Capital Markets

Finisar: It’s Not Our Default

An options probe turns into a quagmire of capital-raising issues for the high-tech company.
Stephen TaubJuly 23, 2007

For the third time in less than a year Finisar Corp. is disputing claims made by investors who contend that the company has defaulted on debt covenants. The company is in the process of suing the creditors for false claims, meanwhile, the creditors want to make a federal case out of the suit — literally.

That’s not all. The Nasdaq Stock Market is hounding Finisar about delisting its stock, unless it brings its regulatory filings up to date. For its part, the company, which generates $389 million of revenues making components for high-speed data networks, wants more time to file its Form 10-K and 10-Qs, so it can complete an internal investigation into the timing of stock options awards. Indeed, this mid-cap company is being haunted by an options probe that stretches back to 2000, and may turn up nothing of consequence.

In a regulatory filing released today, Finisar recounts its ongoing saga, starting with its most recent problems, the receipt of three substantially identical notices of default for the company’s 2.5 percent convertible senior subordinated notes due in 2010, its 2.5 percent convertible subordinated notes due in 2010, and its 5.25 percent convertible subordinated motes due in 2008. The notices state that the company’s failure to timely file its annual report for the fiscal year ended April 30, 2007, constituted a default under each of the three indentures between the company and the trustee governing the three notes. The notices state that if the company does not cure the default within 60 days, an “Event of Default” would occur under the indenture.

The two other default notices were similar. In April 2007, the company failed to timely file its quarterly report for the period ended January 28, 2007. Finisar noted that it had delayed filing the October and January quarterly reports, as well as the annual report, until its audit committee completes an internal review of its historical stock option practices, adding that the investigation is near completion.

Likewise, in January 2007, Finisar received three notices of default from the trustee related to the company’s failure to timely file its quarterly report for the three-month period ended October 29, 2006. On March 7, the company reported that the 60-day cure period had expired and that, as a result, the trustee or holders of at least 25 percent of one or more series of the notes may deem the company to have been in default under the indentures and attempt to declare all unpaid principal, and any accrued interest, on the notes be due and payable.

Meanwhile, Finisar management says it is in the process of finalizing revised measurement dates for a number of stock option grants issued during the period from November 1999 to September 2006, after which it will determine the amount of non-cash charges for compensation expenses, the resulting tax impact, and the accounting impact on its financial statements for each fiscal period going back to fiscal 2000. When this is complete, company officials say Finisar will prepare revised historical financial statements. As a result, the company plans to file the late reports “as soon as practicable” following the preparation of revised historical financial statements.

Furthermore, Finisar officials argue that the company is not in default under the terms of the indentures, asserting that the plain language of each indenture requires only that the company file with the trustee only reports that have actually been filed with the Securities and Exchange Commission. Therefore, since the quarterly and annual reports have not yet been filed with the SEC, the company is not obligated to file them with the trustee.

On March 2, the company filed a lawsuit in the Superior Court of the State of California for the County of Santa Clara against the trustee seeking a declaration that the company is not in default under the three indentures with respect to the October quarterly report. The trustee answered the lawsuit by generally denying all allegations, and asking for the state case to be moved to the United States District Court for the Northern District of California. That led to a new motion from Finisar, asking that the case be remanded back to the state court, with hearing on that motion scheduled for September 2007.

By June 21, Finisar filed a another lawsuit claiming it is not in default under the three indentures related to the January quarterly report.

While the court battle over the status of its debt covenants remains in limbo until September, Finisar will be kept busy managing its problems with Nasdaq. Earlier this month Finisar received notice from the exchange about the company’s failure to compliance with Nasdaq’s listing requirements. Mainly, the company failed to file its April 2007 annual report on time. This wasn’t the first delisting notice for Finisar. The company received similar notices stemming from its failure to timely file its quarterly reports for the periods ended October 29, 2006 and January 28, 2007.

In response to the original staff determination notice, Finisar requested a hearing before the Nasdaq Listing Qualifications Panel, which was held on February 15. At the hearing, Finisar requested that its common stock continue to be listed pending completion of the options review, the preparation of restated financials – if required – and the filing of its October quarterly report. Finisar extended the request to cover the delayed filing of its January quarterly report.

In April, the Nasdaq panel granted Finisar an extension to June 11 to file its October report and any required restatements, and an extension to July 3, to file its January report. Finisar appealed the decision to the Nasdaq Listing and Hearing Review Council and asked for an extension to come into compliance with its reporting obligations until at least August 31. The Council subsequently called for review and stayed the April 4 decision of the Panel. But the Council also requested that Finisar make an additional submission by August 10, rather than at the end of the month.