components. If we overestimate our component requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory, which could interrupt our
manufacturing and delay delivery of our products to our customers. Any of these
occurrences would significantly harm our business.
WE ARE DEPENDENT ON WIDESPREAD MARKET ACCEPTANCE OF TWO PRODUCT FAMILIES, AND
OUR REVENUES WILL DECLINE IF THE MARKET DOES NOT CONTINUE TO ACCEPT EITHER OF
THESE PRODUCT FAMILIES
We currently derive substantially all of our revenue from sales of our
optical subsystems and network performance test systems. We expect that revenue
from these products will continue to account for substantially all of our
revenue for the foreseeable future. Accordingly, widespread acceptance of these
products is critical to our future success. If the market does not continue to
accept either our optical subsystems or our network performance test systems,
our revenues will decline significantly. Factors that may affect the market
acceptance of our products include the continued growth of the markets for LANs,
SANs, CATV networks and extended versions of these networks and, in particular,
Gigabit Ethernet and Fibre Channel-based technologies as well as the
performance, price and total cost of ownership of our products and the
availability, functionality and price of competing products and technologies.
Many of these factors are beyond our control. In addition, in order to achieve
widespread market acceptance, we must differentiate ourselves from the
competition through product offerings and brand name recognition. We cannot
assure you that we will be successful in making this differentiation or
achieving widespread acceptance of our products. Failure of our existing or
future products to maintain and achieve widespread levels of market acceptance
will significantly impair our revenue growth.
BECAUSE OF INTENSE COMPETITION FOR TECHNICAL PERSONNEL, WE MAY NOT BE ABLE TO
RECRUIT OR RETAIN NECESSARY PERSONNEL
We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, technical, sales and marketing,
finance and manufacturing personnel. In particular, we will need to increase the
number of technical staff members with experience in high-speed networking
applications as we further develop our product lines. Competition for these
highly skilled employees in our industry is intense. Our failure to attract and
retain these qualified employees could significantly harm our business. The loss
of the services of any of our qualified employees, the inability to attract or
retain qualified personnel in the future or delays in hiring required personnel
could hinder the development and
23
introduction of and negatively impact our ability to sell our products. In
addition, employees may leave our company and subsequently compete against us.
Moreover, companies in our industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices. We have been subject to claims of this type and may be subject
to such claims in the future as we seek to hire qualified personnel. Some of
these claims may result in material litigation. We could incur substantial costs
in defending ourselves against these claims, regardless of their merits.
CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS
TO UPGRADE OUR INFRASTRUCTURE
We have experienced a period of rapid growth, which has placed a significant
strain on our resources. Unless we manage our growth effectively, we may make
mistakes in operating our business, such as inaccurate sales forecasting,
material planning and financial reporting, which may result in fluctuations in
our operating results and cause the price of our stock to decline. We plan to
continue to expand our operations significantly. This anticipated growth will
continue to place a significant strain on our management and operational
resources. In order to manage our growth effectively, we must implement and
improve our operational systems, procedures and controls on a timely basis. If
we cannot manage growth effectively, our business could be significantly harmed.
OUR PRODUCTS MAY CONTAIN DEFECTS THAT MAY CAUSE US TO INCUR SIGNIFICANT COSTS,
DIVERT OUR ATTENTION FROM PRODUCT DEVELOPMENT EFFORTS AND RESULT IN A LOSS OF
CUSTOMERS
Networking products frequently contain undetected software or hardware
defects when first introduced or as new versions are released. Our products are
complex and defects may be found from time to time. In addition, our products
are often embedded in or deployed in conjunction with our customers' products
which incorporate a variety of components produced by third parties. As a
result, when problems occur, it may be difficult to identify the source of the
problem. These problems may cause us to incur significant damages or warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relation problems or
loss of customers, all of which would harm our business.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
BUSINESS
Our success and ability to compete is dependent in part on our proprietary
technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect our proprietary rights. To date, we have relied
primarily on proprietary processes and know-how to protect our intellectual
property. Although we have filed for several patents, some of which have issued,
we cannot assure you that any patents will issue as a result of pending patent
applications or that our issued patents will be upheld. Any infringement of our
proprietary rights could result in significant litigation costs, and any failure
to adequately protect our proprietary rights could result in our competitors
offering similar products, potentially resulting in loss of a competitive
advantage and decreased revenues. Despite our efforts to protect our proprietary
rights, existing patent, copyright, trademark and trade secret laws afford only
limited protection. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States. Attempts may be made to copy or reverse engineer aspects of our products
or to obtain and use information that we regard as proprietary. Accordingly, we
may not be able to prevent misappropriation of our technology or deter others
from developing similar technology. Furthermore, policing the unauthorized use
of our products is difficult. Litigation may be necessary in the future to
enforce our intellectual property rights or to determine the validity and scope
of the proprietary rights of others. This litigation could result in substantial
costs and diversion of resources and could significantly harm our business.
24
CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS
The networking industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
We are currently involved in a patent infringement lawsuit. For a more detailed
discussion of this lawsuit, please refer to "--We are subject to a pending legal
proceeding." In addition, from time to time, other parties may assert patent,
copyright, trademark and other intellectual property rights to technologies and
in various jurisdictions that are important to our business. Any claims
asserting that our products infringe or may infringe proprietary rights of third
parties, if determined adversely to us, could significantly harm our business.
Any claims, with or without merit, could be time-consuming, result in costly
litigation, divert the efforts of our technical and management personnel, cause
product shipment delays or require us to enter into royalty or licensing
agreements, any of which could significantly harm our business. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, if at all. In addition, our agreements with our customers typically require
us to indemnify our customers from any expense or liability resulting from
claimed infringement of third party intellectual property rights. In the event a
claim against us was successful and we could not obtain a license to the
relevant technology on acceptable terms or license a substitute technology or
redesign our products to avoid infringement, our business would be significantly
harmed.
IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES OPERATION AND RESELLER DISTRIBUTION
CHANNELS OR SUCCESSFULLY MANAGE OUR EXPANDED SALES ORGANIZATION, OUR ABILITY
TO INCREASE OUR REVENUES WILL BE HARMED
Historically, we have relied primarily on a limited direct sales
organization, supported by third party manufacturers' representatives, to sell
our products domestically and on indirect distribution channels to sell our
products internationally. Our distribution strategy focuses primarily on
developing and expanding our direct sales organization in North America and our
indirect distribution channels internationally. We may not be able to
successfully expand our direct sales organization and the cost of any expansion
may exceed the revenue generated. To the extent that we are successful in
expanding our direct sales organization, we cannot assure you that we will be
able to compete successfully against the significantly larger and well-funded
sales and marketing operations of many of our current or potential competitors.
In addition, if we fail to develop relationships with significant international
resellers or domestic manufacturers' representatives, of if these resellers or
representatives are not successful in their sales or marketing efforts, sales of
our products may decrease and our business would be significantly harmed. We
have granted exclusive rights to substantially all of our resellers to sell our
product and to our representatives to market our products in their specified
territories. Our resellers and representatives may not market our products
effectively or continue to devote the resources necessary to provide us with
effective sales, marketing and technical support. Our inability to effectively
manage the expansion of our domestic sales and support staff or maintain
existing or establish new relationships with domestic manufacturer
representatives and international resellers would harm our business.
ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND HARM OUR OPERATING RESULTS
We expect to review opportunities to buy other businesses or technologies
that would complement our current products, expand the breadth of our markets or
enhance our technical capabilities, or that may otherwise offer growth
opportunities. We may buy businesses, products or technologies in the future. If
we make any future acquisitions, we could issue stock that would dilute existing
stockholders' percentage ownership, incur substantial debt or assume contingent
liabilities. Our experience in acquiring other business and technologies is
limited. Potential acquisitions also involve numerous risks, including:
- problems assimilating the purchased operations, technologies or products;
- unanticipated costs associated with the acquisition;
25
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of purchased organizations.
We cannot assure you that we would be successful in overcoming problems
encountered in connection with such acquisitions, and our inability to do so
could significantly harm our business.
OUR EXECUTIVE OFFICERS AND DIRECTORS AND ENTITIES AFFILIATED WITH THEM OWN A
LARGE PERCENTAGE OF OUR VOTING STOCK, WHICH WILL ALLOW THEM TO CONTROL ALL
MATTERS REQUIRING STOCKHOLDER APPROVAL
Our executive officers, directors and 5% or greater stockholders
beneficially own 86,076,120 shares or approximately 53.9% of the outstanding
shares of our common stock. These stockholders, acting together, would be able
to control all matters requiring approval by stockholders, including the
election or removal of directors and the approval of mergers or other business
combination transactions. This concentration of ownership could have the effect
of delaying or preventing a change in our control or otherwise discouraging a
potential acquirer from attempting to obtain control of us, which in turn could
have an adverse effect on the market price of our common stock or prevent our
stockholders from realizing a premium over the market price for their shares of
common stock. See "Item 12--Security Ownership of Certain Beneficial Owners and
Management."
IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL OPERATIONS OR MANAGE THEM
EFFECTIVELY, OUR BUSINESS WOULD BE SIGNIFICANTLY HARMED
Historically, substantially all of our sales have been made to customers in
North America. To address expanding international markets, we have recently
established relationships with distributors in Japan, the United Kingdom,
Israel, Germany and Korea. The growth of our distribution channels outside of
North America will be subject to a number of risks and uncertainties, including:
- the difficulties and costs of obtaining regulatory approvals for our
products;
- unexpected changes in regulatory requirements;
- legal uncertainties regarding liability, tariffs and other trade barriers;
- inadequate protection of intellectual property in some countries;
- increased difficulty in collecting delinquent or unpaid accounts;
- potentially adverse tax consequences;
- adoption of different local standards; and
- potential political and economic instability.
Any of these factors could significantly harm our existing international
operations and business or significantly impair our ability to expand into
international markets.
Our international sales currently are U.S. dollar-denominated. As a result,
an increase in the value of the U.S. dollar relative to foreign currencies could
make our products less competitive in international markets. In the future, we
may elect to invoice some of our international customers in local currency.
Doing so will subject us to fluctuations in exchange rates between the U.S.
dollar and the particular local currency.
26
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER, EVEN IF SUCH A TRANSACTION WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS
Some provisions of our Certificate of Incorporation and Bylaws, as well as
provisions of Delaware law, may discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable. These provisions include:
- authorizing the board to issue additional preferred stock;
- prohibiting cumulative voting in the election of directors;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder actions by written consent;
- creating a classified Board of Directors pursuant to which our directors
are elected for staggered three-year terms; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
OUR HEADQUARTERS AND MOST OF OUR CONTRACT MANUFACTURERS ARE LOCATED IN NORTHERN
CALIFORNIA WHERE NATURAL DISASTERS MAY OCCUR
Currently, our corporate headquarters and most of our contract manufacturers
are located in Northern California. Northern California historically has been
vulnerable to natural disasters and other risks, such as earthquakes, fires and
floods, which at times have disrupted the local economy and posed physical risks
to our and our manufacturers' property. We presently do not have redundant,
multiple site capacity in the event of a natural disaster. In the event of such
disaster, our business would suffer.
OUR STOCK PRICE IS VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT OR
ABOVE YOUR PURCHASE PRICE
The trading price of our common stock has fluctuated substantially since our
initial public offering in November 1999. The stock market in general, and the
Nasdaq National Market and stocks of technology companies in particular, have
experienced extreme price and volume fluctuations. This volatility is often
unrelated or disproportionate to the operating performance of these companies.
Broad market and industry factors may adversely affect the market price of our
common stock, regardless of our actual operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class-action litigation has often been initiated against these
companies. This litigation, if initiated, could result in substantial costs and
a diversion of management's attention and resources, which would significantly
harm our business.
ITEM 2. PROPERTIES
Our facility is located in Sunnyvale, California. We lease approximately
75,000 square feet for our corporate headquarters which includes research and
development, sales and marketing, general and administrative and manufacturing
operations. This lease expires in July 2006. We currently sublease approximately
15,000 square feet of this facility. We believe our current facilities will be
adequate to meet our needs through fiscal 2001.
In addition, we continue to lease our prior facility in Mountain View,
California under a lease expiring in May 2002. We intend to continue subleasing
this 20,000 square foot facility through the expiration of the lease term.
27
ITEM 3. LEGAL PROCEEDINGS
In April 1999, Methode, a manufacturer of electronic component devices,
filed a lawsuit against us and another manufacturer alleging that our
optoelectronic products infringe four patents held by Methode. The original
complaint sought monetary damages and injunctive relief. Methode has amended its
complaint to add another manufacturer as an additional defendant, to allege
infringement of a fifth Methode patent and to allege that we breached our
obligations under a license and supply agreement with Methode by failing to
provide Methode with unspecified information regarding new technology related to
the products licensed under the agreement. The amended complaint seeks
additional compensatory damages of at least $224.3 million plus interest for the
alleged breach of this license and supply agreement. In addition, Methode has
notified us that it intends to file another amended complaint alleging
infringement of a sixth Methode patent. We believe that we have strong defenses
against Methode's lawsuit, and we have filed a counterclaim against Methode.
Portions of our counterclaim, based on principles of state law, were dismissed
in May 2000 on grounds of federal preemption; however, our basic claims of
ownership of the patents remain subject to our pending counterclaim. On June 5,
2000, Methode transferred the patents at issue in the litigation, as well as a
number of other patents, to Stratos Lightwave LLC, and on June 21, 2000, Stratos
Lightwave LLC transferred the same patents to Stratos Lightwave, Inc. Methode
has made a motion to add Stratos Lightwave, Inc. to the lawsuit as an additional
plaintiff.
We intend to defend Methode's lawsuit and pursue our counterclaim
vigorously. However, the litigation is in the preliminary stage, and we cannot
predict its outcome with certainty. The litigation process is inherently
uncertain and we may not prevail. Patent litigation is particularly complex and
can extend for a protracted time, which can substantially increase the cost of
such litigation. In connection with the Methode litigation, we have incurred,
and expect to continue to incur, substantial legal fees and expenses. The
Methode litigation has also diverted, and is expected to continue to divert, the
efforts and attention of some of our key management and technical personnel. As
a result, our defense of this litigation, regardless of its eventual outcome,
has been, and will likely continue to be, costly and time consuming. Should the
outcome of the litigation be adverse to us, we could be required to pay
significant monetary damages to Methode and could be enjoined from selling those
of our products found to infringe Methode's patents unless and until we are able
to negotiate a license from Methode. In the event that we obtain a license from
Methode, we would likely be required to make royalty payments with respect to
sales of our products covered by the license. Any such royalty payments would
increase our cost of revenues and reduce our gross profit. If we are required to
pay significant monetary damages, are enjoined from selling any of our products
or are required to make substantial royalty payments pursuant to any such
license agreement, our business would be significantly harmed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the quarter ended April 30, 2000.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since our initial public offering on November 11, 1999, our common stock has
traded on the Nasdaq National Market under the symbol "FNSR." The following
table sets forth the range of high and low closing sales prices of our common
stock for the periods indicated, as adjusted for a three-for-one stock split
effective in April 2000:
FISCAL YEAR ENDING APRIL 30, 2000 HIGH LOW
- --------------------------------- -------- --------
Third Quarter (from November 11, 1999 through January 30,
2000)................................................... $42.333 $20.750
Fourth Quarter (through April 30, 2000)................... $61.729 $19.167
The closing price of the Company's Common Stock on June 30, 2000 was
$25.938. The approximate number of stockholders of record on June 30, 2000 was
242.
We have never declared or paid dividends on our Common Stock and currently
do not intend to pay dividends in the foreseeable future so that we may reinvest
our earnings in the development of our business. The payment of dividends in the
future will be at the discretion of the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere in this report. The statement of operations data set forth below for
the years ended April 30, 1998, 1999 and 2000 and the balance sheet data as of
April 30, 1999 and 2000 are derived from, and are qualified by reference to, our
audited financial statements included elsewhere in this report. The balance
sheet data as of April 30, 1998 and 1997 are derived from audited financial
statements not included in this prospectus. The statement of operations data set
forth below for the year ended April 30,
29
1996 and the balance sheet data as of April 30, 1996 are derived from unaudited
financial statements not included in this report.
FISCAL YEAR ENDED APRIL 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 5,660 $ 8,457 $ 22,067 $ 35,471 $ 67,147
Cost of revenues........................ 3,122 3,438 8,705 15,514 34,190
-------- -------- -------- -------- --------
Gross profit............................ 2,538 5,019 13,362 19,957 32,957
-------- -------- -------- -------- --------
Operating expenses:
Research and development.............. 1,442 2,536 3,806 7,864 13,806
Sales and marketing................... 116 645 1,629 4,145 7,122
General and administrative............ 280 464 833 2,299 3,516
Amortization of deferred stock
compensation........................ -- -- -- 428 5,530
-------- -------- -------- -------- --------
Total operating expenses............ 1,838 3,645 6,268 14,736 29,974
-------- -------- -------- -------- --------
Income from operations.................. 700 1,374 7,094 5,221 2,983
Interest income (expense), net.......... 10 13 5 (275) 3,252
Other income (expense), net............. -- -- (25) (28) (99)
-------- -------- -------- -------- --------
Income before income taxes.............. 710 1,387 7,074 4,918 6,136
Provision for income taxes.............. 247 440 2,715 1,873 3,255
-------- -------- -------- -------- --------
Net income.............................. $ 463 $ 947 $ 4,359 $ 3,045 $ 2,881
======== ======== ======== ======== ========
Net income per share:
Basic................................... $ 0.00 $ 0.01 $ 0.03 $ 0.03 $ 0.03
======== ======== ======== ======== ========
Diluted................................. $ 0.00 $ 0.01 $ 0.03 $ 0.02 $ 0.02
======== ======== ======== ======== ========
Shares used in per share calculations:
Basic................................... 132,000 132,000 131,259 110,580 113,930
======== ======== ======== ======== ========
Diluted................................. 132,000 132,000 131,259 134,814 144,102
======== ======== ======== ======== ========
APRIL 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $ 772 $ 422 $ 722 $ 5,044 $320,735
Working capital............................... 856 1,685 5,730 13,011 342,711
Total assets.................................. 1,948 2,987 7,761 20,955 365,042
Long-term portion of note payable and capital
lease obligations, and other long-term
liabilities................................. -- -- 416 11,032 524
Convertible redeemable preferred stock........ -- -- -- 26,260 --
Total stockholders' equity (deficit).......... 1,141 2,088 6,447 (21,503) 352,422
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ substantially from
those anticipated in these forward-looking statements as a
30
result of many factors, including those set forth under "Item 1. BUSINESS--Risk
Factors That Could Affect Our Future Performance". The following discussion
should be read together with our financial statements and related notes thereto
included elsewhere in this document.
OVERVIEW
We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over local area
networks, or LANs, and storage area networks, or SANs. Additionally, we have
recently developed products for digitizing the return path of a CATV network and
for aggregating data traffic in extended networks. We are focused on providing
high-performance, reliable, value-added optical subsystems for networking and
storage equipment manufacturers that develop and market systems based on Gigabit
Ethernet and Fibre Channel protocols. Our line of optical subsystems supports a
wide range of network applications, transmission speeds, distances and mediums.
We also provide unique network performance test systems which assist networking
and storage equipment manufacturers in the design of reliable, high-speed
networking systems and the testing and monitoring of the performance of these
systems.
Finisar was founded in 1988. We funded our initial product development
efforts largely through revenues derived under research and development
contracts. After shipping our first products in 1991, we continued to finance
our operations principally through internal cash flow and periodic bank
borrowings until November 1998. At that time we raised $5.6 million of net
proceeds from the sale of equity securities and bank borrowings to fund the
continued growth and development of our business. In November 1999, we received
net proceeds of $151.0 million from the initial public offering of shares of our
common stock, and in April 2000 we received an additional $191 million from an
additional public offering of shares of our common stock.
Our revenues are derived principally from sales of our optical subsystems
and network performance test systems to networking and storage systems
manufacturers. Sales to our two largest customers accounted for 49.2% of our
revenues for the fiscal year ended April 30, 1999 and 48.5% of our revenues for
the fiscal year ended April 30, 2000. Although we are attempting to expand our
customer base, we expect that significant customer concentration will continue
for the foreseeable future.
We sell our products through our direct sales force, with the support of our
manufacturers' representatives, directly to domestic customers and indirectly
through distribution channels to international customers. We recognize revenues
at the time of shipment. The evaluation and qualification cycle prior to the
initial sale for our optical subsystems may span a year or more, while the sales
cycle for our test systems is usually considerably shorter. Historically,
substantially all of our sales have been made to customers in North America. To
address expanding international markets, we have recently established
relationships with distributors in Japan, the United Kingdom, Israel, Germany,
and Korea.
The market for optical subsystems is characterized by declining average
selling prices resulting from factors such as increased competition, the
introduction of new products and a rapid growth in unit volumes as manufacturers
continue to deploy network and storage systems. We anticipate that our average
selling prices will continue to decrease in future periods, although the timing
and amount of these decreases cannot be predicted with any certainty.
Our cost of revenues consists of materials, salaries and related expenses
for manufacturing personnel, manufacturing overhead and warranty expense. We
outsource the majority of our assembly operations, and we conduct manufacturing
engineering, supply chain management, quality assurance and documentation
control at our facility in Sunnyvale, California. Accordingly, a significant
portion of our cost of revenues consists of payments to our contract
manufacturers. There can be no assurance that we will be able to reduce our cost
of revenues to keep pace with anticipated decreases in average selling prices.
31
Our gross profit margins vary among our product families, and are generally
higher on our network performance test systems than on our optical subsystems.
Our gross margins are generally lower for newly introduced products and improve
as unit volumes increase. Our overall gross margins have fluctuated from period
to period as a result of shifts in product mix, the introduction of new
products, decreases in average selling prices for older products and our ability
to reduce product costs. As a result of a significant growth in sales of optical
subsystem products over the past several quarters, including sales of new
products to a number of new customers, we have experienced a sustained product
shift toward a greater percentage of optical subsystem products resulting in a
decline in overall gross margins. We expect this trend to continue at least
through the quarter ended July 31, 2000.
Research and development expenses consist primarily of salaries and related
expenses for design engineers and other technical personnel, the cost of
developing prototypes and fees paid to consultants. We charge all research and
development expenses to operations as incurred. We believe that continued
investment in research and development is critical to our long-term success.
Accordingly, we expect that our research and development expenses will increase
in future periods.
Sales and marketing expenses consist primarily of commissions paid to
manufacturers' representatives, salaries and related expenses for personnel
engaged in sales, marketing and field support activities and other costs
associated with the promotion of our products. We intend to pursue aggressive
selling and marketing campaigns and to expand our direct sales organization. We
therefore expect that our sales and marketing expenses will increase in future
periods.
General and administrative expenses consist primarily of salaries and
related expenses for administrative, finance and human resources personnel,
professional fees and other corporate expenses. We expect that, in support of
our continued growth and our operations as a public company, general and
administrative expenses will continue to increase for the foreseeable future.
General and administrative expenses are also likely to be affected in future
periods by significant legal fees and expenses incurred in connection with
pending patent litigation.
In connection with the grant of stock options to employees between
August 1, 1998 and October 15, 1999 we recorded deferred stock compensation of
$2.4 million in fiscal 1999, and $13.0 million in fiscal 2000, representing the
difference between the deemed value of our common stock for accounting purposes
and the option exercise price of these options at the date of grant. Deferred
stock compensation is presented as a reduction of stockholder's equity, with
accelerated amortization recorded over the vesting period which is typically
five years. We amortized $428,000 and $5.5 million of deferred compensation
during fiscal 1999 and fiscal 2000. We expect to record additional amortization
expense relating to deferred stock compensation approximately as follows:
$4.4 million during fiscal 2001, $2.7 million during fiscal 2002, $1.5 million
during fiscal 2003 and $850,000 thereafter. The amount of deferred stock
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
32
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
FISCAL YEAR ENDED
APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues............................................ 39.4 43.7 50.9
----- ----- -----
Gross profit................................................ 60.6 56.3 49.1
----- ----- -----
Operating expenses:
Research and development.................................. 17.2 22.2 20.6
Sales and marketing....................................... 7.4 11.7 10.6
General and administrative................................ .8 .5 5.3
Amortization of deferred stock compensation............... -- 1.1 8.2
----- ----- -----
Total operating expenses................................ 28.4 41.5 44.7
----- ----- -----
Income from operations...................................... 32.2 14.8 4.4
Interest income (expense), net.............................. 0.0 (0.8) 4.8
Other income (expense), net................................. (0.1) (0.1) (0.1)
----- ----- -----
Income before income taxes.................................. 32.1 13.9 9.1
Provision for income taxes.................................. 12.3 5.3 4.8
----- ----- -----
Net income.................................................. 19.8% 8.6% 4.3%
===== ===== =====
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 2000 AND 1999
REVENUES. Revenues increased 89% from $35.5 million in fiscal 1999 to
$67.1 million in fiscal 2000. This reflects a 120% increase in sales of optical
subsystems from $21.3 million in fiscal 1999 to $46.8 million in fiscal 2000 and
a 43% increase in sales of test systems from $14.2 million in fiscal 1999 to
$20.3 million in fiscal 2000. Sales of optical subsystems and test systems
represented 69.7% and 30.3%, respectively, of total revenues in fiscal 2000, and
59.9% and 40.1%, respectively, in fiscal 1999. Sales to our two principal
customers during the last two fiscal years were as follows:
FISCAL YEAR FISCAL YEAR
ENDED APRIL 30, ENDED APRIL 30,
-------------------------- -------------------------
1999 2000 1999 2000
------------ ----------- ----------- -----------
SALES (IN MILLIONS) PERCENTAGE OF REVENUES
Newbridge Networks..................... $8.9 $16.5 25.1% 24.5%
EMC.................................... $8.5 $16.1 24.1% 24.0%
GROSS PROFIT. Gross profit increased from $20.0 million in fiscal 1999 to
$33.0 million in fiscal 2000. As a percentage of revenues, gross profit
decreased from 56.3% in fiscal 1999 to 49.1% in fiscal 2000. The lower gross
margin reflects lower average selling prices for optical subsystems as a result
of increased shipment levels and a higher percentage of total revenues from the
sale of optical subsystems (69.7% in fiscal 2000 and 59.9% in fiscal 1999) which
generally have lower gross margins than test systems.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 76% from $7.9 million in fiscal 1999 to $13.8 million in fiscal 2000.
This increase was primarily related to higher compensation expense resulting
from higher manpower levels and increased expenditures for materials purchased
for product development programs. Research and development expenses as a
percentage of revenues decreased from 22.2% in fiscal 1999 to 20.6% in fiscal
2000.
33
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 72%
from $4.1 million in fiscal 1999 to $7.1 million in fiscal 2000. This increase
was primarily due to increases in commissions paid to manufacturers'
representatives as a result of increased sales and increases in the number of
direct sales and marketing personnel. Sales and marketing expenses as a percent
of revenues decreased from 11.7% in fiscal 1999 to 10.6% in fiscal 2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 53% from $2.3 million in fiscal 1999 to $3.5 million in fiscal 2000.
This increase was related to higher compensation expense resulting from higher
manpower levels and increased expenses for professional services, primarily
legal and accounting services. General and administrative expenses decreased as
a percent of revenues from 6.5% in fiscal 1999 to 5.3% in fiscal 2000.
INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense, of
$3.3 million in fiscal 2000, compares to a net interest expense of $275,000 in
the prior year. The increase in interest income was the result of an increase in
cash balances resulting from the Company's initial public offering in November
1999 and an additional public offering in April 2000. Interest expense in fiscal
1999 is related primarily to borrowings of $11.0 million commencing in November
of 1998 which were repaid from the proceeds of the public offering in November
1999.
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$1.9 million in fiscal 1999 to $3.3 million in fiscal 2000 reflecting an
effective tax rate of 38.1% and 53.0%, respectively. Excluding the nondeductible
charge for the amortization of deferred compensation in both years, the
effective tax rate was 35.0% in fiscal 1999 and 27.9% in fiscal 2000. The
decrease reflects in part the nontaxable nature of a portion of interest income
earned during fiscal 2000. The effective tax rate differs from the statutory
rate primarily due to state taxes offset by research and development credits and
projected benefits from a foreign sales corporation. See Note 8 to our financial
statements.
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1999 AND 1998
REVENUES. Revenues increased 61% from $22.1 million in fiscal 1998 to
$35.5 million in fiscal 1999. The increase was primarily due to an increase of
166% in sales of test systems from $5.4 million in fiscal 1998 to $14.2 million
in fiscal 1999. Sales of test systems as a percentage of total revenues
increased from 24.2% in fiscal 1998 to 40.1% of revenues in fiscal 1999. Sales
of optical subsystems grew by 27% from $16.7 million in fiscal 1998 to
$21.3 million in fiscal 1999. Sales of optical subsystems as a percentage of
total revenues decreased from 75.8% in fiscal 1998 to 59.9% in fiscal 1999.
Sales to our two principal customers during fiscal 1998 and 1999 were as
follows:
FISCAL YEAR FISCAL YEAR
ENDED APRIL 30, ENDED APRIL 30,
------------------------- -------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
SALES (IN MILLIONS) PERCENTAGE OF REVENUES
Newbridge Networks..................... $9.7 $8.9 43.9% 25.1%
EMC.................................... $3.2 $8.5 14.6% 24.1%
GROSS PROFIT. Gross profit increased from $13.4 million in fiscal 1998 to
$20.0 million in fiscal 1999. Gross profit as a percentage of total revenues
decreased from 60.6% in fiscal 1998 to 56.3% in fiscal 1999 reflecting startup
costs associated with the introduction of new optical subsystem products and
lower average selling prices for some optical subsystems which more than offset
the shift in product mix toward a greater percentage of higher-margin test
system sales.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased from $3.8 million in fiscal 1998 to $7.9 million in fiscal 1999. The
107% increase from fiscal 1998 to fiscal 1999 was primarily related to an
increase in the number of research and development personnel and increased
expenditures
34
related to prototype development. Research and development expenses increased as
a percentage of revenues from 17.2% in fiscal 1998 to 22.2% in fiscal 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$1.6 million in fiscal 1998 to $4.1 million in fiscal 1999. The 154% increase
was primarily due to increases in commissions paid to manufacturers'
representatives as a result of increased sales, particularly for test systems,
and increases in the number of direct sales and marketing personnel. Sales and
marketing expenses as a percentage of revenues increased from 7.4% in fiscal
1998 to 11.7% in fiscal 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $833,000 in fiscal 1998 to $2.3 million in fiscal 1999. The 176%
increase was primarily related to an expense of $397,000 in connection with the
relocation of our primary operations from Mountain View, California to our new
facility in Sunnyvale, California as well as increased expenditures for legal
and other professional services. As a result of these additional charges,
general and administrative expenses increased as a percentage of revenues from
3.8% in fiscal 1998 to 6.5% in fiscal 1999.
INTEREST INCOME (EXPENSE), NET. Interest income of $5,000 in fiscal 1998
compared to interest expense of $275,000 in fiscal 1999. The additional interest
expense is due to borrowings of $11.0 million under a term loan beginning in
November 1998.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased from
$2.7 million in fiscal 1998 to $1.9 million in fiscal 1999 reflecting an
effective tax rates of 38.4% and 38.1%, respectively. The annual effective tax
rates differ from the statutory rate primarily due to state taxes, offset by
research and development tax credits. See Note 8 to our financial statements.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly statements of operations
data for the eight fiscal quarters ended April 30, 2000, and such data expressed
as a percentage of revenues. This information reflects all normal non-recurring
adjustments that we consider necessary for a fair presentation of such
35
information in accordance with generally accepted accounting principles. The
results for any quarter are not necessarily indicative of results that may be
expected for any future period.
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30,
1998 1998 1999 1999 1999 1999 2000 2000
--------- --------- --------- ---------- --------- --------- --------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues:
Optical subsystems............ $3,666 $4,566 $5,270 $7,752 $9,480 $10,828 $10,916 $15,550
Test systems.................. 3,128 2,836 3,715 4,538 4,399 5,249 5,594 5,131
------ ------ ------ ------ ------ ------- ------- -------
Total revenues................ 6,794 7,402 8,985 12,290 13,879 16,077 16,510 20,681
Cost of revenues.............. 2,666 3,058 4,171 5,619 6,252 7,878 8,122 11,938
------ ------ ------ ------ ------ ------- ------- -------
Gross profit.................. 4,128 4,344 4,814 6,671 7,627 8,199 8,388 8,743
------ ------ ------ ------ ------ ------- ------- -------
Operating expenses:
Research and development.... 1,394 1,764 1,890 2,816 2,840 3,333 3,878 3,755
Sales and marketing......... 833 871 1,160 1,281 1,542 1,895 1,643 2,042
General and
administrative............ 298 421 484 1,096 759 864 974 919
Amortization of deferred
stock compensation........ -- 99 120 209 287 1,723 1,781 1739
------ ------ ------ ------ ------ ------- ------- -------
Total operating expenses.... 2,525 3,155 3,654 5,402 5,428 7,815 8,276 8,455
------ ------ ------ ------ ------ ------- ------- -------
Income from operations........ 1,603 1,189 1,160 1,269 2,199 384 112 288
Interest income (expense),
net......................... (7) 17 141) (144) (89) (84) 1,342 2,083
Other income (expense), net... 25 -- (21) (32) (28) (28) (16) (27)
------ ------ ------ ------ ------ ------- ------- -------
Income before income taxes.... 1,621 1,206 998 1,093 2,082 272 1,438 2,344
Provision for income taxes.... 568 458 384 463 829 659 1,095 672
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)............. $1,053 $ 748 $ 614 $ 630 $1,253 $ (387) $ 343 $ 1,672
====== ====== ====== ====== ====== ======= ======= =======
AS A PERCENTAGE OF REVENUES:
Revenues:
Optical subsystems............ 54.0% 61.7% 58.7% 63.1% 68.3% 67.4% 66.1% 75.2%
Test systems.................. 46.0 38.3 41.3 36.9 31.7 32.6 33.9 24.8
------ ------ ------ ------ ------ ------- ------- -------
Total revenues................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues.............. 39.2 41.3 46.4 45.7 45.0 49.0 49.2 57.7
------ ------ ------ ------ ------ ------- ------- -------
Gross profit.................. 60.8 58.7 53.6 54.3 55.0 51.0 50.8 42.3
------ ------ ------ ------ ------ ------- ------- -------
Operating expenses:
Research and development.... 20.5 23.8 21.1 22.9 20.5 20.7 23.5 18.2
Sales and marketing......... 12.3 11.8 12.9 10.4 11.1 11.8 9.9 9.9
General and
administrative............ 4.4 5.7 5.4 8.9 5.5 5.4 5.9 4.4
Amortization of deferred
compensation.............. -- 1.3 1.3 1.7 2.1 10.7 10.8 8.4
------ ------ ------ ------ ------ ------- ------- -------
Total operating expenses.... 37.2 42.6 40.7 43.9 39.2 48.6 50.1 40.9
------ ------ ------ ------ ------ ------- ------- -------
Income from operations........ 23.6 16.1 12.9 10.4 15.8 2.4 0.7 1.4
Interest income (expense),
net......................... (0.1) 0.2 (1.6) (1.2) (0.6) (0.5) 8.1 10.0
Other income (expense), net... 0.4 -- (0.2) (0.3) (0.2) (0.2) (0.1) (0.1)
------ ------ ------ ------ ------ ------- ------- -------
Income before income taxes.... 23.9 16.3 11.1 8.9 15.0 1.7 8.7 11.3
Provision for income taxes.... 8.4 6.2 4.3 3.8 6.0 4.1 6.6 3.2
------ ------ ------ ------ ------ ------- ------- -------
Net income (loss)............. 15.5% 10.1% 6.8% 5.1% 9.0% (2.4)% 2.1% 8.1%
====== ====== ====== ====== ====== ======= ======= =======
Revenues increased over the last eight quarters as a result of increased
unit sales to an expanding customer base with sales of optical subsystems
growing faster than that of test systems. As a result, revenues from the sale of
optical subsystems as a percentage of total revenues grew from 54.0% of total
revenues for the first quarter ended July 31, 1999 to 75.2% of total revenues
for the fourth quarter ended April 30, 2000.
36
Gross profit margins generally declined over the last two fiscal years,
principally as a result of a shift in product mix toward a greater percentage of
lower margin optical subsystem products and a lower percentage of higher margin
test systems. Gross margins in the fourth quarter ended April 30, 2000 were also
impacted by the introduction of a new optical subsystem product having lower
average selling prices and lower margins than most of the company's existing
products.
Quarterly increases in operating expenses reflected the continued expansion
of our operations throughout the eight-quarter period. An expense of $397,000 in
connection with the relocation of our primary operations to our new facility was
included in general and administrative expenses for the quarter ended April 30,
1999. Income from operations was adversely affected beginning in the quarter
ended October 31, 1999 by the amortization of deferred compensation associated
with the issuance of stock options to employees and directors prior to the
Company's initial public offering in November 1999.
Net interest expense increased significantly beginning in the quarter ended
January 31, 1999 as a result of a term loan for $11.0 million in November 1998.
The increase in net interest income beginning in the quarter ended January 31,
2000 reflected increased cash balances following our initial public offering in
November 1999 and an additional public offering in April 2000.
We may experience a delay in generating or recognizing revenues for a number
of reasons. Orders at the beginning of each quarter typically do not equal
expected revenues for that quarter and are generally cancelable at any time.
Accordingly, we depend on obtaining orders in a quarter for shipment in that
quarter to achieve our revenue objectives. In addition, the timing of product
releases, purchase orders and product availability could result in significant
product shipments at the end of a quarter. Failure to ship these products by the
end of a quarter may adversely affect our operating results. Furthermore, our
customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty.
Most of our expenses, such as employee compensation and lease payments for
facilities and equipment are relatively fixed in the near term. In addition, our
expense levels are based in part on our expectations regarding future revenues.
As a result, any shortfall in revenues relative to our expectations could cause
significant changes in our operating results from quarter to quarter. Our
quarterly and annual operating results have fluctuated in the past and are
likely to fluctuate significantly in the future due to a variety of factors,
some of which are outside of our control. Due to the foregoing factors, you
should not rely on our quarterly revenues and operating results to predict our
future performance.
LIQUIDITY AND CAPITAL RESOURCES
From inception through November 1998, we financed our operations primarily
through internal cash flow and periodic bank borrowings. In November 1998, we
raised $5.6 million of net proceeds from the sale of preferred stock and bank
borrowings to fund the continued growth and development of our business. In
November 1999, we received net proceeds of $151 million from the initial public
offering of our common stock, and in April 2000 we received an additional
$191 million from an additional public offering.
As of April 30, 2000, our principal sources of liquidity were
$320.7 million in cash, cash equivalents and short-term investments, and
$6.5 million available under a revolving loan facility that matures October 31,
2003. Borrowings under the facility are collateralized by substantially all of
our assets and bear interest at our election at the time of borrowing at either
the London Interbank Offering Rate or the bank's prime rate. There were no
borrowings under this facility as of April 30, 2000.
Net cash provided by operating activities totaled $1.1 million in fiscal
1999 while $4.4 million was used in operating activities in fiscal 2000. Cash
provided by operations during fiscal 1999 was primarily a result of continued
growth in revenues and net income offset in part by an increase in related
assets and liabilities for working capital purposes. The use of net cash in
operating activities in fiscal 2000 was primarily a result
37
of continuing growth in revenues and net income which was more than offset by an
increase in assets and liabilities for working capital purposes.
Net cash used in investing activities totaled $2.1 million in fiscal 1999
and $157.7 million in fiscal 2000. Net cash used in investing activities in
fiscal 1999 consisted primarily of purchases of equipment. Net cash used in
investing activities in fiscal 2000 consisted primarily of short-term
investments totaling $149.5 million which generally mature greater than 90 days
from the initial date of purchase. Other investing activities during fiscal 2000
consisted primarily of purchases of equipment and leasehold improvements
totaling $8.4 million.
Net cash provided by financing activities totaled $5.4 million in fiscal
1999, and $328.2 million in fiscal 2000. Net cash provided by financing
activities in fiscal 1999 primarily consisted of net proceeds of $26.3 million
from the sale of preferred stock and $11.0 million in bank borrowings under a
term loan, offset by $31.7 million used to repurchase shares of our outstanding
common stock. Net cash provided by financing activities in fiscal 2000 reflected
net proceeds to us of $151 million from the initial public offering of our
common stock in November 1999 and another $191 million from an additional public
offering of our common stock in April 2000. Following the initial public
offering, $11.0 million of the net proceeds was used to repay debt and
$2.6 million was used to redeem preferred stock.
We had no material commitments for capital expenditures at April 30, 2000,
but we expect these expenditures to exceed $10 million in fiscal 2001 following
an expenditure of $8.4 million in fiscal 2000. These expenditures will primarily
be for equipment, furniture and leasehold improvements. We also have total
minimum lease obligations of $12.4 million from April 30, 2000 through
April 30, 2007, under non-cancelable operating leases.
We believe that our existing balances of cash and cash equivalents, together
with our available credit facilities and cash flow expected to be generated from
our future operations, will be sufficient to meet our cash needs for working
capital and capital expenditures for at least the next 12 months.
IMPACT OF YEAR 2000
Many computer systems and software products were coded to accept only
two-digit entries in date code fields. Beginning in the year 2000, these date
code fields were required to accept four-digit entries to distinguish 21st
century dates from 20th century dates. Computer programs or hardware that have
date-sensitive software or embedded chips and have not been upgraded to comply
with these "year 2000" requirements may recognize a date using "00" as the year
1900 rather that the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Prior to December 31, 1999, we completed our assessment of the ability of
our products to operate properly in the year 2000, as well as an assessment of
the computers, software applications and equipment used in connection with our
internal operations and determined that no year 2000-related problems existed
that could not be remediated by the replacement of relatively inexpensive
equipment. Although we have not experienced year 2000-related problems to date,
it is possible that year 2000-related issues may yet cause problems or
disruptions during the remainder of the year. While we believe that all of our
products and systems are year 2000 compliant, we cannot assure you that we will
not discover a problem during the year 2000 and experience unanticipated
material costs due to undetected errors or defects. Also, failure of other
systems used by our customers may adversely affect the performance of our
products, which may in turn adversely affect our business. Should any such
problem arise, it is possible that customers or third parties might seek
indemnification or damages from us as a result of year 2000 issue-related errors
caused by or not prevented by our products. We cannot predict the extent to
which we might be liable for such costs but it is still conceivable that year
2000 problems could result in substantial expenditures.
38
RECENT ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", or
SAB 101. SAB 101 summarizes certain of the SEC Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We are currently evaluating the impact of SAB 101. Should we
determine that a change in our accounting policy is necessary, such a change
will be made effective May 1, 2000 and would result in a charge to results of
operations for the cumulative effect of the change. This amount, if recognized,
would be recorded as deferred revenue and recognized as revenue in future
periods. Financial statements for prior periods would not be restated.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We place our investments with high credit issuers
in short-term securities with maturities ranging from overnight up to
36 months. The average maturity of the portfolio will not exceed 18 months. The
portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. We have no investments denominated in
foreign country currencies and therefore our investments are not subject to
foreign exchange risk.
The following table summarizes the expected maturity, average interest rate
and fair market value of the short-term securities held by the Company as of
April 30, 2000 (in thousands).
YEARS ENDED APRIL 30,
------------------------------
2001 2002 2003 TOTAL COST FMV
-------- -------- -------- ---------- --------
Available for sale securities..................... 82,031 44,771 23,041 149,843 149,541
Average interest rate............................. 5.91% 5.21% 5.39%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL INFORMATION FINISAR
CORPORATION FINANCIAL STATEMENTS
INDEX
Report of Ernst & Young LLP, Independent Auditors........... 40
Financial Statements:
Balance Sheets............................................ 41
Statements of Operations.................................. 42
Statement of Convertible Redeemable Preferred Stock,
Redeemable Preferred Stock and Changes in Stockholders'
Equity (Deficit)........................................ 43
Statements of Cash Flows.................................. 44
Notes to Financial Statements............................. 45
39
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Finisar Corporation
We have audited the accompanying balance sheets of Finisar Corporation as of
April 30, 1999 and 2000, and the related statements of operations, convertible
redeemable preferred stock, redeemable preferred stock and changes in
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended April 30, 2000. These financial statements are the
responsibility of Finisar Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Finisar Corporation at
April 30, 1999 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended April 30, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
May 25, 2000
40
FINISAR CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
APRIL 30,
-------------------
1999 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,044 $171,194
Short-term investments.................................... -- 149,541
Accounts receivable (net of allowance for doubtful
accounts of $265 and $455 at April 30, 1999 and
April 30, 2000)......................................... 6,653 14,348
Accounts receivable, other................................ 3 151
Inventories............................................... 5,236 16,494
Income tax receivable..................................... -- 148
Deferred income taxes..................................... 1,047 2,653
Prepaid expenses.......................................... 194 278
-------- --------
Total current assets........................................ 18,177 354,807
Other assets................................................ 296 809
Property, equipment and improvements, net................... 2,482 9,426
-------- --------
Total assets................................................ $ 20,955 $365,042
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,394 $ 5,908
Accrued compensation...................................... 1,499 3,001
Other accrued liabilities................................. 1,476 3,065
Income tax payable........................................ 743 122
Capital lease obligations, current portion................ 54 --
-------- --------
Total current liabilities................................... 5,166 12,096
-------- --------
Long-term liabilities:
Note payable, long-term portion........................... 11,015 --
Capital lease obligations, long-term portion.............. 17 --
Other long-term liabilities............................... -- 524
-------- --------
Total long-term liabilities................................. 11,032 524
-------- --------
Commitments and contingent liabilities...................... --
Convertible redeemable preferred stock:
No par value, 12,100,000 shares authorized at April 30,
1999, and no shares authorized at April 30, 2000;
12,039,486 shares issued and outstanding at April 30,
1999; no shares issued and outstanding at April 30,
2000.................................................... 26,260 --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding at
April 30, 1999 and 2000................................. -- --
Common stock:
$0.001 par value, 200,000,000 shares authorized:
159,842,784 shares issued and outstanding at April 30,
2000................................................... -- 160
No par value, 75,000,000 shares authorized at April 30,
1999; no shares authorized at April 30, 2000;
97,147,095 shares issued and outstanding at April 30,
1999; no shares issued and outstanding at April 30,
2000................................................... 4,304 --
Additional paid-in capital................................ -- 384,526
Notes receivable from stockholders........................ (1,521) (3,248)
Deferred stock compensation............................... (1,975) (9,404)
Accumulated other comprehensive income (loss)............. -- (182)
Retained earnings (accumulated deficit)................... (22,311) (19,430)
-------- --------
Total stockholders' equity (deficit)........................ (21,503) 352,422
-------- --------
Total liabilities and stockholders' equity (deficit)........ $ 20,955 $365,042
======== ========
SEE ACCOMPANYING NOTES.
41
FINISAR CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
Revenues.................................................... $ 22,067 $ 35,471 $ 67,147
Cost of revenues............................................ 8,705 15,514 34,190
-------- -------- --------
Gross profit................................................ 13,362 19,957 32,957
-------- -------- --------
Operating expenses:
Research and development.................................. 3,806 7,864 13,806
Sales and marketing....................................... 1,629 4,145 7,122
General and administrative................................ 833 2,299 3,516
Amortization of deferred stock compensation............... -- 428 5,530
-------- -------- --------
Total operating expenses.................................... 6,268 14,736 29,974
-------- -------- --------
Income from operations...................................... 7,094 5,221 2,983
Interest income............................................. 38 154 3,704
Interest expense............................................ (33) (429) (452)
Other income (expense) net.................................. (25) (28) (99)
-------- -------- --------
Income before income taxes.................................. 7,074 4,918 6,136
Provision for income taxes.................................. 2,715 1,873 3,255
-------- -------- --------
Net income.................................................. $ 4,359 $ 3,045 $ 2,881
======== ======== ========
Net income per share:
Basic..................................................... $ 0.03 $ 0.03 $ 0.03
======== ======== ========
Diluted................................................... $ 0.03 $ 0.02 $ 0.02
======== ======== ========
Shares used in computing net income per share:
Basic..................................................... 131,259 110,580 113,930
======== ======== ========
Diluted................................................... 131,259 134,814 144,102
======== ======== ========
SEE ACCOMPANYING NOTES.
42
FINISAR CORPORATION
STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK,
REDEEMABLE PREFERRED STOCK AND
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONVERTIBLE REDEEMABLE
REDEEMABLE PREFERRED
PREFERRED STOCK STOCK COMMON STOCK
---------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- -------- ----------- -------- ----------- --------
Balance at April 30, 1997........................ -- $ -- -- $ -- 132,000,000 $ 95
Contribution of shares by principal
shareholder.................................. -- -- -- -- (6,600,000) --
Net income and comprehensive income............ -- -- -- -- -- --
----------- -------- ----------- ------- ----------- -------
Balance at April 30, 1998........................ -- -- -- -- 125,400,000 95
Stock options exercised........................ -- -- -- -- 15,118,980 1,806
Issuance of preferred stock at $2.1932 per
share, net of issuance costs of $145......... 12,039,486 26,260 -- -- -- --
Repurchase of common stock at $0.7311 per
share........................................ -- -- -- -- (43,371,885) --
Deferred stock compensation.................... -- -- -- -- -- 2,403
Amortization of deferred stock compensation.... -- -- -- -- -- --
Net income and comprehensive income............ -- -- -- -- -- --
----------- -------- ----------- ------- ----------- -------
Balance at April 30, 1999........................ 12,039,486 26,260 -- -- 97,147,095 4,304
Reincorporation in State of
Delaware..................................... -- -- -- -- -- (4,207)
Conversion of preferred stock.................. (12,039,486) (26,260) 12,039,486 2,640 26,945,691 27
Issuance of common stock, net of issuance costs
of $2,720.................................... -- -- -- -- 31,815,699 32
Redemption of preferred stock.................. -- -- (12,039,486) (2,640) -- --
Stock options exercised net of loans and
repurchase of unvested shares................ -- -- -- -- 3,934,299 4
Deferred stock compensation.................... -- -- -- -- -- --
Amortization of deferred stock compensation.... -- -- -- -- -- --
Payments received on stockholder notes
receivable................................... -- -- -- -- -- --
Unrealized loss on short-term investments...... -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
Comprehensive income...........................
----------- -------- ----------- ------- ----------- -------
Balance at April 30, 2000........................ -- $ -- -- $ -- 159,842,784 $ 160
=========== ======== =========== ======= =========== =======
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
NOTES ACCUMULATED RETAINED
ADDITIONAL RECEIVABLE DEFERRED OTHER EARNINGS
PAID-IN FROM STOCK COMPREHENSIVE (ACCUMULATED
CAPITAL STOCKHOLDERS COMPENSATION INCOME DEFICIT)
---------- ------------ ------------- -------------- -------------
Balance at April 30, 1997........................ $ -- $ -- $ -- $ -- $ 1,993
Contribution of shares by principal
shareholder.................................. -- -- -- -- --
Net income and comprehensive income............ -- -- -- -- 4,359
-------- -------- -------- ----- --------
Balance at April 30, 1998........................ -- -- -- -- 6,352
Stock options exercised........................ -- (1,521) -- -- --
Issuance of preferred stock at $2.1932 per
share, net of issuance costs of $145......... -- -- -- -- --
Repurchase of common stock at $0.7311 per
share........................................ -- -- -- -- (31,708)
Deferred stock compensation.................... -- -- (2,403) -- --
Amortization of deferred stock compensation.... -- -- 428 -- --
Net income and comprehensive income............ -- -- -- -- 3,045
-------- -------- -------- ----- --------
Balance at April 30, 1999........................ -- (1,521) (1,975) -- (22,311)
Reincorporation in State of
Delaware..................................... 4,207 -- -- -- --
Conversion of preferred stock.................. 23,593 -- -- -- --
Issuance of common stock, net of issuance costs
of $2,720.................................... 341,534 -- -- -- --
Redemption of preferred stock.................. -- -- -- -- --
Stock options exercised net of loans and
repurchase of unvested shares................ 2,233 (1,897) -- -- --
Deferred stock compensation.................... 12,959 -- (12,959) -- --
Amortization of deferred stock compensation.... -- -- 5,530 -- --
Payments received on stockholder notes
receivable................................... -- 170 -- -- --
Unrealized loss on short-term investments...... -- -- -- (182) --
Net income..................................... -- -- -- -- 2,881
Comprehensive income...........................
-------- -------- -------- ----- --------
Balance at April 30, 2000........................ $384,526 $ (3,248) $ (9,404) $(182) $(19,430)
======== ======== ======== ===== ========
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
Balance at April 30, 1997........................ $ 2,088
Contribution of shares by principal
shareholder.................................. --
Net income and comprehensive income............ 4,359
--------
Balance at April 30, 1998........................ 6,447
Stock options exercised........................ 285
Issuance of preferred stock at $2.1932 per
share, net of issuance costs of $145......... --
Repurchase of common stock at $0.7311 per
share........................................ (31,708)
Deferred stock compensation.................... --
Amortization of deferred stock compensation.... 428
Net income and comprehensive income............ 3,045
--------
Balance at April 30, 1999........................ (21,503)
Reincorporation in State of
Delaware..................................... --
Conversion of preferred stock.................. 23,620
Issuance of common stock, net of issuance costs
of $2,720.................................... 341,566
Redemption of preferred stock.................. --
Stock options exercised net of loans and
repurchase of unvested shares................ 340
Deferred stock compensation.................... --
Amortization of deferred stock compensation.... 5,530
Payments received on stockholder notes
receivable................................... 170
Unrealized loss on short-term investments...... (182)
Net income..................................... 2,881
--------
Comprehensive income........................... 2,699
--------
Balance at April 30, 2000........................ $352,422
========
SEE ACCOMPANYING NOTES.
43
FINISAR CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1998 1999 2000
-------- -------- ---------
Net income.................................................. $ 4,359 $ 3,045 $ 2,881
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization............................. 161 433 1,161
Amortization of deferred stock compensation............... -- 428 5,530
Loss on fixed assets disposal............................. 30 237 --
Changes in operating assets and liabilities:
Accounts receivable....................................... (1,584) (3,868) (7,695)
Inventories............................................... (1,781) (2,505) (11,258)
Other assets.............................................. 8 (490) (745)
Deferred income taxes..................................... (241) (660) (1,606)
Accounts payable.......................................... (179) 1,129 4,514
Accrued compensation...................................... 55 1,383 1,502
Income tax payable........................................ (298) 824 (769)
Other accrued liabilities................................. 212 1,103 2,113
------- ------- ---------
Net cash provided by (used in) operating activities......... 742 1,059 (4,372)
------- ------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment......................... (855) (2,100) (8,355)
Purchase of short-term investments.......................... -- -- (150,109)
Sale of short-term investments.............................. -- -- 750
------- ------- ---------
Net cash used in investing activities....................... (855) (2,100) (157,714)
------- ------- ---------
FINANCING ACTIVITIES
Payments on capital lease obligations....................... (37) (39) (71)
Proceeds from borrowings under bank note.................... 500 11,015 --
Repayments of borrowings under bank note.................... (50) (450) (11,015)
Proceeds from exercise of stock options, net of loans and
repurchase of unvested shares............................. 285 396
Proceeds from issuance of common stock in initial and
secondary public offerings, net of issue costs............ -- -- 341,566
Proceeds from issuance of preferred stock................... -- 26,260 --
Redemption of preferred stock............................... -- -- (2,640)
Repurchase of common stock.................................. -- (31,708) --
------- ------- ---------
Net cash provided by financing activities................... 413 5,363 328,236
------- ------- ---------
Net increase in cash and cash equivalents................... 300 4,322 166,150
Cash and cash equivalents at beginning of year.............. 422 722 5,044
------- ------- ---------
Cash and cash equivalents at end of year.................... $ 722 $ 5,044 $ 171,194
======= ======= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................... $ 33 $ 364 $ 481
======= ======= =========
Cash paid for taxes....................................... $ 3,254 $ 1,710 $ 5,028
======= ======= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Acquisition of property, equipment and improvements under
capital lease obligations............................... $ 132 $ -- $ --
======= ======= =========
Issuance of common stock in exchange for notes
receivable.............................................. $ -- $ 1,521 $ 1,950
======= ======= =========
Conversion of preferred stock to common stock............. $ -- $ -- $ 23,620
======= ======= =========
Deferred stock compensation related to options granted.... $ -- $ 2,403 $ 12,959
======= ======= =========
SEE ACCOMPANYING NOTES.
44
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Finisar Corporation ("Finisar" or the "Company") was incorporated in the
state of California on April 17, 1987. In November 1999, Finisar reincorporated
in the state of Delaware. Finisar designs, manufactures, and markets fiber optic
subsystems and network performance test systems for high-speed data
communications.
FISCAL PERIODS
In fiscal 2000, the Company began to maintain its financial records on the
basis of a fiscal year ending on April 30, with fiscal quarters ending on the
Sunday closest to the end of the period (thirteen-week periods). For ease of
reference, all references to period end dates have been presented as though the
period ended on the last day of the calendar month. The first three quarters of
fiscal 2000 ended on August 1, 1999, October 31, 1999 and January 30, 2000,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
REVENUE RECOGNITION
Revenue is recognized at the time of product shipment, net of allowances for
estimated returns. Warranty expenses are also estimated and provided for at the
time of shipment.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject Finisar to concentrations of
credit risk include cash, cash equivalents, short-term investments and accounts
receivable. Finisar places its cash, cash equivalents and short-term investments
with high-credit quality financial institutions. Such investments are generally
in excess of FDIC insurance limits. Concentrations of credit risk, with respect
to accounts receivable, exist to the extent of amounts presented in the
financial statements. Accounts receivable from two customers represented 33.8%
and 16.0% of the total balance at April 30, 1999 and 24.7% and 12.5% of the
total balance at April 30, 2000, respectively. Generally, Finisar does not
require collateral or other security to support customer receivables. Finisar
performs periodic credit evaluations of its customers and maintains an allowance
for potential credit losses based on historical experience and other information
available to management. Losses to date have been within management's
expectations.
CURRENT VULNERABILITIES DUE TO CERTAIN CONCENTRATIONS
Finisar sells products primarily to customers located in North America.
During fiscal 1998, 1999 and 2000, revenues from two customers represented 43.9%
and 14.6%, 25.1% and 24.1%, and 24.5% and 24.0% of total revenues, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
45
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Finisar's cash equivalents consist of money market funds and highly liquid
short-term investments with qualified financial institutions. Finisar considers
all highly liquid investments with an original maturity from the date of
purchase of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments consist of interest bearing securities with
maturities greater than 90 days. The Company has adopted the provisions of
Statement of Financial Accounting Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, the
Company has classified its short-term investments as available-for-sale.
Available-for-sale securities are stated at market value and unrealized holding
gains and losses, net of the related tax effect, are excluded from earnings and
are reported as a separate component of stockholders' equity until realized. A
decline in the market value of the security below cost that is deemed other than
temporary is charged to earnings, resulting in the establishment of a new cost
basis for the security. At April 30, 2000, the Company's marketable investment
securities consisted of highly liquid investments in both taxable and tax free
municipal obligations with various maturity dates through February 1, 2003. The
difference between market value and cost of these securities at April 30, 2000
was a loss of $302,608 or $182,065 on an after-tax basis.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are stated at cost, net of accumulated
depreciation and amortization. Property, equipment and improvements are
depreciated on a straight-line basis over the estimated useful lives of the
assets, generally five years.
STOCK-BASED COMPENSATION
Finisar accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
NET INCOME PER SHARE
Basic and diluted net income per share are presented in accordance with SFAS
No. 128, "Earnings Per Share" ("SFAS 128"), for all periods presented. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
shares and convertible preferred shares issued or granted for nominal
consideration prior to the effective date of Finisar's initial public offering
are required to be included in the calculation of basic and diluted net income
per share as if they had been outstanding for all periods presented. To date,
Finisar has not had any issuances or grants for nominal consideration.
46
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective April 12, 2000, the Company's shareholders approved a
three-for-one stock split in the form of a stock dividend. Accordingly, all
share and per-share data for all prior periods presented have been restated to
reflect this event.
Basic net income per share has been computed using the weighted-average
number of shares of common stock outstanding during the period. Diluted net
income per share has been computed using the weighted-average number of shares
of common stock and dilutive potential common shares from options (under the
treasury stock method) and convertible redeemable preferred stock (on an
if-converted basis) outstanding during the period.
The following table presents the calculation of basic and diluted net income
per share (in thousands, except per share amounts):
FISCAL YEARS ENDED APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
Numerator:
Net income.......................................... $ 4,359 $ 3,045 $ 2,881
======== ======== ========
Historical:
Denominator for basic net income per share:
Weighted-average shares outstanding--basic.......... 131,259 110,580 113,930
-------- -------- --------
Effect of dilutive securities:
Employee stock options.............................. -- 2,187 4,994
Stock subject to repurchase......................... -- 9,129 10,748
Convertible redeemable preferred stock.............. -- 12,918 14,430
-------- -------- --------
Dilutive potential common shares...................... -- 24,234 30,172
-------- -------- --------
Denominator for diluted net income per share.......... 131,259 134,814 144,102
======== ======== ========
Basic net income per share............................ $ 0.03 $ 0.03 $ 0.03
======== ======== ========
Diluted net income per share.......................... $ 0.03 $ 0.02 $ 0.02
======== ======== ========
COMPREHENSIVE INCOME
Effective May 1, 1998, Finisar adopted Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes rules for reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities to be included in
comprehensive income. The amount of the change in net unrealized loss on
available-for-sale securities in fiscal 2000 was $302,608 or $182,065 on an
after-tax basis. Prior to fiscal 2000, net income equaled comprehensive income.
SEGMENT REPORTING
Effective May 1, 1998, Finisar adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 superseded SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise." SFAS 131 establishes standards for the
way that public business enterprises report information about operating
47
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS 131 did not affect Finisar's results of operations or financial position.
EFFECT OF NEW ACCOUNTING STATEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). Finisar is required to adopt SFAS 133 for the year ending
April 30, 2002. SFAS 133 establishes methods of accounting for derivative
financial instruments and hedging activities. Because Finisar currently holds no
derivative financial instruments as defined by SFAS 133 and does not currently
engage in hedging activities, adoption of SFAS 133 is not expected to have a
material effect on Finisar's financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize
certain costs related to internal use software once certain criteria have been
met. Finisar has implemented SOP 98-1 for the year ending April 30, 2000.
Adoption of SOP 98-1 did not have a material effect on Finisar's financial
condition or results of operations in fiscal 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the SEC Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company is currently evaluating the impact of SAB 101. Should
the Company determine that a change in its accounting policy is necessary, such
a change will be made effective May 1, 2000 and would result in a charge to
results of operations for the cumulative effect of the change. This amount, if
recognized, would be recorded as deferred revenue and recognized as revenue in
future periods. Prior financial statements would not be restated.
2. SHORT-TERM INVESTMENTS
The following table summarizes the Company's short-term investments in terms
of type of investment, original cost, gross unrealized gain or (loss) and fair
market value as of April 30, 2000 (in thousands).
ORIGINAL GROSS
PURCHASE UNREALIZED
INVESTMENT TYPE COST GAIN (LOSS) MARKET VALUE
- --------------- -------- ----------- ------------
Corporate.................................. $ 65,684 $(194) $ 65,490
Government Agency.......................... 2,037 (13) 2,024
Municipal.................................. 82,122 (95) 82,027
-------- ----- --------
Total...................................... $149,843 $(302) $149,541
======== ===== ========
Included in the above table is $67,812 of investments with maturities in the
years ended April 30, 2002 and 2003.
48
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
Inventories consist of the following (in thousands):
APRIL 30,
-------------------
1999 2000
-------- --------
Raw materials.............................................. $2,908 $ 8,960
Work-in-process............................................ 1,763 6,524
Finished goods............................................. 565 1,010
------ -------
$5,236 $16,494
====== =======
4. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following (in
thousands):
APRIL 30,
-------------------
1999 2000
-------- --------
Computer equipment.......................................... $ 840 $2,603
Office equipment, furniture, and fixtures................... 445 833
Machinery and equipment..................................... 1,795 6,144
Leasehold improvements...................................... -- 1,470
------ ------
3,080 11,050
Accumulated depreciation and amortization................... (598) (1,624)
------ ------
Property and equipment, net................................. $2,482 $9,426
====== ======
Finisar had financed $132,447 of equipment purchased under capital lease
arrangements as of April 30, 1999. These leases arrangements were paid in full
as of April 30, 2000. Accumulated amortization of assets acquired under capital
leases was $40,261 at April 30, 1999 and $0 at April 30, 2000.
5. COMMITMENTS
Future minimum payments under non-cancelable operating lease agreements are
as follows as of April 30, 2000 (in thousands):
Fiscal years ending April 30:
2001........................................................ $ 2,097
2002........................................................ 2,157
2003........................................................ 1,850
2004........................................................ 1,857
2005........................................................ 1,902
Thereafter.................................................. 2,563
-------
Total minimum payments required............................. $12,426
=======
Rent expense was approximately $412,000, $366,905 and $1,168,726 for the
years ended April 30, 1998, 1999 and 2000.
49
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LOAN AGREEMENT
On November 4, 1998, Finisar borrowed the principal amount of $11,015,000
under a secured term loan agreement and entered into a secured revolving loan
facility for additional borrowings of up to $6,500,000. The term loan was repaid
in November 1999 with proceeds from the common stock offering (see Note 7). The
revolving loan facility expires in October 2003. No amounts were outstanding
under the revolving loan facility at April 30, 1999 or April 30, 2000. All
business assets have been pledged as collateral for borrowings under the term
loan and the revolving loan facility.
7. CONVERTIBLE REDEEMABLE PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT)
COMMON STOCK AND PREFERRED STOCK
Following the Company's re-incorporation in November 1999, Finisar is
authorized to issue 200,000,000 shares of $0.001 par value common stock and
5,000,000 shares of $0.001 par value preferred stock. The board of directors has
the authority to issue the undesignated preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof. The
holder of each share of common stock has the right to one vote.
Common stock subject to future issuance as of April 30, 2000 is as follows:
Exercise of outstanding options............................. 5,678,706
Common stock available for grant under stock option plans... 14,128,815
Common stock reserved for issuance under the employee stock
purchase plan............................................. 750,000
----------
20,557,521
==========
Effective November 11, 1999, the Company sold 27,915,000 shares in an
initial public offering of its common stock at a price of $6.33, including
3,465,000 shares that were sold upon exercise of the underwriters' overallotment
option. Of the shares sold, 25,815,699 shares, with an aggregate offering price
of $163,499,427, were sold by Finisar, and 2,099,301 shares, with an aggregate
offering price of $13,295,573, were sold by selling stockholders. An aggregate
underwriting discount of $12,375,650 was paid in connection with the offering,
$11,444,960 of which was paid by Finisar and $930,690 of which was paid by the
selling stockholders. Other expenses of the offering incurred by Finisar were
approximately $1,500,000. Net proceeds of the offering to the Company after
deducting underwriting discounts and commissions, and other expenses aggregated
approximately $150.6 million. Of the net proceeds raised in the initial public
offering, $11.0 million was used to repay bank loans and another $2.6 million
was used to redeem the Company's no par value, redeemable preferred stock.
Effective April 6, 2000, the Company sold 23,175,000 shares in an additional
public offering of its common stock at a price of $33.33 per share, including
75,000 shares that were sold upon exercise of the underwriters' overallotment
option. Of the shares sold, 6,000,000 shares, with an aggregate offering price
of $200,000,000, were sold by Finisar, and 17,175,000 shares, with an aggregate
offering price of $572,500,000, were sold by selling stockholders. An aggregate
underwriting discount of $30,127,500 was paid in connection with the offering,
$7,800,000 of which was paid by Finisar and $22,327,500 of which was paid by the
selling stockholders. Other expenses of the offering incurred by Finisar were
approximately
50
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE REDEEMABLE PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT) (CONTINUED)
$1,100,000. Net proceeds of the offering to the Company after deducting
underwriting discounts and commissions, and other expenses aggregated
approximately $191.1 million.
The balance of the net proceeds raised from the initial public offering and
secondary offering will be used for general corporate purposes, including
working capital and capital expenditures. The Company may also use a portion of
the net proceeds to acquire or invest in complementary businesses or products or
to obtain the right to any of these types of acquisitions or investments.
Pending such uses, the remaining net proceeds of the offering have been invested
in short-term, investment-grade, interest-bearing securities.
CONVERTIBLE REDEEMABLE PREFERRED STOCK
On November 6, 1998 and November 25, 1998, Finisar issued an aggregate of
12,039,486 shares of convertible redeemable preferred stock to investors at
$2.1932 per share, resulting in gross cash proceeds of $26,405,000. In
conjunction with the Company's initial public offering on November 11, 1999, the
convertible redeemable preferred shares were converted into 26,945,691 shares of
common stock and 12,039,486 shares of redeemable preferred stock; the Company
then paid $2.6 million to redeem the redeemable preferred stock.
Holders of convertible redeemable preferred stock were entitled to non
cumulative dividends at an annual rate equal to $0.1316 per share (adjusted for
stock splits and like events), in preference to other stockholders if, when and
as declared by the board of directors. No dividends had been declared as of
April 30, 2000.
The holders of outstanding convertible redeemable preferred stock, voted as
a single class, and were entitled to appoint one director of Finisar. In all
other matters, each holder of convertible redeemable preferred stock had voting
rights based on the number of shares of common stock into which the preferred
stock was convertible.
The holders of outstanding convertible redeemable preferred stock were
entitled to receive upon liquidation and in certain other circumstances (a
merger, acquisition, or similar event), an amount per share of $2.1932 plus all
accrued but unpaid dividends (including any unpaid interest on such amounts).
Any remaining assets would be distributed on a pro rata basis among the holders
of all common stock and preferred stock (on an if-converted basis).
REDEEMABLE PREFERRED STOCK
Holders of outstanding redeemable preferred stock were entitled to non
cumulative dividends at an annual rate equal to $0.0381 per share (adjusted for
stock splits and like events), in preference to holders of common stock as and
when declared by the board of directors. No dividends had been declared as of
April 30, 2000. In conjunction with the initial public offering on November 11,
1999, all outstanding convertible redeemable preferred shares were converted
into 26,945,691 shares of common stock and 12,039,486 shares of redeemable
preferred stock; the Company then paid $2.6 million to redeem the redeemable
preferred stock.
The holders of redeemable preferred stock had no voting rights.
51
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE REDEEMABLE PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT) (CONTINUED)
The holders of redeemable preferred stock were entitled to receive upon
liquidation and in certain other circumstances (a merger, acquisition, or
similar event), an amount per share of $0.6345 plus all accrued but unpaid
dividends (including any unpaid interest on such amounts).
1999 EMPLOYEE STOCK PURCHASE PLAN
Finisar's 1999 Employee Stock Purchase Plan was adopted by the board of
directors and approved by the stockholders in September 1999. A total of 750,000
shares of common stock are reserved for issuance under the plan, cumulatively
increased by 750,000 shares on May 1, 2001 and each May 1 thereafter through
May 1, 2010. Employees, including officers and employee directors, are eligible
to participate in the plan if they are employed by Finisar for more than
20 hours per week and more than five months in any calendar year. The plan will
be implemented during sequential 12-month offering periods, generally commencing
on or about December 1 of each year. However, the first such offering period
commenced on the effective date of the initial public offering and will
terminate on November 30, 2000. In addition, a six-month offering period will
generally commence on June 1 of each year.
The employee stock purchase plan permits eligible employees to purchase
Finisar common stock through payroll deductions, which may not exceed 20% of the
employee's total compensation. Stock may be purchased under the plan at a price
equal to 85% of the fair market value of Finisar common stock on either the
first or the last day of the offering period, whichever is lower.
STOCK OPTION PLANS
As discussed in Note 1 and as permitted under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), Finisar has elected to follow APB Opinion No. 25 and related
interpretations in accounting for stock-based awards to employees.
During fiscal 1989 and 1999, Finisar adopted the 1989 and 1999 Stock Option
Plans (the "Plans"). Under the Plans, options to purchase common stock may be
granted at an exercise price of not less than 85% of the fair value of a share
of common stock on the date of grant (110% of the fair value in certain
instances) as determined by the board of directors. For purposes of determining
the fair market value of the common stock, the board of directors has considered
a number of factors including appraisals by independent third parties, the price
paid for convertible redeemable preferred stock in arms'-length transactions and
the illiquid nature of the common stock. Options generally vest over five years
and have a maximum term of 10 years. All options granted under the Plans are
immediately exercisable. As of April 30, 2000, 10,747,361 shares issued upon
exercise of options are subject to repurchase.
Finisar's 1999 Stock Option Plan was amended by the board of directors and
approved by the stockholders in September 1999. The amendment increased the
aggregate maximum number of shares that may be issued under the Plan on May 1,
2001 and each May 1 thereafter by a number of shares equal to 5% of the number
of shares of Finisar's common stock issued and outstanding as of the immediately
preceding April 30, subject to certain restrictions on the aggregate maximum
number of shares that may be issued pursuant to incentive stock options.
52
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE REDEEMABLE PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT) (CONTINUED)
A summary of activity under the Plans is as follows:
OPTIONS OUTSTANDING
----------------------------------
OPTIONS AVAILABLE NUMBER OF WEIGHTED-AVERAGE
FOR GRANT SHARES PRICE PER SHARE EXERCISE PRICE
----------------- ----------- --------------- ----------------
Balance at April 30, 1997................ 74,966,400 2,133,600 $ 0.004-$0.017 $0.013
Options granted.......................... (8,811,000) 8,811,000 $ 0.043 $0.043
Options canceled......................... 66,000 (66,000) $ 0.017 $0.017
----------- -----------
Balance at April 30, 1998................ 66,221,400 10,878,600 $ 0.004-$0.043 $0.038
Decrease in authorized shares............ (37,916,400) -- -- --
Options granted.......................... (8,700,000) 8,700,000 $ 0.05-$.437 $0.234
Options exercised........................ -- (15,118,980) $ 0.004-$.437 $0.120
----------- -----------
Balance at April 30, 1999................ 19,605,000 4,459,620 $ 0.017-$.437 $0.190
Options granted.......................... (5,497,710) 5,497,710 $ 0.47-$21.708 $2.287
Options exercised........................ -- (4,041,099) $ 0.017-$3.40 $0.591
Options canceled......................... 237,525 (237,525) $ 0.017-$6.33 $0.775
Shares repurchased....................... 25,800 -- $ 0.043-$0.050 $0.050
Options expired.......................... (241,800) -- -- --
----------- -----------
Balance at April 30, 2000................ 14,128,815 5,678,706 $0.017-$21.708 $1.916
=========== ===========
NUMBER
OUTSTANDING AT NUMBER EXERCISABLE WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE
EXERCISE PRICE APRIL 30, 2000 AT APRIL 30, 2000 CONTRACTUAL LIFE EXERCISE PRICE
- -------------- --------------- ------------------ -------------------------- ----------------
(IN YEARS)
$0.02.................... 240,000 240,000 6.84 $ 0.02
$0.04.................... 2,044,620 2,044,620 7.88 $ 0.04
$0.05.................... 102,000 102,000 8.27 $ 0.05
$0.09.................... 40,500 40,500 8.45 $ 0.09
$0.44.................... 420,000 420,000 8.94 $ 0.44
$0.47.................... 383,400 383,400 9.26 $ 0.47
$0.67.................... 195,000 195,000 9.33 $ 0.67
$1.00.................... 338,001 338,001 9.40 $ 1.00
$3.40.................... 778,500 -- 9.45 $ 3.40
$3.67.................... 240,000 -- 9.49 $ 3.67
$6.33.................... 847,935 -- 9.53 $ 6.33
$21.71................... 48,750 -- 9.75 $21.71
--------- ---------
$0.02-$21.71............. 5,678,706 3,763,521 8.70 $ 1.92
========= =========
The weighted-average fair value of options granted was $0.05 during fiscal
1999 and $2.287 during fiscal 2,000.
RESTRICTED SHARES ISSUED FOR PROMISSORY NOTES
During fiscal 1999, employees exercised options for 7,938,924 shares of
common stock in exchange for promissory notes in the aggregate principal amount
of $1,520,788. During fiscal 2000, employees exercised options for 2,792,523
shares of common stock in exchange for promissory notes in the aggregate
principal
53
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE REDEEMABLE PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT) (CONTINUED)
amount of $1,632,413. The notes are full recourse, are secured by the shares and
bear interest at a rate of 6% per annum. The shares are restricted and are
subject to a right of repurchase at the original exercise price in favor of
Finisar. This repurchase right lapses in accordance with the original vesting
schedule of the option, which is generally five years.
DEFERRED STOCK COMPENSATION
In connection with the grant of certain stock options to employees, Finisar
recorded deferred stock compensation of $2.4 million during fiscal 1999 and
$13.0 million during fiscal 2000 prior to the Company's initial public offering,
representing the difference between the deemed value of our common stock for
accounting purposes and the option exercise price of these options at the date
of grant. Deferred stock compensation is presented as a reduction of
stockholders' equity, with graded amortization recorded over the five year
vesting period. The amortization expense relates to options awarded to employees
in all operating expense categories. The following table summarizes the amount
of deferred stock compensation expense which Finisar has recorded and the
amortization it has recorded and expects to record in future periods. Amounts to
be recorded in future periods could decrease if options for which accrued but
unvested compensation has been recorded are forfeited (in thousands):
DEFERRED
STOCK
COMPENSATION AMORTIZATION
GENERATED EXPENSE
------------ ------------
Fiscal year ended April 30, 1999.................... $ 2,403 $ 428
Fiscal year ended April 30, 2000.................... 12,959 5,530
Fiscal year ending April 30, 2001 (unaudited)....... -- 4,428
Fiscal year ending April 30, 2002 (unaudited)....... -- 2,659
Fiscal year ending April 30, 2003 (unaudited)....... -- 1,467
Fiscal year ending April 30, 2004 (unaudited)....... -- 715
Fiscal year ending April 30, 2005 (unaudited)....... -- 135
------- -------
Total............................................. $15,362 $15,362
======= =======
ACCOUNTING FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income is required by SFAS 123 as if
Finisar had accounted for its employee stock options granted subsequent to
April 30, 1995 under the fair value method of SFAS 123. The fair value for
Finisar's stock option grants prior to the Company's initial public offering was
estimated at the date of grant using the minimum value option valuation model.
The fair value of stock options grants subsequent to the initial public offering
were valued using Black-Scholes valuation model based on the actual stock
closing price on the day previous to the date of grant. The option valuation
models were developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions.
Because Finisar's stock-based awards have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards. The fair value of these
options was estimated at the
54
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE REDEEMABLE PREFERRED STOCK, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT) (CONTINUED)
date of grant using the following weighted-average assumptions for fiscal years
1998, 1999 and 2000: risk-free interest rates of 6% for 1998, 5.5% for 1999 and
6% for 2000; a dividend yield of 0%; a volatility factor of .91 for 2000; and a
weighted-average expected life of the option of four years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Finisar
Corporation's pro forma information is as follows (in thousands, except per
share amounts):
YEARS ENDED APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
Net income:
As reported....................................... $4,359 $3,045 $2,881
====== ====== ======
Pro forma......................................... $4,333 $3,000 $2,463
====== ====== ======
Basic net income per share:
As reported....................................... $ 0.03 $ 0.03 $ 0.03
====== ====== ======
Pro forma......................................... $ 0.03 $ 0.03 $ 0.02
====== ====== ======
Diluted net income per share:
As reported....................................... $ 0.03 $ 0.02 $ 0.02
====== ====== ======
Pro forma......................................... $ 0.03 0.02 $ 0.02
====== ====== ======
8. INCOME TAXES
Finisar's provision for income taxes consists of the following (in
thousands):
YEARS ENDED APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
Current:
Federal.......................................... $2,391 $1,995 $ 3,875
State............................................ 565 538 473
------ ------ -------
2,956 2,533 4,348
------ ------ -------
Deferred:
Federal.......................................... (226) (508) (968)
State............................................ (15) (152) (125)
------ ------ -------
(241) (660) (1,093)
------ ------ -------
Provision for income taxes......................... $2,715 $1,873 $ 3,255
====== ====== =======
55
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Finisar's provision for income taxes differs from the amount computed by
applying the federal statutory rate to income taxes as follows:
YEARS ENDED APRIL 30,
--------------------------------------
1998 1999 2000
-------- -------- --------
Expected income tax provision at U.S. federal
statutory rate................................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit................ 5.0 4.8 3.7
Deferred Compensation.............................. -- 3.0 30.6
Tax Exempt Interest................................ -- -- (7.6)
Research and development credits................... (0.8) (4.0) (7.9)
Other permanent differences........................ 0.2 0.3 0.2
---- ---- ----
38.4% 38.1% 53.0%
==== ==== ====
Significant components of Finisar's deferred federal and state income taxes
are as follows (in thousands):
APRIL 30,
-------------------
1999 2000
-------- --------
Deferred tax assets:
Inventory reserve......................................... $ 503 $1,091
Accruals not currently deductible......................... 679 787
Tax Credits............................................... -- 654
Unrealized Loss on Marketable Securities.................. -- 121
------ ------
Total deferred tax assets................................... 1,182 2,653
Deferred tax liabilities: -- --
Tax depreciation over book depreciation................... (135) (392)
------ ------
Net deferred tax assets..................................... $1,047 $2,261
====== ======
9. SEGMENTS AND GEOGRAPHIC INFORMATION
Finisar operates in one reportable segment, the design, manufacture, and
marketing of fiber optic subsystems and network performance test systems for
high-speed data communications. The following is a summary of operations within
geographic areas based on the location of the entity purchasing the Company's
product (in thousands):
YEARS ENDED APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
Revenues from sales to unaffiliated customers:
United States.................................. $ 9,877 $24,822 $46,900
Canada......................................... 9,695 8,941 16,878
Rest of the World.............................. 2,495 1,708 3,369
------- ------- -------
$22,067 $35,471 $67,147
======= ======= =======
56
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SEGMENTS AND GEOGRAPHIC INFORMATION (CONTINUED)
Revenues generated in the U.S. and Canada (collectively, North America) are
all to customers located in those geographic regions.
10. PENDING LITIGATION
In April 1999, Methode (formerly Methode Electronics), a manufacturer of
electronic component devices, filed a lawsuit against Finisar and another
manufacturer, Hewlett-Packard Co., in the United States District Court for the
Northern District of Illinois alleging that our optoelectronic products infringe
four patents held by Methode. The original complaint sought monetary damages and
injunctive relief. In July 1999, we and Hewlett-Packard filed a motion, which
was opposed by Methode, to transfer the case to the United States District Court
for the Northern District of California. In August 1999, the Court granted our
motion. Methode has amended its complaint to add Agilent Technologies, Inc. as
an additional defendant, to allege infringement of a fifth Methode patent and to
allege that we breached our obligations under a license and supply agreement
with Methode by failing to provide Methode with unspecified information
regarding new technology related to the products licensed under the agreement.
The amended complaint seeks compensatory damages of at least $224.3 million plus
interest for the alleged breach of contract. In addition, Methode has also
notified us that it intends to file another amended complaint alleging
infringement of a sixth Methode patent. On June 5, 2000, Methode transferred the
patents at issue in the litigation, as well as a number of other patents, to an
affiliated company, Stratos Lightwave LLC, and on June 21, 2000, Stratos
Lightwave LLC transferred the same patents to Stratos Lightwave, Inc. Methode
has made a motion to add Stratos Lightwave, Inc. to the lawsuit as an additional
plaintiff.
Based on consultation with counsel, it is our position that the Methode
patents are invalid, unenforceable and/or not infringed by our products. The
United States Patent and Trademark Office has determined that all of the claims
asserted by Methode in one of the patents are invalid, although this
determination is not final and is subject to further administrative review. We
also believe, based on consultation with counsel, that the breach of contract
claim included in the amended complaint is without merit and that, in any event,
the amended complaint grossly overstates the amount of damages that Methode
could possibly have suffered as a result of any such breach. We believe that we
have strong defenses against Methode's lawsuit. In addition, we have filed a
counterclaim against Methode asserting, among other things, that one of our
founders, Frank H. Levinson, is the primary inventor of the technology that is
the subject of all five patents, that Methode improperly obtained the patents
based on our disclosure of the technology to Methode and that we are the
rightful owner or co-owner of the patents. Portions of our counterclaim, based
on principles of state law, were dismissed in May 2000 on grounds of federal
preemption; however, our basic claims of ownership of the patents remain subject
to our pending counterclaim.
57
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. PENDING LITIGATION (CONTINUED)
We intend to defend Methode's lawsuit and pursue our counterclaim
vigorously. However, the litigation is in the preliminary stage, and its outcome
cannot be predicted with certainty. The litigation process is inherently
uncertain. Patent litigation is particularly complex and can extend for a
protracted time, which can substantially increase the cost of such litigation.
In connection with the Methode litigation, we have incurred, and expect to
continue to incur, substantial legal fees and expenses. The Methode litigation
has also diverted, and is expected to continue to divert, the efforts and
attention of some of our key management and technical personnel. As a result,
our defense of this litigation, regardless of its eventual outcome, has been,
and will likely continue to be, costly and time consuming. Should the outcome of
the litigation be adverse to us, we could be required to pay significant
monetary damages to Methode and could be enjoined from selling those products
found to infringe Methode's patents unless and until we are able to negotiate a
license from Methode. In the event we obtain a license from Methode, we would
likely be required to make royalty payments with respect to sales of products
covered by the license. Any such payments would increase our cost of revenues
and reduce our gross profit. If we are required to pay significant monetary
damages, are enjoined from selling any of our products or are required to make
substantial royalty payments pursuant to any such license agreement, our
business would be significantly harmed.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and directors, and their ages as of April 30, 2000,
are as follows:
NAME AGE POSITION(S)
- ---- -------- --------------------------------------------------------------
Jerry S. Rawls................ 55 President, Chief Executive Officer and Director
Frank H. Levinson............. 47 Chairman of the Board and Chief Technical Officer
Mark J. Farley................ 38 Vice President, Digital Systems Engineering
Jan Lipson.................... 49 Vice President, Optical Engineering
Stephen K. Workman............ 49 Vice President, Finance, Chief Financial Officer and Secretary
Michael C. Child.............. 45 Director
Roger C. Ferguson............. 57 Director
Richard B. Lieb............... 52 Director
Larry D. Mitchell............. 57 Director
JERRY S. RAWLS has served as a member of our Board of Directors since
March 1989, as our President since April 1989 and as our Chief Executive Officer
since August 1999. From September 1968 to February 1989, Mr. Rawls was employed
by Raychem Corporation, a materials science and engineering company, where he
held various management positions including Division General Manager of the
Aerospace Products Division and Interconnection Systems Division. Mr. Rawls
holds a B.S. in Mechanical Engineering from Texas Tech University and an M.S. in
Industrial Administration from Purdue University.
FRANK H. LEVINSON founded Finisar in April 1987 and has served as a member
of our Board of Directors since February 1988 and as our Chairman of the Board
and Chief Technical Officer since August 1999. Mr. Levinson also served as our
Chief Executive Officer from February 1988 to August 1999. From September 1980
to December 1983, Mr. Levinson was a Member of Technical Staff at AT&T Bell
Laboratories. From January 1984 to July 1984, he was a Member of Technical Staff
at Bellcore, a provider of services and products to the communications industry.
From April 1985 to December 1985, Mr. Levinson was the principal optical
scientist at Raychem Corporation, and from January 1986 to February 1988, he was
Optical Department Manager at Raynet, Inc., a fiber optic systems company.
Mr. Levinson holds a B.S. in Mathematics/Physics from Butler University and an
M.S. and Ph.D. in Astronomy from the University of Virginia.
MARK J. FARLEY has served as our Vice President, Digital Systems Engineering
since April 1996. From August 1991 to April 1996, Mr. Farley was a consulting
design engineer. During that time, Mr. Farley was heavily involved in the design
of Finisar's early products. From September 1986 to August 1991, Mr. Farley was
a hardware design manager with Raynet, Inc. From September 1984 to
September 1986, he was a hardware design manager at Tandem Computers.
Mr. Farley holds a B.S. in Electrical Engineering from the Massachusetts
Institute of Technology.
JAN LIPSON has served as our Vice President, Optical Engineering since
April 1998. From June 1995 to April 1998, Mr. Lipson was Vice-President,
Advanced Technology for Ortel Corporation, a fiber optic components supplier to
the cable television industry. From March 1982 to June 1995, Mr. Lipson was
employed by AT&T Bell Laboratories, and most recently held the position of
Department Head and Development Manager for the Subsystems Development Group in
the Lightwave Communications Area. From October 1978 to March 1982, Mr. Lipson
was a member of the technical staff at Los Alamos
59
National Labs. Mr. Lipson holds a B.S. in Physics from the California Institute
of Technology, a Ph.D. in Physics from the University of California at San Diego
and an M.B.A. from the University of Pittsburgh.
STEPHEN K. WORKMAN has served as our Vice President, Finance and Chief
Financial Officer since March 1999 and as our Secretary since August 1999. From
November 1989 to March 1999, Mr. Workman served as Chief Financial Officer at
Ortel Corporation. Mr. Workman holds a B.S. in Engineering Science and an M.S.
in Industrial Administration from Purdue University.
MICHAEL C. CHILD has been a member of our Board of Directors since
November 1998. Mr. Child has been employed by TA Associates, Inc., a venture
capital investment firm, since July 1982 where he currently serves as a Managing
Director. Mr. Child also serves on the Board of Directors of Fargo Electronics
and several private companies. Mr. Child holds a B.S. in Electrical Engineering
from the University of California at Davis and an M.B.A. from the Stanford
Graduate School of Business.
ROGER J. FERGUSON has been a member of our Board of Directors since
August 1999. Mr. Ferguson has served as Chief Executive Officer of Semio Inc.,
an early stage software company, since July 1999 and as a principal in VenCraft,
LLC, a venture capital partnership, since July 1997. From 1993 to 1997,
Mr. Ferguson was Chief Executive Officer of DataTools, Inc., a database software
company. From 1987 to 1993, Mr. Ferguson served as Chief Operating Officer for
Network General Inc., a network analysis company. Mr. Ferguson also serves on
the Boards of Directors of Microtest, Inc. and several private companies.
Mr. Ferguson holds a B.A. in Psychology from Dartmouth College and an M.B.A.
from the Amos Tuck School at Dartmouth.
RICHARD B. LIEB has been a member of our Board of Directors since
October 1999. Since November 1990 Mr. Lieb has served as Executive President of
SEI Investments, an investment and investment processing business solutions
company. Mr. Lieb holds a B.A. in History from Duke University and an M.A. in
Public Administration from the Wharton School of Business at the University of
Pennsylvania.
LARRY D. MITCHELL has been a member of our Board of Directors since
October 1999. Mr. Mitchell has been retired since October 1997. From
October 1994 to October 1997, he served as a site General Manager in Roseville,
California for Hewlett-Packard. Mr. Mitchell holds a B.A. in Engineering Science
from Dartmouth College and an M.B.A. from the Stanford Graduate School of
Business.
Our President, Secretary and Chief Financial Officer are elected by the
Board of Directors, all other executive officers are elected by the Board of
Directors or appointed by the President, and all officers serve at the
discretion of the Board of Directors. Each of our officers and directors, other
than non-employee directors, devotes his full time to the affairs of Finisar.
ITEM 11. EXECUTIVE COMPENSATION (SEE ITEM 13 BELOW)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (SEE
ITEM 13 BELOW)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (SEE BELOW)
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information called for in Part III, Items 11, 12 and 13 of Form 10-K is omitted
since the Company will file with the Securities and Exchange Commission not
later than 120 days after the close of the fiscal year ended April 30, 2000, a
definitive proxy statement pursuant to Regulation 14A in connection with its
2000 Annual Meeting of Stockholders, and the information required by such items
is incorporated by reference to information to be set forth in such proxy
statement.
60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS
See Index to Financial Statements and Financial Statement Schedule at
page 39 of this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of Finisar is filed as part of
this Registration Statement and should be read in conjunction with the financial
statements and related notes.
SCHEDULE PAGE
- -------- --------
II--Valuation and Qualifying Accounts....................... 62
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
(3) EXHIBITS
The exhibits listed in the Index to Exhibits are filed as part of this
Report (see page 64).
(b) Reports on Form 8-K
Finisar did not file or amend any reports on Form 8-K during the quarter
ended April 30, 2000.
61
FINISAR CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER DEDUCTIONS-- END OF
PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
------------ ---------- ---------- ------------ ----------
(IN THOUSANDS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended April 30, 1998............ $ -- $ 16,538 $ -- $ -- $ 16,538
Year ended April 30, 1999............ 16,538 248,600 -- -- 265,138
Year ended April 30, 2000............ 265,138 190,218 -- -- 455,356
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: July 20, 2000 FINISAR CORPORATION
By: /s/ JERRY S. RAWLS
-----------------------------------------
Jerry S. Rawls
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
President and Chief
/s/ JERRY S. RAWLS Executive Officer
------------------------------------------- (Principal Executive July 20, 2000
Jerry S. Rawls Officer)
/s/ FRANK H. LEVINSON
------------------------------------------- Chairman of the Board and July 20, 2000
Frank H. Levinson Chief Technical Officer
Vice President, Finance,
/s/ STEPHEN K. WORKMAN Chief Financial Officer
------------------------------------------- and Secretary (Principal July 20, 2000
Stephen K. Workman Financial and Accounting
Officer)
/s/ MICHAEL C. CHILD
------------------------------------------- Director July 20, 2000
Michael C. Child
/s/ ROGER C. FERGUSON
------------------------------------------- Director July 20, 2000
Roger C. Ferguson
/s/ RICHARD B. LIEB
------------------------------------------- Director July 20, 2000
Richard B. Lieb
/s/ LARRY D. MITCHELL
------------------------------------------- Director July 20, 2000
Larry D. Mitchell
63
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
3.4 Bylaws of Registrant (1)
3.5 Restated Certificate of Incorporation of Registrant (1)
4.1 Specimen certificate representing the common stock (1)
10.1 Form of Indemnity Agreement between Registrant and
Registrant's directors and officers (1)
10.2 1989 Stock Option Plan (1)
10.3 1999 Stock Option Plan (1)
10.4 1999 Employee Stock Purchase Plan (1)
10.5 Securities Purchase Agreement between Registrant and certain
investors, dated as of November 6, 1998 (1)
10.6 Shareholders' Agreement among Registrant and certain of its
shareholders, dated as of November 6, 1998 (1)
10.7 Voting Agreement among Registrant and certain of its
shareholders, dated as of November 6, 1998 (1)
10.8 Loan Agreement between Registrant and Fleet National Bank,
dated as of November 6, 1998 (1)
10.9 Security Agreement between Registrant and Fleet National
Bank, dated as of November 4, 1998 (1)
10.10 Security Agreement Re: Contracts, Leases, License and
Permits between Registrant and Fleet National Bank, dated
as of November 4, 1998 (1)
10.11 Building Office Lease for 582 Market Street, Suite 609-610,
San Francisco, CA, dated December 17, 1996 between
Registrant and Niantic Corporation (1)
10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA,
dated April 30, 1997 between Registrant and DM Group VIII
and DM Group VIII-E (1)
10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA,
dated May 26, 1999 between Registrant and Aetna Life
Insurance Company (1)
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
- ------------------------
(1) Incorporated by reference to the same numbered exhibit to Registrant's
Registration Statement on Form S-1 (File No. 333-87017).
64