<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1999
REGISTRATION NO. 333-XXXXX
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FINISAR CORPORATION
(Exact name of Registrant as specified in its charter)
--------------------------
<TABLE>
<S> <C> <C>
CALIFORNIA 3674 94-3038428
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code number) Identification
incorporation or organization) No.)
</TABLE>
1308 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 548-1000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
--------------------------
JERRY S. RAWLS
CHIEF EXECUTIVE OFFICER
FINISAR CORPORATION
1308 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 548-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
DENNIS C. SULLIVAN, ESQ. PETER E. WILLIAMS III, ESQ.
JOHN M FOGG, ESQ. BRIAN D. MCALLISTER, ESQ.
ANDREW M. JACOBSON, ESQ. TIMOTHY J. HARRIS, ESQ.
GRAY CARY WARE & FREIDENRICH LLP MORRISON & FOERSTER LLP
400 HAMILTON AVENUE 755 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94301-1825 PALO ALTO, CALIFORNIA 94304-1018
(650) 328-6561 (650) 813-5600
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / _________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock (no par value)........................... $115,000,000 $31,970
</TABLE>
(1) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(o) under the Securities Act.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[FINISAR LOGO]
COMMON STOCK
--------------
This is Finisar Corporation's initial public offering of common stock.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of this
offering, we expect that the common stock will trade on the Nasdaq National
Market under the symbol "FNSR."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
-----------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ---------
<S> <C> <C>
Public offering price.................................................... $ $
Underwriting discount.................................................... $ $
Proceeds, before expenses, to Finisar Corporation........................ $ $
</TABLE>
The underwriters may also purchase up to an additional
shares from certain of our stockholders at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. We will not receive any of the proceeds from any shares that
may be sold by the selling stockholders.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery in New York, New York on or about
,1999.
------------------
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
SOUNDVIEW TECHNOLOGY GROUP
------------------
The date of this prospectus is , 1999.
<PAGE>
[INSIDE FRONT COVER]
FINISAR
GIGABIT ETHERNET AND FIBRE CHANNEL SOLUTIONS
<TABLE>
<S> <C>
OPTICAL DATA LINKS OPTICAL LINK EXTENDERS
[Picture of Finisar's Optical Data [Picture of Finisar's Optical Link
Links.] Extenders.]
- - Transmitters, Receivers, and - Extending the Distance of Fiber Optic
Transceivers for Switches, Hubs, Links
Servers and Storage Arrays - Up to 120 km
- - Built-in Diagnostics - Built-in Diagnostics
- - Multi-mode and Single-mode for
Multiple Transmission Distances
OPTICITY NETWORK PERFORMANCE TEST SYSTEMS
[Picture of Finisar's Opticity 3000.] [Picture of a Finisar Network Performance
Test System.]
- - Extending the Distance and Capacity of - Testing and Monitoring of High Speed
Fiber Optic Links Networking Systems
- - Multiple Channels up to 10 Gbps - For Fibre Channel, ESCON, NGIO
- - SNMP Compatible - Multiple Configurations
</TABLE>
[Diagram of optical networking system, including Gigabit Ethernet Local Area
network, Gigabit Ethernet Remote Campus LAN, Multi-Protocol Internet Service
Provider, Fibre Channel Remote SAN BackUp Site, Fibre Channel Storage Area
network and pictures of four Finisar Corporation products.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 5
Forward-Looking Statements................................................................................. 17
Use of Proceeds............................................................................................ 18
Dividend Policy............................................................................................ 18
Capitalization............................................................................................. 19
Dilution................................................................................................... 20
Selected Financial Data.................................................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 32
Management................................................................................................. 48
Certain Transactions....................................................................................... 55
Principal and Selling Stockholders......................................................................... 56
Description of Capital Stock............................................................................... 58
Shares Eligible for Future Sale............................................................................ 61
Underwriting............................................................................................... 62
Legal Matters.............................................................................................. 65
Experts.................................................................................................... 65
Where You Can Find More Information........................................................................ 65
Index to Financial Statements.............................................................................. F-1
</TABLE>
INFORMATION IN PROSPECTUS
Unless specifically stated, the information in this prospectus:
- reflects the automatic conversion of all outstanding shares of our
convertible redeemable preferred stock into an aggregate of 8,981,897
shares of our common stock and 12,039,486 shares of our redeemable
preferred stock and the redemption of such shares of redeemable preferred
stock for $2,640,260 upon the closing of this offering;
- assumes the reincorporation of our company in Delaware prior to the
closing of this offering; and
- reflects the creation of a new class of preferred stock and an increase in
the number of authorized shares of common stock to 200,000,000 upon the
closing of this offering.
Beginning in fiscal 2000, our financial records have been maintained 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
comparison, all references to period end dates in this prospectus have been
presented as though the period ended on the last day of the calendar month. The
first quarter of fiscal 2000 ended on August 1, 1999.
You should rely only on the information contained in this prospectus.
Neither we nor the underwriters have authorized any person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We and the underwriters are not making
an offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing in this
prospectus is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations and prospects may
have changed since that date.
Finisar is a registered trademark of Finisar Corporation. This prospectus
contains product names, trade names and trademarks of Finisar and other
organizations.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY,
INCLUDING THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT
DECISION.
FINISAR CORPORATION
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. 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 efficient
design of reliable, high-speed networking systems and the testing and monitoring
of the performance of these systems.
The growing number of users accessing networks, the need to accommodate
higher-bandwidth traffic and the increasingly mission-critical nature of data
networking and storage networking has created the need for a new generation of
high-speed, high-performance networking and storage systems that rely on fiber
optic transmission technology. Many of these systems operate over Gigabit
Ethernet-based LANs, Fibre Channel-based SANs or extended versions of these
networks. These systems utilize fiber optic subsystems which enable them to
transmit data at very high speeds with high accuracy, often over long distances.
In addition to creating a need for optical subsystems, complex protocols such as
Gigabit Ethernet and Fibre Channel have resulted in a demand for advanced
network performance test systems. As these protocols have emerged, system
testing has become more difficult, requiring increasingly sophisticated and
specialized test systems capable of capturing data at high speeds, filtering the
data and identifying various types of intermittent errors and other network
problems.
The development and manufacture of high quality, cost-effective fiber optic
subsystems for LANs and SANs present a number of significant technical
challenges. Data integrity, reliability and standards compliance become
increasingly difficult at high transmission speeds. Additionally, manufacturers
require optical subsystems which support a broad range of network applications.
To date, we believe that only a limited number of companies have developed the
specialized expertise required to engineer fiber optic subsystems and network
performance test systems which meet the requirements of manufacturers of
high-speed data networking and storage systems. Our optical subsystems and
network performance test systems are designed to provide the following key
benefits to systems manufacturers:
VALUE-ADDED FUNCTIONS AND INTELLIGENCE. Our high-speed fiber optic
subsystems are engineered to deliver value-added functionality and intelligence.
For example, many of our optical subsystems include a microprocessor with
proprietary embedded software that allows customers to monitor the optical
performance of each port on their systems in real time. Additionally, many of
our subsystems are engineered to automatically recognize different versions of
the Fibre Channel protocol and to interoperate with legacy systems. Real-time
monitoring and interoperability are particularly important in the Gigabit
Ethernet LAN and Fibre Channel SAN markets where reliability and time to market
are critical. Our test systems also contain value-added software functions such
as data capture, data generation and error generation.
HIGH LEVEL OF DATA INTEGRITY. Through the use of advanced packaging and
circuit design, our optical subsystems deliver a high level of data integrity,
which results in precise transmission of data at very high speeds over varying
distances. This high level of data integrity allows our subsystems to operate
reliably over a wide range of temperatures and other field conditions which we
believe enables our customers to design and deliver more robust systems.
1
<PAGE>
HIGH RELIABILITY. We design all of our subsystems to provide the high
reliability and flexibility required by manufacturers for mission-critical
applications such as real-time SAN storage backup and LAN backbone switching.
Some of our products have a statistically-determined mean time to failure of 40
million hours. In addition, because our subsystems exceed the FCC standards for
electromagnetic interference emissions, we offer manufacturers greater
flexibility in the design of their systems.
BROAD OPTICAL SUBSYSTEM PRODUCT LINE. We offer a broad line of optical
subsystems which operate at varying protocols, speeds, fiber types, voltages,
wavelengths and distances and are available in a variety of industry standard
packaging configurations, or form factors. The breadth of our optical subsystems
product line is important to many of our customers who manufacture a wide range
of networking products for diverse applications.
BROAD TEST SYSTEM PRODUCT LINE. We offer a broad line of test systems to
assist our customers in efficiently designing reliable, high-speed networking
systems and testing and monitoring the performance of these systems. We believe
our test systems enable our customers to focus their attention on the
development of new products, reduce overall development costs and speed time to
market.
Our goal is to be the optical subsystem and network performance test system
provider of choice for multiple protocols and network applications. We intend to
maintain our technological leadership through continual enhancement of our
existing products and the development of new products as evolving technology
permits higher speed transmission of data, with greater capacity, over longer
distances. We plan to leverage our relationships with our existing customers as
they enter new, high-speed data communications markets and to expand our sales
and marketing organization in order to establish new relationships with other
key data and storage networking manufacturers. We intend to capitalize on our
customers' satisfaction and our service-oriented approach to take advantage of
cross-selling opportunities. We also plan to expand our international sales
efforts.
We sell our products to leading networking and storage equipment
manufacturers such as 3Com, EMC, Emulex, IBM, Newbridge Networks and Sun
Microsystems, as well as emerging manufacturers such as Brocade Communications
and Extreme Networks. For the fiscal year ended April 30, 1999, we had revenues
of $35.5 million and net income of $3.1 million. For the quarter ended July 31,
1999, we had revenues of $13.9 million and net income of $1.3 million.
CORPORATE INFORMATION
Finisar was incorporated in California in April 1987 and reincorporated in
Delaware in , 1999. Our principal executive offices are located at 1308
Moffett Park Drive, Sunnyvale, California 94089, our telephone number is (408)
548-1000 and our website is located at www.finisar.com. Information on our
website is not a part of this prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... shares
Common stock to be outstanding after this
offering................................... shares
Use of proceeds.............................. To repay outstanding indebtedness and redeem
our redeemable preferred stock and for
general corporate purposes, principally
working capital and capital expenditures. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol....... FNSR
</TABLE>
The number of shares that will be outstanding after the offering is based on
the number of shares outstanding as of July 31, 1999 and excludes:
- 1,356,540 shares of common stock issuable upon exercise of options
outstanding at July 31, 1999 under our 1989 and 1999 stock option plans,
with a weighted average exercise price of $0.50 per share, 647,000 shares
issuable upon exercise of options granted subsequent to July 31, 1999 with
a weighted average exercise price of $1.41 per share, and an additional
5,888,000 shares reserved for issuance under our 1999 stock option plan as
of September 13, 1999; and
- 250,000 shares of common stock reserved for issuance under our 1999
employee stock purchase plan.
3
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere in this prospectus. The statement of operations data for the fiscal
years ended April 30, 1997, 1998 and 1999 are derived from, and are qualified by
reference to, our audited financial statements included elsewhere in this
prospectus. The statement of operations data for the years ended April 30, 1995
and 1996 are derived from unaudited financial statements not included in this
prospectus. The statement of operations data for the three month periods ended
July 31, 1998 and 1999 and the balance sheet data as of July 31, 1999 are
derived from, and are qualified by reference to, our unaudited financial
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JULY 31,
----------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $ 2,684 $ 5,660 $ 8,457 $ 22,067 $ 35,471 $ 6,794 $ 13,879
Gross profit................. 1,822 2,538 5,019 13,362 19,957 4,128 7,627
Income from operations....... 654 700 1,374 7,094 5,651 1,603 2,247
Net income................... 433 463 947 4,358 3,077 1,053 1,300
Net income per share (1):
Basic...................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04
Diluted.................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03
Shares used in per share
calculations (1):
Basic...................... 44,000 44,000 44,000 43,753 36,860 41,800 29,464
Diluted.................... 44,000 44,000 44,000 43,753 44,937 41,800 42,610
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1999
-------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(2) AS ADJUSTED(3)
--------- ----------- -------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 5,404 $ 5,404 $
Working capital.................................. 14,007 14,007
Total assets..................................... 24,459 24,459
Long-term debt................................... 11,019 11,019
Convertible redeemable preferred stock........... 26,259 --
Total stockholders' equity (deficit)(4).......... (19,950) 3,669
</TABLE>
- ------------------------
(1) See Note 1 to our financial statements for a description of the computation
of the number of shares and net income per share.
(2) The pro forma amounts give effect to the conversion of all outstanding
shares of our convertible redeemable preferred stock into 8,981,897 shares
of our common stock and 12,039,486 shares of our redeemable preferred stock.
(3) The pro forma as adjusted amounts reflect pro forma amounts, as further
adjusted to reflect the sale of shares of common stock by
Finisar in this offering, at an assumed initial public offering price of $
per share and after deducting the estimated underwriting
discount and estimated offering expenses, and our receipt and application of
the net proceeds, including the repayment of our term loan and redemption of
all outstanding shares of redeemable preferred stock upon the closing of
this offering. See "Use of Proceeds" and "Capitalization."
(4) Total stockholders' equity (deficit) reflects retained earnings of $10.8
million prior to giving effect to the repurchase of shares of our common
stock for $31.7 million in November 1998.
4
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING A
DECISION TO BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR,
OUR BUSINESS COULD BE HARMED, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES.
OUR OPERATING RESULTS ARE SUBJECT TO MANY FACTORS, SOME OF WHICH ARE OUTSIDE OF
OUR CONTROL, THAT COULD CAUSE OUR QUARTERLY AND ANNUAL OPERATING RESULTS TO
FLUCTUATE AND OUR STOCK PRICE TO BE VOLATILE
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:
- demand for and market acceptance of our products and our customers'
products;
- continued development of the LAN, SAN and extended network markets;
- our ability to develop, introduce, ship and support new products and
product enhancements and to manage product transitions;
- announcements and new product introductions by our competitors;
- timing and size of orders for our products;
- loss or addition of one or more significant customers;
- our ability to attain and maintain production volumes and quality levels
for our products, including our ability to obtain sufficient supplies of
long lead-time and sole or limited sourced components for our products;
- changes in our product mix or the distribution channels through which we
sell our products;
- timing of the qualification process for our products by potential or
existing customers; and
- increases in manufacturing cost, including the prices of components we
purchase.
We may experience a delay in generating or recognizing revenues for a number
of reasons. Orders at the beginning of each quarter typically do not equal
expected revenues for that quarter and are generally cancelable at any time.
Accordingly, we depend on obtaining orders in a quarter for shipment in that
quarter to achieve our revenue objectives. Failure to ship these products by the
end of a quarter may adversely affect our operating results. Furthermore, our
customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty. Because we base our operating expenses on anticipated
revenue trends and a high percentage of our expenses are fixed in the short
term, any delay in generating or recognizing forecasted revenues could
significantly harm our business.
It is likely that in some future quarters our operating results may fall
below the expectations of securities analysts and investors. In this event, the
trading price of our common stock would significantly decline.
OUR SUCCESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE EMERGING HIGH-SPEED
LAN, SAN AND EXTENDED NETWORK MARKETS
Our optical subsystem and network performance test systems products are used
exclusively in high-speed local area networks, or LANs, storage area networks,
or SANs, and extended networks. Accordingly, widespread adoption of high-speed
LANs, SANs and extended networks is critical to our future success. The markets
for high-speed LANs, SANs and extended networks have only recently begun to
develop and are rapidly evolving. Because these markets are new and evolving, it
is difficult to
5
<PAGE>
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 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 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 in redesigning our products to meet this
new industry standard. We cannot assure you that we will be successful in
re-designing our products. Our products comprise only a part of an entire
networking system, and we depend on the companies that provide other components
to support industry standards as they evolve. The failure of these companies,
many of which are significantly larger than we are, to support these industry
standards could negatively impact market acceptance of our products. Moreover,
if we introduce a product before an industry standard has become widely
accepted, we may incur significant expenses and losses due to lack of customer
demand, unusable purchased components for these products and the diversion of
our engineers from future product development efforts. In addition, because we
may develop some products prior to the adoption of industry standards, we may
develop products that do not comply with the eventual industry standard. Our
failure to develop products that comply with industry standards would limit our
ability to sell our products. Finally, if new standards evolve, we may not be
able to successfully design and manufacture new products in a timely fashion, if
at all, that meet these new standards.
In the United States, our products must comply with various regulations and
standards defined by the Federal Communications Commission and Underwriters
Laboratories. Internationally, products that we develop also will be required to
comply with standards established by local authorities in various countries.
Failure to comply with existing or evolving standards established by regulatory
authorities or to obtain timely domestic or foreign regulatory approvals or
certificates could significantly harm our business.
WE DEPEND ON LARGE PURCHASES FROM A FEW SIGNIFICANT CUSTOMERS, AND ANY LOSS,
CANCELLATION, REDUCTION OR DELAY IN PURCHASES BY THESE CUSTOMERS COULD HARM OUR
BUSINESS
A small number of customers have accounted for a significant portion of our
revenues. Our success will depend on our continued ability to develop and manage
relationships with significant customers. Sales to Newbridge Networks
Corporation and EMC Corporation represented 34.9% and 19.0% of our revenues
during the three month period ended July 31, 1999, 25.1% and 20.8% of our
revenues for fiscal 1999 and 43.9% and 14.6% of our revenues for fiscal 1998.
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 reducing 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
6
<PAGE>
their products which 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 and will in the future seek price concessions
from us. Further, our customers may in the future shift their purchases of
certain 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 any further
price concessions could significantly harm our business.
BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS, OUR CUSTOMERS MAY
CEASE PURCHASING OUR PRODUCTS AT ANY TIME IF WE FAIL TO MEET OUR CUSTOMERS'
NEEDS
We do not have long-term contracts with our customers. As a result, our
agreements with our customers do not provide any assurance of future sales.
Accordingly:
- our customers can stop purchasing our products at any time without
penalty;
- our customers are free to purchase products from our competitors; and
- our customers are not required to make minimum purchases.
Sales are typically made pursuant to individual purchase orders, often with
extremely short lead times. If we are unable to fulfill these orders in a timely
manner, we will lose sales and customers.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE EFFECTIVELY,
WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE
The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We expect that new technologies will emerge as
competition and the need for higher and more cost effective bandwidth increases.
Our future performance will depend on the successful development, introduction
and market acceptance of new and enhanced products that address these changes as
well as current and potential customer requirements. The introduction of new and
enhanced products may cause our customers to defer or cancel orders for existing
products. We have in the past experienced delays in product development and such
delays may occur in the future. Therefore, to the extent customers defer or
cancel orders in the expectation of a new product release or there is any delay
in development or introduction of our new products or enhancements of our
products, our operating results would suffer. We also may not be able to develop
the underlying core technologies necessary to create new products and
enhancements, or to license these technologies from third parties. Product
development delays may result from numerous factors, including:
- changing product specifications and customer requirements;
- difficulties in hiring and retaining necessary technical personnel;
- difficulties in reallocating engineering resources and overcoming resource
limitations;
- difficulties with contract manufacturers;
- changing market or competitive product requirements; and
- unanticipated engineering complexities.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as 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.
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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 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., Cielo
Communications, Inc., International Business Machines Inc. 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, 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.
WE EXPECT AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE WHICH MAY REDUCE
GROSS MARGINS OR REVENUES, AND, AS A RESULT, WE MUST CONTINUE TO REDUCE OUR
PRODUCT COSTS IN ORDER TO PRICE OUR PRODUCTS COMPETITIVELY
The market for optical subsystems is characterized by declining average
selling prices, or ASPs, 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 ASPs. We anticipate that ASPs 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 ASPs. 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.
WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING
In April 1999, Methode Electronics, 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 lawsuit seeks
monetary damages and injunctive relief. We believe that we have strong defenses
against Methode's lawsuit, and we intend to defend the suit vigorously. However,
the litigation is in the preliminary stage, and we cannot predict its outcome.
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
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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 royalty payments
pursuant to any such license agreement, our business would be significantly
harmed. See "Business--Pending Legal Proceeding."
OUR CUSTOMERS OFTEN EVALUATE OUR PRODUCTS FOR LONG AND VARIABLE PERIODS WHICH
CAUSES THE TIMING OF PURCHASES AND OUR 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 WE NEED TO EXPAND THESE REQUIREMENTS
We currently rely on three contract manufacturers for substantially all of
our assembly requirements. We do not have any long term contracts with these
manufacturers. We have experienced delays in product shipments from contract
manufacturers in the past, which in turn delayed product shipments to our
customers. We may in the future experience similar delays or other problems,
such as inferior quality and insufficient quantity of product, any of which
could significantly harm our business. We cannot assure you that we will be able
to effectively manage our contract manufacturers or that these manufacturers
will meet our future requirements for timely delivery of products of sufficient
quality and quantity. We intend to regularly introduce new products and product
enhancements, which will require that we rapidly achieve volume production by
coordinating our efforts with those of our suppliers and contract manufacturers.
The inability of our contract manufacturers to provide us with adequate supplies
of high-quality products or the loss of any of our contract manufacturers would
cause a delay in our ability to fulfill orders while we obtain a replacement
manufacturer and would significantly harm our business.
If the demand for our products grows, we will need to increase our material
purchases, contract manufacturing capacity and internal test and quality
assurance functions. Any disruptions in product flow could limit our revenue,
adversely affect our competitive position and reputation and result in
additional costs or cancellation of orders under agreements with our customers.
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In addition, we are considering sourcing a significant portion of our
contract manufacturing internationally. 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.
BECAUSE SUBSTANTIALLY ALL OF OUR REVENUE IS DERIVED FROM SALES OF TWO PRODUCT
FAMILIES, WE ARE DEPENDENT ON WIDESPREAD MARKET ACCEPTANCE OF THESE PRODUCT
FAMILIES
We currently derive substantially all of our revenue from sales of our
optical subsystems and network performance test systems. We expect that revenue
from these products will continue to account for substantially all of our
revenue for the foreseeable future. Accordingly, widespread acceptance of these
products is critical to our future success. If the market does not continue to
accept either our optical subsystems or our network performance test systems,
our revenues will decline significantly. Factors that may affect the market
acceptance of our products include the continued growth of the markets for LANs,
SANs 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.
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IF WE LOSE QUALIFIED PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED
PERSONNEL, WE MAY NOT BE SUCCESSFUL
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 may be subject to claims
of this type in the future as we seek to hire qualified personnel and 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 WILL 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
Networking products frequently contain undetected software or hardware
defects when first introduced or as new versions are released. Our products are
complex and defects may be found from time to time. In addition, our products
are often embedded in or deployed in conjunction with our customers' products
which incorporate a variety of components produced by third parties. As a
result, when problems occur, it may be difficult to identify the source of the
problem. These problems may cause us to incur significant damages or warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relation problems or
loss of customers, all of which would harm our business.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR
BUSINESS
Our success and ability to compete is dependent in part on our proprietary
technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect our proprietary rights. To date, we have relied
primarily on certain 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
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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. See "Risk
Factors--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.
WE MUST CONTINUE TO DEVELOP AND EXPAND OUR DIRECT SALES OPERATION AND RESELLER
DISTRIBUTION CHANNELS TO INCREASE REVENUE
Historically, we have relied primarily on a limited direct sales
organization, supported by third party representatives, to sell our products
domestically and on indirect distribution channels to sell our products
internationally. Our distribution strategy focuses primarily on developing and
expanding our direct sales organization in North America and our indirect
distribution channels internationally. We may not be able to successfully expand
our direct sales organization and the cost of any expansion may exceed the
revenue generated. To the extent that we are successful in expanding our direct
sales organization, we cannot assure you that we will be able to compete
successfully against the significantly larger and well-funded sales and
marketing operations of many of our current or potential competitors. In
addition, if we fail to develop relationships with significant international
resellers or domestic manufacturing 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.
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IF WE OR OUR SUPPLIERS, MANUFACTURERS, CUSTOMERS OR SERVICE PROVIDERS FAIL TO BE
YEAR 2000 COMPLIANT, OUR BUSINESS MIGHT BE SEVERELY DISRUPTED
The risk that software or hardware inaccurately process dates following the
year 2000 presents several risks for our business. In particular, we are subject
to:
- costs associated with the failure of our products to be year 2000
compliant, including potential warranty or other claims from our
customers, which may result in significant expense to us;
- business shutdowns or slowdowns as a result of a failure of the internal
management systems we use to run our business, which could disrupt our
business operations;
- interruption of product or component supplies, or a reduction in product
quality, as a result of the failure of systems used by our manufacturers
or suppliers; and
- reductions or deferrals in sales activities as a result of year 2000
compliance issues of our customers.
Our internal year 2000 compliance review is focused on reviewing our
internal computer information and security systems for year 2000 compliance, and
developing and implementing remedial programs to resolve year 2000 issues in a
timely manner; however, we have not tested our products in every possible
computer environment, and therefore such products may not be fully year 2000
compliant. Additionally, we are contacting our third party suppliers and
manufacturers and requesting their written assurances that their systems are
year 2000 compliant. To date, our year 2000 costs have been primarily driven by
the cost of our personnel conducting the year 2000 compliance review. We
estimate such costs to date have been $100,000.
If our suppliers, manufacturers, vendors, major distributors and partners
fail to correct their year 2000 problems, these failures could result in an
interruption in, or a failure of, our normal business activities or operations.
In particular, the failure of a sole or limited source supplier or contract
manufacturer to be year 2000 compliant could seriously interrupt our
manufacturing process, which could substantially reduce our revenues. If a year
2000 problem occurs, it may be difficult to determine which vendor's products
have caused the problem. These failures could interrupt our operations and
damage our relationships with our customers. Due to the general uncertainty
inherent in the year 2000 problem resulting from the readiness of third-party
suppliers and vendors, we are unable to determine at this time whether any year
2000 failures will harm us.
Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems. This
situation may reduce funds available to purchase our products. Therefore, some
customers may wait to purchase our products until after the year 2000, which may
reduce our revenue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Compliance."
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US
TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES
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. While we have no current agreements or negotiations underway, 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;
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- 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.
CONTROL BY OUR EXISTING STOCKHOLDERS WILL LIMIT YOUR ABILITY TO INFLUENCE THE
OUTCOME OF MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DISCOURAGE POTENTIAL
ACQUISITIONS OF OUR BUSINESS BY THIRD PARTIES
Upon completion of this offering, our executive officers, directors and 5%
or greater stockholders will beneficially own shares or approximately
% of the outstanding shares of common stock, or shares or %, assuming the
full exercise of the underwriters' over-allotment option. These stockholders,
acting together, would be able to control all matters requiring approval by
stockholders, including the election or removal of directors and the approval of
mergers or other business combination transactions. This concentration of
ownership could have the effect of delaying or preventing a change in our
control or otherwise discouraging a potential acquirer from attempting to obtain
control of us, which in turn could have an adverse effect on the market price of
our common stock or prevent our stockholders from realizing a premium over the
market price for their shares of common stock. See "Principal and Selling
Stockholders."
IF WE ARE UNABLE TO MANAGE OUR INTERNATIONAL OPERATIONS EFFECTIVELY, OUR
BUSINESS WOULD BE SIGNIFICANTLY HARMED
Historically, substantially all of our sales have been made to customers in
North America. To address expanding international markets, we have recently
established relationships with distributors in Japan, the United Kingdom and
Israel. 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
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local currency. Doing so will subject us to fluctuations in exchange rates
between the U.S. dollar and the particular local currency.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DISCOURAGE POTENTIAL
ACQUISITIONS OF OUR BUSINESS BY THIRD PARTIES
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.
For a more detailed discussion of such anti-takeover provisions, see
"Description of Capital Stock."
MANAGEMENT CAN SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH OUR
STOCKHOLDERS MAY NOT AGREE
Net proceeds of this offering are not allocated for a specific purpose. Our
management will have broad discretion in determining how to spend the net
proceeds from this offering and may spend the proceeds in a manner that our
stockholders may not deem desirable. We cannot assure you that our investments
and use of the net proceeds of this offering will yield favorable returns or
results.
OUR HEADQUARTERS AND CONTRACT MANUFACTURERS ARE ALL LOCATED IN NORTHERN
CALIFORNIA WHERE NATURAL DISASTERS MAY OCCUR
Currently, our corporate headquarters and contract manufacturers are located
in Northern California. Northern California historically has been vulnerable to
certain 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.
SUBSTANTIAL NUMBERS OF SHARES OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR SALE
IN THE PUBLIC MARKET SIMULTANEOUSLY, WHICH COULD CAUSE THE MARKET PRICE OF OUR
STOCK TO DECLINE
Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of shares is
available for sale, could cause the market price of our common stock to decline.
The number of shares of common stock available for sale in the public market
will be limited by lock-up agreements under which the holders of substantially
all of our outstanding shares of common stock and options and warrants to
purchase common stock will agree not to sell or otherwise dispose of any of
their shares for a period of 180 days after the date of this prospectus without
the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Upon the expiration of these lock-up agreements and assuming the full exercise
of all vested options to purchase common stock outstanding on , 1999,
shares of common stock will
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become eligible for sale simultaneously. Moreover, Merrill Lynch may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements. In addition to the adverse effect
a price decline could have on holders of common stock, that decline would likely
impede our ability to raise capital through the issuance of additional shares of
common stock or other equity securities. See "Shares Eligible for Future Sale"
and "Underwriting."
PURCHASERS IN THIS OFFERING WILL SUFFER IMMEDIATE, SUBSTANTIAL DILUTION IN PRO
FORMA NET TANGIBLE BOOK VALUE PER SHARE
The initial public offering price of our common stock will be substantially
higher than the pro forma net tangible book value per share of the outstanding
common stock immediately after the offering. Therefore, based on an assumed
initial public offering price of $ per share, if you purchase our common
stock in this offering you will suffer immediate dilution of approximately
$ per share. If additional shares are sold by the underwriters following
exercise of their over-allotment option, or if outstanding options or warrants
for our common stock are exercised, there will be further dilution. See
"Dilution."
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS ON
REASONABLE TERMS
Our capital requirements depend on several factors, including the rate of
market acceptance of our products, the ability to expand our customer base and
the growth of operating expenses. If our capital requirements vary from those
currently planned, we may require additional financing sooner than anticipated.
If we raise additional funds through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution or these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock. If
we raise additional funds through the issuance of debt securities, those
securities would have rights, preferences and privileges senior to holders of
common stock and the terms of this debt could impose restrictions on our
operations. Additional financing may not be available, if at all, when needed on
terms favorable to us. If adequate funds are not available or are not available
on acceptable terms, we may be unable to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures, which
could significantly harm our business.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT
OR ABOVE THE OFFERING PRICE
There previously has not been a public market for our common stock. We
cannot predict the extent to which investor interest in us will lead to the
development of a trading market or how liquid that market might become. The
initial public offering price for our common stock will be determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the trading market. For a
discussion of the factors to be considered in determining the initial public
offering price, see "Underwriting."
In addition, 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.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. We use words like
"anticipates," "believes," "plans," "expects," "future," "intends" and similar
expressions to identify these forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including:
- uncertainty regarding the commercial acceptance of high-speed networking
and storage technologies;
- uncertainty regarding our future operating results;
- our ability to introduce new products;
- delays or losses of sales due to long sales and implementation cycles for
our products;
- the possibility of lower prices, reduced gross margins and loss of market
share due to increased competition; and
- increased demands on our resources due to anticipated growth.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information or future events.
17
<PAGE>
USE OF PROCEEDS
We estimate our net proceeds from the sale of the shares of common
stock offered by Finisar in this offering to be approximately $
million, based on an assumed initial public offering price of $ per share and
after deducting the estimated underwriting discount and offering expenses. We
will not receive any of the proceeds from any shares that may be sold by the
selling stockholders upon exercise of the underwriters' over-allotment option.
We intend to use the net proceeds of this offering:
- to repay outstanding indebtedness of approximately $11.0 million under our
bank credit facility;
- to redeem all outstanding shares of our redeemable preferred stock for
$2,640,260; and
- for general corporate purposes, including capital expenditures and working
capital.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. However, we have no current commitments or agreements with respect
to any of these types of acquisitions or investments. Pending these uses, we
intend to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities.
Borrowings under our credit facility bear interest at our election at the
time of borrowing at either the London Interbank Offering Rate or the bank's
prime rate. The interest rate on our credit facility was 7.04% per annum as of
July 31, 1999.
DIVIDEND POLICY
We have never paid cash dividends on our capital stock. We currently intend
to retain future earnings to finance the growth and development of our business,
and we do not anticipate paying any cash dividends in the foreseeable future. In
addition, the terms of our bank credit agreement currently prohibit the payment
of dividends on our capital stock.
18
<PAGE>
CAPITALIZATION
The following table sets forth our short-term debt and total capitalization
as of July 31, 1999:
- on an actual basis;
- on a pro forma basis, giving effect to the conversion of all outstanding
shares of convertible redeemable preferred stock into 8,981,897 shares of
common stock and 12,039,486 shares of redeemable preferred stock; and
- on a pro forma basis, as further adjusted to reflect the sale of
shares of common stock by Finisar in this offering, at an assumed
initial public offering price of $ per share and after deducting the
estimated underwriting discount and estimated offering expenses, and our
receipt and application of the net proceeds.
<TABLE>
<CAPTION>
JULY 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of capital lease obligations.................................. $ 51 $ 51 $ 51
--------- ----------- -------------
--------- ----------- -------------
Long-term portion of note payable and capital lease obligations............... $ 11,019 $ 11,019 $ 4
Convertible redeemable preferred stock, no par value: 12,100,000 shares
authorized, 12,039,486 shares issued and outstanding, actual; 12,100,000
shares authorized, no shares issued or outstanding, pro forma; no shares
authorized, issued or outstanding, proforma as adjusted..................... 26,259 -- --
Redeemable preferred stock, no par value: 12,100,000 shares authorized, no
shares issued or outstanding, actual; 12,100,000 shares authorized,
12,039,486 issued and outstanding, pro forma; no shares authorized, issued
or outstanding, pro forma as adjusted....................................... -- 2,640 --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; no shares authorized, issued or
outstanding, actual and pro forma; 5,000,000 shares authorized, no
shares issued or outstanding, pro forma as adjusted..................... -- -- --
Common stock, no par value; 75,000,000 shares authorized, 32,512,365
shares issued and outstanding, actual; 75,000,000 shares authorized,
41,494,262 shares issued and outstanding, pro forma; Common Stock,
$0.001 par value; 200,000,000 shares authorized, shares issued and
outstanding, pro forma as adjusted (1).................................. 6,115 29,734
Deferred stock compensation............................................... (3,415) (3,415) (3,415)
Notes receivable from stockholders........................................ (1,671) (1,671) (1,671)
Retained earnings (accumulated deficit) (2)............................... (20,979) (20,979) (20,979)
--------- ----------- -------------
Total stockholders' equity (deficit) (2)................................ $ (19,950) $ 3,669 $
--------- ----------- -------------
--------- ----------- -------------
Total capitalization.................................................. $ 17,328 $ 17,328 $
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
- ------------------------------
(1) Excludes:
- 1,356,540 shares of common stock issuable upon exercise of options
outstanding at July 31, 1999 under our 1989 and 1999 stock option plans,
with a weighted average exercise price of $0.50 per share, 647,000 shares
of common stock issuable upon exercise of options granted subsequent to
July 31, 1999 with a weighted average exercise price of $1.41 per share,
and an additional 5,888,000 shares reserved for issuance under our 1999
stock option plan as of September 13, 1999; and
- 250,000 shares of common stock reserved for issuance under our 1999
employee stock purchase plan.
See "Management--Stock Plans," "Description of Capital Stock" and Note 6 to
our financial statements.
(2) Reflects retained earnings of $10.8 million prior to giving effect to the
repurchase of shares of our common stock for $31.7 million in November 1998.
19
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of July 31,
1999 was approximately $3.6 million, or $0.09 per share. Pro forma net tangible
book value per share represents the amount of our total assets, excluding net
intangible assets, less our total liabilities, divided by the total number of
shares of common stock outstanding, after giving effect to the conversion of all
outstanding shares of convertible redeemable preferred stock into an aggregate
of 8,981,897 shares of common stock and 12,039,486 shares of redeemable
preferred stock, and the redemption of all outstanding shares of redeemable
preferred stock. Dilution in pro forma net tangible book value per share
represents the difference between the amount per share paid by investors in this
offering and the pro forma net tangible book value per share of our common stock
immediately after the offering. After giving effect to the sale of the
shares of common stock by us in this offering, at an assumed initial public
offering price of $ per share, and after deducting the estimated underwriting
discount and estimated offering expenses payable by us, the pro forma net
tangible book value of our common stock would have been $ million, or
$ per share. This represents an immediate increase in net tangible book
value of $ per share to existing stockholders and an immediate dilution
of $ per share to new investors. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
---------
Pro forma net tangible book value per share as of July 31,
1999........................................................ $ 0.09
Increase per share attributable to new investors.............. $
---------
Pro forma net tangible book value per share after this
offering...................................................... $
---------
Dilution per share to new investors............................. $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis, as of July 31, 1999:
- the number of shares of common stock purchased from us;
- the total consideration paid to us;
- the average price per share paid by existing stockholders; and
- the average price per share paid by new investors, before deducting the
estimated underwriting discount and offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 41,494,262 % $ 26,799,005 % $ 0.65
New investors.....................................
------------- ----- ------------- -----
Total......................................... 100.0% $ 100.0% $
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
In the event that the underwriters exercise in full their over-allotment
option, sales by the selling stockholders in this offering will reduce the
number of shares of common stock held by existing stockholders to or
approximately % of the total number of shares of common stock outstanding
after this offering and will increase the number of shares held by new investors
to or approximately % of the total number of shares of common stock
outstanding after this offering. See "Principal and Selling Stockholders."
The information in the above table excludes 1,356,540 shares of common stock
issuable upon exercise of options outstanding at July 31, 1999 under our 1989
and 1999 stock option plans, with a weighted average exercise price of $0.50 per
share, and 647,000 shares of common stock issuable upon exercise of options
granted subsequent to July 31, 1999 with a weighted average exercise price of
$1.41 per share. To the extent these options are exercised, there will be
further dilution to the new investors. See "Management--Stock Plans" and Note 6
to our financial statements.
20
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere in this prospectus. The statement of operations data set forth below
for the years ended April 30, 1997, 1998 and 1999 and the balance sheet data as
of April 30, 1998 and 1999 are derived from, and are qualified by reference to,
our audited financial statements included elsewhere in this prospectus. The
balance sheet data as of April 30, 1997 are derived from audited financial
statements not included in this prospectus. The statement of operations data set
forth below for the years ended April 30, 1995 and 1996 and the balance sheet
data as of April 30, 1995 and 1996 are derived from unaudited financial
statements not included in this prospectus. The statement of operations data set
forth below for the three month periods ended July 31, 1998 and 1999 and the
balance sheet data as of July 31, 1999 are derived from, and are qualified by
reference to, our unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include all normal recurring
adjustments that we consider necessary for a fair presentation of our financial
position and results of operations. The results of operations for the three
months ended July 31, 1999 are not necessarily indicative of the results that
may be expected for the full fiscal year ending April 30, 2000, or any other
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JULY 31,
----------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 2,684 $ 5,660 $ 8,457 $ 22,067 $ 35,471 $ 6,794 $ 13,879
Cost of revenues................................ 862 3,122 3,438 8,705 15,514 2,666 6,252
--------- --------- --------- --------- --------- --------- ---------
Gross profit.................................... 1,822 2,538 5,019 13,362 19,957 4,128 7,627
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development...................... 745 1,442 2,536 3,806 7,864 1,394 2,840
Sales and marketing........................... 144 116 645 1,629 4,145 833 1,542
General and administrative.................... 279 280 464 833 1,902 298 759
Amortization of deferred compensation......... -- -- -- -- 395 -- 239
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.................... 1,168 1,838 3,645 6,268 14,306 2,525 5,380
--------- --------- --------- --------- --------- --------- ---------
Income from operations.......................... 654 700 1,374 7,094 5,651 1,603 2,247
Interest income (expense), net.................. 1 10 13 4 (275) (7) (90)
Other income (expense), net..................... -- -- -- (25) (425) 25 (28)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes...................... 655 710 1,387 7,073 4,951 1,621 2,129
Provision for income taxes...................... 222 247 440 2,715 1,874 568 829
--------- --------- --------- --------- --------- --------- ---------
Net income...................................... $ 433 $ 463 $ 947 $ 4,358 $ 3,077 $ 1,053 $ 1,300
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share:
Basic......................................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Diluted....................................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in per share calculations:
Basic......................................... 44,000 44,000 44,000 43,753 36,860 41,800 29,464
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Diluted....................................... 44,000 44,000 44,000 43,753 44,937 41,800 42,610
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------------------------- JULY 31,
1995 1996 1997 1998 1999 1999
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 474 $ 772 $ 422 $ 722 $ 5,044 $ 5,404
Working capital........................................ 757 856 1,685 5,729 13,011 14,007
Total assets........................................... 1,277 1,948 2,987 7,761 20,955 24,459
Long-term debt......................................... -- -- -- 416 11,032 11,019
Convertible redeemable preferred stock................. -- -- -- -- 26,259 26,259
Total stockholders' equity (deficit)................... 678 1,141 2,088 6,447 (21,503) (19,950)
</TABLE>
21
<PAGE>
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" and elsewhere in this
prospectus. The following discussion should be read together with our financial
statements and related notes thereto included elsewhere in this prospectus.
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. 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.
We were incorporated in 1987 and funded our initial product development
efforts largely through revenues derived under research and development
contracts. After shipping our first product 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.
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 45.1% of our
revenues for the fiscal year ended April 30, 1999 and 53.5% of our revenues for
the three months 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.
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 and Israel.
The market for optical subsystems is characterized by declining average
selling prices, or ASPs, 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 anticipate that our ASPs will
decrease in future periods, although the timing and amount of these decreases
cannot be predicted with any certainty.
Our cost of revenues consists of materials, salaries and related expenses
for manufacturing personnel, manufacturing overhead and warranty expense. We
outsource the majority of our assembly operations, and we conduct manufacturing
engineering, supply chain management, quality assurance and documentation
control at our facility in Sunnyvale, California. Accordingly, a significant
portion of our cost of revenues consists of payments to our contract
manufacturers. There can be no assurance that we will be able to reduce our cost
of revenues to keep pace with anticipated decreases in ASPs.
22
<PAGE>
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. We expect that our overall gross margins will fluctuate from
period to period as a result of shifts in product mix, anticipated decreases in
ASPs and our ability to reduce product costs.
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 certain stock options to employees, we
recorded deferred stock compensation of $2.0 million during each of fiscal 1999
and the three months ended July 31, 1999, respectively, 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
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 $395,000 and $239,000 of deferred compensation during
fiscal 1999 and the three months ended July 31, 1999. As of July 31, 1999, the
remaining deferred compensation of approximately $3.4 million is scheduled to be
amortized as follows: $1.3 million during the remainder of fiscal 2000, $1.0
million during fiscal 2001, $624,000 during fiscal 2002, $335,000 during fiscal
2003 and $171,000 thereafter. The amount of deferred compensation expense to be
recorded in future periods could decrease if options for which accrued but
unvested compensation has been recorded are forfeited.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED APRIL 30, JULY 31,
------------------------------- --------------------
1997 1998 1999 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................. 40.7 39.4 43.7 39.2 45.0
--------- --------- --------- --------- ---------
Gross profit................................................. 59.3 60.6 56.3 60.8 55.0
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................... 30.0 17.2 22.2 20.5 20.5
Sales and marketing........................................ 7.6 7.4 11.7 12.3 11.1
General and administrative................................. 5.5 3.8 5.4 4.4 5.5
Amortization of deferred compensation...................... -- -- 1.0 -- 1.7
--------- --------- --------- --------- ---------
Total operating expenses................................. 43.1 28.4 40.3 37.2 38.8
--------- --------- --------- --------- ---------
Income from operations....................................... 16.2 32.2 16.0 23.6 16.2
Interest income (expense), net............................... 0.2 0.0 (0.8) (0.1) (0.6)
Other income (expense), net.................................. -- (0.1) (1.2) 0.4 (0.2)
--------- --------- --------- --------- ---------
Income before income taxes................................... 16.4 32.1 14.0 23.9 15.4
Provision for income taxes................................... 5.2 12.3 5.3 8.4 6.0
--------- --------- --------- --------- ---------
Net income................................................... 11.2% 19.8% 8.7% 15.5% 9.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
COMPARISON OF THREE MONTHS ENDED JULY 31, 1999 AND JULY 31, 1998
REVENUES. Revenues increased 104% from $6.8 million for the three months
ended July 31, 1998 to $13.9 million for the three months ended July 31, 1999.
This increase was primarily due to increased unit sales of our optical
subsystems and, to a lesser extent, increased unit sales of our network
performance test systems. Sales of optical subsystems and test systems accounted
for 68.3% and 31.7%, respectively, of revenues for the three months ended July
31, 1999, compared to 54.0% and 46.0%, respectively, for the three months ended
July 31, 1998. Sales to Newbridge Networks and EMC Corporation accounted for
34.9% and 19.0%, respectively, of revenues for the three months ended July 31,
1999, compared to 14.9% and 32.0%, respectively, for the three months ended July
31, 1998.
GROSS PROFIT. Gross profit increased from $4.1 million for the three months
ended July 31, 1998 to $7.6 million for the three months ended July 31, 1999. As
a percentage of revenues, gross profit decreased from 60.8% for the three months
ended July 31, 1998 to 55.0% for the three months ended July 31, 1999. This
decrease in gross profit margin was primarily related to a shift in product mix,
with a greater proportion of revenues being generated by sales of optical
subsystems, compared to sales of network performance test systems.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 104% from $1.4 million for the three months ended July 31, 1998 to
$2.8 million for the three months ended July 31, 1999. This increase was
primarily related to an increase in the number of research and development
personnel and increased expenditures for materials purchased for development
projects currently in process. Despite this increase, research and development
expenses remained constant as a percentage of revenues at 20.5% in the three
months ended July 31, 1998 and 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 85%
from $833,000 for the three months ended July 31, 1998 to $1.5 million for the
three months ended July 31, 1999. This
24
<PAGE>
increase was primarily related to an increase in commissions paid to
manufacturers' representatives associated with the increase in revenues and an
increase in the number of sales and marketing personnel. Sales and marketing
expenses declined as a percentage of revenues from 12.3% in the three months
ended July 31, 1998 to 11.1% in the three months ended July 31, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 155% from $298,000 for the three months ended July 31, 1998 to
$759,000 for the three months ended July 31, 1999. This increase was primarily
the result of increased legal expenses, most of which were incurred in
connection with pending patent litigation, increased expenses for other
professional services, and an increase in the number of general and
administrative personnel. General and administrative expenses increased as a
percentage of revenues from 4.4% in the three months ended July 31, 1998 to 5.5%
in the three months ended July 31, 1999.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net decreased
from an expense of $7,000 for the three months ended July 31, 1998 to an expense
of $90,000 for the three months ended July 31, 1999. The increase in interest
expense reflected additional interest associated with a term loan of $11.0
million beginning in November 1998.
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$568,000 for the three months ended July 31, 1998 based on an effective rate of
35.0% to $829,000 for the three months ended July 31, 1999 based on a projected
annual effective tax rate of 35.0%, excluding the impact of deferred stock
compensation charges of 3.9%. The projected 1999 annual 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 7 to our financial statements.
COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1997, 1998 AND 1999
REVENUES. Revenues increased from $8.5 million in fiscal 1997 to $22.1
million in fiscal 1998 and $35.5 million in fiscal 1999. The 161% increase from
fiscal 1997 to fiscal 1998 reflected increased unit sales across both of our
product lines, with sales of optical subsystems and network performance test
systems representing 75.8% and 24.2% of revenues, respectively, in fiscal 1998,
compared to 71.9% and 28.1% in fiscal 1997. The 61% increase from fiscal 1998 to
fiscal 1999 was primarily due to increased unit sales of test systems which
accounted for 40.1% of revenues in fiscal 1999, while optical subsystems
accounted for 59.9%. Sales to our two principal customers during fiscal 1997,
1998 and 1999 were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
SALES (IN MILLIONS)
------------------------------- -------------------------------
1997 1998 1999 1997 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Newbridge Networks................................ $ 3.5 $ 9.7 $ 8.9 41.4% 43.9% 25.1%
EMC............................................... $ 0.1 $ 3.2 $ 7.4 1.2% 14.6% 20.8%
</TABLE>
GROSS PROFIT. Gross profit increased from $5.0 million in fiscal 1997 to
$13.4 million in fiscal 1998 and $20.0 million in fiscal 1999. With product mix
remaining relatively unchanged between fiscal 1997 and 1998, our gross profit
margin remained relatively constant at 59.3% in fiscal 1997 and 60.6% in fiscal
1998. Our gross profit margin decreased to 56.3% in fiscal 1999 reflecting
startup costs associated with the introduction of new optical subsystem products
and lower ASPs for some optical subsystems which more than offset the shift in
product mix toward a greater percentage of higher-margin test system sales.
25
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased from $2.5 million in fiscal 1997 to $3.8 million in fiscal 1998 and
$7.9 million in fiscal 1999. The 50% increase from fiscal 1997 to fiscal 1998
was primarily due to an increase in the number of research and development
personnel. The 107% increase from fiscal 1998 to fiscal 1999 was primarily
related to an increase in the number of research and development personnel and
increased expenditures related to prototype development. Research and
development expenses declined as a percentage of revenues from 30.0% in fiscal
1997 to 17.2% in fiscal 1998 reflecting the 161% increase in revenues, but
increased to 22.2% in fiscal 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from
$645,000 in fiscal 1997 to $1.6 million in fiscal 1998 and $4.1 million in
fiscal 1999. The 153% increase from fiscal 1997 to fiscal 1998 and the 154%
increase from fiscal 1998 to fiscal 1999 were each 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 percentage of revenues remained relatively unchanged
at 7.6% in fiscal 1997 compared to 7.4% in fiscal 1998, but increased to 11.7%
in fiscal 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $464,000 in fiscal 1997 to $833,000 in fiscal 1998 and $1.9
million in fiscal 1999. The 80% increase in fiscal 1998 and the 128% increase in
fiscal 1999 were each primarily related to increases in the number of
administrative personnel. Increased expenditures for legal and other
professional services also contributed to the increase in fiscal 1999. General
and administrative expenses declined as a percentage of revenues from 5.5% in
fiscal 1997 to 3.8% in fiscal 1998 and increased to 5.4% in fiscal 1999.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net remained
relatively unchanged from fiscal 1997 to fiscal 1998. In fiscal 1999, interest
expense of $275,000 reflected borrowings under our $11.0 million term loan
beginning in November 1998.
OTHER INCOME (EXPENSE), NET. An expense of $425,000 was recorded in fiscal
1999 in connection with the relocation of our primary operations from Mountain
View, California to our new facility in Sunnyvale, California. We expect to
sublease the Mountain View facility through the end of the remaining lease term
in May 2002.
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$440,000 in fiscal 1997 to $2.7 million in fiscal 1998 and decreased to $1.9
million in fiscal 1999. The provision for income taxes is based on annual
effective tax rates of 31.7%, 38.4% and 35.0%, excluding the impact of deferred
stock compensation charges of 2.8%. The annual effective tax rates differ from
the statutory rate primarily due to state taxes, offset by research and
development tax credits. See Note 7 to our financial statements.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly statement of operations
data for the five quarters ended July 31, 1999, and such data expressed as a
percentage of revenues. This information reflects all normal non-recurring
adjustments that we consider necessary for a fair presentation of such
information in accordance with generally accepted accounting principles. The
results for any quarter are not necessarily indicative of results that may be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1998 1998 1999 1999 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................... $ 6,794 $ 7,402 $ 8,985 $ 12,290 $ 13,879
Cost of revenues............................................. 2,666 3,058 4,171 5,619 6,252
--------- --------- --------- --------- ---------
Gross profit................................................. 4,128 4,344 4,814 6,671 7,627
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................... 1,394 1,764 1,890 2,816 2,840
Sales and marketing........................................ 833 871 1,160 1,281 1,542
General and administrative................................. 298 421 484 699 759
Amortization of deferred compensation...................... -- 99 120 176 239
--------- --------- --------- --------- ---------
Total operating expenses................................. 2,525 3,155 3,654 4,972 5,380
--------- --------- --------- --------- ---------
Income from operations....................................... 1,603 1,189 1,160 1,699 2,247
Interest income (expense), net............................... (7) 17 (141) (144) (90)
Other income (expense), net.................................. 25 -- (21) (429) (28)
--------- --------- --------- --------- ---------
Income before income taxes................................... 1,621 1,206 998 1,126 2,129
Provision for income taxes................................... 568 458 384 464 829
--------- --------- --------- --------- ---------
Net income................................................... $ 1,053 $ 748 $ 614 $ 662 $ 1,300
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
AS A PERCENTAGE OF REVENUES:
Revenues..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................. 39.2 41.3 46.4 45.7 45.0
--------- --------- --------- --------- ---------
Gross profit................................................. 60.8 58.7 53.6 54.3 55.0
--------- --------- --------- --------- ---------
Operating expenses:
Research and development................................... 20.5 23.8 21.1 22.9 20.5
Sales and marketing........................................ 12.3 11.8 12.9 10.4 11.1
General and administrative................................. 4.4 5.7 5.4 5.7 5.5
Amortization of deferred compensation...................... -- 1.3 1.3 1.4 1.7
--------- --------- --------- --------- ---------
Total operating expenses................................. 37.2 42.6 40.7 40.4 38.8
--------- --------- --------- --------- ---------
Income from operations....................................... 23.6 16.1 12.9 13.9 16.2
Interest income (expense), net............................... (0.1) 0.2 (1.6) (1.2) (0.6)
Other income (expense), net.................................. 0.4 -- (0.2) (3.5) (0.2)
--------- --------- --------- --------- ---------
Income before income taxes................................... 23.9 16.3 11.1 9.2 15.4
Provision for income taxes................................... 8.4 6.2 4.3 3.8 6.0
--------- --------- --------- --------- ---------
Net income................................................... 15.5% 10.1% 6.8% 5.4% 9.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Revenues increased steadily over the last five quarters as a result of
increased unit sales to an expanding customer base. The 37% increase in revenues
for the three months ended April 30, 1999 was primarily due to substantial
increases in shipments to several of our major customers and the introduction of
a new optical subsystem product.
Gross profit margins fluctuated over the five-quarter period, principally as
a result of a shift in product mix toward a greater percentage of lower margin
optical subsystem products and a lower percentage of higher margin test systems.
Gross margins were also negatively impacted in the second
27
<PAGE>
half of fiscal 1999 by start-up costs associated with the introduction of new
optical subsystem products and lower ASPs for some optical subsystems.
Quarterly increases in operating expenses reflected the continued expansion
of our operations throughout the five-quarter period. Net interest expense
increased significantly beginning in the three months ended January 31, 1999 as
a result of the $11.0 million term loan in November 1998. An expense of $425,000
was recorded in the quarter ended April 30, 1999 in recognition of costs in
connection with the relocation of our primary operations to our new facility.
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. Some of the factors that could cause
our quarterly or annual operating results to fluctuate include:
- demand for and market acceptance of our products and our customers'
products;
- continued development of the LAN and SAN and extended network markets;
- our ability to develop, introduce, ship and support new products and
product enhancements and to manage product transitions;
- announcements and new product introductions by our competitors;
- timing and size of orders for our products;
- loss or addition of one or more significant customers;
- our ability to attain and maintain production volumes and quality levels
for our products, including our ability to obtain sufficient supplies of
long lead-time and sole or limited sourced components for our products;
- changes in our product mix or the distribution channels through which we
sell our products;
- timing of the qualification process for our products by potential or
existing customers; and
- increases in manufacturing costs, including the prices of components we
purchase.
We may experience a delay in generating or recognizing revenues for a number
of reasons. Orders at the beginning of each quarter typically do not equal
expected revenues for that quarter and are generally cancelable at any time.
Accordingly, we depend on obtaining orders in a quarter for shipment in that
quarter to achieve our revenue objectives. In addition, the timing of product
releases, purchase orders and product availability could result in significant
product shipments at the end of a quarter. Failure to ship these products by the
end of a quarter may adversely affect our operating results. Furthermore, our
customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified time frames without
significant penalty.
Most of our expenses, such as employee compensation and lease payments for
facilities and equipment are relatively fixed in the near term. In addition, our
expense levels are based in part on our expectations regarding future revenues.
As a result, any shortfall in revenues relative to our expectations could cause
significant changes in our operating results from quarter to quarter. Due to the
foregoing factors, you should not rely on our quarterly revenues and operating
results to predict our future performance.
LIQUIDITY AND CAPITAL RESOURCES
From our 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.
As of July 31, our principal sources of liquidity were $5.4 million in cash
and cash equivalents, and $6.5 million available under a revolving loan
facility. 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
28
<PAGE>
London Interbank Offering Rate or the bank's prime rate. The interest rate on
our facility was 7.04% as of July 31, 1999.
Net cash provided by operating activities was $742,000 in fiscal 1998, $1.1
million in fiscal 1999 and $913,000 in the three months ended July 31, 1999.
Cash provided by operations for these periods was primarily due to continued
growth in revenues and net income offset in part by an increase in related
assets and liabilities for working capital purposes.
Net cash used in investing activities was $855,000 in fiscal 1998, $2.1
million in fiscal 1999 and $550,000 in the three months ended July 31, 1999. Net
cash used in investing activities consisted primarily of purchases of equipment.
Net cash provided by financing activities was $413,000 in fiscal 1998 and
$5.4 million in fiscal 1999, and $2,000 was used in the three months ended July
31, 1999. Net cash provided by financing activity in fiscal 1999 primarily
consisted of net proceeds of $26.3 million from the sale of preferred stock and
$11.0 million in bank borrowings under a term loan, offset by $31.7 million used
to repurchase shares of our outstanding common stock.
We had no material commitments for capital expenditures at July 31, 1999,
but we expect such expenditures to total approximately $5.0 million in fiscal
2000. These expenditures will primarily be for equipment, furniture and
leasehold improvements. We also have total minimum lease obligations of $8.7
million from July 31, 1999 through April 30, 2007, under non-cancelable
operating and capital leases.
We believe that our existing balances of cash and cash equivalents, together
with the net proceeds of this offering, 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, although we could be required, or could elect, to seek
additional funding prior to that time. Our future capital requirements will
depend on many factors, including the rate of revenue growth, the extent to
which we utilize subcontractors, the timing and extent of spending to support
product development efforts and the expansion of our sales and marketing
efforts. There can be no assurance that additional equity or debt financing, if
required, will be available on terms that are acceptable or at all.
IMPACT OF YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two-digit entries in date code fields. Beginning in the year 2000,
these date code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. Computer programs or hardware that
have date-sensitive software or embedded chips and have not been upgraded to
comply with these "year 2000" requirements may recognize a date using "00" as
the year 1900 rather that the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
GENERAL READINESS ASSESSMENT. The year 2000 problem can affect the
computers, software and other equipment that we use in our operations. As a
result, we have instituted a year 2000 compliance plan, implemented by a team of
our internal information technology staff responsible for monitoring the
assessment and remediation of our year 2000 projects and reporting that status
to our executive staff. This project team is continuing to assess the potential
effect and costs of remediating the year 2000 problem for our internal systems.
To date, we have not obtained verification or validation from any independent
third parties of our processes to assess and correct any of our year 2000
problems or the costs associated with these activities.
ASSESSMENT OF FINISAR'S PRODUCTS. We have assessed the ability of our
products to operate properly in the year 2000. We believe that our current
products are year 2000 compliant. Accordingly, we do not believe that the year
2000 issue presents a material exposure as it relates to our products.
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<PAGE>
ASSESSMENT OF INTERNAL INFRASTRUCTURE. We believe that we have identified
most of the major computers, software applications and related equipment used in
connection with our internal operations that need to be evaluated to determine
if they must be modified, upgraded or replaced to minimize the possibility of a
material disruption to our business. Based on a review of these computer
systems, we have determined that, except for certain computers that run under
the Microsoft Windows95 operating system, our computer systems and applications
are compliant with the year 2000 format. We expect to remediate any remaining
year 2000 problems prior to December 31, 1999.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, telephone switches, security systems and other common devices, may
be affected by the year 2000 problem. We have assessed the potential effect of
the year 2000 problem on our office and facilities equipment and have determined
that no problems exist that cannot be remediated by the replacement of
relatively inexpensive equipment.
COSTS OF REMEDIATION. We estimate the total cost to us of completing any
required modifications, upgrades or replacements of our internal systems will
not exceed $100,000, most of which we expect to incur during calendar year 1999.
Based on the activities described above, we do not believe that the year 2000
problem will have a material adverse effect on our business or operating
results.
SUPPLIERS. As part of our review of the year 2000 problem, we have
contacted third-party suppliers of components and key contractors used in the
assembly of our products to identify and, to the extent possible, resolve issues
involving the year 2000 problem. However, we have limited or no control over the
actions of these third-party suppliers and subcontractors. Thus, while we expect
that we will be able to resolve any significant year 2000 problems with these
third parties, there can be no assurance that these suppliers will resolve any
or all year 2000 problems before the occurrence of a material disruption to the
operation of our business. Any failure on the part of these third parties to
timely resolve year 2000 problems with their systems in a timely manner could
have a material adverse effect on our business. We expect to complete this
process before December 31, 1999.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. We expect to identify and
resolve all year 2000 problems that could materially adversely affect our
business operations before December 31, 1999. However, we believe that it is not
possible to determine with complete certainty that all year 2000 problems
affecting us have been identified or corrected. The number of devices and
systems that could be affected and the interactions among these devices and
systems are too numerous to address. In addition, no one can accurately predict
whether failures will occur as a result of the year 2000 problem or the
severity, timing, duration or financial consequences of these potential
failures. As a result, we believe that the following consequences are possible:
- a significant number of operational inconveniences and inefficiencies for
us, our contract manufacturers and our customers that will divert
management's time and attention and financial and human resources from
ordinary business activities;
- possible business disputes and claims, including claims under product
warranty, due to year 2000 problems experienced by our customers and
incorrectly attributed to our products, which we believe will be resolved
in the ordinary course of business; and
- a few serious business disputes alleging that we failed to comply with the
terms of contracts or industry standards of performance, some of which
could result in litigation or contract termination.
CONTINGENCY PLANS. While we have not yet fully developed a comprehensive
contingency plan to address situations that may result if we are is unable to
achieve year 2000 readiness of our critical operations, such a plan is likely to
include the accelerated replacement of affected equipment or software which
could have a material adverse impact on our financial results and operations.
30
<PAGE>
DISCLAIMER. The discussion of our efforts and expectations relating to year
2000 compliance are forward-looking statements. Our ability to achieve year 2000
compliance, and the level of incremental costs associated therewith, could be
adversely affected by, among other things, the availability and cost of contract
personnel and external resources, third-party suppliers' ability to modify
proprietary software and unanticipated problems not identified in the ongoing
compliance review.
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<PAGE>
BUSINESS
We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over local area
networks, or LANs, and storage area networks, or SANs. 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 efficient
design of reliable, high-speed networking systems and the testing and monitoring
of the performance of these systems. We sell our products to leading networking
and storage equipment manufacturers such as 3Com, EMC, Emulex, IBM, Newbridge
Networks and Sun Microsystems, as well as emerging manufacturers such as Brocade
Communications and Extreme Networks. For the fiscal year ended April 30, 1999,
we had revenues of $35.5 million and net income of $3.1 million. For the quarter
ended July 31, 1999, we had revenues of $13.9 million and net income of $1.3
million.
INDUSTRY BACKGROUND
The ubiquity of computing by businesses, organizations and individuals
worldwide and the need to interconnect multiple computing and storage devices to
enable widespread communications has given rise to the multi-billion dollar
computer networking and storage industries. There has been a rapid growth in the
number of corporate and residential users accessing communications networks.
This growth has resulted in large-scale equipment expenditures by enterprises
and service providers to develop and expand their network and storage
infrastructures. Networking and storage equipment expenditures are also
accelerating due to the need to upgrade equipment to reliably accommodate data
traffic which requires greater transmission capacity, or bandwidth, such as
e-commerce and online transaction processing-related traffic, multimedia file
transfers and movement of large blocks of stored data across networks. The
transmission and storage of data has become increasingly mission-critical as
enterprises increasingly rely on data-intensive applications to support a wider
range of functions over a geographically dispersed employee and customer base.
The continuing expansion of the network infrastructure, the growing number of
users accessing networks, the need to accommodate higher-bandwidth traffic and
the increasingly mission-critical nature of data networking and storage
networking have created the need for a new generation of high-speed,
high-performance networking and storage systems that rely on fiber optic
transmission technology.
EVOLUTION OF NETWORKS, NETWORKING SYSTEMS AND NETWORKING PROTOCOLS
GIGABIT ETHERNET AND LOCAL AREA NETWORKS. Early LANs were implemented to
connect a limited number of users within relatively close proximity. Most of
these LANs used the Ethernet transmission protocol which was developed to allow
users to access the LAN and share basic common services such as file servers and
printers. Because these early LANs had relatively limited performance
requirements, short connection distances and low transmission speeds, systems on
these LANs were generally connected by copper cabling.
As deployment of LANs increased, Ethernet became the predominant LAN
technology, with a greater than 95% market share in 1998 according to the
Dell'Oro Group. As bandwidth needs and server processing power increased and
larger numbers of users strained the early LAN infrastructure, Ethernet
technology evolved from the original 10 megabits per second, or Mbps, version to
100 Mbps Fast Ethernet. In response to continually increasing bandwidth and
performance requirements, Gigabit Ethernet technology, which operates at 1,000
Mbps, was introduced in 1998. Dataquest estimates that sales of Gigabit Ethernet
switches will increase from $364 million in 1998 to over $3.7 billion in 2002,
representing a compound annual growth rate of 79%. These switches contain
varying numbers of ports which serve as the connection to the network. According
to Dataquest, the number of Gigabit Ethernet port shipments is projected to grow
from 211,000 in 1998 to over 6 million in 2002, representing a
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compound annual growth rate of 130%. Most of these Gigabit Ethernet ports will
rely on fiber optic subsystems, which allow data to be transmitted accurately,
at very high speeds and over long distances. Although the transmission speeds
currently offered by Gigabit Ethernet are expected to meet the increasing
bandwidth needs of enterprise and service provider networks for the near future,
manufacturers have begun to develop networking systems with per-port
transmission speeds of 10 gigabits per second, or Gbps, ten times faster than
Gigabit Ethernet. Because of the scalability and migration capacity built into
the Gigabit Ethernet protocol, manufacturers developing these systems are able
to leverage this standard much as they did when they migrated from 100 Mbps Fast
Ethernet to 1,000 Mbps Gigabit Ethernet. This next generation of high-speed
networking systems will require even higher performance fiber optic subsystems.
FIBRE CHANNEL AND STORAGE AREA NETWORKS. Like data networking technology,
data storage technology has evolved rapidly over the past decade. Traditionally,
storage devices were connected to a single server and LAN in close proximity
using a standard interface protocol known as the Small Computer Systems
Interface, or SCSI. SCSI currently allows storage devices and servers to
communicate at a maximum speed of 80 megabytes per second, over a maximum
transmission distance of 12 meters and supports a maximum of 15 devices on a
single bus. Although these distances and speeds were sufficient for early
storage applications, SCSI has become a limiting technology for emerging storage
applications, which require networking at high speeds over long distances and
need to interconnect large numbers of users.
In recent years, demand has increased for faster, more efficient
interconnection of data storage systems with servers and LANs. Contributing to
this demand are:
- the need to connect increasing numbers of storage devices and servers to a
growing number of users;
- the need to interconnect servers and storage systems supplied by multiple
vendors;
- the increasingly mission-critical nature of stored data and the need for
rapid access to this data; and
- the expense and complexity associated with managing increasingly large
amounts of data storage.
Although advances in technology, including the recent development of Gigabit
Ethernet, increased LAN transmission speeds by more than 1,000 times during the
1990s, storage-to-server data transmission speeds on SCSI-based systems
increased by less than ten times during this period. This speed disparity
created a bottleneck between storage systems and servers and the LANs connected
to those servers. Recently, the Fibre Channel interconnect protocol has been
standardized to address the speed, distance and connectivity limitations of
SCSI-based storage while maintaining backward compatibility with the installed
base of SCSI-based storage systems. Fibre Channel allows up to 126 devices to
communicate at rates up to 1.062 Gbps over distances of up to 10 kilometers. The
Fibre Channel protocol has enabled the development of high-speed storage area
networks, or SANs, which provide the interconnection between storage systems and
servers.
Fibre Channel-based SANs provide many benefits, including transmission
speeds comparable to high-speed LANs and transmission distances which allow
broader sharing of resources. SANs also enable enhanced network applications
such as storage backup, and better overall storage management achievable through
centralized storage resources. According to Gartner Group, more than 70% of
shared storage in networked environments is projected to be reorganized into
SANs by 2002. IDC projects that the market for Fibre Channel systems will grow
from $2.2 billion in 1998 to over $19.6 billion in 2002, representing a compound
annual growth rate of 73%. In addition, emf Associates forecasts the number of
Fibre Channel port shipments will grow from 2.2 million in 1998 to over 46.7
million in 2002, representing a compound annual growth rate of 115%. Most of
these ports will rely on fiber optic subsystems to transmit and receive data at
very high speeds with high accuracy, and often over long distances. Like
manufacturers of Gigabit Ethernet-based LAN systems, Fibre Channel-
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<PAGE>
based SAN system manufacturers are already developing the next generation of SAN
products with speeds of 2.125 Gbps, twice as fast as current Fibre Channel
speeds. Like Gigabit Ethernet, the Fibre Channel protocol is scalable, allowing
for the potential development of systems with speeds of over 8 Gbps. The speeds
contemplated by future generation SAN systems will require even higher
performance fiber optics subsystems.
In addition to SANs, Fibre Channel technology is being used in other
high-speed data communications applications including the interconnection of
clusters of switches based on the asynchronous transfer mode, or ATM, protocol.
ATM switches are often used in service provider network cores to switch traffic
between multiple networks. In these core networks, multiple switches are often
grouped together in a service provider's central office. The interconnections
between these systems are often provided by Fibre Channel-based subsystems which
allow high-speed, cost-effective communication links between these switches.
EXTENDED LANS AND SANS. As technologies such as Gigabit Ethernet and Fibre
Channel have enabled transmission of data at higher speeds over longer distances
than previous networking technologies permitted, they have allowed the
geographic extension of LANs and SANs over installed but unused fiber optic
cable, known as "dark" fiber lines. Enterprises have recently begun to lease
dark fiber from service providers to implement these extended networks. These
extended LANs and SANs can interconnect network systems throughout a corporate
campus or metropolitan area rather than only within a single building. Extended
networks enable organizations to use their networks for enhanced applications
such as real-time backup storage at distances of up to 120 kilometers for
disaster protection. In addition, by using dark fiber lines, extended data
networks can offer organizations a potentially cost-effective way to address
increased bandwidth requirements. We believe that future extended networks will
incorporate both Fibre Channel and Gigabit Ethernet transmission protocols. As
with shorter-distance LANs and SANs, these extended networks will require
high-performance fiber optic subsystems.
DEMAND FOR HIGH-SPEED DATA COMMUNICATION TEST SYSTEMS
The design and development of data and storage networking systems require
extensive testing to ensure system performace and reliability. As new, highly
complex transmission protocols such as Gigabit Ethernet and Fibre Channel have
emerged, system testing has become more difficult, requiring increasingly
sophisticated and specialized test systems capable of capturing data at high
speeds, filtering the data and identifying various types of intermittent errors
and other network problems. Other new technologies are continually being
developed, such as the Next Generation Input/Output, or NGIO, transmission
protocol, which is being engineered to interconnect clusters of computer
devices. In the past, many systems manufacturers designed their own test
equipment each time they developed a new product. However, as the pace of
technological change has accelerated, the performance requirements of data
communications systems have increased and competition has afforded shorter
market windows within which manufacturers can develop and introduce new
products. Thus, system manufacturers have increasingly focused on the design and
development of their own products and turned to specialized independent
suppliers for state-of-the-art test equipment. As Ethernet and Fibre
Channel-based systems reach even higher transmission speeds and new standards
like NGIO emerge, the internal development of test equipment by systems
manufacturers will become more challenging, further increasing the demand for
high performance, easy-to-use test systems from independent suppliers.
EVOLUTION OF FIBER OPTIC SUBSYSTEMS FOR NETWORKING
Fiber optic transmission technology was originally developed for use in
long-haul communications backbone networks to increase capacity and speed. In
contrast, early LANs and storage systems, with their relatively limited
performance requirements, short connection distances and low transmission
speeds, did not require the performance capabilities of fiber optics. Systems on
these networks were generally interconnected using copper cabling.
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<PAGE>
As the bandwidth, storage capacity and transmission distance requirements of
enterprises and service providers have increased, it has become necessary to
utilize the superior transmission capabilities of fiber optics to build
practical, high-speed LANs based on Gigabit Ethernet technology and high-speed
SANs based on Fibre Channel. As these fiber optic LANs and SANs are being
deployed, fiber optics is becoming the dominant transmission technology for
high-speed data networking and storage applications. Systems connected with
fiber optics require optical subsystems to convert electrical signals into
optical signals and back into electrical signals at high speeds.
The development and manufacture of high quality, cost-effective fiber optic
subsystems for LANs and SANs present a number of significant technical
challenges, including the following:
- As data rates increase, it becomes significantly more difficult to
maintain data integrity because high speed signals can be degraded unless
subsystem components such as lasers, detectors and integrated circuits are
properly integrated and packaged;
- The increasingly mission-critical nature of data transmission and storage
has magnified the impact of system failures, increasing the need for
system reliability and the importance of real-time performance monitoring;
- Manufacturers of high speed networking equipment require optical
subsystems that support a wide range of transmission distances, protocols
and applications; and
- Compliance with FCC standards for electromagnetic interference emissions,
or EMI, is significantly more difficult to achieve at higher data rates.
To date, we believe that only a limited number of companies have developed
the specialized expertise required to engineer fiber optic subsystems and test
systems which meet the requirements of manufacturers of high-speed data
networking and storage systems.
THE FINISAR SOLUTION
We are a leading provider of fiber optic subsystems and network performance
test systems which enable high-speed data communications over LANs and SANs. 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 efficient design of reliable, high-speed networking systems
and the testing and monitoring of the performance of these systems. Our products
provide the following key benefits to manufacturers of high-speed data
networking and storage systems:
VALUE-ADDED FUNCTIONS AND INTELLIGENCE. Our high-speed fiber optic
subsystems are engineered to deliver value-added functionality and intelligence.
For example, many of our optical subsystems include a microprocessor with
proprietary embedded software that allows customers to monitor the optical
performance of each port on their systems in real time. In addition, many of our
subsystems are engineered to automatically recognize different versions of the
Fibre Channel protocol and to interoperate with legacy systems. Real-time
monitoring and interoperability are particularly important in the Gigabit
Ethernet LAN and Fibre Channel SAN markets where reliability and time to market
are critical. Our test systems also contain value-added software functions such
as data capture, data generation and error generation.
HIGH LEVEL OF DATA INTEGRITY. Through the use of advanced packaging and
circuit design, our optical subsystems deliver a high level of data integrity,
which results in precise transmission of data at very high speeds over varying
distances. We engineer our subsystems to exceed the industry standard error rate
of 1 bit per trillion bits transmitted. This degree of data integrity allows our
subsystems to operate reliably over a wide range of temperatures and other field
conditions which we believe enables our customers to design and deliver more
robust systems.
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HIGH RELIABILITY. We design all of our subsystems to provide the high
reliability required for mission-critical data networking and storage
applications. Some of our products have a statistically-determined mean time to
failure of 40 million hours. Our subsystems are engineered to operate with
minimal power requirements thereby increasing product life, and to function
across a wide range of temperatures and voltages. This reliability and
flexibility have allowed our subsystems to be designed into the products of
manufacturers who provide systems for mission-critical applications such as
real-time SAN storage backup and LAN backbone switching. In addition, because
our subsystems exceed the FCC standards for EMI, we offer manufacturers greater
flexibility in the design of their systems and integration of other components
and subsystems.
BROAD OPTICAL SUBSYSTEM PRODUCT LINE. We offer a broad line of optical
subsystems which operate at varying protocols, speeds, fiber types, voltages,
wavelengths and distances and are available in a variety of industry standard
packaging configurations, or form factors. Our optical subsystems are designed
to comply with key networking protocols such as Fibre Channel and Gigabit
Ethernet and to plug directly into standard port configurations used in our
customers' products. The breadth of our optical subsystems product line is
important to many of our customers who manufacture a wide range of networking
products for diverse applications.
BROAD TEST SYSTEM PRODUCT LINE. We believe that we are a leading provider
of network performance test systems for Fiber Channel-based networks. We offer a
broad line of test systems to assist our customers in efficiently designing
reliable, high-speed networking systems and testing and monitoring the
performance of these systems. We believe our test systems enable our customers
to focus their attention on the development of new products, reduce overall
development costs and speed time to market.
STRATEGY
Our objective is to be the leading provider of fiber optic subsystems and
test systems to manufacturers of high-speed data networking and storage systems.
Key elements of our strategy include the following:
MAINTAIN TECHNOLOGY LEADERSHIP IN HIGH-SPEED FIBER OPTIC TRANSMISSION. We
have been focused on the development of fiber optic subsystems since 1988.
Current Finisar employees were actively involved in the original development of
the Fibre Channel standard and, more recently, in the development and
implementation of Gigabit Ethernet and the emerging NGIO protocol. Our years of
engineering experience, our multi-disciplinary technical expertise and our
participation in the development of industry standards have enabled us to become
a leader in the design and development of fiber optic subsystems and test
systems. We intend to maintain our technological leadership through continual
enhancement of our existing products and the development of new products as
evolving technology permits higher speed transmission of data, with greater
capacity, over longer distances. For example, we are designing flexible hardware
and software architectures to support emerging technologies such as 10 Gbps
Ethernet, 2 Gbps Fibre Channel, wavelength division multiplexing, or WDM, and
the NGIO protocol. We also intend to focus on increased product integration to
enhance the price/performance capabilities of our products.
LEVERAGE CORE COMPETENCIES ACROSS MULTIPLE, HIGH-GROWTH MARKETS. We believe
that fiber optic technology will increasingly become the transmission technology
of choice for multiple high-growth data communication markets, including Gigabit
Ethernet-based LANs, Fibre Channel-based SANs and extended LANs and SANs. These
markets are characterized by differentiated applications with unique design
criteria such as product function, performance, cost, in-system monitoring, size
limitations and software. We intend to target opportunities where our core
competencies in high-speed data transmission protocols such as Gigabit Ethernet,
Fibre Channel and NGIO can be leveraged into leadership positions as these
technologies are extended across multiple markets and applications. Our
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goal is to be the optical subsystem and network performance test system provider
of choice for multiple protocols and network applications.
STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. Over the past 11 years, we
have established valuable relationships and a loyal base of customers by
providing high-quality products and superior service. Our service-oriented
approach has allowed us to work closely with leading data and storage network
system manufacturers, understand and address their current needs and anticipate
their future requirements. We intend to leverage our relationships with our
existing customers as they enter new, high-speed data communications markets. We
have recently established new customer relationships with several emerging
Gigabit Ethernet and Fibre Channel networking equipment manufacturers. We intend
to expand our sales and marketing organization in order to establish new
relationships with other key data communications network manufacturers.
CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. Many manufacturers of high-speed
data networking and storage systems purchase both optical subsystems and test
systems from third-party providers. Frequently, however, different groups or
departments within a manufacturer's organization are responsible for qualifying
and purchasing subsystems and test equipment. We are increasingly able to
capitalize on our customers' satisfaction with one of our product lines and our
service-oriented approach to gain valuable introductions that lead to sales of
our other product line. As this trend develops, we intend to leverage our unique
expertise in subsystems and test systems. In particular, the widespread
acceptance of our Fibre Channel test systems is providing opportunities to
develop new customers for our optical subsystems.
EXPAND INTERNATIONAL OPERATIONS. Historically, substantially all of our
sales have been made to system manufacturers located in North America. In the
fiscal year ended April 30, 1999, sales to customers outside North America
represented less than 3% of our total revenues. Recently, manufacturers in other
parts of the world have developed and introduced high-speed networking products
based on the Gigabit Ethernet and Fibre Channel protocols and international
markets for our products are beginning to expand. To better address these
expanding international markets, we have recently established relationships with
distributors in Japan, the United Kingdom and Israel. We intend to further
extend our international operations by expanding our network of distributors and
sales representatives in key international markets. As international Fibre
Channel and Gigabit Ethernet standards are substantially the same as those in
North America, we do not expect that we will require substantial product
development efforts to enter international markets.
PRODUCTS
We provide a broad line of complementary optical subsystems and test systems
for high-speed data communications over Gigabit Ethernet LANs and Fibre Channel
SANs.
OPTICAL SUBSYSTEMS
Our optical subsystems product line consists of three product
families--optical data links, optical link extenders and Opticity 3000. Our
optical data links are integrated into our customers' systems and used for both
short- and long-distance fiber optic communications. Our optical link extenders
are external subsystems used for fiber optic communications over long distances.
Our Opticity 3000 is an external link extender subsystem which also includes
multiplexer functionality that permits multi-channel data transmission over long
distances.
OPTICAL DATA LINKS
Our family of optical data link products consists of transmitters, receivers
and transceivers based on the Gigabit Ethernet and Fibre Channel protocols. A
transmitter converts electrical signals into optical signals for transmission
over fiber optics. A receiver converts incoming optical signals into electric
signals. A transceiver combines both transmitter and receiver functions. Our
optical data link
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products perform these functions with high reliability and data integrity and
support a wide range of protocols, transmission speeds, fiber types,
wavelengths, transmission distances, form factors and software enhancements. As
illustrated below, an optical data link is plugged into a port on a switch, hub,
server or storage array and provides the physical connection from that system to
the LAN, SAN or extended network.
[Diagram of optical data link using Finisar Corporation products.]
Our high-speed fiber optic subsystems are engineered to deliver value-added
functionality and intelligence. Most of our optical data link products include a
microprocessor with proprietary embedded software that allows customers to
monitor transmitted and received optical power, temperature, drive current and
other link parameters of each port on their systems in real time. In addition,
our intelligent optical data links are used by many enterprise networking and
storage system manufacturers to enhance the ability of their systems to diagnose
and correct abnormalities in fiber optic networks.
The following table describes our principal optical data link products:
<TABLE>
<CAPTION>
TRANSMISSION TRANSMISSION FORM SOFTWARE
PROTOCOLS SPEED (GBPS) FIBER TYPES WAVELENGTHS(NM) DISTANCES FACTORS ENHANCEMENTS
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
TRANSMITTERS
Fibre Channel 1.062 Multimode 850 500 m 17-pin Built-in
diagnostics
Gigabit Ethernet 1.25 Singlemode 1310 10 km
1550 30 km
80 km
- ------------------------------------------------------------------------------------------------------------------
RECEIVERS
Fibre Channel 1.062 Multimode 850 500 m 17-pin Reports on received
optical power
levels
Gigabit Ethernet 1.25 Singlemode 1310 10 km
1550 30 km
80 km
- ------------------------------------------------------------------------------------------------------------------
TRANSCEIVERS
Fibre Channel 1.062 Multimode 850 500 m 28-pin Built-in
diagnostics
Gigabit Ethernet 1.25 Singlemode 1310 10 km 9-pin OFC auto-sense
1550 30 km GBIC Serial
identification
80 km RJ-45
</TABLE>
OPTICAL LINK EXTENDERS
Our FLX-2000 family of optical link extenders allows enterprises to extend
the distance of fiber optic links in Gigabit Ethernet and Fibre Channel-based
networks while preserving data integrity and
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reliability. Using our optical link extenders, Gigabit Ethernet networks can be
extended from the maximum standard distance of 5 kilometers to up to 120
kilometers, and Fibre Channel networks can be extended from the maximum standard
distance of 10 kilometers to up to 120 kilometers. Our optical link extenders
enable new network applications such as remote storage and real-time backup, as
well as geographic extensions of a network. In addition, our optical link
extenders provide a value-added diagnostic function by measuring the bit error
rate on data links and monitoring and reporting system status.
OPTICITY 3000
Introduced in September 1999, our Opticity 3000 combines link extender and
basic, cost-effective wavelength division multiplexing functions that allow
enterprises and service providers to extend the distance of transmission and
increase the amount of data transmitted over fiber optic data links. The
Opticity 3000 is able to multiplex up to eight channels of Fibre Channel or
Gigabit Ethernet traffic on a single fiber pair, providing aggregate full-duplex
bandwidth of up to 10 Gbps. The Opticity 3000 can be remotely managed using
standard network management protocols such as the Simple Network Management
Protocol. Opticity 3000 also has features such as redundant power supply
designed to maximize reliability and uptime in case of failures.
NETWORK PERFORMANCE TEST SYSTEMS
Our GT and GLA family of network performance test systems assist networking
and storage system manufacturers in the efficient design of reliable, high-speed
networking systems and the testing and monitoring of the performance of these
systems. We believe we are the leading supplier of test equipment for the Fibre
Channel protocol used in enterprise SANs. We also offer Gigabit Ethernet test
systems. Our test systems allow engineers, service technicians and network
managers to capture data at high speeds, filter the data and identify various
types of intermittent errors and other network problems.
We recently contracted with Intel Corporation to provide test systems which
support the emerging NGIO protocol. NGIO is a peripheral component interconnect,
or PCI, bus replacement technology for use in all platforms from the desktop to
clustered enterprise level systems. We recently introduced a new family of test
systems for use in the development and commercialization of products based on
NGIO technology. In September 1999, we delivered our first NGIO test system, a
data analyzer, to Intel, and we are currently Intel's sole supplier of test
equipment for this new standard.
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Our GT and GLA family of test system products includes data generators, data
analyzers, error injector/data jammers and low-cost, real-time link monitors.
The following table describes our GT and GLA family of products:
<TABLE>
<CAPTION>
INTRODUCTION PROTOCOL TRANSMISSION
PRODUCT DESCRIPTION DATE SUPPORTED SPEED APPLICATION CONFIGURATION
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
GIGABIT LINK ANALYZERS
GLA-2100 5/94 Fibre Channel 1.062 Gbps Physical Layer PC-Hosted
Testing
GLA-3100ES 10/96 ESCON 200 Mbps R&D Service PC-Hosted
GLA-3100FC 1/97 Fibre Channel 1.062 Gbps R&D Service PC-Hosted
- ---------------------------------------------------------------------------------------------------------------
GT FIBRE CHANNEL GIGABIT TRAFFIC SYSTEM
GT-A 1/98 Fibre Channel 1.062 Gbps R&D Portable, Desk
Protocol and Top, High
Performance Analysis Perf. Tower
Card Set
GT-G 1/98 Fibre Channel 1.062 Gbps Inter-operability Portable, Desk
Data Generator Card Top, High
Perf. Tower
GT-J 2/99 Fibre Channel 1.062 Gbps Error Recovery Portable, Desk
Error Injector Module Top, High
Perf. Tower
- ---------------------------------------------------------------------------------------------------------------
GT FIBRE CHANNEL GIGABIT TRAFFIC JAMMER
Full Duplex 2/99 Fibre Channel 1.062 Gbps Error Recovery Portable, Desk
Error Injector System Top, High
Perf. Tower
- ---------------------------------------------------------------------------------------------------------------
GT GIGABIT TRAFFIC CHECK
GT-C-FC 5/98 Fibre Channel 1.062 Gbps Field Service Hand Held
Link Monitor
GT-C-GE 5/98 Gigabit 1.25 Gbps Field Service Hand Held
Link Monitor Ethernet
- ---------------------------------------------------------------------------------------------------------------
GT--NGIO NEXT GENERATION INPUT/OUTPUT TRAFFIC SYSTEM
GT-NGIO-A 9/99 NGIO 2.500 Gbps R&D Portable, Desk
Protocol and Top, Tower
Performance Analysis
Module
</TABLE>
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CUSTOMERS
The following table is a list of our customers who have purchased more than
$75,000 of our products during the 12-month period ended July 31, 1999:
<TABLE>
<S> <C> <C>
3Com Corporation Essential Communications Mitsui & Co. Ltd.
Alcatel Extreme Networks, Inc. Mylex Corporation
Amdahl Corporation Fermi National Accelerator Lab Network Appliance, Inc.
Atl Products, Incorporated. Fibre Technologies Ltd. Newbridge Networks Corporation
Boeing Corporation Fujitsu Computer Products Qlogic Corporation
Brocade Communications Systems, Inc. Gadzoox Networks, Inc. Quantum Corporation
Bull Electronics GCH Test & Computer Services Ltd. Raytheon Corporation
Comdisco, Incorporated Hewlett-Packard Corporation Seagate Technology Inc.
Compaq Computer Corporation Hitachi Sequent Computer Systems, Inc.
ConvergeNet Technologies Inc. Hy-Line Computer Components Storage Networks Inc.
Crossroads Systems, Incorporated International Business Machines Storagetek, Inc.
Corp.
Data General Corporation Inrange Technologies Corp. Sun Microsystems Inc.
Dell Computers Corporation Intel Corporation The Shure Group
Digital Equipment Corporation Jaycor Networks Inc. Thomas & Betts Corporation
Dolch Computer Systems Lockheed Martin Corporation Vixel Corporation
EG&G Incorporated LSI Logic Corporation VME Microsystems International
EMC Corporation McData Corporation W J Hughes Research Center
Emulex Corporation McDonnell Douglas Corporation Western Digital Corporation
</TABLE>
Sales to our two principal customers, Newbridge Networks and EMC
Corporation, accounted for 43.9% and 14.6% of our revenues in fiscal 1998, 25.1%
and 20.8% in fiscal 1999 and 34.9% and 19.0% in the three months ended July 31,
1999.
CUSTOMER CASE STUDIES
The following are representative examples of how our customers have used our
products:
STORAGE ARRAY MANUFACTURER. A manufacturer of storage arrays required a
Fibre Channel optical subsystem for a new, high-performance storage array. The
manufacturer specified high reliability and the ability to tolerate relatively
large variances in system temperature and voltage. We supplied a unique Fibre
Channel transceiver that operates over ranges of -10 DEG.C to +85 DEG.C and
5Vplus or minus10%, compared to industry standard ranges of 0 DEG.C to 50 DEG.C
and 5Vplus or minus5%. In addition, the diagnostic and communications
microprocessor incorporated into our transceiver allows the manufacturer's
storage arrays to automatically monitor their optical network connections and
set alarms when abnormal conditions are detected. We currently are the sole
source supplier of Fibre Channel optical transceivers used in the manufacturer's
storage arrays.
The same manufacturer was faced with the challenge of demonstrating to its
customers that its storage systems could reliably recover from error conditions
and move data over a Fibre Channel link between the customer's storage array and
computer systems. Errors in computer storage networks are typically random and
difficult to reproduce and track to their source. Because of the relationship we
had built supplying transceivers, the manufacturer contacted us about its
problem. We supplied our GT-J Error Injector Module, which the manufacturer used
to inject errors into its network systems in a controlled and repeatable manner.
This test system also allowed the manufacturer to capture detailed information
about each injected error and the behavior of the storage system as it attempted
to detect the error and correct the problem. With this information, the
manufacturer was able to modify its storage system software to ensure that
errors were automatically recognized and corrected, increasing the reliability
of its storage systems and satisfying its customers. Because of the successful
application of this test system, the manufacturer subsequently began using other
Finisar test systems in multiple levels of its product verification, from
low-level software and hardware testing to systems integration.
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TELECOMMUNICATIONS SWITCH MANUFACTURER. A telecommunications switch
manufacturer required high-speed links to connect clusters of switches within
its customers' central offices. The customer desired the high level of
reliability of a core telecommunications system, delivered over mulitmode
optical fiber. We developed unique transmitter and receiver subsystems
incorporating a long-wavelength, telecommunications-grade laser to accommodate
the customer's specification. These subsystems have operated reliably for an
aggregate of more than a billion operating hours over a two and one-half year
period. Recently, the customer also began using our singlemode optical
subsystems to connect switch frames over longer distances between multiple
offices. The customer ships its switches throughout the world, and we are
currently the single source supplier of optical subsystems for these
inter-switch links.
GIGABIT ETHERNET SWITCH MANUFACTURER. A Gigabit Ethernet switch
manufacturer required optical transceivers that could operate at a wider
temperature range (-10 DEG.C to +85 DEG.C) with lower electromagnetic
interference emissions than other available products. After six months of
testing, the customer qualified our GBIC optical transceivers, initially for use
in its newest switch product and, more recently in all its switch platforms
which support the GBIC form factor. The customer has designated Finisar as its
single source supplier for GBIC optical transceivers. As a result of the
performance of our GBIC transceivers, the customer has qualified other Finisar
optical subsystems for use in some of its other high-speed switches.
MERCHANT BANK. A merchant bank required long distance storage backup for
trading floor applications on servers at two sites located in the same city but
beyond the standard distance supported by the Fibre Channel protocol. These
applications contain critical data on equity trades and currency conversion
rates that require real-time backup. The customer selected our Fibre Channel
link extenders to allow the two sites to be connected over two different routes
of leased single-mode fiber cable. One route is 14 kilometers in length, and the
other is 37 kilometers. The two routes use different ducts installed in
different parts of the city. Each server has access to local and remote data
storage systems. The network is configured so that all points in the network are
linked to all other points, allowing all disks to be mirrored in real-time and
for a data path in operation to remain operational in the event of a major
outage. This configuration provides disaster protection in case either fiber
cable is damaged.
TECHNOLOGY
The development of high quality fiber optic subsystems and test systems for
high-speed data communications requires multidisciplinary expertise in the
following six technology areas:
HIGH FREQUENCY SEMICONDUCTOR DESIGN. Our fiber optic subsystems development
efforts are supported by an engineering team that specializes in analog/digital
integrated circuit design. This group works in both silicon and gallium
arsenide, or GaAs, semiconductor technologies where circuit element frequencies
are very fast and can be as high as 60 GHz. We have designed proprietary
circuits including laser drivers and receiver pre- and post-amplifiers. Our
designs allowed us to be early entrants in the 1.0 Gbps data communications
market and more recently in the 2.5 Gbps data communications market. These
advanced semiconductor devices provide significant cost advantages and will be
critical in the development of future products capable of even faster data
rates.
OPTICAL SUBSYSTEM DESIGN. Finisar has established itself as a low-cost
design leader beginning with its initial Gbps optical subsystems in 1992. From
that base we have developed new singlemode laser alignment approaches and
low-cost, all-metal packaging techniques for improved EMI performance and
environmental tolerance. We develop our own component and packaging and designs
and integrate these designs with proprietary manufacturing processes that allow
our products to be manufactured in high volume.
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<PAGE>
COMPLEX LOGIC DESIGN. Our test equipment designs are based on field
programmable gate arrays, or FPGAs. In recent customer trials, our newest
products are being used to operate with clock frequencies of up to 125 MHz and
logic densities up to 1 million gates per chip. Our test systems use FPGAs that
are programmed by the host PC and therefore can be configured differently for
different tests. All of our logic design is done in the VHDL hardware
description language which will enable migration to ASICs as volumes warrant. We
develop VHDL code in a modular fashion for reuse in logic design which comprises
a critical portion of our intellectual property. This re-usable technology base
of logic design is available for use in both our test system and optical
subsystem product lines and allows us to reduce the time to market for our new
and enhanced products.
SOFTWARE TECHNOLOGY. We devote substantial engineering resources to the
development of software technology for use in all of our product lines. We have
developed software to control our test systems, analyze data collected by our
test systems, and monitor, maintain, test and calibrate our optical subsystems.
A majority of our software technology and expertise is focused on the use of
object-oriented development techniques to develop software subsystems that can
be reused across multiple product lines. We have created substantial
intellectual property in the area of data analysis software for our Fibre
Channel test equipment. This technology allows us to rapidly sort, filter and
analyze large amounts of data using a proprietary database format. This database
format is both hardware platform-independent and protocol-independent. This
independence allows all of the software tools developed for our existing test
products to be utilized in all of our new test products that collect data
traces. Because the database format is also protocol-independent, new protocols
can be added quickly and easily. Another important component of our intellectual
property is our graphical user interface, or GUI, design. Many years of customer
experience with our test products have enabled us to define a simple yet
effective method to display complex protocols in clear and concise GUIs for
intuitive use by engineers.
SYSTEM DESIGN. The design of all of our products requires a combination of
sophisticated technical competencies--optical engineering, high-speed digital
and analog design, ASIC design and software engineering. We have built an
organization of people with skills in all of these areas. It is the integration
of these technical competencies that enables us to produce products that meet
the needs of our customers. Our combination of these technical competencies has
enabled us to design and manufacturer optical subsystems with built-in optical
test multiplexing, and network monitoring, as well as test systems that
integrate optical and protocol testing with user interface software.
MANUFACTURING SYSTEM DESIGN. The design skills gained in our test systems
group are also used in the manufacturing of our optical subsystems. We utilize
our high-speed FPGA design blocks and concepts and GUI software elements to
provide specialized manufacturing test systems for our internal use. These test
systems are optimized for test capacity and broad test coverage. We use
automated, software-controlled testing to enhance the field reliability of all
Finisar products. All of our products are subjected to temperature testing of
powered systems as well as full functional tests.
COMPETITION
We believe the principal competitive factors in the optical subsystem and
test system markets are:
- product performance, features, functionality and reliability;
- price/performance characteristics;
- timeliness of new product introductions;
- adoption of emerging industry standards;
- service and support;
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- size and scope of distribution network;
- brand name;
- access to customers; and
- size of installed customer base.
We believe we compete favorably with our competitors with respect to most of
the foregoing factors; however, the markets for optical subsystems and network
performance test systems for use in LANs, SANs 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 which would significantly harm
our business. For optical subsystems, we compete primarily with Agilent
Technologies, Inc., Cielo Communications, Inc., International Business Machines,
Inc. 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, our current and
potential customers may attempt to integrate their operations by producing their
own optical subsystems and network 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.
SALES, MARKETING AND TECHNICAL SUPPORT
We sell our products in North America through our direct sales force and a
network of independent manufacturers' representatives. Our direct sales
force maintains close contact with our customers and provides technical support
to our manufacturers' representatives. In our international markets, our direct
sales force works with local resellers who assist us in providing support and
maintenance to the territories they cover. We have recently established
relationships with distributors in Japan, the United Kingdom and Israel.
Both our optical subsystems and our network performance test systems are
often sold to the same customer. We are increasingly able to capitalize on our
customers' satisfaction with one of our product lines and our service-oriented
approach to gain valuable introductions that can lead to sales of our other
product line. We anticipate that we will continue to benefit from these trends
in the future.
Our marketing efforts are focused on increasing awareness of our optical
subsystems and test systems product lines and our brand name. Key components of
our marketing efforts include:
- continuing our active participation in industry associations and standards
committees to promote and further enhance Gigabit Ethernet and Fibre
Channel technologies, promote standardization in the LAN and SAN markets,
and increase our visibility as industry experts; and
- leveraging major trade show events and LAN and SAN conferences to promote
our broad product lines.
In addition, our marketing group provides marketing support services for our
executive staff, our direct sales force and our manufacturers' representatives
and resellers. Through our marketing activities, we provide technical and
strategic sales support to our direct sales personnel and resellers
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<PAGE>
including in-depth product presentations, technical manuals, sales tools,
pricing, marketing communications, marketing research, trademark administration
and other support functions.
A high level of continuing service and support is critical to our objective
of developing long-term customer relationships. We emphasize customer service
and technical support in order to provide our customers and their end users with
the knowledge and resources necessary to successfully utilize our product line.
Our customer service utilizes a technical team of field and factory applications
engineers, technical marketing personnel and, when required, product design
engineers. We provide extensive customer support throughout the qualification
and sale process. In addition, we also provide many resources through our World
Wide Web site, including product documentation and technical information. We
intend to continue to provide our customers with comprehensive product support
and believe it is critical to remaining competitive.
MANUFACTURING
We outsource the majority of our assembly operations, and we conduct
manufacturing engineering, supply chain management, quality assurance and
documentation control operations at our facility in Sunnyvale, California. This
approach enables us to focus on our design strengths, reduce fixed costs and
capital expenditures and provide flexibility in meeting market demand.
We currently rely on three U.S.-based contract manufacturers for
substantially all of our assembly operations. We do not have long-term contracts
with any of our contract manufacturers, and none of them are obligated to
perform assembly services for us for any specific period or at any specified
price, except as may be provided in a particular purchase order. We are
currently considering the use of contract manufacturers in Asia for a portion of
our assembly requirements.
We design and develop a number of the key components of our products,
including ASICs, printed circuit boards and software. In addition, our
manufacturing team works closely with our engineers to manage the supply chain.
Product testing and burn-in are performed at our facility. We also use
inspection, testing and statistical process controls to assure the quality and
reliability of our products. In addition, most of our optical subsystems have an
intelligent interface that allows us to monitor product quality during the
manufacturing process.
Although we use standard parts and components for our products where
possible, we currently purchase a few key components used in the manufacture of
our products from single or limited sources. Our principal single source
components include ASICs and lasers. Generally, purchase commitments with our
single or limited source suppliers are on a purchase order basis. Any
interruption or delay in the supply of any of these components, or the inability
to procure these components from alternate sources at acceptable prices and
within a reasonable time, would substantially harm our business. In addition,
qualifying additional suppliers can be time-consuming and expensive and may
increase the likelihood of errors.
We use a rolling twelve-month forecast based on anticipated product orders
to determine our material requirements. Lead times for materials and components
we order vary significantly, and depend on factors such as the specific
supplier, contract terms and demand for a component at a given time. It is our
practice to maintain a 12-month inventory of sole source components to decrease
the risk of a component shortage.
RESEARCH AND DEVELOPMENT
In fiscal 1998 and fiscal 1999, our research and development expenses were
$3.8 million and $7.9 million, respectively. We believe that our future success
depends on our ability to continue to enhance our existing products and to
develop new products that maintain technological competitiveness. We focus our
product development activities on addressing the evolving needs of our customers
within the LAN, SAN and extended network markets. We work closely with our
original
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equipment manufacturers and system integrators to monitor changes in the
marketplace. We design our products around current industry standards and will
continue to support emerging standards that are consistent with our product
strategy. Our research and development groups are aligned with our different
product lines and we have specific groups devoted to ASIC design and test,
gigabit per second subsystem design, test equipment hardware and software
design. In addition, our research and development also includes manufacturing
engineer efforts whereby we examine each product for its manufacturability,
predicted reliability, expected lifetime and manufacturing costs.
We are currently undertaking development efforts for our product lines with
emphasis on increasing reliability, integrity and performance, as well as
value-added functions. Some examples of products that we are working on are 10
Gbps Ethernet and 2.125 Gbps Fibre Channel optical subsystems. We also intend to
focus on increased product integration to enhance the price/performance
capabilities of our products. We believe that our research and development
efforts are key to our ability to maintain technical competitiveness and to
deliver innovative products that address the needs of the market. However, there
can be no assurance that our product development efforts will result in
commercially successful products, or that our products will not be rendered
obsolete by changing technology or new product announcements by other companies.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part on our proprietary
technology. We rely on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect our proprietary rights. To date, we have relied
primarily on certain proprietary processes and know-how to protect our
intellectual property. Although we have filed for several patents, some of which
have issued, we cannot assure you that any patents will issue as a result of
pending patent applications or that our issued patents will be upheld. Any
infringement of our proprietary rights could result in significant litigation
costs, and any failure to adequately protect our proprietary rights could result
in our competitors offering similar products, potentially resulting in loss of a
competitive advantage and decreased revenues. Despite our efforts to protect our
proprietary rights, existing patent, copyright, trademark and trade secret laws
afford only limited protection. In addition, the laws of some foreign countries
do not protect our proprietary rights to the same extent as do the laws of the
United States. Attempts may be made to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as proprietary.
Accordingly, we may not be able to prevent misappropriation of our technology or
deter others from developing similar technology. Furthermore, policing the
unauthorized use of our products is difficult. Litigation may be necessary in
the future to enforce our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and could significantly
harm our business.
The networking industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
From time to time, third parties may assert patent, copyright, trademark and
other intellectual property rights to technologies and in various jurisdictions
that are important to our business. Any claims asserting that our products
infringe or may infringe proprietary rights of third parties, if determined
adversely to us, could 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.
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<PAGE>
PENDING LITIGATION
In April 1999, Methode Electronics, 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 lawsuit seeks monetary damages and injunctive relief. In August 1999, the
Court granted a motion to transfer the case to the United States District Court
for the Northern District of California. It is our position that the Methode
patents are invalid, unenforceable and/or not infringed by our products. We
believe that we have strong defenses against Methode's lawsuit, and we intend to
defend the suit vigorously. However, the litigation is in the preliminary stage,
and we cannot predict its outcome. 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 of our
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
our 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 royalty payments pursuant to any such license agreement, our business
would be significantly harmed.
FACILITIES
Our facility is located in Sunnyvale, California. We lease approximately
50,000 square feet for our corporate headquarters which includes research and
development, sales and marketing, general and administrative and manufacturing
operations. This lease expires in July 2006. We believe our current facilities
will be adequate to meet our needs for the foreseeable future. In addition, we
have an option to lease approximately 25,000 additional square feet at the same
location to accommodate our future space requirements. We may exercise this
option upon the expiration of a third-party lease with a maximum term of three
years.
In addition, we continue to lease our prior facility in Mountain View,
California under a lease expiring in May 2002. We intend to continue subleasing
this 20,000 square foot facility through the expiration of the lease term.
EMPLOYEES
As of July 31, 1999, we employed a total of 152 full-time employees. We also
from time to time employ part-time employees and hire contractors. Our employees
are not represented by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe that our employee relations are good.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages as of August 31, 1999,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Jerry S. Rawls............................... 55 President, Chief Executive Officer and Director
Frank H. Levinson............................ 46 Chairman of the Board and Chief Technical Officer
Mark J. Farley............................... 37 Vice President, Digital Systems Engineering
Jan Lipson................................... 48 Vice President, Optical Engineering
Stephen K. Workman........................... 48 Vice President, Finance, Chief Financial Officer
and Secretary
Michael C. Child............................. 44 Director
Roger C. Ferguson............................ 56 Director
</TABLE>
JERRY S. RAWLS has served as a member of our Board of Directors since March
1989, as our President since April 1989 and as our Chief Executive Officer since
August 1999. From September 1968 to February 1989, Mr. Rawls was employed by
Raychem Corporation, a materials science and engineering company, where he held
various management positions including Division General Manager of the Aerospace
Products Division and Interconnection Systems Division. Mr. Rawls holds a B.S.
in Mechanical Engineering from Texas Tech University and an M.S. in Industrial
Administration from Purdue University.
FRANK H. LEVINSON founded Finisar in April 1987 and has served as a member
of our Board of Directors since February 1988 and as our Chairman of the Board
and Chief Technical Officer since August 1999. Mr. Levinson also served as our
Chief Executive Officer from February 1988 to August 1999. From September 1980
to December 1983, Mr. Levinson was a Member of Technical Staff at AT&T Bell
Laboratories. From January 1984 to July 1984, he was a Member of Technical Staff
at Bellcore, a provider of services and products to the communications industry.
From April 1985 to December 1985, Mr. Levinson was the principal optical
scientist at Raychem Corporation, and from January 1986 to February 1988, he was
Optical Department Manager at Raynet, Inc., a fiber optic systems company. Mr.
Levinson holds a B.S. in Mathematics/Physics from Butler University and an M.S.
and Ph.D. in Astronomy from the University of Virginia.
MARK J. FARLEY has served as our Vice President, Digital Systems Engineering
since April 1996. From August 1991 to April 1996, Mr. Farley was a consulting
design engineer. During that time, Mr. Farley was heavily involved in the design
of Finisar's early products. From September 1986 to August 1991, Mr. Farley was
a hardware design manager with Raynet, Inc. From September 1984 to September
1986, he was a hardware design manager at Tandem Computers. Mr. Farley holds a
B.S. in Electrical Engineering from the Massachusetts Institute of Technology.
JAN LIPSON has served as our Vice President, Optical Engineering since April
1998. From June 1995 to April 1998, Mr. Lipson was Vice-President, Advanced
Technology for Ortel Corporation, a fiber optic components supplier to the cable
television industry. From March 1982 to June 1995, Mr. Lipson was employed by
AT&T Bell Laboratories, and most recently held the position of Department Head
and Development Manager for the Subsystems Development Group in the Lightwave
Communications Area. From October 1978 to March 1982, Mr. Lipson was a member of
the technical staff at Los Alamos National Labs. Mr. Lipson holds a B.S. in
Physics from the California Institute of Technology, a Ph.D. in Physics from the
University of California at San Diego and an M.B.A. from the University of
Pittsburgh.
STEPHEN K. WORKMAN has served as our Vice President, Finance and Chief
Financial Officer since March 1999 and as our Secretary since August 1999. From
November 1989 to March 1999, Mr. Workman served as Chief Financial Officer at
Ortel Corporation. Mr. Workman holds a B.S. in Engineering Science and an M.S.
in Industrial Administration from Purdue University.
48
<PAGE>
MICHAEL C. CHILD has been a member of our Board of Directors since November
1998. Mr. Child has been employed by TA Associates, Inc., a venture capital
investment firm, since July 1982 where he currently serves as a Managing
Director. Mr. Child holds a B.S. in Electrical Engineering from the University
of California at Davis and an M.B.A. from the Stanford Graduate School of
Business.
ROGER J. FERGUSON has been a member of our Board of Directors since August
1999. Mr. Ferguson has served as Chief Executive Officer of Semio Inc., an early
stage software company, since July 1999 and as a principal in VenCraft, LLC, a
venture capital partnership, since July 1997. From 1993 to 1997, Mr. Ferguson
was Chief Executive Officer of DataTools, Inc., a database software company.
From 1987 to 1993, Mr. Ferguson served as Chief Operating Officer for Network
General Inc., a network analysis company. Mr. Ferguson also serves on the Boards
of Directors of Microtest, Inc. and several other private companies. Mr.
Ferguson holds a B.A. in Psychology from Dartmouth College and an M.B.A. from
the Amos Tuck School at Dartmouth.
Our President, Secretary and Chief Financial Officer are elected by the
Board of Directors, all other executive officers are elected by the Board of
Directors or appointed by the President, and all officers serve at the
discretion of the Board of Directors. Each of our officers and directors, other
than nonemployee directors, devotes his full time to the affairs of Finisar.
COMPOSITION OF THE BOARD OF DIRECTORS
Our Board of Directors is currently fixed at four directors. Mr. Child was
elected to serve on our Board of Directors pursuant to a voting agreement
entered into in November 1998 in connection with the sale of our convertible
redeemable preferred stock. This agreement will terminate upon the closing of
this offering. Upon the closing of this offering, our certificate of
incorporation will provide that the terms of office of the members of the Board
of Directors will be divided into three classes: Class I, whose term will expire
at the annual meeting of stockholders to be held in 2000, Class II, whose term
will expire at the annual meeting of stockholders to be held in 2001 and Class
III, whose term will expire at the annual meeting of stockholders to be held in
2002. The Class I director will be Mr. Ferguson, the Class II director will be
Mr. Levinson and the Class III directors will be Messrs. Child and Rawls. At
each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following their election. Our nonemployee directors devote such time to our
affairs as is necessary to discharge their duties. There are no family
relationships among any of our directors, officers or key employees.
BOARD COMMITTEES
The audit committee of our Board of Directors recommends the appointment of
our independent auditors, reviews our internal accounting procedures and
financial statements and consults with and reviews the services provided by our
independent auditors, including the results and scope of their audit. The audit
committee currently consists of Messrs. Child and Ferguson.
The compensation committee of our Board of Directors reviews and recommends
to the Board of Directors the compensation and benefits of all executive
officers of Finisar and establishes and reviews general policies relating to
compensation and benefits of Finisar employees. The compensation committee
currently consists of Messrs. Child and Ferguson.
COMPENSATION OF DIRECTORS
Directors of Finisar do not receive cash compensation for their services as
directors or members of committees of the Board of Directors. However,
non-employee directors are eligible to receive stock options. We do reimburse
directors for their reasonable expenses incurred in attending meetings of the
Board of Directors.
49
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The following table sets forth information regarding compensation received
during the fiscal year ended April 30, 1999 by our Chief Executive Officer and
each of our other executive officers whose total salary and bonus earned during
the fiscal year ended April 30, 1999 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM AND OTHER
COMPENSATION
-------------------------
ANNUAL COMPENSATION NUMBER OF
--------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- ----------------------------------------------- --------- --------- ----------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Jerry S. Rawls (2) ............................ $ 190,000 $ 106,192 $ 4,677 -- $ --
President
Frank H. Levinson (2) ......................... 190,000 106,192 3,581 -- --
Chief Executive Officer
Mark J. Farley ................................ 160,000 64,731 2,857 -- --
Vice President, Digital Systems Engineering
Jan Lipson .................................... 140,000 44,077 162 300,000 (3) --
Vice President, Optical Engineering
</TABLE>
- ------------------------------
(1) Represents contributions to each executive officer's 401(k) plan account.
(2) In August 1999, Mr. Rawls was elected to the additional office of Chief
Executive Officer, and Mr. Levinson became Chairman of the Board and Chief
Technical Officer.
(3) This option is immediately exercisable, subject to a right of repurchase in
favor of Finisar which lapses at the rate of 20% per year over a period of
five years.
OPTION GRANTS
The following table sets forth information regarding grants of stock options
to each of the executive officers named in the Summary Compensation Table above
during the fiscal year ended April 30, 1999. All of these options were granted
under our 1989 stock option plan. The percentage of total options set forth
below is based on an aggregate of 2,900,000 options granted during the fiscal
year. All options were granted at the fair market value of our common stock, as
determined by the Board of Directors on the date of grant. Potential realizable
values are net of exercise price, but before taxes associated with exercise.
Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the option term. The assumed 5% and 10% rates of stock
price appreciation are provided in accordance with rules of the SEC and do not
represent Finisar's estimate or projection of the future common stock price.
50
<PAGE>
OPTIONS GRANTED IN FISCAL YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
--------------------------------------------- DEEMED RATES OF
NUMBER OF % OF TOTAL VALUE PER STOCK PRICE
SECURITIES OPTIONS SHARE AT APPRECIATION
UNDERLYING GRANTED TO EXERCISE DATE OF FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT --------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE ($/SHARE) 5% 10%
- ------------------------- ----------- ----------------- ------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Jerry S. Rawls........... -- -- -- -- -- -- --
Frank H. Levinson........ -- -- -- -- -- -- --
Mark J. Farley........... -- -- -- -- -- -- --
Jan Lipson............... 300,000(1) 10.3 0.15 8/6/08 0.15 $ 28,300 $ 71,718
</TABLE>
- ------------------------------
(1) This option is immediately exercisable, subject to a right of repurchase in
favor of Finisar which lapses at the rate of 20% per year over a period of
five years.
OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS
The following table sets forth the number of shares of common stock acquired
and the value realized upon exercise of stock options during the fiscal year
ended April 30, 1999 and the number of shares of common stock subject to
exercisable and unexercisable options held as of April 30, 1999 by each of the
executive officers named in the Summary Compensation Table above.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND VALUES AT APRIL 30, 1999
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED
IN-THE-MONEY
NUMBER OF OPTIONS AT 4/30/99 OPTIONS AT 4/30/99 (2)
SHARES
ACQUIRED ON VALUE ------------------------ ------------------------
NAME EXERCISE REALIZED (1) VESTED UNVESTED VESTED UNVESTED
- ------------------------- ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jerry S. Rawls........... -- -- -- -- -- --
Frank H. Levinson........ -- -- -- -- -- --
Mark J. Farley........... 1,538,460 $ 30,769 -- 661,540 -- $ 780,617
Jan Lipson............... 300,000 33,000 -- -- -- --
</TABLE>
- ------------------------------
(1) The value realized upon exercise is based on the deemed fair value of the
underlying securities on the date of exercise, minus the per share exercise
price, multiplied by the number of shares acquired upon exercise.
(2) The value of unexercised options set forth above is calculated based on the
deemed fair value of the underlying securities on April 30, 1999 of $1.31
per share, minus the exercise price.
STOCK PLANS
1999 STOCK OPTION PLAN
Finisar's 1999 stock option plan was adopted by the Board of Directors and
approved by the stockholders in April 1999. Finisar is authorized to issue up to
7,000,000 shares of common stock under this plan. This number of shares will be
increased on May 1, 2001 and each subsequent May 1 during the term of the plan
by 5% of the number of shares of common stock issued and outstanding on the
immediately preceding April 30. The 1999 stock option plan is currently being
administered by the Board of Directors. The plan allows grants of incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code,
to employees, including officers and employee directors. In addition, it allows
grants of nonstatutory options to employees, non-employee directors and
consultants. The plan expires in April 2009, but may be terminated sooner by the
Board of Directors.
The exercise price of incentive stock options granted under the 1999 stock
option plan must not be less than the fair market value of a share of the common
stock on the date of grant. In the case of
51
<PAGE>
nonstatutory stock options, the exercise price must not be less than 85% of the
fair market value of a share of the common stock on the date of grant. With
respect to an incentive stock option granted to any optionee who owns stock
representing more than 10% of the voting power of all classes of Finisar's
outstanding capital stock, the exercise price of the option must be equal to at
least 110% of the fair market value of a share of the common stock on the date
of grant, and the term of the option may not exceed five years. The terms of all
other options may not exceed ten years. The aggregate fair market value
(determined as of the date of option grant) of the common stock for which
incentive stock options may become exercisable for the first time by any
optionee may not exceed $100,000 in any calendar year. The Board of Directors
has the discretion to determine vesting schedules and exercise requirements, if
any, of all options granted under the plan. However, the plan provides that in
connection with a change in control, if the acquiring corporation fails to
assume the plan's outstanding options or replace them with substantially
equivalent new options, all options will become immediately exercisable in full.
In addition, the plan allows the Board of Directors to provide in any option
agreement full acceleration of the exercisability of these options if, within 12
months following a change in control, the optionee is terminated without cause
or resigns for "good reason," as defined in the option agreement.
As of July 31, 1999, under the 1999 stock option plan 220,000 shares of
common stock had been issued upon exercise of options outstanding, options to
purchase 245,000 shares of common stock, with a weighted average exercise price
of $1.31, were outstanding, and 6,535,000 shares of common stock remained
available for future grants.
1989 STOCK OPTION PLAN
Finisar's 1989 stock option plan was adopted by the Board of Directors and
approved by the stockholders in April 1989. Prior to the expiration of its
ten-year term in April 1999, a total of 7,675,611 shares of common stock were
reserved for issuance under the 1989 stock option plan. Although no additional
options will be granted under this plan, the options for 1,111,540 shares of
common stock outstanding as of July 31, 1999 will remain subject to its
provisions and the plan will continue to be administered by the Board of
Directors.
The 1989 stock option plan allowed the grant of incentive stock options and
nonstatutory stock options. The exercise price of incentive stock options
granted under the plan was required to be not less than the fair market value of
a share of the common stock on the date of grant. The exercise price of
nonstatutory stock options granted under the plan was required to be not less
than 85% of the fair market value of a share of common stock on the date of
grant. With respect to any optionee who owned stock representing more than 10%
of the voting power of all classes of Finisar's outstanding capital stock, the
exercise price of any option was required to be equal to at least 110% of the
fair market value of a share of the common stock on the date of grant, the term
of any incentive stock option could not exceed five years and the term of any
nonstatutory stock option could not exceed five years and one day. The terms of
all other options could not exceed ten years. The aggregate fair market value
(determined as of the date of option grant) of the common stock for which
incentive stock options could become exercisable for the first time by any
optionee could not exceed $100,000 in any calendar year. The Board of Directors
had the discretion to determine vesting schedules and exercise requirements, if
any, of all option grants under this plan. However, the plan provided that in
connection with a sale of all or substantially all of the assets of Finisar, or
a merger of Finisar with or into another corporation, if the acquiring
corporation fails to assume the plan's outstanding options or replace them with
equivalent new options, all options will become immediately vested and
exercisable in full.
As of July 31, 1999, under the 1989 stock option plan 6,549,660 shares of
common stock had been issued upon exercise of options outstanding and options to
purchase 1,111,540 shares of common stock, at a weighted average exercise price
of $0.32, were outstanding.
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<PAGE>
1999 EMPLOYEE STOCK PURCHASE PLAN
Finisar's 1999 employee stock purchase plan was adopted by the Board of
Directors and approved by the stockholders in September 1999. A total of 250,000
shares of common stock are reserved for issuance under the plan, cumulatively
increased by 250,000 shares on May 1, 2001 and each May 1 thereafter through May
1, 2010. This plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be administered by the Board of Directors.
Employees, including officers and employee directors, are eligible to
participate in the plan if they are employed by Finisar for more than 20 hours
per week and more than five months in any calendar year. The plan will be
implemented during sequential 12-month offering periods, generally commencing on
or about December 1 of each year. However, the first such offering period will
commence on the effective date of this offering and will terminate on November
30, 2000. In addition, a six-month offering period will generally commence on
June 1 of each year.
The employee stock purchase plan permits eligible employees to purchase our
common stock through payroll deductions, which may not exceed 20% of the
employee's total compensation. Stock may be purchased under the plan at a price
equal to 85% of the fair market value of our common stock on either the first or
the last day of the offering period, whichever is lower. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of a participant's employment
with Finisar. Participants may not purchase shares of common stock having a
value, measured at the beginning of the offering period, greater than $25,000 in
any calendar year or more than a number of shares in any offering period
determined by dividing $25,000 (or $12,500 with respect to a six-month offering
period) by the fair market value of a share of Finisar common stock determined
at the beginning of the offering period.
401(k) PLAN
Our 401(k) retirement and deferred savings plan covers all eligible
employees and is intended to qualify as a tax-qualified plan under the Internal
Revenue Code. Employees are eligible to participate in the plan on the first day
of the month immediately following twelve months of service with Finisar. The
plan provides that each participant may contribute up to 12% of his or her
pre-tax gross compensation up to a statutory limit, which is $10,000 in calendar
year 1999. All amounts contributed by participants and earnings on participant
contributions are fully vested at all times. Finisar may contribute an amount
equal to one-half of the first 5% of each participant's contribution. Finisar's
contributions vest one-fifth per year over five years. Finisar's contributions
to the plan through July 31, 1999 totaled approximately $113,000.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by the Delaware General Corporation Law, we have adopted
provisions in our certificate of incorporation which provide that our directors
shall not be personally liable for monetary damages to Finisar or its
stockholders for a breach of fiduciary duty as a director, except liability for:
- a breach of the director's duty of loyalty to Finisar or its stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- an act related to our unlawful stock repurchase or payment of a dividend
under Section 174 of the Delaware General Corporation Law; or
- transactions from which the director derived an improper personal benefit.
These limitations of liability do not apply to liabilities arising under the
federal securities laws and do not affect the availability of equitable remedies
such as injunctive relief or rescission. Our certificate
53
<PAGE>
of incorporation also authorizes us to indemnify our officers, directors and
other agents to the fullest extent permitted under Delaware law.
As permitted by the Delaware General Corporation Law, our bylaws provide
that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions;
- we are required to advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law, subject to limited
exceptions; and
- the rights provided in the bylaws are not exclusive.
We intend to enter into separate indemnification agreements with each of our
directors and officers which may be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. These
indemnification agreements may require us, among other things, to indemnify our
directors and officers against liabilities that may arise by reason of their
status or service as directors or officers, other than liabilities arising from
willful misconduct. These indemnification agreements also may require us to
advance any expenses incurred by the directors or officers as a result of any
proceeding against them as to which they could be indemnified and to obtain
directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification by us is
sought. In addition, we are not aware of any threatened litigation or proceeding
which may result in a claim for indemnification.
We intend to maintain directors' and officers' liability insurance.
54
<PAGE>
CERTAIN TRANSACTIONS
FINANCING TRANSACTION
In November 1998, we sold and issued an aggregate of 12,039,486 shares of
our convertible redeemable preferred stock at a price of $2.1932 per share. TA
Associates, Inc., of which Mr. Child is a Managing Director, and its affiliated
entities purchased 9,422,305 of such shares for an aggregate purchase price of
$20,665,000. Upon the closing of this offering, each share of convertible
redeemable preferred stock will be converted into 0.7460371 of a share of common
stock and one share of redeemable preferred stock, and all outstanding shares of
redeemable preferred stock will be redeemed for $0.2193 per share.
LOAN TO OFFICER
In August 1998, we loaned $225,000 to Mr. Lipson. This loan was evidenced by
a promissory note bearing interest at the rate of 2% per annum and
collateralized by a deed of trust owned by Mr. Lipson. Mr. Lipson repaid this
loan in full in December 1998.
CONTRIBUTIONS TO CAPITAL AND REPURCHASES OF COMMON STOCK
In March 1998, Mr. Levinson and his wife contributed 2,200,000 shares of our
common stock, having a fair market value of $0.13 per share, to the capital of
Finisar.
In connection with our convertible redeemable preferred stock financing in
November 1998, we repurchased 7,397,922 shares of our common stock from Mr.
Levinson at a per share price of $2.1932 for an aggregate purchase price of
$16,225,123, 5,439,373 and 1,400,000 shares of our common stock from Mr. Rawls
and a trust for the benefit of members of his family, respectively, at a per
share price of $2.1932 for aggregate purchase prices of $11,929,633 and
$3,070,480, respectively, and 220,000 shares of our common stock from Mr. Farley
at a per share price of $2.1932 for an aggregate purchase price of $482,504.
OPTION GRANTS AND EXERCISES
In March 1998, we granted Mr. Farley an option to purchase an aggregate of
2,200,000 shares of common stock, with an exercise price of $0.13 per share. Mr.
Farley exercised a portion of this option to purchase 1,538,460 shares. The
exercise price was paid by Mr. Farley by delivery to us of a promissory note in
the principal amount of $200,000, bearing interest at the rate of 6% per annum
and collateralized by shares of our common stock owned by Mr. Farley. Mr. Farley
repaid this loan in full in January 1999.
In March 1999, we granted Mr. Workman an option to purchase an aggregate of
200,000 shares of common stock, with an exercise price of $1.31 per share. Mr.
Workman exercised this option in full in April 1999. The exercise price was paid
by Mr. Workman by delivery to us of a promissory note in the principal amount of
$262,000 bearing interest at the rate of 6% per annum. This promissory note is
payable in full by April 2004 and is collateralized by shares of our common
stock owned by Mr. Workman.
OTHER TRANSACTIONS
We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require Finisar to
indemnify such individuals to the fullest extent permitted by Delaware law.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of July 31, 1999, and as adjusted to
reflect the sale of the common stock offered hereby, by:
- each stockholder who is known by us to beneficially own more than 5% of
common stock;
- each of our executive officers listed on the Summary Compensation Table
under "Management;"
- each of our directors; and
- all of our executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING(1)
AFTER THE OFFERING
------------------------- -------------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------------------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
SIGNIFICANT STOCKHOLDERS:
Entities affiliated with TA Associates, Inc. (2)................... 7,029,388 16.9% 7,029,388
Entities affiliated with Summit Partners (3)....................... 1,843,660 4.4 1,843,660
EXECUTIVE OFFICERS AND DIRECTORS:
Jerry S. Rawls..................................................... 8,470,627 20.4 8,470,627
Frank H. Levinson (4).............................................. 15,598,872 37.6 15,598,872
Mark J. Farley (5)................................................. 1,885,000 4.5 1,885,000
Jan Lipson (6)..................................................... 300,000 * 300,000
Michael C. Child (7)............................................... 7,029,388 16.9 7,029,388
Roger C. Ferguson (8).............................................. 0 * 0
All executive officers and directors as a group (7 persons)(9)..... 33,483,887 79.4 33,483,887
</TABLE>
- ------------------------
* Less than 1%.
(1) The number of shares beneficially owned and the percentage of shares
outstanding are based on (a) 41,494,262 shares outstanding as of July 31,
1999 and (b) shares outstanding after completion of this
offering, assuming no exercise of the underwriters' over-allotment option.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. All shares of common stock subject to options exercisable within
60 days following July 31, 1999 are deemed to be outstanding and
beneficially owned by the person holding those options for the purpose of
computing the number of shares beneficially owned and the percentage of
ownership of that person. They are not, however, deemed to be outstanding
and beneficially owned for the purpose of computing the percentage ownership
of any other person. Except as indicated in the other footnotes to the table
and subject to applicable community property laws, based on information
provided by the persons named in the table, these persons have sole voting
and investment power with respect to all shares of the common stock shown as
beneficially owned by them.
(2) Includes 1,699,095 shares held by Advent Atlantic and Pacific III L.P.,
5,097,285 shares held by TA/ Advent VIII, L.P., 102,047 shares held by TA
Investors LLC and 130,961 shares held by TA Executives Fund LLC. TA/Advent
VIII L.P., Advent Atlantic & Pacific III L.P., TA Executives Fund LLC and TA
Investors LLC are part of an affiliated group of investment partnerships.
The general partner of TA/Advent VIII L.P. is TA Associates VIII LLC. The
general partner of Advent Atlantic and Pacific III L.P. is TA Associates AAP
III Partners L.P. TA Associates, Inc. is the general partner of TA
Associates AAP III Partner L.P. and is the sole manager of TA Advent VIII
56
<PAGE>
LLC, TA Executives Fund LLC and TA Investors. In such capacity, TA
Associates, Inc., through an executive committee, exercises sole voting and
investment power with respect to all shares held of record by the named
investment partnerships; individually, no stockholder, director or officer
of TA Associates, Inc., is deemed to have or share such voting or investment
power. In the event the underwriters exercise their over-allotment option in
full, entities affiliated with TA Associates, Inc. would sell shares
and, after the offering would own shares, representing % of our
outstanding common stock. The address of TA Associates, Inc. is 125 High
Street, High Street Tower, Suite 2500, Boston, MA 02110.
(3) Includes 1,408,567 shares held by Summit Ventures V, L.P., 250,728 shares
held by Summit Ventures V Companion Fund L.P., 95,083 shares held by Summit
Ventures V Advisors Fund (QP), L.P., 29,057 shares held by Summit V Advisors
Fund, L.P. and 60,225 shares held by Summit Investors III, L.P., each of
which is an affiliate of Summit Partners. The address of Summit Partners is
499 Hamilton Avenue, Suite 200, Palo Alto, CA 94301.
(4) Includes 14,098,872 shares held by the Frank H. & Wynette Levinson 1998
Revocable Trust, 500,000 shares held by the Rose Wynette Levinson 1998 Gift
Trust, 500,000 shares held by the Alana Marie Levinson 1998 Gift Trust and
500,000 shares held by the Frank Henry Levinson 1998 Gift Trust.
(5) Includes 661,540 shares issuable upon exercise of options exercisable within
60 days following July 31, 1999 and 300,000 shares held by the Julia
Christine Farley Irrevocable Trust.
(6) Includes 240,000 shares subject to a right of repurchase in favor of Finisar
which lapses over time.
(7) Mr. Child disclaims beneficial ownership of all shares held by affiliates of
TA Associates, Inc. of which Mr. Child is a Managing Director, except to the
extent of 14,454 shares of common stock in which he has an ownership
interest through TA Investors LLC and 2,551 shares of common stock in which
the Child Childrens Trust has an ownership interest through TA Investors
LLC.
(8) Mr. Ferguson was granted an option to purchase 20,000 shares of common stock
in August 1999.
(9) Including 7,012,383 shares held by TA Associates, Inc. and its affiliates as
to which Mr. Child disclaims beneficial ownership. See Note 2 above.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 200,000,000 shares of common stock, $0.001 par value per share, and 5,000,000
shares of preferred stock, $0.001 par value per share.
The following is a summary of the material terms of our common stock and
preferred stock. Please see our certificate of incorporation, filed as an
exhibit to the registration statement of which this prospectus is a part, for
more detailed information.
COMMON STOCK
As of July 31, 1999, there were 32,512,365 shares of our common stock
outstanding held of record by 102 stockholders. The holders of our common stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of stockholders. Upon the closing of this offering, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Subject to
preferences applicable to any outstanding preferred stock, holders of common
stock are entitled to receive ratably any dividends declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of Finisar, holders of common
stock are entitled to share ratably in the assets remaining after payment of
liabilities and the liquidation preferences of any outstanding preferred stock.
Holders of our common stock have no preemptive, conversion or redemption rights.
Each outstanding share of common stock is, and all shares of common stock to be
outstanding upon the closing of this offering will be, fully paid and
non-assessable.
PREFERRED STOCK
Upon the closing of this offering, all shares of our convertible redeemable
preferred stock outstanding will be converted into an aggregate of 8,981,897
shares of common stock and 12,039,486 shares of redeemable preferred stock, and
all outstanding shares of redeemable preferred stock will be redeemed.
Thereafter, up to 5,000,000 shares of undesignated preferred stock will be
authorized for issuance. Our Board of Directors has the authority, without
further action by its stockholders, to issue preferred stock in one or more
series. In addition, the Board of Directors may fix the rights, preferences and
privileges of any preferred stock it determines to issue. Any or all of these
rights may be superior to the rights of the common stock. Preferred stock could
thus be issued quickly with terms calculated to delay or prevent a change in
control of Finisar or to make removal of management more difficult.
Additionally, the issuance of preferred stock may decrease the market price of
our common stock. At present, we have no plans to issue any shares of preferred
stock.
REGISTRATION RIGHTS
Under the Securities Purchase Agreement dated as of November 6, 1998, the
purchasers of our convertible redeemable preferred stock have various
registration rights with respect to the 8,981,897 shares of common stock into
which their convertible redeemable preferred stock will be converted upon the
closing of this offering.
Beginning 180 days after the date of this prospectus, these holders have the
right to require Finisar, on not more than two occasions, to file a registration
statement under the Securities Act to register their shares at our expense.
Demand for this registration must be made by holders of at least 20% of the
shares that are entitled to this registration. The underwriters of the offering
have the right, subject to some limitations, to limit the number of shares
included.
If we propose to register any of our securities under the Securities Act for
our own account or for the account of other security holders, the purchasers of
our convertible redeemable preferred stock are entitled to notice of that
registration and have the right to include some or all of their shares of common
stock in that registration, at our expense, subject to marketing and other
limitations.
58
<PAGE>
The purchasers of our convertible redeemable preferred stock have the right
to require Finisar, no more frequently than twice during any nine month period,
to file a registration statement on Form S-3 under the Securities Act to
register their shares at Finisar's expense. Demand for this registration must be
made by the holders of at least 20% of the shares that are entitled to this
registration. The underwriters of this offering have the right, subject to some
limitations, to limit the number of shares included.
ANTITAKEOVER PROVISIONS
DELAWARE LAW
Finisar will be subject to Section 203 of the Delaware General Corporation
Law regulating corporate takeovers, which prohibits a Delaware corporation from
engaging in any business combination with an "interested stockholder," unless:
- prior to the date of the transaction, the Board of Directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
- the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding (a) shares
owned by persons who are directors and also officers, and (b) shares owned
by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
- on or subsequent to the date of the transaction, the business combination
is approved by the board and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Except as otherwise specified in Section 203, an "interested stockholder" is
defined to include (a) any person that is the owner of 15% or more of the
outstanding voting securities of the corporation, or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within three years immediately prior
to the date of determination and (b) the affiliates and associates of any such
person.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Provisions of our certificate of incorporation and bylaws, which will become
effective upon the closing of this offering, may have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of Finisar. These provisions could cause the
price of our common stock to decrease. Some of these provisions allow us to
issue preferred stock without any vote or further action by the stockholders,
eliminate the right of stockholders to act by written consent without a meeting
and eliminate cumulative voting in the election of directors. These provisions
may make it more difficult for stockholders to take specific corporate actions
and could have the effect of delaying or preventing a change in control of
Finisar.
Our certificate of incorporation provides that, upon the closing of this
offering, the Board of Directors will be divided into three classes of
directors, with each class serving a staggered three-year term. See
"Management--Composition of the Board of Directors." The classification system
of electing directors may discourage a third party from making a tender offer or
otherwise attempting to obtain control of us and may maintain the incumbency of
the Board of Directors, because the classification of the Board of Directors
generally increases the difficulty of replacing a majority of the directors.
59
<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company.
LISTING
Finisar has applied to have its common stock approved for listing on the
Nasdaq National Market under the trading symbol "FNSR."
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been a public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales, could adversely affect the trading
price of the common stock.
Upon completion of this offering, we will have outstanding
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options to purchase common stock after
July 31, 1999. Of these shares, the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, except for any shares purchased by "affiliates" of Finisar, as
defined in Rule 144 under the Securities Act, which would be subject to the
limitations and restrictions described below.
The remaining 41,494,262 shares of common stock outstanding upon completion
of this offering will be "restricted securities" as defined in Rule 144. These
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144 or 701 under the
Securities Act, which are summarized below. Sales of these restricted securities
in the public market, or the availability of these shares for sale, could
adversely affect the trading price of our common stock.
Holders of approximately 41,494,262 of these restricted securities,
including all of our officers and directors and the entities affiliated with
them, have entered into lock-up agreements providing that, subject to limited
exceptions, they will not sell, directly or indirectly, any common stock without
the prior consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated for a
period of 180 days from the date of this prospectus.
All of these restricted securities will be eligible for sale in the public
market, subject in some cases to the volume limitations and other restrictions
of Rule 144, beginning 180 days after the date of this prospectus upon
expiration of the lock-up agreements described above.
Shares issued upon exercise of options granted by us prior to the date of
this prospectus will be available for sale in the public market under Rule 701
of the Securities Act. Rule 701 permits resales of these shares in reliance upon
Rule 144 but without compliance with various restrictions, including the holding
period requirement, imposed under Rule 144. In general, under Rule 144,
beginning 90 days after the date of this prospectus, a person (or persons whose
shares are aggregated) who has beneficially owned restricted securities for at
least one year would be entitled to sell within any three-month period a number
of shares not to exceed the greater of (1) one percent of the then outstanding
shares of common stock or (2) the average weekly trading volume of our common
stock during the four calendar weeks preceding the filing of a Form 144 with
respect to the sale. Sales under Rule 144 are also subject to manner of sale and
notice requirements, as well as to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
an affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
We have reserved an aggregate of 34,550,000 shares of common stock for
issuance pursuant to our 1989 and 1999 stock option plans and our 1999 employee
stock purchase plan. As of July 31, 1999, options to purchase an aggregate of
1,356,540 shares of common stock were outstanding under our stock option plans.
We intend to file registration statements on Form S-8 under the Securities Act
approximately 90 days after the date of this prospectus to register an aggregate
of 7,781,540 shares of common stock issued or reserved for issuance under its
stock option plans and employee stock purchase plan. Shares of common stock
issued under the foregoing plans, after the filing of related registration
statements, will be freely tradable in the public market, subject in the case of
the holders to the Rule 144 limitations applicable to Finisar affiliates,
lock-up agreements with the underwriters and vesting restrictions imposed by
Finisar.
61
<PAGE>
UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities
Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, Morgan
Keegan & Company, Inc. and SoundView Technology Group, Inc. are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in a purchase agreement, we have agreed to sell to each
of the underwriters, and each of the underwriters, severally and not jointly,
has agreed to purchase, the number of shares of our common stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................................................
J.P. Morgan Securities Inc. ...............................................................
Dain Rauscher Wessels......................................................................
Morgan Keegan & Company, Inc. .............................................................
SoundView Technology Group, Inc. ..........................................................
----------
Total......................................................................................
----------
----------
</TABLE>
Subject to the terms and conditions set forth in the purchase agreement,
each of the underwriters is committed to purchase all of the shares of our
common stock being sold pursuant to the purchase agreement if any shares of our
common stock are purchased. Under certain circumstances, under the terms of the
purchase agreement, the commitments of the non-defaulting underwriters may be
increased or the purchase agreement may be terminated. We and the selling
stockholders have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that they propose initially to offer the
shares of our common stock to the public at the initial public offering price
set forth on the cover page of this prospectus, and to certain dealers at such
price less a concession not in excess of $ per share of common stock.
The underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share of common stock on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the per share and total public offering price, the
underwriting discount to be paid by us and the selling stockholders to the
underwriters and the proceeds before expenses to
62
<PAGE>
us and the selling stockholders. This information is presented assuming either
no exercise or full exercise by the underwriters of their over-allotment
options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
---------- ---------- ----------
<S> <C> <C> <C>
Public offering price.............................................. $ $ $
Underwriting discount.............................................. $ $ $
Proceeds, before expenses, to Finisar.............................. $ $ $
Proceeds to the selling stockholders............................... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ and are payable by us.
OVER-ALLOTMENT OPTION
The selling stockholders have granted to the underwriters an option,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of additional shares of common stock from the selling
stockholders at the public offering price less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.
RESERVED SHARES
At our request, the underwriters have reserved approximately shares of
our common stock for sale at the public offering price to our directors,
consultants and certain other persons with relationships to Finisar. The number
of shares of our common stock available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares which are not orally confirmed for purchase within one day of the pricing
of the offering will be offered by the underwriters to the general public on the
same basis as the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors, and most of our existing
stockholders have agreed, with certain exceptions, not to directly or
indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of, or otherwise dispose of or transfer any shares
of our common stock or any securities convertible into or exchangeable or
exercisable for our common stock, whether now owned or later acquired by
the person executing the agreement or with respect to which the person
executing the agreement later acquires the power of disposition, or file
any registration statement under the Securities Act relating to any shares
of our common stock for a period of 180 days after the date of this
prospectus; or
- enter into any swap or other agreement that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of our
common stock, whether any such swap or transaction is to be settled by
delivery of our common stock or other securities, in cash or otherwise,
without the prior written consent of Merrill Lynch for a period of 180 days
after the date of this prospectus. See "Shares Eligible for Future Sale."
63
<PAGE>
NASDAQ NATIONAL MARKET LISTING
Before this offering, there has been no public market for our common stock.
The public offering price will be determined through negotiations among us and
the representatives. In addition to prevailing market conditions the factors to
be considered by us and the representatives in determining the public offering
price of our common stock are:
- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
- certain aspects of our financial information;
- the history of, and the prospects for, our company and the industry in
which we compete;
- an assessment of our management, our past and present operations, the
prospects for, and timing of, our future revenue;
- the present state of our development;
- the percentage interest of Finisar being sold as compared to the valuation
for the entire company; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market subsequent
to the offering at or above the public offering price.
We have applied for a listing of our common stock on the Nasdaq National
Market under the symbol "FNSR."
The underwriters have advised us that they do not expect sales to accounts
over which the underwriters exercise discretionary authority to exceed 5% of the
total number of shares of our common stock offered by them.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase our common stock. As an
exception to these rules, the representatives are permitted to engage in certain
transactions that stabilize the price of our common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the representatives may
reduce that short position by purchasing common stock in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above. In general, purchases of a
security for the purpose of stabilization or to reduce a short position could
cause the price of the security to be higher than it might be in the absence of
such purchases.
The representatives may also impose a penalty bid on certain underwriters
and selling group members. This means that, if the representatives purchase
shares of our common stock in the open market to reduce the underwriters' short
position or to stabilize the price of our common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group members
that sold those shares as part of the offering. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
64
<PAGE>
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal
matters relating to the offering will be passed upon for the underwriters by
Morrison & Foerster LLP, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule at April 30, 1998 and 1999 and for the fiscal years
ended April 30, 1997, 1998 and 1999, as set forth in their report. We have
included our financial statements and schedule in this prospectus and elsewhere
in the registration statement in reliance on Ernst & Young LLP's reports, given
on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
the exhibits and schedules thereto, under the Securities Act with respect to the
shares to be sold in this offering. This prospectus does not contain all the
information set forth in the registration statement. For further information
about us and the shares to be sold in this offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to, are not
necessarily complete, and in each instance please refer to the copy of the
contract, agreement or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by this reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the SEC at the SEC's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C.,
Washington, D.C. 20549 and at the regional offices of the SEC located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You
can request copies of these documents upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings,
including the registration statement will also be available to you on the SEC's
Web site. The address of this site is http://www.sec.gov.
65
<PAGE>
FINISAR CORPORATION
FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Audited Financial Statements
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statement of Convertible Redeemable Preferred Stock and Changes in Stockholders'
Equity (Deficit).................................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Finisar Corporation
We have audited the accompanying balance sheets of Finisar Corporation as of
April 30, 1998 and 1999, and the related statements of operations, convertible
redeemable preferred stock and changes in stockholders' equity (deficit), and
cash flows for each of the three years in the period ended April 30, 1999. These
financial statements are the responsibility of Finisar Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Finisar Corporation at April
30, 1998 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended April 30, 1999, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
June 25, 1999
F-2
<PAGE>
FINISAR CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
APRIL 30, JULY 31,
---------------------- JULY 31, 1999 (NOTE
1998 1999 1999 1)
--------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 721,675 $ 5,043,796 $ 5,403,638
Accounts receivable (net of allowance for doubtful
accounts of $16,538, $265,138 and $407,318 at April 30,
1998, 1999 and July 31, 1999)........................... 2,787,515 6,656,148 7,561,823
Inventories............................................... 2,731,323 5,236,328 6,959,246
Deferred income taxes..................................... 387,200 1,047,442 1,047,442
Prepaid expenses.......................................... -- 193,505 164,550
--------- ----------- -----------
Total current assets........................................ 6,627,713 18,177,219 21,136,699
Income taxes receivable..................................... 81,385 -- --
Other assets................................................ -- 295,976 465,692
Property and equipment, net................................. 1,052,241 2,481,735 2,856,145
--------- ----------- -----------
Total assets................................................ $7,761,339 $20,954,930 $24,458,536
--------- ----------- -----------
--------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 265,276 $ 1,394,461 $ 2,514,526
Accrued compensation...................................... 116,108 1,498,811 1,402,862
Other accrued liabilities................................. 372,972 1,476,408 1,949,588
Income tax payable........................................ -- 742,669 1,211,669
Note payable, current portion............................. 100,000 -- --
Capital lease obligations, current portion................ 44,047 53,539 50,952
--------- ----------- -----------
Total current liabilities................................... 898,403 5,165,888 7,129,597
--------- ----------- -----------
Long-term liabilities:
Note payable, long-term portion........................... 350,000 11,015,000 11,015,000
Capital lease obligations, long-term portion.............. 66,244 17,462 4,381
--------- ----------- -----------
Total long-term liabilities................................. 416,244 11,032,462 11,019,381
--------- ----------- -----------
Commitments and contingencies
Convertible redeemable preferred stock:
No par value, 12,100,000 shares authorized: no shares
issued and outstanding at April 30, 1998; 12,039,486
shares issued and outstanding at April 30, 1999 and July
31, 1999; no shares issued and outstanding pro forma;
liquidation preference $26,405,000 at April 30, 1999 and
July 31, 1999........................................... -- 26,259,664 26,259,664 $ --
Redeemable preferred stock:
No par value, 12,100,000 shares authorized; no shares
issued and outstanding at April 30, 1998, 1999 or July
31, 1999; 12,039,486 shares issued and outstanding pro
forma................................................... -- -- -- 2,640,260
Stockholders' equity (deficit):
Common stock:
No par value, 75,000,000 shares authorized; 41,800,000,
32,382,365, 32,512,365 and 41,494,262 shares issued
and outstanding at April 30, 1998 and 1999, July 31,
1999 and pro forma, respectively...................... 95,200 3,908,824 6,114,967 29,734,371
Deferred stock compensation............................... -- (1,612,178) (3,415,129) (3,415,129)
Notes receivable from stockholders........................ -- (1,520,788) (1,671,437) (1,671,437)
Retained earnings (accumulated deficit)................... 6,351,492 (22,278,942) (20,978,507) (20,978,507)
--------- ----------- ----------- ------------
Total stockholders' equity (deficit)........................ 6,446,692 (21,503,084) (19,950,106) $3,669,298
--------- ----------- ----------- ------------
------------
Total liabilities and stockholders' equity (deficit)........ $7,761,339 $20,954,930 $24,458,536
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
FINISAR CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30, THREE MONTHS ENDED JULY 31,
------------------------------------------ ---------------------------
1997 1998 1999 1998 1999
------------ ------------- ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 8,457,000 $ 22,066,942 $ 35,471,114 $ 6,793,507 $ 13,879,459
Cost of revenues....................... 3,438,000 8,704,928 15,513,930 2,665,500 6,252,055
------------ ------------- ------------- ------------ -------------
Gross profit........................... 5,019,000 13,362,014 19,957,184 4,128,007 7,627,404
------------ ------------- ------------- ------------ -------------
Operating expenses:
Research and development............. 2,536,000 3,806,132 7,863,646 1,393,903 2,840,391
Sales and marketing.................. 645,000 1,629,451 4,145,370 833,652 1,542,143
General and administrative........... 463,622 832,548 1,902,102 297,943 758,873
Amortization of deferred stock
compensation....................... -- -- 395,202 -- 239,192
------------ ------------- ------------- ------------ -------------
Total operating expenses............... 3,644,622 6,268,131 14,306,320 2,525,498 5,380,599
------------ ------------- ------------- ------------ -------------
Income from operations................. 1,374,378 7,093,883 5,650,864 1,602,509 2,246,805
Interest income........................ 15,000 38,141 154,058 -- 98,755
Interest expense....................... (2,000) (33,240) (428,507) (6,607) (188,141)
Other income (expense) net............. -- (25,451) (425,417) 25,253 (27,984)
------------ ------------- ------------- ------------ -------------
Income before income taxes............. 1,387,378 7,073,333 4,950,998 1,621,155 2,129,435
Provision for income taxes............. 440,000 2,714,900 1,873,693 568,169 829,000
------------ ------------- ------------- ------------ -------------
Net income............................. $ 947,378 $ 4,358,433 $ 3,077,305 $ 1,052,986 $ 1,300,435
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
Net income per share:
Basic................................ $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
Diluted.............................. $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
Shares used in computing net income per
share:
Basic................................ 44,000,000 43,752,877 36,860,000 41,800,000 29,463,905
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
Diluted.............................. 44,000,000 43,752,877 44,937,917 41,800,000 42,609,931
------------ ------------- ------------- ------------ -------------
------------ ------------- ------------- ------------ -------------
Pro forma net income per share:
Basic................................ $ 0.07 $ 0.03
------------- -------------
------------- -------------
Diluted.............................. $ 0.07 $ 0.03
------------- -------------
------------- -------------
Shares used in computing pro forma net
income per share:
Basic................................ 41,166,389 38,445,802
------------- -------------
------------- -------------
Diluted.............................. 44,937,917 42,609,931
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
FINISAR CORPORATION
STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------
CONVERTIBLE REDEEMABLE
PREFERRED STOCK COMMON STOCK
------------------------ ------------------------- DEFERRED STOCK
SHARES AMOUNT SHARES AMOUNT COMPENSATION
----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1996......................... -- $ -- 44,000,000 $ 95,200 $ --
Net income and comprehensive income............. -- -- -- -- --
----------- ----------- ----------- ------------ --------------
Balance at April 30, 1997......................... -- -- 44,000,000 95,200 --
Contribution of shares by principal
shareholder................................... -- -- (2,200,000) -- --
Net income and comprehensive income............. -- -- -- -- --
----------- ----------- ----------- ------------ --------------
Balance at April 30, 1998......................... -- -- 41,800,000 95,200 --
Stock options exercised......................... -- -- 5,039,660 1,806,244 --
Issuance of preferred stock at $2.1932 per
share, net of issuance costs of $145,334 12,039,486 26,259,664 -- -- --
Repurchase of common stock at $2.1932 per
share......................................... -- -- (14,457,295) -- --
Deferred stock compensation..................... -- -- -- 2,007,380 (2,007,380)
Amortization of deferred stock compensation..... -- -- -- -- 395,202
Net income and comprehensive income............. -- -- -- -- --
----------- ----------- ----------- ------------ --------------
Balance at April 30, 1999......................... 12,039,486 26,259,664 32,382,365 3,908,824 (1,612,178)
Stock options exercised
(unaudited)................................... -- -- 130,000 164,000 --
Deferred stock compensation..................... -- -- -- 2,042,143 (2,042,143)
Amortization of deferred stock compensation..... -- -- -- -- 239,192
Net income and comprehensive income
(unaudited)................................... -- -- -- -- --
----------- ----------- ----------- ------------ --------------
Balance at July 31, 1999 (unaudited).............. 12,039,486 $26,259,664 32,512,365 $ 6,114,967 $(3,415,129)
----------- ----------- ----------- ------------ --------------
----------- ----------- ----------- ------------ --------------
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------
NOTES RETAINED TOTAL
RECEIVABLE EARNINGS STOCKHOLDERS'
FROM (ACCUMULATED EQUITY
STOCKHOLDERS DEFICIT) (DEFICIT)
------------ ------------ -------------
<S> <C> <C> <C>
Balance at April 30, 1996......................... $ -- $ 1,045,681 $ 1,140,881
Net income and comprehensive income............. -- 947,378 947,378
------------ ------------ -------------
Balance at April 30, 1997......................... -- 1,993,059 2,088,259
Contribution of shares by principal
shareholder................................... -- -- --
Net income and comprehensive income............. -- 4,358,433 4,358,433
------------ ------------ -------------
Balance at April 30, 1998......................... -- 6,351,492 6,446,692
Stock options exercised......................... (1,520,788) -- 285,456
Issuance of preferred stock at $2.1932 per
share, net of issuance costs of $145,334 -- -- --
Repurchase of common stock at $2.1932 per
share......................................... -- (31,707,739) (31,707,739)
Deferred stock compensation..................... -- -- --
Amortization of deferred stock compensation..... -- -- 395,202
Net income and comprehensive income............. -- 3,077,305 3,077,305
------------ ------------ -------------
Balance at April 30, 1999......................... (1,520,788) (22,278,942) (21,503,084)
Stock options exercised
(unaudited)................................... (150,649) -- 13,351
Deferred stock compensation..................... -- -- --
Amortization of deferred stock compensation..... -- -- 239,192
Net income and comprehensive income
(unaudited)................................... -- 1,300,435 1,300,435
------------ ------------ -------------
Balance at July 31, 1999 (unaudited).............. $(1,671,437) $(20,978,507) $ (19,950,106)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
FINISAR CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEARS ENDED APRIL 30, JULY 31,
---------------------------------- ---------------------
1997 1998 1999 1998 1999
--------- ---------- ----------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 947,378 $4,358,433 $ 3,077,305 $1,052,986 $1,300,435
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization.................... 41,127 161,699 432,628 65,027 176,008
Amortization of deferred stock compensation...... -- -- 395,202 -- 239,192
Loss on fixed assets disposal.................... -- 29,963 237,498 -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (764,617) (1,583,937) (3,868,633) (946,732) (905,675)
Inventories.................................... (505,663) (1,780,709) (2,505,005) (492,561) (1,722,918)
Other assets................................... (720) 7,900 (489,481) (4,903) (140,761)
Deferred income taxes.......................... -- (240,622) (660,242) -- --
Accounts payable............................... (53,890) (178,640) 1,129,185 (302,258) 1,120,065
Accrued compensation........................... 20,450 54,758 1,382,703 503,143 (95,949)
Income tax payable............................. -- (298,478) 824,054 61,170 469,000
Other accrued liabilities...................... 109,278 211,928 1,103,436 693,954 473,180
--------- ---------- ----------- --------- ----------
Net cash provided by (used in) operating
activities....................................... (206,657) 742,295 1,058,650 629,826 912,577
--------- ---------- ----------- --------- ----------
INVESTING ACTIVITIES
Purchases of property and equipment................ (143,642) (855,446) (2,099,620) (144,406) (550,418)
--------- ---------- ----------- --------- ----------
Net cash used in investing activities.............. (143,642) (855,446) (2,099,620) (144,406) (550,418)
--------- ---------- ----------- --------- ----------
FINANCING ACTIVITIES
Payments on capital lease obligations.............. -- (37,367) (39,290) -- (15,668)
Proceeds from borrowings under bank note........... -- 500,000 11,015,000 -- --
Repayments of borrowings under bank note........... -- (50,000) (450,000) (25,000) --
Proceeds from issuance of common stock............. -- -- 285,456 -- 13,351
Proceeds from issuance of preferred stock.......... -- -- 26,259,664 -- --
Repurchase of common stock......................... -- -- (31,707,739) -- --
--------- ---------- ----------- --------- ----------
Net cash provided by (used in) financing
activities....................................... -- 412,633 5,363,091 (25,000) (2,317)
--------- ---------- ----------- --------- ----------
Net (decrease) increase in cash and cash
equivalents...................................... (350,299) 299,482 4,322,121 460,420 359,842
Cash and cash equivalents at beginning of period... 772,492 422,193 721,675 721,675 5,043,796
--------- ---------- ----------- --------- ----------
Cash and cash equivalents at end of period......... $ 422,193 $ 721,675 $ 5,043,796 $1,182,095 $5,403,638
--------- ---------- ----------- --------- ----------
--------- ---------- ----------- --------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................. $ 1,595 $ 32,659 $ 363,650 $ 6,607 $ 188,141
--------- ---------- ----------- --------- ----------
--------- ---------- ----------- --------- ----------
Cash paid for taxes................................ $ 440,000 $3,254,000 $ 1,709,881 $ 506,999 $ 360,000
--------- ---------- ----------- --------- ----------
--------- ---------- ----------- --------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES
Acquisition of property and equipment under capital
lease obligations................................ $ 15,211 $ 132,447 $ -- $ -- $ --
--------- ---------- ----------- --------- ----------
--------- ---------- ----------- --------- ----------
Issuance of common stock in exchange for notes
receivable....................................... $ -- $ -- $ 1,520,788 $ -- $ 150,649
--------- ---------- ----------- --------- ----------
--------- ---------- ----------- --------- ----------
Deferred stock compensation related to
options granted.................................. $ -- $ -- $ 2,007,380 $ -- $2,042,143
--------- ---------- ----------- --------- ----------
--------- ---------- ----------- --------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Finisar Corporation ("Finisar" or the "Company") was incorporated in the
state of California on April 17, 1987. Finisar designs, manufactures, and
markets fiber optic subsystems and network performance test systems for
high-speed data communications.
INTERIM FINANCIAL INFORMATION
The interim financial information at July 31, 1999 and for the three months
ended July 31, 1998 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.
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 calender month. The first quarter of fiscal
2000 ended on August 1, 1999.
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 and cash equivalents and accounts receivable. Finisar
places its cash and cash equivalents with high-credit quality financial
institutions. At times, such investments may be in excess of FDIC insurance
limits. Concentrations of credit risk, with respect to accounts receivable,
exist to the extent of amounts presented in the financial statements. Accounts
receivable from two customers represented 32.3% and 33.2% of the total balance
at April 30, 1998, 32.2% and 18.2% at April 30, 1999 and 23.5% and 28.5% at July
31, 1999, 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.
F-7
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CURRENT VULNERABILITIES DUE TO CERTAIN CONCENTRATIONS
Finisar sells products primarily to customers located in North America.
During fiscal 1997, 1998, and 1999, revenues from two customers represented
41.4% and 1.2%, and 43.9% and 14.6%, and 25.1% and 20.8% of total revenues,
respectively (34.9% and 19.0% in the quarter ended July 31, 1999).
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 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.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets, generally five years.
STOCK-BASED COMPENSATION
Finisar accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
NET INCOME PER SHARE
Basic and diluted net income per share are presented in accordance with SFAS
No. 128, "Earnings Per Share" ("SFAS 128"), for all periods presented. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
shares and convertible preferred shares issued or granted for nominal
consideration prior to the anticipated effective date of Finisar's initial
public offering (the "Offering," see Note 10) should 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.
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. Basic and diluted pro forma net
income per share have been computed as described above and also give effect to
the conversion of all convertible redeemable preferred stock which automatically
convert upon the completion of the Company's initial public offering.
F-8
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and pro forma diluted net income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY
FISCAL YEARS ENDED APRIL 30, 31,
---------------------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income............................. $ 947,378 $ 4,358,433 $ 3,077,305 $ 1,052,986 $ 1,300,435
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Historical:
Denominator for basic net income per
share:
Weighted-average shares
outstanding--basic................... 36,860,000 29,463,905
Effect of dilutive securities:
Employee stock options................. -- -- 728,448 -- 1,240,289
Stock subject to repurchase............ -- -- 3,043,080 -- 2,923,840
Convertible redeemable preferred
stock................................ -- -- 4,306,389 -- 8,981,897
------------ ------------ ------------ ------------ ------------
Dilutive potential common shares......... -- -- 8,077,917 -- 13,146,026
------------ ------------ ------------ ------------ ------------
Denominator for diluted net income per
share.................................. 44,000,000 43,752,877 44,937,917 41,800,000 42,609,931
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Basic net income per share............... $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted net income per share............. $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Denominator for pro forma basic net
income per share:
Weighted average shares
outstanding--basic................... 36,860,000 29,463,905
Convertible redeemable preferred
stock................................ 4,306,389 8,981,897
------------ ------------
Weighted-average shares
outstanding--pro forma basic......... 41,166,389 38,445,802
------------ ------------
Effect of dilutive securities:
Employee stock options................. 728,448 1,240,289
Stock subject to repurchase............ 3,043,080 2,923,840
------------ ------------
Pro forma dilutive potential common
shares................................. 3,771,528 4,164,129
------------ ------------
Denominator for pro forma diluted net
income per share....................... 44,937,917 42,609,931
------------ ------------
------------ ------------
Pro forma basic net income per share..... $ 0.07 $ 0.03
------------ ------------
------------ ------------
Pro forma diluted net income per share... $ 0.07 $ 0.03
------------ ------------
------------ ------------
</TABLE>
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
If the Offering is consummated, all of the convertible redeemable preferred
stock will be automatically converted into common stock and redeemable preferred
stock upon completion of the
F-9
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
offering (see Note 10). Unaudited pro forma stockholders' equity at July 31,
1999, as adjusted for the assumed conversion of such shares, is disclosed on the
balance sheets.
COMPREHENSIVE INCOME
Effective May 1, 1998, Finisar adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income". Comprehensive income is equal to net income for all
periods presented and has been disclosed in the statement of stockholders'
equity.
SEGMENT REPORTING
Effective May 1, 1998, Finisar adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 superseded SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise." SFAS 131 establishes standards for the
way that public business enterprises report information about operating segments
in interim financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS 131 did not affect Finisar's results of operations or
financial position.
EFFECT OF NEW ACCOUNTING STATEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). Finisar is required to adopt SFAS 133 for the year ending April 30, 2002.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities. Because Finisar currently holds no derivative financial
instruments as defined by SFAS 133 and does not currently engage in hedging
activities, adoption of SFAS 133 is not expected to have a material effect on
Finisar's financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize
certain costs related to internal use software once certain criteria have been
met. Finisar is required to implement SOP 98-1 for the year ending April 30,
2000. Adoption of SOP 98-1 is not expected to have a material effect on
Finisar's financial condition or results of operations.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
presentation.
F-10
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
-------------------------- JULY 31,
1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................................................... $ 1,546,445 $ 2,907,811 $ 3,717,834
Work-in-process......................................................... 988,788 1,763,038 2,856,203
Finished goods.......................................................... 196,090 565,479 385,209
------------ ------------ ------------
$ 2,731,323 $ 5,236,328 $ 6,959,246
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
-------------------------- JULY 31,
1998 1999 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment...................................................... $ 505,343 $ 839,547 $ 1,011,128
Office equipment, furniture, and fixtures............................... 422,852 445,421 445,421
Research and development equipment...................................... 215,888 1,021,549 1,185,272
Manufacturing equipment................................................. 146,583 773,352 988,466
------------ ------------ ------------
1,290,666 3,079,869 3,630,287
Accumulated depreciation and amortization............................... (238,425) (598,134) (774,142)
------------ ------------ ------------
Property and equipment, net............................................. $ 1,052,241 $ 2,481,735 $ 2,856,145
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Finisar has financed $132,447 of equipment purchased under capital lease
arrangements as of April 30, 1998 and 1999 and July 31, 1999. Accumulated
amortization of assets acquired under capital leases was $17,063, $43,552 and
$50,174 at April 30, 1998 and 1999 and July 31, 1999, respectively.
F-11
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS
Future minimum payments under noncancelable capital and operating lease
agreements are as follows as of April 30, 1999:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASE LEASE
------------ ----------
<S> <C> <C>
Fiscal years ending April 30:
2000.......................................................... $ 349,300 $ 59,176
2001.......................................................... 363,128 17,144
2002.......................................................... 377,650 --
2003.......................................................... 31,572 --
------------ ----------
Total minimum payments required................................. $ 1,121,650 76,320
------------
------------
Amount representing interest.................................... (5,319)
----------
Present value of future lease payments.......................... 71,001
Current portion................................................. (53,539)
----------
Long-term portion............................................... $ 17,462
----------
----------
</TABLE>
Rent expense was approximately $77,034, $412,000, $366,905 and $136,822 for
the years ended April 30, 1997, 1998, and 1999 and the quarter ended July 31,
1999.
In August 1999, Finisar entered into a new facility operating lease. This
lease is non-cancellable and has a term of 7 years. Future lease payments for
fiscal years 2000, 2001, 2002, 2003, and thereafter are $580,306, $1,012,944,
$1,044,032, $1,075,120 and $3,904,110, respectively.
5. LOAN AGREEMENT
On November 4, 1998, Finisar borrowed the principal amount of $11,015,000
under a secured term loan agreement and entered into a secured revolving loan
facility for additional borrowings of up to $6,500,000. The revolving loan
facility expires in April 2003. No amounts were outstanding under the revolving
loan facility at April 30, 1999 or July 31, 1999. All business assets have been
pledged as collateral for borrowings under the term loan and the revolving loan
facility.
The term loan is repayable quarterly, commencing April 30, 2001. Quarterly
repayment amounts are $275,375, $826,125, and $1,652,250 in 2001, 2002, and
2003, respectively. Interest is payable monthly on the outstanding principal
amount of borrowings under the term loan and the revolving loan facility at the
effective prime or LIBOR rate (7.04% at April 30, 1999 and July 31, 1999).
Finisar believes that as of April 30, 1999, the fair value of the term loan
approximates its carrying value.
The loan agreement contains certain financial covenants and currently
prohibits the payment of dividends. At April 30, 1999 and July 31, 1999, Finisar
was in compliance with those covenants.
6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
Finisar's Articles of Incorporation provide for the issuance of up to
75,000,000 shares of common stock. The holder of each share of common stock
shall have the right to one vote.
F-12
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
Common stock subject to future issuance is as follows:
<TABLE>
<CAPTION>
JULY 31,
1999
APRIL 30, ------------
1999
------------ (UNAUDITED)
<S> <C> <C>
Conversion of convertible redeemable preferred stock.............. 8,981,897 8,981,897
Exercise of outstanding options................................... 1,486,540 1,356,540
Common stock available for grant under stock option
plans........................................................... 6,535,000 6,535,000
------------ ------------
17,003,437 16,873,437
------------ ------------
------------ ------------
</TABLE>
CONVERTIBLE REDEEMABLE PREFERRED STOCK
Holders of convertible redeemable preferred stock are entitled to non
cumulative dividends at an annual rate equal to $0.1316 per share (adjusted for
stock splits and like events), in preference to other stockholders if, when and
as declared by the board of directors. No dividends have been declared as of
April 30, 1999 or July 31, 1999.
The holders of outstanding convertible redeemable preferred stock, voting as
a single class, are entitled to appoint one director of Finisar. In all other
matters, each holder of convertible redeemable preferred stock has voting rights
based on the number of shares of common stock into which the preferred stock is
convertible, as described below.
The holders of outstanding convertible redeemable preferred stock are
entitled to receive upon liquidation and in certain other circumstances (a
merger, acquisition, or similar event), an amount per share of $2.1932 plus all
accrued but unpaid dividends (including any unpaid interest on such amounts).
Any remaining assets shall be distributed on a pro rata basis among the holders
of all common stock and preferred stock (on an if-converted basis).
Upon the approval of the holders of a majority of the outstanding shares of
convertible redeemable preferred stock, the convertible redeemable preferred
stock will be redeemed by Finisar for cash in three installments of the
following percentages on the following dates: November 6, 2004 (33.3%); November
6, 2005 (50%); and November 6, 2006 (16.7%). The redemption price for each share
is $2.1932 plus all accrued but unpaid dividends (including any unpaid interest
on such amounts).
F-13
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
At the option of each individual holder of convertible redeemable preferred
stock, each share of convertible redeemable preferred stock is convertible,
without any payment of additional consideration, into one fully paid share of
redeemable preferred stock and one fully paid share of common stock (adjusted
for stock splits, stock sales, issue of options, warrants, and like events).
Upon the closing of an underwritten public offering prior to July 30, 2000 (in
which the aggregate net proceeds exceed $20,000,000) each share of convertible
redeemable preferred stock will be automatically converted into one fully paid
share of redeemable preferred stock and a fraction of a fully paid share of
common stock as determined under a formula contained in the Articles of
Incorporation. If the public offering price exceeds $7.0955 per share, each
share of convertible redeemable preferred stock will be automatically converted
into approximately 0.746 shares of common stock.
On November 6, 1998 and November 25, 1998, Finisar issued an aggregate of
12,039,486 shares of convertible redeemable preferred stock to investors at
$2.1932 per share, resulting in gross cash proceeds of $26,405,000.
REDEEMABLE PREFERRED STOCK
Holders of outstanding redeemable preferred stock are entitled to non
cumulative dividends at an annual rate equal to $0.0381 per share (adjusted for
stock splits and like events), in preference to holders of common stock as and
when declared by the board of directors. No dividends have been declared as of
April 30, 1999 or July 31, 1999.
The holders of redeemable preferred stock have no voting rights.
The holders of redeemable preferred stock are entitled to receive upon
liquidation and in certain other circumstances (a merger, acquisition, or
similar event), an amount per share of $0.6345 plus all accrued but unpaid
dividends (including any unpaid interest on such amounts).
Upon the approval of the majority of redeemable preferred stockholders, the
redeemable preferred shares must be redeemed by Finisar for cash. The redemption
price for each share shall be $0.6345 plus all accrued but unpaid dividends
(including any unpaid interest on such amounts). Upon the closing of an
underwritten public offering, Finisar may elect at any time, to redeem in cash
all of the outstanding shares of redeemable preferred stock.
At any time after the sixth anniversary of the issuance of the redeemable
preferred stock, any holder of redeemable preferred stock can require Finisar to
redeem in cash up to 33% of the outstanding shares of redeemable preferred stock
held at that time. This redemption percentage increase to 66% after the seventh
anniversary and to 100% on the eighth anniversary of the issuance of shares.
At April 30, 1999 and July 31, 1999, no redeemable preferred stock had been
issued.
STOCK PLANS
As discussed in Note 1 and as permitted under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), Finisar has elected to follow APB Opinion No. 25 and related
interpretations in accounting for stock-based awards to employees.
F-14
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
During fiscal 1989 and 1999, Finisar adopted the 1989 and 1999 Stock Option
Plans (the "Plans"). Under the Plans, 34,300,000 shares of Finisar's common
stock are reserved for issuance upon exercise of options that may be granted to
eligible participants. Under the Plans, options to purchase common stock may be
granted at an exercise price of not less than 85% of the fair value of a share
of common stock on the date of grant (110% of the fair value in certain
instances) as determined by the board of directors. Options generally vest over
five years and have a maximum term of 10 years. All options granted under the
Plans are immediately exercisable. As of April 30, 1999, 3,043,080 shares issued
upon exercise of options are subject to repurchase (2,923,840 shares at July 31,
1999).
A summary of activity under the Plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED-
OPTIONS ---------------------------- AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE
GRANT SHARES PRICE PER SHARE PRICE
------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at April 30, 1996........................... 18,430,800 7,269,200 $ 0.0027-$0.02 $ 0.0033
Options granted................................... (442,000) 442,000 $ 0.05 $ 0.05
Options canceled.................................. 7,000,000 (7,000,000) $ 0.0027 $ 0.0027
------------- ----------- --------------- -------------
Balance at April 30, 1997........................... 24,988,800 711,200 $ 0.0125-$0.05 $ 0.038
Options granted................................... (2,937,000) 2,937,000 $ 0.13 $ 0.13
Options canceled.................................. 22,000 (22,000) $ 0.05 $ 0.05
------------- ----------- --------------- -------------
Balance at April 30, 1998........................... 22,073,800 3,626,200 $ 0.0125-$0.13 $ 0.1125
Decrease in authorized shares..................... (12,638,800) -- -- --
Options granted................................... (2,900,000) 2,900,000 $ 0.15-$1.31 $ 0.7029
Options exercised................................. -- (5,039,660) $ 0.0125-$1.31 $ 0.3593
------------- ----------- --------------- -------------
Balance at April 30, 1999........................... 6,535,000 1,486,540 $ 0.05-$1.31 $ 0.5693
Options exercised (unaudited)..................... -- (130,000) $ 0.05-$1.31 $ 1.2615
------------- ----------- --------------- -------------
Balance at July 31, 1999 (unaudited)................ 6,535,000 1,356,540 $ 0.05-$1.31 $ 0.5029
------------- ----------- --------------- -------------
------------- ----------- --------------- -------------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
----------------------------------------------------
NUMBER WEIGHTED- WEIGHTED-
OUTSTANDING AT AVERAGE REMAINING AVERAGE
EXERCISE PRICE APRIL 30, 1999 CONTRACTUAL LIFE EXERCISE PRICE
- ----------------------------------------------------------------- -------------- ------------------- ---------------
(IN YEARS)
<S> <C> <C> <C>
$0.05............................................................ 107,000 7.72 $ 0.05
$0.13............................................................ 691,540 8.76 $ 0.13
$0.15............................................................ 116,000 9.18 $ 0.15
$0.26............................................................ 15,000 9.32 $ 0.26
$1.31............................................................ 557,000 9.81 $ 1.31
--------------
$0.05-$1.31...................................................... 1,486,540 9.12
--------------
--------------
</TABLE>
The weighted-average fair value of options granted during fiscal 1999 was
$0.15.
F-15
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
RESTRICTED SHARES ISSUED FOR PROMISSORY NOTES
During fiscal 1999, employees exercised options for 2,646,308 shares of
common stock in exchange for promissory notes in the aggregate principal amount
of $1,520,788. The notes are full recourse, are secured by the shares and bear
interest at a rate of 6% per annum. The shares are restricted and are subject to
a right of repurchase at the original exercise price in favor of Finisar. This
repurchase right lapses in accordance with the original vesting schedule of the
option, which is generally five years.
DEFERRED STOCK COMPENSATION
In connection with the grant of certain stock options to employees, Finisar
recorded deferred stock compensation of $2,007,380 and $2,042,143 during fiscal
1999 and the three months ended July 31, 1999, respectively, 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
compensation is presented as a reduction of stockholders' equity, with graded
amortization recorded over the five year vesting period. We amortized $395,000
and $239,000 of deferred compensation during fiscal 1999 and the three months
ended July 31, 1999. At July 31, 1999, the remaining deferred compensation of
approximately $3.4 million is scheduled to be amortized as follows: $1.3 million
during the remainder of fiscal 2000, $1.0 million during fiscal 2001, $624,000
during fiscal 2002, $335,000 during fiscal 2003 and $171,000 thereafter. The
amortization expense relates to options awarded to employees in all operating
expense categories. The amount of deferred compensation expense to be recorded
in future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income is required by SFAS 123 as if
Finisar had accounted for its employee stock options granted subsequent to April
30, 1995 under the fair value method of SFAS 123. The fair value for Finisar's
stock option grants was estimated at the date of grant using the minimum value
option valuation model. The minimum value option valuation model was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions. Because Finisar's
stock-based awards have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based awards. The fair value of these options was estimated at the
date of grant using the minimum value method option pricing model with the
following weighted-average assumptions for fiscal years 1997, 1998, and 1999:
risk-free interest rates of 6% for 1997 and 1998 and 5.5% for 1999; a dividend
yield of 0%; and a weighted-average expected life of the option of four years.
F-16
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Finisar
Corporation's pro forma information is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
APRIL 30,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net income:
As reported....................................... $ 947,378 $ 4,358,433 $ 3,007,305
------------ ------------ ------------
------------ ------------ ------------
Pro forma......................................... $ 946,924 $ 4,332,764 $ 3,032,651
------------ ------------ ------------
------------ ------------ ------------
Basic net income per share:
As reported....................................... $ 0.02 $ 0.10 $ 0.08
------------ ------------ ------------
------------ ------------ ------------
Pro forma......................................... $ 0.02 $ 0.10 $ 0.07
------------ ------------ ------------
------------ ------------ ------------
Diluted net income per share:
As reported....................................... $ 0.02 $ 0.10 $ 0.06
------------ ------------ ------------
------------ ------------ ------------
Pro Forma......................................... $ 0.02 $ 0.10 $ 0.06
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
7. INCOME TAXES
Finisar's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
--------------------------------------
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................................. $ 422,773 $ 2,390,613 $ 1,995,827
State............................................... 122,740 564,909 538,107
---------- ------------ ------------
545,513 2,955,522 2,533,934
Deferred:
Federal............................................. (81,773) (225,479) (508,263)
State............................................... (23,740) (15,143) (151,978)
---------- ------------ ------------
(105,513) (240,622) (660,241)
---------- ------------ ------------
Provision for income taxes............................ $ 440,000 $ 2,714,900 $ 1,873,693
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
Finisar provision for income taxes differs from the amount computed by
applying the federal statutory rate to income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Expected income tax provision at U.S. federal statutory rate
(34%).......................................................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit.............................. 5.0 5.0 4.8
Research & development credits................................... (7.0) (0.8) (4.0)
Other permanent differences...................................... (0.3) 0.2 3.0
--------- --------- ---------
31.7% 38.4% 37.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Significant components of Finisar's deferred federal and state income taxes
are as follows:
<TABLE>
<CAPTION>
APRIL 30,
------------------------
1998 1999
---------- ------------
<S> <C> <C>
Deferred tax assets:
Inventory reserve................................................. $ 164,934 $ 503,049
Accruals not currently deductible................................. 235,587 679,639
---------- ------------
Total deferred tax assets........................................... 400,521 1,182,688
Deferred tax liabilities:
Tax depreciation over book depreciation............................. (13,321) (135,246)
---------- ------------
Net deferred tax assets............................................. $ 387,200 $ 1,047,442
---------- ------------
---------- ------------
</TABLE>
8. SEGMENTS AND GEOGRAPHIC INFORMATION
Finisar operates in one industry 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:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------------
1997 1998 1999
------------ ------------- ------------- THREE MONTHS
ENDED JULY
31, 1999
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues from sales to unaffiliated customers:
United States....................................... $ 4,676,165 $ 9,877,244 $ 24,822,399 $ 8,128,699
Canada.............................................. 3,573,479 9,695,295 8,940,592 4,876,732
Rest of the World................................... 207,356 2,494,403 1,708,123 874,028
------------ ------------- ------------- -------------
$ 8,457,000 $ 22,066,942 $ 35,471,114 $ 13,879,459
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
Revenues generated in the U.S. and Canada (collectively, North America) are
all to customers located in those geographic regions.
9. PENDING LITIGATION
In April 1999, Methode Electronics, a manufacturer of electronic component
devices, filed a lawsuit against Finisar and another manufacturer,
Hewlett-Packard Co., in the United States District Court for the Northern
District of Illinois alleging that Finisar's optoelectronic products infringe
four patents held by Methode. The lawsuit seeks monetary damages and injunctive
relief. In August 1999, the Court granted a motion to transfer the case to the
United States District Court for the Northern District of California. It is
Finisar's position that the Methode patents are invalid, unenforceable and/or
not infringed by Finisar's products. Finisar believes that it has strong
defenses against Methode's lawsuit, and Finisar intends to defend the suit
vigorously and does not believe it will have a material impact on its results of
operations or financial position. However, the litigation is in the preliminary
stage, and Finisar cannot predict its outcome. 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. Should the outcome of the litigation be adverse, Finisar could be
required to
F-18
<PAGE>
FINISAR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. PENDING LITIGATION (CONTINUED)
pay significant monetary damages to Methode and could be enjoined from selling
those of Finisar's products found to infringe Methode's patents unless and until
Finisar is able to negotiate a license from Methode. If Finisar is required to
pay significant monetary charges, is enjoined from selling any of Finisar's
products or is required to make royalty payments pursuant to any such business
agreement, Finisar's business would be significantly harmed.
10. EVENTS SUBSEQUENT TO THE DATE OF THE AUDIT REPORT
The board of directors has authorized Finisar to file a registration
statement with the U.S. Securities and Exchange Commission for an initial public
offering of its common stock. If the offering is consummated under the terms
presently anticipated, all of the currently outstanding shares of convertible
redeemable preferred stock will be automatically converted into 8,981,897 shares
of common stock and 12,039,486 shares of redeemable preferred stock and all
shares of such redeemable preferred stock will be redeemed for approximately
$2,640,000 from the net proceeds of the offering.
REINCORPORATION
In September 1999, Finisar's board of directors authorized the
reincorporation of the Company in the state of Delaware. Following the
reincorporation, Finisar will be authorized to issue 200,000,000 shares of
$0.001 par value common stock and 5,000,000 shares of $0.001 par value preferred
stock. The board of directors has the authority to issue the undesignated
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof.
1999 EMPLOYEE STOCK PURCHASE PLAN
Finisar's 1999 Employee Stock Purchase Plan was adopted by the board of
directors and approved by the stockholders in September 1999. A total of 250,000
shares of common stock are reserved for issuance under the plan, cumulatively
increased by 250,000 shares on May 1, 2001 and each May 1 thereafter through May
1, 2010. Employees, including officers and employee directors, are eligible to
participate in the plan if they are employed by Finisar for more than 20 hours
per week and more than five months in any calendar year. The plan will be
implemented during sequential 12-month offering periods, generally commencing on
or about December 1 of each year. However, the first such offering period will
commence on the effective date of the offering and will terminate on November
30, 2000. In addition, a six-month offering period will generally commence on
June 1 of each year.
The employee stock purchase plan permits eligible employees to purchase
Finisar common stock through payroll deductions, which may not exceed 20% of the
employee's total compensation. Stock may be purchased under the plan at a price
equal to 85% of the fair market value of Finisar common stock on either the
first or the last day of the offering period, whichever is lower.
1999 STOCK OPTION PLAN
Finisar's 1999 Stock Option Plan was amended by the board of directors and
approved by the stockholders in September 1999. The amendment increased the
aggregate maximum number of shares that may be issued under the Plan on May 1,
2001 and each May 1 thereafter by a number of shares equal to 5% of the number
of shares of Finisar's common stock issued and outstanding as of the immediately
preceding April 30, subject to certain restrictions on the aggregate maximum
number of shares that may be issued pursuant to incentive stock options.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999, (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO A DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
[FINISAR LOGO]
COMMON STOCK
------------------
P R O S P E C T U S
------------------
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
SOUNDVIEW TECHNOLOGY GROUP
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE FINISAR SOLUTION
KEY BENEFITS
PARTIAL CLIENT LIST:
We provide the following key benefits to
manufacturers of high speed data networking
and storage systems:
[List of Representative
Clients]
VALUE-ADDED FUNCTIONS AND INTELLIGENCE.
Our high-speed fiber optic subsystems are
engineered to deliver value-added
functionality and intelligence. Many of our
optical subsystems include a microprocessor
with proprietary embedded software that allows
customers to monitor the optical performance
of each port on their systems in real time.
Real-time monitoring and interoperability are
particularly important in the Gigabit Ethernet
LAN and Fibre Channel SAN markets where
reliability and time to market are critical.
HIGH LEVEL OF DATA INTEGRITY.
Our optical subsystems deliver a high level of
data integrity, which results in precise
transmission of data at very high speeds over
varying distances. Our subsystems exceed the
industry standard error rate of 1 bit per
trillion bits transmitted. This degree of data
integrity allows our subsystems to operate
reliably over a wide range of temperatures and
other field conditions which we believe
enables our customers to design and deliver
more robust systems.
HIGH RELIABILITY.
Our subsystems operate with minimal power
requirements, and function across a wide range
of temperatures and voltages. This reliability
and flexibility have allowed our subsystems to
be designed into the products of manufacturers
who provide systems for mission-critical
applications such as real-time SAN storage
backup and LAN backbone switching.
BROAD OPTICAL SUBSYSTEM PRODUCT LINE.
We offer a broad line of optical subsystems
which operate at varying protocols, speeds,
fiber types, voltages, wavelengths and
distances and are available in a variety of
industry standard packaging configurations.
Our optical subsystems are designed to comply
with key networking protocols such as Fibre
Channel and Gigabit Ethernet and to plug
directly into standard port configurations
used in our customers' products.
BROAD TEST SYSTEM PRODUCT LINE.
We offer a broad line of test systems to
assist our customers in efficiently designing
reliable, high-speed networking systems and
testing and monitoring the performance of
these systems. We believe our test systems
enable our customers to focus their attention
on the development of new products, reduce
overall development costs and increase speed
to market.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions payable by the Registrant in connection
with the sale and distribution of the common stock being registered. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market application
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $
NASD filing fee.....................................................
Nasdaq National Market application fee..............................
Blue sky qualification fees and expenses............................
Printing and engraving expenses.....................................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Director and officer liability insurance............................
Transfer agent and registrar fees...................................
Miscellaneous expenses..............................................
---------
Total............................................................. $
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's certificate of
incorporation and bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnification agreements (Exhibit
10.1) with its directors and officers which would require the Registrant, among
other things, to indemnify them against certain liabilities which may arise by
reason of their status or service (other than liabilities arising from willful
misconduct of a culpable nature). The Registrant also intends to maintain
director and officer liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreements may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Since July 31, 1996, Finisar has issued and sold the following
unregistered securities:
1. From inception through July 31, 1999, Finisar issued options to
purchase an aggregate of 40,328,200 shares of common stock under its 1989
and 1999 stock options plans, of which 6,769,660 have been exercised.
2. In November 1998, Finisar sold 12,039,486 shares of its convertible
redeemable preferred stock to certain investors at a purchase price of
$2.1932 per share, for an aggregate purchase price of $26,405,000.
II-1
<PAGE>
There were no underwriters employed in connection with any of the
transactions set forth in this Item 15.
The issuances described in Items 15(a)(1) and 15(a)(2) were deemed exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
Certain issuances described in Item 15(a)(1) were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about Finisar or had access, through
employment or other relationships, to such information.
For additional information concerning these equity investment transactions,
see the section entitled "Certain Transactions" in the prospectus.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Articles of Incorporation of Registrant
*3.2 Amended and Restated Bylaws of Registrant
*3.3 Certificate of Incorporation of Registrant (Delaware)
*3.4 Bylaws of Registrant (Delaware)
*3.5 Form of Amended and Restated Certificate of Incorporation of Registrant to be filed after the closing of
the offering
*4.1 Specimen certificate representing the common stock
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP
*10.1 Form of Indemnification Agreement between Registrant and Registrant's directors and officers
*10.2 1989 Stock Option Plan
10.3 1999 Stock Option Plan
10.4 1999 Employee Stock Purchase Plan
*10.5 Securities Purchase Agreement between Registrant and certain investors, dated as of November 6, 1998
*10.6 Shareholders' Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998
*10.7 Voting Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998
*10.8 Loan Agreement between Registrant and Fleet National Bank, dated as of November 6, 1998
*10.9 Security Agreement between Registrant and Fleet National Bank, dated as of November 4, 1998
*10.10 Security Agreement Re: Contracts, Leases, License and Permits between Registrant and Fleet National
Bank, dated as of November 4, 1998
*10.11 Building Office Lease for 582 Market Street, Suite 609-610, San Francisco, CA, dated December 17, 1996
between Registrant and Niantic Corporation
*10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA, dated April 30, 1997 between Registrant and DM
Group VIII and DM Group VIII-E
*10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA, dated May 26, 1999 between Registrant and
Aetna Life Insurance Company
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Ernst & Young LLP, independent auditors
*23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on II-4)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of Finisar is filed as part of
this Registration Statement and should be read in conjunction with the financial
statements and related notes.
<TABLE>
<CAPTION>
SCHEDULE PAGE
- ----------------------------------------------------------------------------------------------------------- -----------
<S> <C>
II -- Valuation and Qualifying Accounts.................................................................... S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions payable by the Registrant in connection
with the sale and distribution of the common stock being registered. All amounts
shown are estimates except for the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market application
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $
NASD filing fee.....................................................
Nasdaq National Market application fee..............................
Blue sky qualification fees and expenses............................
Printing and engraving expenses.....................................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Director and officer liability insurance............................
Transfer agent and registrar fees...................................
Miscellaneous expenses..............................................
---------
Total............................................................. $
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's certificate of
incorporation and bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnification agreements (Exhibit
10.1) with its directors and officers which would require the Registrant, among
other things, to indemnify them against certain liabilities which may arise by
reason of their status or service (other than liabilities arising from willful
misconduct of a culpable nature). The Registrant also intends to maintain
director and officer liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnification agreements may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Since July 31, 1996, Finisar has issued and sold the following
unregistered securities:
1. From inception through July 31, 1999, Finisar issued options to
purchase an aggregate of 40,328,200 shares of common stock under its 1989
and 1999 stock options plans, of which 6,769,660 have been exercised.
2. In November 1998, Finisar sold 12,039,486 shares of its convertible
redeemable preferred stock to certain investors at a purchase price of
$2.1932 per share, for an aggregate purchase price of $26,405,000.
II-1
<PAGE>
There were no underwriters employed in connection with any of the
transactions set forth in this Item 15.
The issuances described in Items 15(a)(1) and 15(a)(2) were deemed exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
Certain issuances described in Item 15(a)(1) were deemed exempt from
registration under the Securities Act in reliance on Section 4(2) or Rule 701
promulgated thereunder as transactions pursuant to compensatory benefit plans
and contracts relating to compensation. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about Finisar or had access, through
employment or other relationships, to such information.
For additional information concerning these equity investment transactions,
see the section entitled "Certain Transactions" in the prospectus.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Articles of Incorporation of Registrant
*3.2 Amended and Restated Bylaws of Registrant
*3.3 Certificate of Incorporation of Registrant (Delaware)
*3.4 Bylaws of Registrant (Delaware)
*3.5 Form of Amended and Restated Certificate of Incorporation of Registrant to be filed after the closing of
the offering
*4.1 Specimen certificate representing the common stock
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP
*10.1 Form of Indemnification Agreement between Registrant and Registrant's directors and officers
*10.2 1989 Stock Option Plan
10.3 1999 Stock Option Plan
10.4 1999 Employee Stock Purchase Plan
*10.5 Securities Purchase Agreement between Registrant and certain investors, dated as of November 6, 1998
*10.6 Shareholders' Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998
*10.7 Voting Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998
*10.8 Loan Agreement between Registrant and Fleet National Bank, dated as of November 6, 1998
*10.9 Security Agreement between Registrant and Fleet National Bank, dated as of November 4, 1998
*10.10 Security Agreement Re: Contracts, Leases, License and Permits between Registrant and Fleet National
Bank, dated as of November 4, 1998
*10.11 Building Office Lease for 582 Market Street, Suite 609-610, San Francisco, CA, dated December 17, 1996
between Registrant and Niantic Corporation
*10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA, dated April 30, 1997 between Registrant and DM
Group VIII and DM Group VIII-E
*10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA, dated May 26, 1999 between Registrant and
Aetna Life Insurance Company
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Ernst & Young LLP, independent auditors
*23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on II-4)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of Finisar is filed as part of
this Registration Statement and should be read in conjunction with the financial
statements and related notes.
<TABLE>
<CAPTION>
SCHEDULE PAGE
- ----------------------------------------------------------------------------------------------------------- -----------
<S> <C>
II -- Valuation and Qualifying Accounts.................................................................... S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act, and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Sunnyvale, State of California, on
September 9, 1999
FINISAR CORPORATION
BY: /S/ JERRY S. RAWLS
-----------------------------------------
Jerry S. Rawls
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Jerry S. Rawls and Stephen K. Workman, and
each of them acting individually, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him in any and all capacities,
to sign any and all amendments to this Registration Statement (including
post-effective amendments or any abbreviated registration statement and any
amendments thereto filed pursuant to Rule 462(b) increasing the number of
securities for which registration is sought), and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------- -------------
/s/ JERRY S. RAWLS President and Chief Executive September 9,
- ------------------------------ Officer (PRINCIPAL EXECUTIVE 1999
Jerry S. Rawls OFFICER)
/s/ FRANK H. LEVINSON Chairman of the Board and Chief September 9,
- ------------------------------ Technical Officer 1999
Frank H. Levinson
Vice President, Finance, Chief September 9,
/s/ STEPHEN K. WORKMAN Financial Officer and Secretary 1999
- ------------------------------ (PRINCIPAL FINANCIAL AND
Stephen K. Workman ACCOUNTING OFFICER)
/s/ MICHAEL C. CHILD Director September 9,
- ------------------------------ 1999
Michael C. Child
/s/ ROGER C. FERGUSON Director September 9,
- ------------------------------ 1999
Roger C. Ferguson
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Articles of Incorporation of Registrant
*3.2 Amended and Restated Bylaws of Registrant
*3.3 Certificate of Incorporation of Registrant (Delaware)
*3.4 Bylaws of Registrant (Delaware)
*3.5 Form of Amended and Restated Certificate of Incorporation of Registrant to be filed after the closing of
the offering
*4.1 Specimen certificate representing the common stock
*5.1 Opinion of Gray Cary Ware & Freidenrich LLP
*10.1 Form of Indemnification Agreement between Registrant and Registrant's directors and officers
*10.2 1989 Stock Option Plan
10.3 1999 Stock Option Plan
10.4 1999 Employee Stock Purchase Plan
*10.5 Securities Purchase Agreement between Registrant and certain investors, dated as of November 6, 1998
*10.6 Shareholders' Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998
*10.7 Voting Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998
*10.8 Loan Agreement between Registrant and Fleet National Bank, dated as of November 6, 1998
*10.9 Security Agreement between Registrant and Fleet National Bank, dated as of November 4, 1998
*10.10 Security Agreement Re: Contracts, Leases, License and Permits between Registrant and Fleet National
Bank, dated as of November 4, 1998
*10.11 Building Office Lease for 582 Market Street, Suite 609-610, San Francisco, CA, dated December 17, 1996
between Registrant and Niantic Corporation
*10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA, dated April 30, 1997 between Registrant and DM
Group VIII and DM Group VIII-E
*10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA, dated May 26, 1999 between Registrant and
Aetna Life Insurance Company
23.1 Consent of Ernst & Young LLP, independent auditors
*23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on II-4)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
Exhibit 10.3
FINISAR CORPORATION
1999 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Finisar Corporation 1999 Stock Option Plan
(the "PLAN") is hereby established effective as of April 20, 1999 (the
"EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an
incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to
the growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the
shares of Stock available for issuance under the Plan have been issued and
all restrictions on such shares under the terms of the Plan and the
agreements evidencing Options granted under the Plan have lapsed. However,
all Options shall be granted, if at all, within ten (10) years from the
earlier of the date the Plan is adopted by the Board or the date the Plan is
duly approved by the shareholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the
Plan, "BOARD" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend
or terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Finisar Corporation, a California
corporation, or any successor corporation thereto.
<PAGE>
(e) "CONSULTANT" means a person engaged to provide consulting
or advisory services (other than as an Employee or a Director) to a
Participating Company, provided that the identity of such person, the nature
of such services or the entity to which such services are provided would not
preclude the Company from offering or selling securities to such person
pursuant to the Plan in reliance on either the exemption from registration
provided by Rule 701 under the Securities Act or, if the Company is required
to file reports pursuant to Section 13 or 15(d) of the Exchange Act,
registration on a Form S-8 Registration Statement under the Securities Act.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the
major duties of the Optionee's position with the Participating Company Group
because of the sickness or injury of the Optionee.
(h) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in
the records of a Participating Company and, with respect to any Incentive
Stock Option granted to such person, who is an employee for purposes of
Section 422 of the Code; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(j) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its
discretion, or by the Company, in its discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, the Stock is listed on a national
or regional securities exchange or market system, the Fair Market Value of a
share of Stock shall be the closing price of a share of Stock (or the mean of
the closing bid and asked prices of a share of Stock if the Stock is so
quoted instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap
Market or such other national or regional securities exchange or market
system constituting the primary market for the Stock, as reported in THE WALL
STREET JOURNAL or such other source as the Company deems reliable. If the
relevant date does not fall on a day on which the Stock has traded on such
securities exchange or market system, the date on which the Fair Market Value
shall be established shall be the last day on which the Stock was so traded
prior to the relevant date, or such other appropriate day as shall be
determined by the Board, in its discretion.
(ii) If, on such date, the Stock is not listed on a
national or
<PAGE>
regional securities exchange or market system, the Fair Market Value of a
share of Stock shall be as determined by the Board in good faith without
regard to any restriction other than a restriction which, by its terms, will
never lapse.
(k) "INCENTIVE STOCK OPTION" means an Option intended to be
(as set forth in the Option Agreement) and which qualifies as an incentive
stock option within the meaning of Section 422(b) of the Code.
(l) "INSIDER" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended
to be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(n) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions
of the Plan. An Option may be either an Incentive Stock Option or a
Nonstatutory Stock Option.
(o) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions
of the Option granted to the Optionee and any shares acquired upon the
exercise thereof. An Option Agreement may consist of a form of "Notice of
Grant of Stock Option" and a form of "Stock Option Agreement" incorporated
therein by reference, or such other form or forms as the Board may approve
from time to time.
(p) "OPTIONEE" means a person who has been granted one or more
Options.
(q) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(s) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(t) "RULE 16b-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(u) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(v) "SERVICE" means an Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a
<PAGE>
Consultant. An Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders
Service to the Participating Company Group or a change in the Participating
Company for which the Optionee renders such Service, provided that there is
no interruption or termination of the Optionee's Service. Furthermore, an
Optionee's Service with the Participating Company Group shall not be deemed
to have terminated if the Optionee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however,
that if any such leave exceeds ninety (90) days, on the one hundred
eighty-first (181st) day following the commencement of such leave any
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and instead shall be treated thereafter as a
Nonstatutory Stock Option unless the Optionee's right to return to Service
with the Participating Company Group is guaranteed by statute or contract.
Notwithstanding the foregoing, unless otherwise designated by the Company or
required by law, a leave of absence shall not be treated as Service for
purposes of determining vesting under the Optionee's Option Agreement. The
Optionee's Service shall be deemed to have terminated either upon an actual
termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its discretion, shall determine whether the
Optionee's Service has terminated and the effective date of such termination.
(w) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(x) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(y) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock
of a Participating Company within the meaning of Section 422(b)(6) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular.
Use of the term "or" is not intended to be exclusive, unless the context
clearly requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board. All questions of interpretation of the Plan or of any Option shall
be determined by the Board, and such determinations shall be final and
binding upon all persons having an interest in the Plan or such Option.
3.2 AUTHORITY OF OFFICERS. Any officer of a Participating Company
shall have
<PAGE>
the authority to act on behalf of the Company with respect to any matter,
right, obligation, determination or election which is the responsibility of
or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation,
determination or election.
3.3 POWERS OF THE BOARD. In addition to any other powers set forth
in the Plan and subject to the provisions of the Plan, the Board shall have
the full and final power and authority, in its discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be
subject to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or
other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares
acquired upon the exercise thereof, including, without limitation, (i) the
exercise price of the Option, (ii) the method of payment for shares purchased
upon the exercise of the Option, (iii) the method for satisfaction of any tax
withholding obligation arising in connection with the Option or such shares,
including by the withholding or delivery of shares of stock, (iv) the timing,
terms and conditions of the exercisability of the Option or the vesting of
any shares acquired upon the exercise thereof, (v) the time of the expiration
of the Option, (vi) the effect of the Optionee's termination of Service with
the Participating Company Group on any of the foregoing, and (vii) all other
terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, cancel or renew any Option or to
waive any restrictions or conditions applicable to any Option or any shares
acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an
Optionee's termination of Service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
<PAGE>
Options; and
(i) to correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Option Agreement and to make
all other determinations and take such other actions with respect to the Plan
or any Option as the Board may deem advisable to the extent not inconsistent
with the provisions of the Plan or applicable law.
3.4 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if
any, of Rule 16b-3.
3.5 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually
and necessarily incurred in connection with the defense of any action, suit
or proceeding, or in connection with any appeal therein, to which they or any
of them may be a party by reason of any action taken or failure to act under
or in connection with the Plan, or any right granted hereunder, and against
all amounts paid by them in settlement thereof (provided such settlement is
approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any such action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such
action, suit or proceeding that such person is liable for gross negligence,
bad faith or intentional misconduct in duties; provided, however, that within
sixty (60) days after the institution of such action, suit or proceeding,
such person shall offer to the Company, in writing, the opportunity at its
own expense to handle and defend the same.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be seven million (7,000,000) and shall
consist of authorized but unissued or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or if shares of Stock are acquired upon the exercise
of an Option subject to a Company repurchase option and are repurchased by
the Company at the Optionee's exercise price, the shares of Stock allocable
to the unexercised portion of such Option or such repurchased shares of Stock
shall again be available for issuance under the Plan. Notwithstanding the
foregoing, at any such time as the offer and sale of securities pursuant to
the Plan is subject to compliance with Section 260.140.45 of Title 10 of the
California Code of Regulations ("SECTION 260.140.45"), the total number of
shares of Stock issuable upon the exercise of all outstanding Options
(together with options outstanding under any other stock option plan of the
Company) and the total number of shares provided for under any stock bonus or
similar plan of the Company shall not exceed thirty percent (30%) (or such
other higher
<PAGE>
percentage limitation as may be approved by the shareholders of the Company
pursuant to Section 260.140.45) of the then outstanding shares of the Company
as calculated in accordance with the conditions and exclusions of Section
260.140.45.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of
the Company, appropriate adjustments shall be made in the number and class of
shares subject to the Plan and to any outstanding Options and in the exercise
price per share of any outstanding Options. If a majority of the shares which
are of the same class as the shares that are subject to outstanding Options
are exchanged for, converted into, or otherwise become (whether or not
pursuant to an Ownership Change Event, as defined in Section 8.1) shares of
another corporation (the "NEW SHARES"), the Board may unilaterally amend the
outstanding Options to provide that such Options are exercisable for New
Shares. In the event of any such amendment, the number of shares subject to,
and the exercise price per share of, the outstanding Options shall be
adjusted in a fair and equitable manner as determined by the Board, in its
discretion. Notwithstanding the foregoing, any fractional share resulting
from an adjustment pursuant to this Section 4.2 shall be rounded down to the
nearest whole number, and in no event may the exercise price of any Option be
decreased to an amount less than the par value, if any, of the stock subject
to the Option. The adjustments determined by the Board pursuant to this
Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing
sentence, "Employees," "Consultants" and "Directors" shall include
prospective Employees, prospective Consultants and prospective Directors to
whom Options are granted in connection with written offers of an employment
or other service relationship with the Participating Company Group. Eligible
persons may be granted more than one (1) Option.
5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on
the effective date of the grant of an Option to such person may be granted
only a Nonstatutory Stock Option. An Incentive Stock Option granted to a
prospective Employee upon the condition that such person become an Employee
shall be deemed granted effective on the date such person commences Service
with a Participating Company, with an exercise price determined as of such
date in accordance with Section 6.1.
5.3 FAIR MARKET VALUE LIMITATION. To the extent that options
designated as Incentive Stock Options (granted under all stock option plans
of the Participating Company Group, including the Plan) become exercisable by
an Optionee for the first time during any calendar year for stock having a
Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the
portions of such options which exceed such amount shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5.3, options
designated as Incentive Stock Options shall be taken into account in the
order in which they were granted, and the Fair
<PAGE>
Market Value of stock shall be determined as of the time the option with
respect to such stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.3, such different
limitation shall be deemed incorporated herein effective as of the date and
with respect to such Options as required or permitted by such amendment to
the Code. If an Option is treated as an Incentive Stock Option in part and as
a Nonstatutory Stock Option in part by reason of the limitation set forth in
this Section 5.3, the Optionee may designate which portion of such Option the
Optionee is exercising. In the absence of such designation, the Optionee
shall be deemed to have exercised the Incentive Stock Option portion of the
Option first. Separate certificates representing each such portion shall be
issued upon the exercise of the Option.
6. TERMS AND CONDITIONS OF OPTIONS.
Options shall be evidenced by Option Agreements specifying the
number of shares of Stock covered thereby, in such form as the Board shall
from time to time establish. No Option or purported Option shall be a valid
and binding obligation of the Company unless evidenced by a fully executed
Option Agreement. Option Agreements may incorporate all or any of the terms
of the Plan by reference and shall comply with and be subject to the
following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of
the Option, (b) the exercise price per share for a Nonstatutory Stock Option
shall be not less than eighty-five percent (85%) of the Fair Market Value of
a share of Stock on the effective date of grant of the Option, and (c) no
Option granted to a Ten Percent Owner Optionee shall have an exercise price
per share less than one hundred ten percent (110%) of the Fair Market Value
of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option
or a Nonstatutory Stock Option) may be granted with an exercise price lower
than the minimum exercise price set forth above if such Option is granted
pursuant to an assumption or substitution for another option in a manner
qualifying under the provisions of Section 424(a) of the Code.
6.2 EXERCISABILITY AND TERM OF OPTIONS. Options shall be
exercisable at such time or times, or upon such event or events, and subject
to such terms, conditions, performance criteria and restrictions as shall be
determined by the Board and set forth in the Option Agreement evidencing such
Option; provided, however, that (a) no Option shall be exercisable after the
expiration of ten (10) years after the effective date of grant of such
Option, (b) no Incentive Stock Option granted to a Ten Percent Owner Optionee
shall be exercisable after the expiration of five (5) years after the
effective date of grant of such Option, (c) no Option granted to a
prospective Employee, prospective Consultant or prospective Director may
become exercisable prior to the date on which such person commences Service
with a Participating Company, and (d) with the exception of an Option granted
to an officer, Director or Consultant, no Option shall become exercisable at
a rate less than twenty percent (20%) per year over a period of five (5)
years from the effective date of grant of such Option, subject to the
Optionee's
<PAGE>
continued Service. Subject to the foregoing, unless otherwise specified by
the Board in the grant of an Option, any Option granted hereunder shall
terminate ten (10) years after the effective date of grant of the Option,
unless earlier terminated in accordance with its provisions.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise provided
below, payment of the exercise price for the number of shares of Stock being
purchased pursuant to any Option shall be made (i) in cash, by check or cash
equivalent, (ii) by tender to the Company, or attestation to the ownership,
of shares of Stock owned by the Optionee having a Fair Market Value (as
determined by the Company without regard to any restrictions on
transferability applicable to such stock by reason of federal or state
securities laws or agreements with an underwriter for the Company) not less
than the exercise price, (iii) by delivery of a properly executed notice
together with irrevocable instructions to a broker providing for the
assignment to the Company of the proceeds of a sale or loan with respect to
some or all of the shares being acquired upon the exercise of the Option
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv)
provided that the Optionee is an Employee and in the Company's sole
discretion at the time the Option is exercised, by delivery of the Optionee's
promissory note in a form approved by the Company for the aggregate exercise
price, provided that, if the Company is incorporated in the State of
Delaware, the Optionee shall pay in cash that portion of the aggregate
exercise price not less than the par value of the shares being acquired, (v)
by such other consideration as may be approved by the Board from time to time
to the extent permitted by applicable law, or (vi) by any combination
thereof. The Board may at any time or from time to time, by approval of or by
amendment to the standard forms of Option Agreement described in Section 7,
or by other means, grant Options which do not permit all of the foregoing
forms of consideration to be used in payment of the exercise price or which
otherwise restrict one or more forms of consideration.
(b) LIMITATIONS ON FORMS OF CONSIDERATION.
(i) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company, or attestation to the
ownership, of shares of Stock to the extent such tender or attestation would
constitute a violation of the provisions of any law, regulation or agreement
restricting the redemption of the Company's stock. Unless otherwise provided
by the Board, an Option may not be exercised by tender to the Company, or
attestation to the ownership, of shares of Stock unless such shares either
have been owned by the Optionee for more than six (6) months or were not
acquired, directly or indirectly, from the Company.
(ii) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
<PAGE>
(iii) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject
to the regulations promulgated by the Board of Governors of the Federal
Reserve System or any other governmental entity affecting the extension of
credit in connection with the Company's securities, any promissory note shall
comply with such applicable regulations, and the Optionee shall pay the
unpaid principal and accrued interest, if any, to the extent necessary to
comply with such applicable regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of
an Option, or to accept from the Optionee the tender of, a number of whole
shares of Stock having a Fair Market Value, as determined by the Company,
equal to all or any part of the federal, state, local and foreign taxes, if
any, required by law to be withheld by the Participating Company Group with
respect to such Option or the shares acquired upon the exercise thereof.
Alternatively or in addition, in its discretion, the Company shall have the
right to require the Optionee, through payroll withholding, cash payment or
otherwise, including by means of a Cashless Exercise, to make adequate
provision for any such tax withholding obligations of the Participating
Company Group arising in connection with the Option or the shares acquired
upon the exercise thereof. The Fair Market Value of any shares of Stock
withheld or tendered to satisfy any such tax withholding obligations shall
not exceed the amount determined by the applicable minimum statutory
withholding rates. The Company shall have no obligation to deliver shares of
Stock or to release shares of Stock from an escrow established pursuant to
the Option Agreement until the Participating Company Group's tax withholding
obligations have been satisfied by the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject
to a right of first refusal, one or more repurchase options, or other
conditions and restrictions as determined by the Board in its discretion at
the time the Option is granted. The Company shall have the right to assign at
any time any repurchase right it may have, whether or not such right is then
exercisable, to one or more persons as may be selected by the Company. Upon
request by the Company, each Optionee shall execute any agreement evidencing
such transfer restrictions prior to the receipt of shares of Stock hereunder
and shall promptly present to the Company any and all certificates
representing shares of Stock acquired hereunder for the placement on such
certificates of appropriate legends evidencing any such transfer restrictions.
6.6 EFFECT OF TERMINATION OF SERVICE.
(a) OPTION EXERCISABILITY. Subject to earlier termination of
the Option as otherwise provided herein and unless otherwise provided by the
Board in the grant of an Option and set forth in the Option Agreement, an
Option shall be exercisable after an Optionee's
<PAGE>
termination of Service only during the applicable time period determined in
accordance with this Section 6.6 and thereafter shall terminate:
(i) DISABILITY. If the Optionee's Service with the
Participating Company Group terminates because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date
on which the Optionee's Service terminated, may be exercised by the Optionee
(or the Optionee's guardian or legal representative) at any time prior to the
expiration of twelve (12) months after the date on which the Optionee's
Service terminated, but in any event no later than the date of expiration of
the Option's term as set forth in the Option Agreement evidencing such Option
(the "OPTION EXPIRATION DATE").
(ii) DEATH. If the Optionee's Service with the
Participating Company Group terminates because of the death of the Optionee,
the Option, to the extent unexercised and exercisable on the date on which
the Optionee's Service terminated, may be exercised by the Optionee's legal
representative or other person who acquired the right to exercise the Option
by reason of the Optionee's death at any time prior to the expiration of
twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date. The Optionee's
Service shall be deemed to have terminated on account of death if the
Optionee dies within thirty (30) days (or such longer period of time as
determined by the Board, in its discretion) after the Optionee's termination
of Service.
(iii) TERMINATION AFTER CHANGE IN CONTROL. The Board may,
in its discretion, provide in any Option Agreement that if the Optionee's
Service with the Participating Company Group ceases as a result of
"Termination After Change in Control" (as defined in such Option Agreement),
then (1) the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months (or such longer period of time as determined by
the Board, in its discretion) after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date, and
(2) the exercisability and vesting of the Option and any shares acquired upon
the exercise thereof shall be accelerated effective as of the date on which
the Optionee's Service terminated to such extent, if any, as shall have been
determined by the Board, in its discretion, and set forth in the Option
Agreement. Notwithstanding the foregoing, if it is determined that the
provisions or operation of this Section 6.6(a)(iii) would preclude treatment
of a Change in Control as a "pooling-of-interests" for accounting purposes
and provided further that in the absence of the preceding sentence such
Change in Control would be treated as a "pooling-of-interests" for accounting
purposes, then this Section 6.6(a)(iii) shall be void AB INITIO, and the
vesting and exercisability of the Option shall be determined under any other
applicable provision of the Plan or the Option Agreement evidencing such
Option.
(iv) OTHER TERMINATION OF SERVICE. If the Optionee's
Service with the Participating Company Group terminates for any reason,
except Disability, death or Termination After Change in Control, the Option,
to the extent unexercised and exercisable by the Optionee on the date on
which the Optionee's Service terminated, may be exercised by the
<PAGE>
Optionee at any time prior to the expiration of thirty (30) days (or such
longer period of time as determined by the Board, in its discretion) after
the date on which the Optionee's Service terminated, but in any event no
later than the Option Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding
the foregoing, if the exercise of an Option within the applicable time
periods set forth in Section 6.6(a) is prevented by the provisions of Section
10 below, the Option shall remain exercisable until thirty (30) days (or such
longer period of time as determined by the Board, in its discretion) after
the date the Optionee is notified by the Company that the Option is
exercisable, but in any event no later than the Option Expiration Date.
(c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b).
Notwithstanding the foregoing, if a sale within the applicable time periods
set forth in Section 6.6(a) of shares acquired upon the exercise of the
Option would subject the Optionee to suit under Section 16(b) of the Exchange
Act, the Option shall remain exercisable until the earliest to occur of (i)
the tenth (10th) day following the date on which a sale of such shares by the
Optionee would no longer be subject to such suit, (ii) the one hundred and
ninetieth (190th) day after the Optionee's termination of Service, or (iii)
the Option Expiration Date.
6.7 TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, an Option shall be exercisable only by the Optionee or the
Optionee's guardian or legal representative. No Option shall be assignable or
transferable by the Optionee, except by will or by the laws of descent and
distribution. Notwithstanding the foregoing, to the extent permitted by the
Board, in its discretion, and set forth in the Option Agreement evidencing
such Option, a Nonstatutory Stock Option shall be assignable or transferable
subject to the applicable limitations, if any, described in Section
260.140.41 of Title 10 of the California Code of Regulations, Rule 701 under
the Securities Act, and the General Instructions to Form S-8 Registration
Statement under the Securities Act.
7. STANDARD FORMS OF OPTION AGREEMENT.
7.1 OPTION AGREEMENT. Unless otherwise provided by the Board at the
time the Option is granted, an Option shall comply with and be subject to the
terms and conditions set forth in the appropriate form of Option Agreement
approved by the Board concurrently with its adoption of the Plan and as
amended from time to time.
7.2 AUTHORITY TO VARY TERMS. The Board shall have the authority
from time to time to vary the terms of any standard form of Option Agreement
described in this Section 7 either in connection with the grant or amendment
of an individual Option or in connection with the authorization of a new
standard form or forms; provided, however, that the terms and conditions of
any such new, revised or amended standard form or forms of Option Agreement
are not inconsistent with the terms of the Plan.
8. CHANGE IN CONTROL.
<PAGE>
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the shareholders of the Company of more than fifty percent
(50%) of the voting stock of the Company; (ii) a merger or consolidation in
which the Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, a
"TRANSACTION") wherein the shareholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting
stock immediately before the Transaction, direct or indirect beneficial
ownership of more than fifty percent (50%) of the total combined voting power
of the outstanding voting stock of the Company or the corporation or
corporations to which the assets of the Company were transferred (the
"TRANSFEREE CORPORATION(S)"), as the case may be. For purposes of the
preceding sentence, indirect beneficial ownership shall include, without
limitation, an interest resulting from ownership of the voting stock of one
or more corporations which, as a result of the Transaction, own the Company
or the Transferee Corporation(s), as the case may be, either directly or
through one or more subsidiary corporations. The Board shall have the right
to determine whether multiple sales or exchanges of the voting stock of the
Company or multiple Ownership Change Events are related, and its
determination shall be final, binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. In the event the
Acquiring Corporation elects not to assume or substitute for outstanding
Options in connection with a Change in Control, any unexercisable or unvested
portions of outstanding Options and any shares acquired upon the exercise
thereof held by Optionees whose Service has not terminated prior to such date
shall be immediately exercisable and vested in full as of the date ten (10)
days prior to the date of the Change in Control. The exercise or vesting of
any Option and any shares acquired upon the exercise thereof that was
permissible solely by reason of this Section 8.2 shall be conditioned upon
the consummation of the Change in Control. Any Options which are neither
assumed or substituted for by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Change in Control and any consideration
received pursuant to the Change in Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if
<PAGE>
the corporation the stock of which is subject to the outstanding Options
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Change in Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent
(50%) of the total combined voting power of its voting stock is held by
another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the outstanding
Options shall not terminate unless the Board otherwise provides in its
discretion.
9. PROVISION OF INFORMATION.
At least annually, copies of the Company's balance sheet and income
statement for the just completed fiscal year shall be made available to each
Optionee and purchaser of shares of Stock upon the exercise of an Option. The
Company shall not be required to provide such information to key employees
whose duties in connection with the Company assure them access to equivalent
information.
10. COMPLIANCE WITH SECURITIES LAW.
The grant of Options and the issuance of shares of Stock upon
exercise of Options shall be subject to compliance with all applicable
requirements of federal, state and foreign law with respect to such
securities. Options may not be exercised if the issuance of shares of Stock
upon exercise would constitute a violation of any applicable federal, state
or foreign securities laws or other law or regulations or the requirements of
any stock exchange or market system upon which the Stock may then be listed.
In addition, no Option may be exercised unless (a) a registration statement
under the Securities Act shall at the time of exercise of the Option be in
effect with respect to the shares issuable upon exercise of the Option or (b)
in the opinion of legal counsel to the Company, the shares issuable upon
exercise of the Option may be issued in accordance with the terms of an
applicable exemption from the registration requirements of the Securities
Act. The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to
be necessary to the lawful issuance and sale of any shares hereunder shall
relieve the Company of any liability in respect of the failure to issue or
sell such shares as to which such requisite authority shall not have been
obtained. As a condition to the exercise of any Option, the Company may
require the Optionee to satisfy any qualifications that may be necessary or
appropriate, to evidence compliance with any applicable law or regulation and
to make any representation or warranty with respect thereto as may be
requested by the Company.
11. TERMINATION OR AMENDMENT OF PLAN.
The Board may terminate or amend the Plan at any time. However,
subject to changes in applicable law, regulations or rules that would permit
otherwise, without the approval of the Company's shareholders, there shall be
(a) no increase in the maximum aggregate number of shares of Stock that may
be issued under the Plan (except by operation of the provisions of Section
4.2), (b) no change in the class of persons eligible to receive Incentive
Stock Options, and (c) no other amendment of the Plan that would require
approval of the Company's
<PAGE>
shareholders under any applicable law, regulation or rule. No termination or
amendment of the Plan shall affect any then outstanding Option unless
expressly provided by the Board. In any event, no termination or amendment of
the Plan may adversely affect any then outstanding Option without the consent
of the Optionee, unless such termination or amendment is required to enable
an Option designated as an Incentive Stock Option to qualify as an Incentive
Stock Option or is necessary to comply with any applicable law, regulation or
rule.
12. SHAREHOLDER APPROVAL.
The Plan or any increase in the maximum aggregate number of shares
of Stock issuable thereunder as provided in Section 4.1 (the "AUTHORIZED
SHARES") shall be approved by the shareholders of the Company within twelve
(12) months of the date of adoption thereof by the Board. Options granted
prior to shareholder approval of the Plan or in excess of the Authorized
Shares previously approved by the shareholders shall become exercisable no
earlier than the date of shareholder approval of the Plan or such increase in
the Authorized Shares, as the case may be.
IN WITNESS WHEREOF, the undersigned President of the Company certifies
that the foregoing sets forth the Finisar Corporation 1999 Stock Option Plan
as duly adopted by the Board on April 20, 1999.
/s/ Jerry S. Rawls
------------------------------------
President
<PAGE>
Exhibit 10.4
FINISAR CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. The Finisar Corporation 1999 Employee Stock Purchase
Plan (the "PLAN") is hereby established effective as of the
effective date of the initial registration by the Company of its
Stock under Section 12 of the Securities Exchange Act of 1934, as
amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
Company and its stockholders by providing an incentive to attract,
retain and reward Eligible Employees of the Participating Company
Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group. The Plan provides
such Eligible Employees with an opportunity to acquire a proprietary
interest in the Company through the purchase of Stock. The Company
intends that the Plan qualify as an "employee stock purchase plan"
under Section 423 of the Code (including any amendments or
replacements of such section), and the Plan shall be so construed.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier of
its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan but defined
for purposes of Section 423 of the Code shall have the same
definition herein. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(A) "BOARD" means the Board of Directors of the Company. If one or more
Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(B) "CODE" means the Internal Revenue Code of 1986, as amended, and any
applicable regulations promulgated thereunder.
(C) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as specified by the
Board. Unless the powers of the Committee have been specifically
limited, the Committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and
any applicable limitations imposed by law.
(D) "COMPANY" means Finisar Corporation, a Delaware corporation, or any
successor corporation thereto.
<PAGE>
(E) "COMPENSATION" means, with respect to any Offering Period, base
wages or salary, overtime pay, bonuses, commissions, shift
differentials, payments for paid time off, payments in lieu of
notice, and any of such compensation deferred under any program or
plan established by a Participating Company, including, without
limitation, pursuant to Section 401(k) or Section 125 of the Code.
Compensation shall be limited to amounts actually payable in cash
directly to the Participant or deferred by the Participant during
the Offering Period. However, notwithstanding the foregoing,
Compensation shall not include sign-on bonuses, profit sharing,
payments pursuant to a severance agreement, termination pay, moving
allowances, relocation payments, expense reimbursements, the cost of
employee benefits paid by a Participating Company, tuition
reimbursements, imputed income arising under any benefit program,
contributions made by a Participating Company under any employee
benefit plan, income directly or indirectly received pursuant to the
Plan or any other stock purchase or stock option plan, or any other
compensation not included above.
(F) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set
forth in Section 5 for eligibility to participate in the Plan.
(G) "EMPLOYEE" means a person treated as an employee of a Participating
Company for purposes of Section 423 of the Code. A Participant shall
be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the
Participant ceasing to be a Participating Company. For purposes of
the Plan, an individual shall not be deemed to have ceased to be an
Employee while on any military leave, sick leave, or other bona fide
leave of absence approved by the Company of ninety (90) days or
less. If an individual's leave of absence exceeds ninety (90) days,
the individual shall be deemed to have ceased to be an Employee on
the ninety-first (91st) day of such leave unless the individual's
right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall
determine in good faith and in the exercise of its discretion
whether an individual has become or has ceased to be an Employee and
the effective date of such individual's employment or termination of
employment, as the case may be. For purposes of an individual's
participation in or other rights, if any, under the Plan as of the
time of the Company's determination, all such determinations by the
Company shall be final, binding and conclusive, notwithstanding that
the Company or any governmental agency subsequently makes a contrary
determination.
(H) "FAIR MARKET VALUE" means, as of any date:
(i) If the Stock is then listed on a national or regional securities
exchange or market system or is regularly quoted by a recognized
securities dealer, the closing sale price of a share of Stock (or
the mean of the closing bid and asked prices if the Stock is so
quoted instead) as quoted on the Nasdaq National Market, the Nasdaq
SmallCap Market or such other national or regional securities
exchange or market system constituting the primary market for the
Stock, or by such recognized securities dealer, as reported in THE
WALL STREET JOURNAL or such other source as the Company deems
reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system or has
been quoted by such securities dealer, the date on which the Fair
Market Value is established shall be the last day on which the
<PAGE>
Stock was so traded or quoted prior to the relevant date, or such
other appropriate day as determined by the Board, in its discretion.
(ii) If, on the relevant date, the Stock is not then listed on a
national or regional securities exchange or market system or
regularly quoted by a recognized securities dealer, the Fair Market
Value of a share of Stock shall be as determined in good faith by
the Board.
(iii) Notwithstanding the foregoing, the Fair Market Value of a
share of Stock on the Effective Date shall be deemed to be the
public offering price set forth in the final prospectus filed with
the Securities and Exchange Commission in connection with the
Company's initial public offering of the Stock.
(I) "OFFERING" means an offering of Stock as provided in Section 6.
(J) "OFFERING DATE" means, for any Offering, the first day of the
Offering Period.
(K) "OFFERING PERIOD" means a period established in accordance with
Section 6.1.
(L) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the
Code.
(M) "PARTICIPANT" means an Eligible Employee who has become a
participant in an Offering Period in accordance with Section 7 and
remains a participant in accordance with the Plan.
(N) "PARTICIPATING COMPANY" means the Company or any Parent Corporation
or Subsidiary Corporation designated by the Board as a corporation
the Employees of which may, if Eligible Employees, participate in
the Plan. The Board shall have the sole and absolute discretion to
determine from time to time which Parent Corporations or Subsidiary
Corporations shall be Participating Companies.
(O) "PARTICIPATING COMPANY GROUP" means, at any point in time, the
Company and all other corporations collectively which are then
Participating Companies.
(P) "PURCHASE DATE" means, for any Purchase Period, the last day of such
period.
(Q) "PURCHASE PERIOD" means a period established in accordance with
Section 6.2.
(R) "PURCHASE PRICE" means the price at which a share of Stock may be
purchased under the Plan, as determined in accordance with Section 9.
(S) "PURCHASE RIGHT" means an option granted to a Participant pursuant
to the Plan to purchase such shares of Stock as provided in Section
8, which the Participant may or may not exercise during the Offering
Period in which such option is outstanding. Such option arises from
the right of a Participant to withdraw any accumulated payroll
deductions of the Participant not previously applied to the purchase
of Stock under the Plan and to terminate participation in the Plan
at any
<PAGE>
time during an Offering Period.
(T) "STOCK" means the common stock of the Company, as adjusted from time
to time in accordance with Section 4.2.
(U) "SUBSCRIPTION AGREEMENT" means a written agreement in such form as
specified by the Company, stating an Employee's election to
participate in the Plan and authorizing payroll deductions under the
Plan from the Employee's Compensation.
(V) "SUBSCRIPTION DATE" means the last business day prior to the
Offering Date of an Offering Period or such earlier date as the
Company shall establish.
(W) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation
of any provision of the Plan. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall
include the singular. Use of the term "or" is not intended to be
exclusive, unless the context clearly requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board. All questions of interpretation of the Plan, of any form of
agreement or other document employed by the Company in the
administration of the Plan, or of any Purchase Right shall be
determined by the Board and shall be final and binding upon all
persons having an interest in the Plan or the Purchase Right.
Subject to the provisions of the Plan, the Board shall determine all
of the relevant terms and conditions of Purchase Rights; provided,
however, that all Participants granted Purchase Rights pursuant to
an Offering shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code. All expenses incurred in
connection with the administration of the Plan shall be paid by the
Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have the
authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election that is the
responsibility of or that is allocated to the Company herein,
provided that the officer has apparent authority with respect to
such matter, right, obligation, determination or election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The Company may,
from time to time, consistent with the Plan and the requirements of
Section 423 of the Code, establish, change or terminate such rules,
guidelines, policies, procedures, limitations, or adjustments as
deemed advisable by the Company, in its discretion, for the proper
administration of the Plan, including, without limitation, (a) a
minimum payroll deduction amount required for participation in an
Offering, (b) a limitation on the frequency or number of changes
permitted in the rate of payroll deduction during an Offering, (c)
an exchange ratio applicable to amounts withheld in a currency other
than United States dollars, (d) a payroll deduction greater than or
less than the amount
<PAGE>
designated by a Participant in order to adjust for the Company's
delay or mistake in processing a Subscription Agreement or in
otherwise effecting a Participant's election under the Plan or as
advisable to comply with the requirements of Section 423 of the
Code, and (e) determination of the date and manner by which the Fair
Market Value of a share of Stock is determined for purposes of
administration of the Plan.
3.4 INDEMNIFICATION. In addition to such other rights of indemnification
as they may have as members of the Board or officers or employees of
the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom
authority to act for the Board or the Company is delegated shall be
indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may
be a party by reason of any action taken or failure to act under or
in connection with the Plan, or any right granted hereunder, and
against all amounts paid by them in settlement thereof (provided
such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that
such person is liable for gross negligence, bad faith or intentional
misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such
person shall offer to the Company, in writing, the opportunity at
its own expense to handle and defend the same.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as provided
in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two hundred fifty thousand
(250,000), cumulatively increased on May 1, 2001 and each May 1
thereafter until and including May 1, 2010 by two hundred fifty
thousand (250,000) shares (the "ANNUAL INCREASE"), and shall consist
of authorized but unissued or reacquired shares of Stock, or any
combination thereof. If an outstanding Purchase Right for any reason
expires or is terminated or canceled, the shares of Stock allocable
to the unexercised portion of that Purchase Right shall again be
available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital
structure of the Company, or in the event of any merger (including a
merger effected for the purpose of changing the Company's domicile),
sale of assets or other reorganization in which the Company is a
party, appropriate adjustments shall be made in the number and class
of shares subject to the Plan, the Annual Increase and each Purchase
Right, and in the Purchase Price. If a majority of the shares of the
same class as the shares subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not
pursuant to an Ownership Change Event) shares of another corporation
(the "NEW SHARES"), the Board may unilaterally amend the outstanding
Purchase Rights to provide that such Purchase Rights are exercisable
for New Shares. In the event of any such amendment, the number of
shares subject to, and the Purchase Price of, the outstanding
Purchase Rights shall be adjusted in a fair and equitable
<PAGE>
manner, as determined by the Board, in its discretion.
Notwithstanding the foregoing, any fractional share resulting from
an adjustment pursuant to this Section 4.2 shall be rounded down to
the nearest whole number, and in no event may the Purchase Price be
decreased to an amount less than the par value, if any, of the stock
subject to the Purchase Right. The adjustments determined by the
Board pursuant to this Section 4.2 shall be final, binding and
conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a Participating
Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except any Employee who is either: (a)
customarily employed by the Participating Company Group for twenty
(20) hours or less per week or (b) customarily employed by the
Participating Company Group for not more than five (5) months in any
calendar year.
5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding any provision of
the Plan to the contrary, no Employee shall be granted a Purchase
Right under the Plan if, immediately after such grant, the Employee
would own or hold options to purchase stock of the Company or of any
Parent Corporation or Subsidiary Corporation possessing five percent
(5%) or more of the total combined voting power or value of all
classes of stock of such corporation, as determined in accordance
with Section 423(b)(3) of the Code. For purposes of this Section
5.2, the attribution rules of Section 424(d) of the Code shall apply
in determining the stock ownership of such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan
shall be implemented by two series of Offerings. One series shall be
of sequential Offerings of approximately twelve (12) months duration
or such other duration as the Board shall determine (an "ANNUAL
OFFERING PERIOD"). The second series shall be of Offerings of
approximately six (6) months duration or such other duration as the
Board shall determine (a "HALF-YEAR OFFERING PERIOD"). Annual
Offering Periods shall commence on or about December 1 of each year
and end on or about the first November 30 occurring thereafter.
Half-Year Offering Periods shall commence on or about June 1 of each
year and end on or about the first November 30 occurring thereafter.
However, an initial Offering (the "INITIAL OFFERING PERIOD") shall
commence on the Effective Date and end on or about November 30,
2000. Notwithstanding the foregoing, the Board may establish a
different duration for one or more Offering Periods or different
commencing or ending dates for such Offering Periods; provided,
however, that no Offering Period may have a duration exceeding
twenty-seven (27) months. If the first or last day of an Offering
Period is not a day on which the national securities exchanges or
Nasdaq Stock Market are open for trading, the Company shall specify
the trading day that will be deemed the first or last day, as the
case may be, of the Offering Period.
6.2 PURCHASE PERIODS. Each Annual Offering Period shall consist of two
(2) consecutive Purchase Periods of approximately six (6) months
duration, or such other number or duration as the Board determines.
A Purchase Period commencing on or about December 1 shall end on or
about the
<PAGE>
next May 31. A Purchase Period commencing on or about June 1 shall
end on or about the next November 30. Each Half-Year Offering Period
shall consist of a single Purchase Period of approximately six (6)
months duration coterminous with such Offering Period. However, the
Initial Offering Period shall consist of two (2) consecutive
Purchase Periods ending on or about May 31, 2000 and November 30,
2000, respectively. Notwithstanding the foregoing, the Board may
establish a different duration for one or more Purchase Periods or
different commencing or ending dates for such Purchase Periods. If
the first or last day of a Purchase Period is not a day on which the
national securities exchanges or Nasdaq Stock Market are open for
trading, the Company shall specify the trading day that will be
deemed the first or last day, as the case may be, of the Purchase
Period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a Participant
in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not
later than the close of business for such office on the Subscription
Date established by the Company for that Offering Period. An
Eligible Employee who does not deliver a properly completed
Subscription Agreement to the Company's designated office on or
before the Subscription Date for an Offering Period shall not
participate in the Plan for that Offering Period or for any
subsequent Offering Period unless the Eligible Employee subsequently
delivers a properly completed Subscription Agreement to the
appropriate office of the Company on or before the Subscription Date
for such subsequent Offering Period. An Employee who becomes an
Eligible Employee after the Offering Date of an Offering Period
shall not be eligible to participate in that Offering Period but may
participate in any subsequent Offering Period provided the Employee
is still an Eligible Employee as of the Offering Date of such
subsequent Offering Period.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after
the final Purchase Date of each Offering Period in which the
Participant participates provided that the Participant remains an
Eligible Employee on the Offering Date of the new Offering Period
and has not either (a) withdrawn from the Plan pursuant to Section
12.1 or (b) terminated employment as provided in Section 13. A
Participant who may automatically participate in a subsequent
Offering Period, as provided in this Section, is not required to
deliver any additional Subscription Agreement for the subsequent
Offering Period in order to continue participation in the Plan.
However, a Participant may deliver a new Subscription Agreement for
a subsequent Offering Period in accordance with the procedures set
forth in Section 7.1 if the Participant desires to change any of the
elections contained in the Participant's then effective Subscription
Agreement.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the Offering
Date of each Offering Period, each Participant in that Offering
Period shall be granted automatically a Purchase Right determined as
follows:
<PAGE>
(A) ANNUAL OFFERING PERIOD. Each Purchase Right granted on the Offering
Date of an Annual Offering Period shall consisting of an option to
purchase that number of whole shares of Stock determined by dividing
Twenty-Five Thousand Dollars ($25,000) by the Fair Market Value of a
share of Stock on the Offering Date.
(B) HALF-YEAR OFFERING PERIOD. Each Purchase Right granted on the
Offering Date of a Half-Year Offering Period shall consist of an
option to purchase that number of whole shares of Stock determined
by dividing Twelve Thousand Five Hundred Dollars ($12,500) by the
Fair Market Value of a share of Stock on the Offering Date.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. If the Board establishes an
Offering Period of any duration other than twelve months or six
months, then the number of shares of Stock subject to each Purchase
Right granted on the Offering Date of such Offering Period shall be
determined as provided in Section 8.1, except that the applicable
dollar amount shall be determined by multiplying $2,083.33 by the
number of months (rounded to the nearest whole month) in the
Offering Period and rounding to the nearest whole dollar.
8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any provision of
the Plan to the contrary, no Participant shall be granted a Purchase
Right which permits his or her right to purchase shares of Stock
under the Plan to accrue at a rate which, when aggregated with such
Participant's rights to purchase shares under all other employee
stock purchase plans of a Participating Company intended to meet the
requirements of Section 423 of the Code, exceeds Twenty-Five
Thousand Dollars ($25,000) in Fair Market Value (or such other
limit, if any, as may be imposed by the Code) for each calendar year
in which such Purchase Right is outstanding at any time. For
purposes of the preceding sentence, the Fair Market Value of shares
purchased during a given Offering Period shall be determined as of
the Offering Date for such Offering Period. The limitation described
in this Section shall be applied in conformance with applicable
regulations under Section 423(b)(8) of the Code.
9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be
acquired in an Offering Period upon the exercise of all or any
portion of a Purchase Right shall be established by the Board;
provided, however, that the Purchase Price on each Purchase Date
shall not be less than eighty-five percent (85%) of the lesser of
(a) the Fair Market Value of a share of Stock on the Offering Date
of the Offering Period or (b) the Fair Market Value of a share of
Stock on the Purchase Date. Unless otherwise provided by the Board
prior to the commencement of an Offering Period, the Purchase Price
on each Purchase Date during that Offering Period shall be
eighty-five percent (85%) of the lesser of (a) the Fair Market Value
of a share of Stock on the Offering Date of the Offering Period, or
(b) the Fair Market Value of a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or
any portion of a
<PAGE>
Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering
Period for which such Purchase Right was granted, subject to the
following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided herein,
the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be
determined by the Participant's Subscription Agreement. The
Subscription Agreement shall set forth the percentage of the
Participant's Compensation to be deducted on each payday during an
Offering Period in whole percentages of not less than one percent
(1%) (except as a result of an election pursuant to Section 10.3 to
stop payroll deductions) or more than twenty percent (20%);
provided, however, that in no event may a Participant's payroll
deductions on any payday for the purchase of shares under the Plan
and all other employee stock purchase plans of a Participating
Company intended to meet the requirements of Section 423 of the Code
exceed twenty percent (20%) of the Participant's Compensation on
such payday. The Board may change the foregoing limits on payroll
deductions effective as of any Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall
continue to the end of the Offering Period unless sooner altered or
terminated as provided herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an Offering
Period, a Participant may elect to increase or decrease the rate of
or to stop deductions from his or her Compensation by delivering to
the Company's designated office an amended Subscription Agreement
authorizing such change on or before the Change Notice Date, as
defined below. A Participant who elects, effective following the
first payday of an Offering Period, to decrease the rate of his or
her payroll deductions to zero percent (0%) shall nevertheless
remain a Participant in the current Offering Period unless such
Participant withdraws from the Plan as provided in Section 12.1. The
"CHANGE NOTICE DATE" shall be the day immediately prior to the
beginning of the first pay period for which such election is to be
effective, unless a different date is established by the Company and
announced to the Participants.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company may, in
its sole discretion, suspend a Participant's payroll deductions
under the Plan as the Company deems advisable to avoid accumulating
payroll deductions in excess of the amount that could reasonably be
anticipated to purchase the maximum number of shares of Stock
permitted (a) under the Participant's Purchase Right or (b) during a
calendar year under the limit set forth in Section 8.3. Payroll
deductions shall be resumed at the rate specified in the
Participant's then effective Subscription Agreement at the
beginning, respectively, of (a) the next Offering Period, provided
that the individual is a Participant in such Offering Period or (b)
the next Purchase Period the Purchase Date of which falls in the
following calendar year, unless the Participant has either withdrawn
from the Plan as provided in Section 12.1 or has ceased to be an
Eligible Employee.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall be
maintained for each Participant. All payroll deductions from a
Participant's Compensation shall be credited to such Participant's
Plan account and shall be deposited with the general funds of the
Company. All
<PAGE>
payroll deductions received or held by the Company may be used by
the Company for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums deducted from a
Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may withdraw
all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock
by delivering to the Company's designated office a written notice on
a form provided by the Company for such purpose. A Participant who
withdraws the entire remaining balance credited to his or her Plan
account shall be deemed to have withdrawn from the Plan in
accordance with Section 12.1. Amounts withdrawn shall be returned to
the Participant as soon as practicable after the Company's receipt
of the notice of withdrawal and may not be applied to the purchase
of shares in any Offering under the Plan. The Company may from time
to time establish or change limitations on the frequency of
withdrawals permitted under this Section, establish a minimum dollar
amount that must be retained in the Participant's Plan account, or
terminate the withdrawal right provided by this Section.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an Offering
Period, each Participant who has not withdrawn from the Plan and
whose participation in the Offering has not otherwise terminated
before such Purchase Date shall automatically acquire pursuant to
the exercise of the Participant's Purchase Right the number of whole
shares of Stock determined by dividing (a) the total amount of the
Participant's payroll deductions accumulated in the Participant's
Plan account during the Offering Period and not previously applied
toward the purchase of Stock by (b) the Purchase Price. However, in
no event shall the number of shares purchased by the Participant
during an Offering Period exceed the number of shares subject to the
Participant's Purchase Right. No shares of Stock shall be purchased
on a Purchase Date on behalf of a Participant whose participation in
the Offering or the Plan has terminated before such Purchase Date.
11.2 PRO RATA ALLOCATION OF SHARES. If the number of shares of Stock
which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the
Plan as provided in Section 4.1, the Company shall make a pro rata
allocation of the remaining shares in as uniform a manner as
practicable and as the Company determines to be equitable. Any
fractional share resulting from such pro rata allocation to any
Participant shall be disregarded.
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each Purchase
Date, the Company shall arrange the delivery to each Participant of
a certificate representing the shares acquired by the Participant on
such Purchase Date; provided that the Company may deliver such
shares to a broker designated by the Company that will hold such
shares for the benefit of the Participant. Shares to be delivered to
a Participant under the Plan shall be registered in the name of the
Participant, or, if requested by the Participant, in the name of the
Participant and his or her
<PAGE>
spouse, or, if applicable, in the names of the heirs of the
Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be
refunded to the Participant as soon as practicable after such
Purchase Date. However, if the cash balance to be returned to a
Participant pursuant to the preceding sentence is less than the
amount that would have been necessary to purchase an additional
whole share of Stock on such Purchase Date, the Company may retain
the cash balance in the Participant's Plan account to be applied
toward the purchase of shares of Stock in the subsequent Purchase
Period or Offering Period, as the case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant
disposes of some or all of the shares of Stock he or she acquires
under the Plan, the Participant shall make adequate provision for
the federal, state, local and foreign tax withholding obligations,
if any, of the Participating Company Group which arise upon exercise
of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be
obligated to, withhold from the Participant's compensation the
amount necessary to meet such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering
Period to which the Purchase Right relates shall expire immediately
upon the end of the Offering Period.
11.7 PROVISION OF REPORTS AND STOCKHOLDER INFORMATION TO PARTICIPANTS.
Each Participant who has exercised all or part of his or her
Purchase Right shall receive, as soon as practicable after the
Purchase Date, a report of such Participant's Plan account setting
forth the total payroll deductions accumulated prior to such
exercise, the number of shares of Stock purchased, the Purchase
Price for such shares, the date of purchase and the cash balance, if
any, remaining immediately after such purchase that is to be
refunded or retained in the Participant's Plan account pursuant to
Section 11.4. The report required by this Section may be delivered
in such form and by such means, including by electronic
transmission, as the Company may determine. In addition, each
Participant shall be provided information concerning the Company
equivalent to that information provided generally to the Company's
common stockholders.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 VOLUNTARY WITHDRAWAL. A Participant may withdraw from the Plan or
any Offering by signing and delivering to the Company's designated
office a written notice of withdrawal on a form provided by the
Company for this purpose. Such withdrawal may be elected at any time
prior to the end of an Offering Period; provided, however, that if a
Participant withdraws from the Plan or an Offering after a Purchase
Date, the withdrawal shall not affect shares of Stock acquired by
the Participant on such Purchase Date. A Participant who voluntarily
withdraws from the Plan or an Offering is prohibited from resuming
participation in the Plan in the same Offering from which he or she
withdrew, but may participate in any subsequent Offering by again
satisfying the requirements of Sections 5 and 7.1. The Company may
impose, from time to time, a requirement that the notice of
withdrawal be on file with the Company's designated office for a
reasonable
<PAGE>
period prior to the effectiveness of the Participant's withdrawal.
12.2 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from the Plan or an Offering pursuant to Section 12.1,
the Participant's accumulated payroll deductions which have not been
applied toward the purchase of shares shall be refunded to the
Participant as soon as practicable after the withdrawal, without the
payment of any interest, and the Participant's interest in the Plan
or the Offering, as applicable, shall terminate. Such accumulated
payroll deductions to be refunded in accordance with this Section
may not be applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to
be an Employee of the Participating Company Group for any reason,
including retirement, disability or death, or upon the failure of a
Participant to remain an Eligible Employee, the Participant's
participation in the Plan shall terminate immediately. In such
event, the Participant's accumulated payroll deductions which have
not been applied toward the purchase of shares shall, as soon as
practicable, be returned to the Participant or, in the case of the
Participant's death, to the Participant's beneficiary designated in
accordance with Section 20, if any, or legal representative, and all
of the Participant's rights under the Plan shall terminate. Interest
shall not be paid on sums returned pursuant to this Section 13. A
Participant whose participation has been so terminated may again
become eligible to participate in the Plan by satisfying the
requirements of Sections 5 and 7.1.
14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if
any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty
percent (50%) of the voting stock of the Company; (ii) a merger or
consolidation in which the Company is a party; (iii) the sale,
exchange, or transfer of all or substantially all of the assets of
the Company; or (iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately
before the Transaction do not retain immediately after the
Transaction, in substantially the same proportions as their
ownership of shares of the Company's voting stock immediately before
the Transaction, direct or indirect beneficial ownership of more
than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or
corporations to which the assets of the Company were transferred
(the "TRANSFEREE CORPORATION(S)"), as the case may be. For purposes
of the preceding sentence, indirect beneficial ownership shall
include, without limitation, an interest resulting from ownership of
the voting stock of one or more corporations which, as a result of
the Transaction,
<PAGE>
own the Company or the Transferee Corporation(s), as the case may
be, either directly or through one or more subsidiary corporations.
The Board shall have the right to determine whether multiple sales
or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event of a
Change in Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case
may be (the "ACQUIRING CORPORATION"), may assume the Company's
rights and obligations under the Plan. If the Acquiring Corporation
elects not to assume the Company's rights and obligations under
outstanding Purchase Rights, the Purchase Date of the then current
Purchase Period shall be accelerated to a date before the date of
the Change in Control specified by the Board, but the number of
shares of Stock subject to outstanding Purchase Rights shall not be
adjusted. All Purchase Rights which are neither assumed by the
Acquiring Corporation in connection with the Change in Control nor
exercised as of the date of the Change in Control shall terminate
and cease to be outstanding effective as of the date of the Change
in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
Neither payroll deductions credited to a Participant's Plan
account nor a Participant's Purchase Right may be assigned,
transferred, pledged or otherwise disposed of in any manner other
than as provided by the Plan or by will or the laws of descent and
distribution. (A beneficiary designation pursuant to Section 20
shall not be treated as a disposition for this purpose.) Any such
attempted assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an
election to withdraw from the Plan as provided in Section 12.1. A
Purchase Right shall be exercisable during the lifetime of the
Participant only by the Participant.
16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to
compliance with all applicable requirements of federal, state and
foreign law with respect to such securities. A Purchase Right may
not be exercised if the issuance of shares upon such exercise would
constitute a violation of any applicable federal, state or foreign
securities laws or other law or regulations or the requirements of
any securities exchange or market system upon which the Stock may
then be listed. In addition, no Purchase Right may be exercised
unless (a) a registration statement under the Securities Act of
1933, as amended, shall at the time of exercise of the Purchase
Right be in effect with respect to the shares issuable upon exercise
of the Purchase Right, or (b) in the opinion of legal counsel to the
Company, the shares issuable upon exercise of the Purchase Right may
be issued in accordance with the terms of an applicable exemption
from the registration requirements of said Act. The inability of the
Company to obtain from any regulatory body having jurisdiction the
authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares under the
Plan shall relieve the Company of any liability in respect of the
failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the
exercise of a Purchase Right, the Company may require the
Participant to satisfy any qualifications that
<PAGE>
may be necessary or appropriate, to evidence compliance with any
applicable law or regulation, and to make any representation or
warranty with respect thereto as may be requested by the Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by
virtue of the Participant's participation in the Plan until the date
of the issuance of a certificate for the shares purchased pursuant
to the exercise of the Participant's Purchase Right (as evidenced by
the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company). No adjustment shall be
made for dividends, distributions or other rights for which the
record date is prior to the date such certificate is issued, except
as provided in Section 4.2. Nothing herein shall confer upon a
Participant any right to continue in the employ of the Participating
Company Group or interfere in any way with any right of the
Participating Company Group to terminate the Participant's
employment at any time.
18. LEGENDS.
The Company may at any time place legends or other
identifying symbols referencing any applicable federal, state or
foreign securities law restrictions or any provision convenient in
the administration of the Plan on some or all of the certificates
representing shares of Stock issued under the Plan. The Participant
shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired
pursuant to a Purchase Right in the possession of the Participant in
order to carry out the provisions of this Section. Unless otherwise
specified by the Company, legends placed on such certificates may
include but shall not be limited to the following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY
THE CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES
UNDER AN EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE TRANSFER AGENT
FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE CORPORATION
IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER
HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER
THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
19. NOTIFICATION OF DISPOSITION OF SHARES.
The Company may require the Participant to give the Company
prompt notice of any disposition of shares acquired by exercise of a
Purchase Right. The Company may require that until such time as a
Participant disposes of shares acquired upon exercise of a Purchase
Right, the Participant shall hold all such shares in the
Participant's name (or, if elected by the Participant, in the name
of the Participant and his or her spouse but not in the name of any
nominee) until the later of two years after the date of grant of
such Purchase Right or one year
<PAGE>
after the date of exercise of such Purchase Right. The Company may
direct that the certificates evidencing shares acquired by exercise
of a Purchase Right refer to such requirement to give prompt notice
of disposition.
20. DESIGNATION OF BENEFICIARY.
20.1 DESIGNATION PROCEDURE. A Participant may file a written designation
of a beneficiary who is to receive (a) shares and cash, if any, from
the Participant's Plan account if the Participant dies subsequent to
a Purchase Date but prior to delivery to the Participant of such
shares and cash or (b) cash, if any, from the Participant's Plan
account if the Participant dies prior to the exercise of the
Participant's Purchase Right. If a married Participant designates a
beneficiary other than the Participant's spouse, the effectiveness
of such designation shall be subject to the consent of the
Participant's spouse. A Participant may change his or her
beneficiary designation at any time by written notice to the Company.
20.2 ABSENCE OF BENEFICIARY DESIGNATION. If a Participant dies without an
effective designation pursuant to Section 20.1 of a beneficiary who
is living at the time of the Participant's death, the Company shall
deliver any shares or cash credited to the Participant's Plan
account to the Participant's legal representative.
21. NOTICES.
All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have
been duly given when received in the form specified by the Company
at the location, or by the person, designated by the Company for the
receipt thereof.
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan,
except that (a) no such amendment or termination shall affect
Purchase Rights previously granted under the Plan unless expressly
provided by the Board and (b) no such amendment or termination may
adversely affect a Purchase Right previously granted under the Plan
without the consent of the Participant, except to the extent
permitted by the Plan or as may be necessary to qualify the Plan as
an employee stock purchase plan pursuant to Section 423 of the Code
or to comply with any applicable law, regulation or rule. In
addition, an amendment to the Plan must be approved by the
stockholders of the Company within twelve (12) months of the
adoption of such amendment if such amendment would authorize the
sale of more shares than are then authorized for issuance under the
Plan or would change the definition of the corporations that may be
designated by the Board as Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company
certifies that the foregoing Finisar Corporation 1999 Employee Stock
Purchase Plan was duly adopted by the Board of Directors of the
Company on September 9, 1999.
/s/ Stephen Workman
------------------------------------
Secretary
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated June 25, 1999 in the Registration Statement (Form
S-1) and related Prospectus of Finisar Corporation dated September 13, 1999.
Our audits also included the financial statement schedule of Finisar
Corporation listed in Item 16(b). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
September 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> APR-30-1998 APR-30-1999 APR-30-2000
<PERIOD-START> MAY-01-1997 MAY-01-1998 MAY-01-1999
<PERIOD-END> APR-30-1998 APR-30-1999 JUL-31-1999
<CASH> 722 5,044 5,404
<SECURITIES> 0 0 0
<RECEIVABLES> 2,804 6,921 7,969
<ALLOWANCES> (17) (265) (407)
<INVENTORY> 2,731 5,236 6,959
<CURRENT-ASSETS> 6,628 18,177 21,137
<PP&E> 1,290 3,080 3,630
<DEPRECIATION> (238) (598) (774)
<TOTAL-ASSETS> 7,761 20,955 24,459
<CURRENT-LIABILITIES> 898 5,166 7,130
<BONDS> 0 0 0
0 26,259 26,259
0 0 0
<COMMON> 95 3,909 6,115
<OTHER-SE> 6,351 (22,412) (26,065)
<TOTAL-LIABILITY-AND-EQUITY> 7,761 20,955 24,459
<SALES> 22,067 35,471 13,879
<TOTAL-REVENUES> 22,067 35,471 13,879
<CGS> 8,705 15,514 6,252
<TOTAL-COSTS> 8,705 15,514 6,252
<OTHER-EXPENSES> 5,436 12,404 4,622
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 33 429 188
<INCOME-PRETAX> 7,073 4,951 2,129
<INCOME-TAX> 2,715 1,874 829
<INCOME-CONTINUING> 4,358 3,077 1,300
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,358 3,077 1,300
<EPS-BASIC> 0.10 0.08 0.04
<EPS-DILUTED> 0.10 0.07 0.03
</TABLE>
