- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM 10-Q MARK ONE /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 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 94089 SUNNYVALE, CALIFORNIA (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: 408-548-1000 ------------------------ 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 / / At July 31, 2000 there were 160,112,969 shares of the registrant's common stock, $.001 par value, issued and outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JULY 31, 2000 PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets (unaudited) as of April 30, 2000 and July 31, 2000......................................... 2 Condensed Statements of Operations (unaudited) for the three months ended July 31, 1999 and July 31, 2000........ 3 Condensed Statements of Cash Flows (unaudited) for the three months ended July 31, 1999 and July 31, 2000........ 4 Notes to Condensed Financial Statements (unaudited)....... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 11 Item 3. Quantitative and Qualitative Disclosure About Market Risk... 27 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................... 28 Item 6. Exhibits and Reports on Form 8-K............................ 29 Signatures........................................................... 30 Index to Exhibits.................................................... 31 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FINISAR CORPORATION CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) APRIL 30, JULY 31, 2000 2000 --------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $171,194 $103,022 Short-term investments.................................... 149,541 212,083 Accounts receivable-trade (net)........................... 14,348 20,215 Accounts receivable, other................................ 151 1,079 Inventories............................................... 16,494 23,594 Income tax receivable..................................... 148 148 Deferred income taxes..................................... 2,653 2,524 Prepaid expenses.......................................... 278 473 -------- -------- Total current assets........................................ 354,807 363,138 Other assets................................................ 809 733 Property, equipment and improvements, net................... 9,426 11,694 -------- -------- Total assets................................................ $365,042 $375,565 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 5,908 $ 8,397 Accrued compensation...................................... 3,001 1,934 Other accrued liabilities................................. 3,065 3,163 Income tax payable........................................ 122 2,099 -------- -------- Total current liabilities................................... 12,096 15,593 -------- -------- Long-term liabilities: Deferred Tax Liability.................................... 392 392 Other long-term liabilities............................... 132 132 -------- -------- Total long-term liabilities................................. 524 524 -------- -------- Stockholders' equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding at April 30, 2000 and July 31, 2000.................................. -- -- Common stock: $0.001 par value, 200,000,000 shares authorized: 159,842,784 and 160,112,969 shares issued and outstanding at April 30, 2000 and July 31, 2000 respectively.......................................... 160 160 Additional paid-in capital................................ 384,526 385,927 Notes receivable from stockholders........................ (3,248) (2,921) Deferred stock compensation............................... (9,404) (7,705) Accumulated other comprehensive income (loss)............. (182) 194 Retained earnings (accumulated deficit)................... (19,430) (16,207) -------- -------- Total stockholders' equity.................................. 352,422 359,448 -------- -------- Total liabilities and stockholders' equity.................. $365,042 $375,565 ======== ======== SEE ACCOMPANYING NOTES. 2 FINISAR CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED JULY 31, ------------------- 2000 1999 -------- -------- Revenues.................................................... $ 27,212 $ 13,879 Cost of revenues............................................ 16,471 6,252 -------- -------- Gross profit................................................ 10,741 7,627 -------- -------- Operating expenses: Research and development.................................. 4,314 2,840 Sales and marketing....................................... 2,507 1,542 General and administrative................................ 1,385 759 Amortization of deferred stock compensation............... 1,699 287 -------- -------- Total operating expenses.................................... 9,905 5,428 -------- -------- Income from operations...................................... 836 2,199 Interest income (expense), net.............................. 4,445 (89) Other non-operating income (expense) net.................... (22) (28) -------- -------- Income before income taxes.................................. 5,259 2,082 Provision for income taxes.................................. 2,036 829 -------- -------- Net income.................................................. $ 3,223 $ 1,253 ======== ======== Net income per share: Basic..................................................... $ 0.02 $ 0.01 ======== ======== Diluted................................................... $ 0.02 $ 0.01 ======== ======== Shares used in computing net income per share: Basic..................................................... 149,951 88,392 ======== ======== Diluted................................................... 165,313 127,830 ======== ======== SEE ACCOMPANYING NOTES. 3 FINISAR CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS) THREE MONTHS ENDED JULY 31, ------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 3,223 $ 1,253 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization............................. 648 176 Amortization of deferred stock compensation............... 1,699 287 Loss on fixed assets disposal............................. -- -- Changes in operating assets and liabilities: Accounts receivable....................................... (6,795) (906) Inventories............................................... (7,100) (1,723) Other assets.............................................. 10 (140) Deferred income taxes..................................... -- -- Accounts payable.......................................... 2,489 1,120 Accrued compensation...................................... (1,067) (96) Income tax payable........................................ 1,977 469 Other accrued liabilities................................. 98 473 -------- ------- Net cash provided by (used in) operating activities......... (4,818) 913 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment......................... (2,916) (550) Purchase of short-term investments.......................... (62,166) -- Sale of short-term investments.............................. -- -- -------- ------- Net cash used in investing activities....................... (65,082) (550) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligations....................... -- (16) Proceeds from exercise of stock options, net of loans and repurchase of unvested shares............................. 1,728 13 -------- ------- Net cash provided by (used in) financing activities......... 1,728 (3) -------- ------- Net increase (decrease) in cash and cash equivalents........ (68,172) 360 Cash and cash equivalents at beginning of period............ 171,194 5,044 -------- ------- Cash and cash equivalents at end of period.................. $103,022 $ 5,404 ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.................................... $ -- $ 188 ======== ======= Cash paid for taxes....................................... $ 50 $ 360 ======== ======= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Issuance of common stock in exchange for notes receivable.............................................. $ 108 $ 151 ======== ======= SEE ACCOMPANYING NOTES. 4 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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. INTERIM FINANCIAL INFORMATION AND BASIS OF PRESENTATION The interim financial information at July 31, 2000 and for the three months ended July 31, 2000 and 1999 is unaudited but, in the opinion of management, has been prepared on the same basis as the annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) that Finisar considers necessary for a fair presentation of its financial position at such date and its operating results and cash flows for those periods. Results for the interim period are not necessarily indicative of the results to be expected for the entire year, or any future period. The balance sheet at July 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 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 and the first quarter of fiscal 2001 ended on July 30, 2000. 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 5 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) from two customers represented 24.7% and 12.5% of the total balance at April 30, 2000 and two customers represented 18.5% and 22.2% of the total balance at July 31, 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 the quarter ended July 31, 1999, revenues from two customers represented 36% and 19.2% and during the quarter ended July 31, 2000 revenues from 4 customers represented 10.6%, 17.5%, 21.3% and 11% of net revenues. RESEARCH AND DEVELOPMENT Research and development expenditures are charged to operations as incurred. 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 July 31, 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 July 31, 2000 was a gain of $202,360 or $194,276 on an after-tax basis and 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. 6 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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. COMPREHENSIVE INCOME Financial Accounting Standards Board Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("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 gain on available-for-sale securities in quarter ended July 31, 2000 was $504,968 or $376,341 on an after-tax basis. SEGMENT REPORTING Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") establishes standards for the way that public business enterprises report information about operating 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 Company has determined it operates only in one segment. 7 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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. NET INCOME PER SHARE The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts): THREE MONTHS ENDED JULY 31, ------------------- 2000 1999 -------- -------- Numerator: Net income................................................ $ 3,223 $ 1,253 ======= ======= Historical: Denominator for basic net income per share: Weighted-average shares outstanding--basic................ 149,951 88,392 ------- ------- Effect of dilutive securities: Employee stock options.................................... 5,293 3,720 Stock subject to repurchase............................... 10,069 8,772 Convertible redeemable preferred stock.................... -- 26,946 ------- ------- Dilutive potential common shares............................ 15,362 39,438 ------- ------- Denominator for diluted net income per share................ 165,313 127,830 ======= ======= Basic net income per share.................................. $ 0.02 $ 0.01 ======= ======= Diluted net income per share................................ $ 0.02 $ 0.01 ======= ======= 8 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. INVENTORIES Inventories consist of the following (in thousands): APRIL 30, JULY 31, 2000 2000 --------- -------- Raw materials............................................. $ 8,960 $15,822 Work-in-process........................................... 6,524 6,903 Finished goods............................................ 1,010 869 ------- ------- $16,494 $23,594 ======= ======= 4. PROPERTY, EQUIPMENT AND IMPROVEMENTS Property, equipment and improvements consist of the following (in thousands): APRIL 30, JULY 31, 2000 2000 --------- -------- Computer equipment........................................ $2,603 $ 1,954 Office equipment, furniture, and fixtures................. 833 1,186 Machinery and equipment................................... 6,144 9,107 Leasehold improvements.................................... 1,470 1,719 ------ ------- 11,050 13,966 Accumulated depreciation and amortization................. (1,624) (2,272) ------ ------- Property and equipment, net............................... $9,426 $11,694 ====== ======= 5. INCOME TAXES Income taxes for the respective periods were computed using the effective tax rate estimated to be applicable for the fiscal year, which is subject to ongoing review and evaluation by management. 6. 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 9 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. DEFERRED STOCK COMPENSATION (CONTINUED) 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 First quarter ended July 31, 2000 (unaudited)............... -- 1,699 Second quarter ending October 31, 2000 (unaudited).......... -- 940 Third quarter ending January 31, 2001 (unaudited)........... -- 901 Fourth quarter ending April 30, 2001 (unaudited)............ -- 888 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 ======= ======= 7. SUBSEQUENT EVENT On August 16, 2000 Finisar Corporation announced it had entered into a definitive agreement to acquire privately-held Sensors Unlimited, Inc. Sensors Unlimited, headquartered in Princeton, New Jersey, is a leading supplier of optical components that monitor the performance of dense wavelength division multiplexing (DWDM) systems. Sensors Unlimited has developed photodiode array technology based on indium gallium arsenide (InGaAs) which is emerging as a cost effective way to optimize the use of existing bandwidth in DWDM fiber optic networks. Under the terms of the agreement, Sensors Unlimited will merge with a wholly-owned subsidiary of Finisar, and Sensors Unlimited stockholders will be entitled to receive up to approximately 20.9 million shares of Finisar Common Stock including shares issuable upon exercise of options assumed in the merger. The Sensors Unlimited stockholders may elect to receive cash payments in lieu of up to 10% of the shares issuable to them. The transaction will be accounted for as a purchase and is intended to qualify as a tax-free reorganization. The closing price of Finisar's Common Stock on August 15, 2000 was $32.50 per share, giving the transaction an approximate value of $700 million. Following the merger, Sensors Unlimited will operate as a subsidiary of Finisar at its current facility in Princeton, New Jersey. Greg Olsen, Sensors Unlimited's founder and its President and CEO, will join Finisar as an Executive Vice President and a member of Finisar's Board of Directors. Olsen will also continue to serve as President and CEO of the Sensors Unlimited subsidiary. The transaction is expected to be completed in the fourth quarter of calendar 2000 and is subject to approval by Sensors Unlimited's stockholders, the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act, and other customary conditions. For the fiscal year ended December 31, 1999, Sensors Unlimited recorded product revenues of $8.4 million and pretax income of $3.3 million (as an S corporation). For the twelve months ended June 30, 2000, Sensors Unlimited recorded unaudited product revenues of $14.9 million and pretax income of $6.0 million (as an S corporation). Historically, a substantial portion of their expenses for research and development have been offset by government research contracts. 10 ITEM 2. 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 result of many factors, including those set forth under "--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 million from the initial public offering of shares of our common stock, and in April 2000 we received $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 55.2% of our revenues for the quarter ended July 31, 1999 and 38.8% of our revenues for the quarter ended July 31, 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 11 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. 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. 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 $287,000 and $1.7 million of deferred compensation during quarters ended July 31, 1999 and July 31, 2000. We expect to record additional amortization expense relating to deferred stock compensation approximately as follows: $2.7 million during the remainder of 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. 12 RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of revenues for the periods indicated: THREE MONTHS ENDED JULY 31, ----------------------- 1999 2000 -------- -------- Revenues................................................... 100.0% 100.0% Cost of revenues........................................... 45.0 60.5 ----- ----- Gross profit............................................... 55.0 39.5 ----- ----- Operating expenses: Research and development................................. 20.5 15.9 Sales and marketing...................................... 11.1 9.2 General and administrative............................... 5.5 5.1 Amortization of deferred stock compensation.............. 2.1 6.2 ----- ----- Total operating expenses............................... 39.2 36.4 ----- ----- Income from operations..................................... 15.8 3.1 Interest income (expense), net............................. (0.6) 16.3 Other non-operating income (expense), net.................. (0.2) (0.1) ----- ----- Income before income taxes................................. 15.0 19.3 Provision for income taxes................................. 6.0 7.5 ----- ----- Net income................................................. 9.0% 11.8% ===== ===== 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): THREE MONTHS ENDED JULY 31, ----------------------- 1999 2000 ---- -------- Revenues (thousands): Optical subsystems........................................ $ 9,480 $22,038 Test Instruments.......................................... 4,399 5,174 ------- ------- $13,879 $27,212 ======= ======= Geographic coverage (thousands): United States............................................. $ 8,129 $23,142 Canada.................................................... 4,877 2,877 Rest of the World......................................... 873 1,193 ------- ------- $13,879 $27,212 ======= ======= 13 THREE MONTHS ENDED JULY 31, ----------------------- 1999 2000 ---- -------- As a percent of revenues: Optical subsystems........................................ 68.3% 81.0% Test Instruments.......................................... 31.7 19.0 ------- ------- 100.0% 100.0% ======= ======= Geographic coverage: United States............................................. 58.6% 85.0% Canada.................................................... 35.1 10.6 Rest of the World......................................... 6.3 4.4 ------- ------- 100.0% 100.0% ======= ======= Revenues generated in the U.S. and Canada (collectively, North America) are all to customers located in those geographic regions. COMPARISON OF FISCAL QUARTERS ENDED JULY 31, 1999 AND JULY 31, 2000 REVENUES. Revenues increased 96% from $13.9 million in quarter ended July 31, 1999 to $27.2 million in quarter ended July 31, 2000. This reflects a 132% increase in sales of optical subsystems from $9.5 million in quarter ended July 31, 1999 to $22.0 million in quarter ended July 31, 2000 and a 17.6% increase in sales of test systems from $4.4 million in quarter ended July 31, 1999 to $5.2 million in quarter ended July 31, 2000. Sales of optical subsystems and test systems represented 81.0% and 19.0%, respectively, of total revenues in quarter ended July 31, 2000, and 68.3% and 31.7%, respectively, in quarter ended July 31, 1999. Sales to our four principal customers during the quarters ended July 31, 1999 and 2000 were as follows: QUARTER QUARTER ENDED ENDED JULY 31, JULY 31, ------------------- ----------------------- 1999 2000 1999 2000 -------- -------- -------- -------- SALES (IN PERCENTAGE OF MILLIONS) REVENUES Alcatel Networks Corporation (formerly Newbridge Networks)................................................. $5.0 $2.9 36.0% 10.6% Brocade Communications Systems.............................. $0.0 $4.8 0.0% 17.5% EMC......................................................... $2.7 $5.8 19.2% 21.3% Emulex...................................................... $0.4 $3.0 3.2% 11.0% GROSS PROFIT. Gross profit increased from $7.6 million in quarter ended July 31, 1999 to $10.7 million in quarter ended July 31, 2000. As a percentage of revenues, gross profit decreased from 55.0% in quarter ended July 31, 1999 to 39.5% in quarter ended July 31, 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 (68.3% in quarter ended July 31, 1999 and 81.0% in quarter ended July 31, 2000) which generally have lower gross margins than test systems. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 52% from $2.8 million in quarter ended July 31, 1999 to $4.3 million in quarter ended July 31, 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 20.5% in quarter ended July 31, 1999 to 15.9% in quarter ended July 31, 2000. 14 SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 62.6% from $1.5 million in quarter ended July 31, 1999 to $2.5 million in quarter ended July 31, 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 11.1% in quarter ended July 31, 1999 to 9.2% in quarter ended July 31, 2000. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 82.5% from $0.8 million in quarter ended July 31, 1999 to $1.4 million in quarter ended July 31, 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 5.5% in quarter ended July 31, 1999 to 5.1% in quarter ended July 31, 2000. INTEREST INCOME (EXPENSE), NET. Interest income, net of interest expense, of $4,4 million in quarter ended July 31, 2000, compares to net interest expense of $89,000 in quarter ended July 31, 1999. 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 $829,000 in quarter ended July 31, 1999 to $2.0 million in quarter ended July 31, 2000 reflecting an effective tax rate of 39.8% and 38.7%, respectively. Excluding the nondeductible charge for the amortization of deferred compensation in both years, the effective tax rate was 35.0% in quarter ended July 31, 1999 and 29.3% in quarter ended July 31, 2000. The decrease reflects in part the nontaxable nature of a portion of interest income earned during quarter ended July 31, 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 included in our Form 10-K for the fiscal year ended April 30, 2000. 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 $191 million from an additional public offering. As of July 31, 2000, our principal sources of liquidity were $315.1 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 July 31, 2000. Net cash used in operating activities totaled $4.8 million in quarter ended July 31, 2000 while $0.9 million was provided by operating activities in quarter ended July 31, 1999. The use of net cash in operating activities in quarter ended July 31, 2000 was primarily a result of continuing growth in revenues and net income which was more than offset by an increase in assets and liabilities for working capital purposes. Cash provided by operations during quarter ended July 31, 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. 15 Net cash used in investing activities of $65.1 million in quarter ended July 31, 2000 consisted primarily of short-term investments totaling $62.2 million which generally mature greater than 90 days from the initial date of purchase. Other investing activities during quarter ended July 31, 2000 consisted primarily of purchases of equipment and leasehold improvements totaling $2.9 million. Net cash used in investing activities of $.6 million in quarter ended July 31, 1999 consisted primarily of purchases of equipment. Net cash provided by financing activities in the quarter ended July 31, 2000 reflected net proceeds to us of $1.7 million from the exercise of employee stock options, net of loans and repurchase of unvested shares. Net cash provided by financing activities totaled $0.0 million in quarter ended July 31, 1999. We had no material commitments for capital expenditures at July 31, 2000. We 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. 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. 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 16 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 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. 17 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 Alcatel Networks Corporation (formerly Newbridge Networks Corporation), Brocade Communications Systems, EMC Corporation and Emulex and represented 10.6%, 17.5%, 21.3% and 11.0% respectively, of our revenues during quarter ended July 31, 2000 and 36.0%, 0.0%, 19.2% and 3.2%, respectively, of our revenues for quarter ended July 31, 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 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 18 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 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. 19 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. 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 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. 20 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 "Part II, Item 1.--Legal Proceedings." 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 21 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 - 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. 22 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 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. 23 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. 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 24 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; - 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 approximately 73.3 million shares or 46% of the outstanding shares of our common stock. These stockholders, acting together, would be able to effectively 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. 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 25 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. 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. 26 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 3. 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. 27 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In April 1999, Methode, a manufacturer of electronic component devices, filed a lawsuit against us 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. 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 compensatory damages of at least $224.3 million plus interest for the alleged breach of contract. In addition, Methode has 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. 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. 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits. Reference is hereby made to the Exhibit Index commencing on page 31. b. Reports on Form 8-K None. 29 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: September 13, 2000 FINISAR CORPORATION By: /s/ JERRY S. RAWLS ----------------------------------------- Jerry S. Rawls PRESIDENT AND CHIEF EXECUTIVE OFFICER By: /s/ STEPHEN K. WORKMAN ----------------------------------------- Stephen K. Workman, VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER 30 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------------------- ----------------------- 27.1 Financial Data Schedule 31