e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended January 31, 2010
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-27999
Finisar Corporation
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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94-3038428
(I.R.S. Employer
Identification No.) |
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1389 Moffett Park Drive
Sunnyvale, California
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94089 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code:
408-548-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if as smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
At February 28, 2010, there were 65,536,100 shares of the registrants common stock, $.001 par
value, issued and outstanding.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended January 31, 2010
2
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. We use words like anticipates, believes, plans, expects,
future, intends and similar expressions to identify these forward-looking statements. We have
based these forward-looking statements on our current expectations and projections about future
events; however, our business and operations are subject to a variety of risks and uncertainties,
and, consequently, actual results may materially differ from those projected by any forward-looking
statements. As a result, you should not place undue reliance on these forward-looking statements
since they may not occur.
Certain factors that could cause actual results to differ from those projected are discussed
in Item 1A. Risk Factors. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or future events.
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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January 31, 2010 |
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April 30, 2009 * |
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(In thousands, except share and per share data) |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
75,514 |
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$ |
37,129 |
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Restricted cash and cash equivalents (Note 16) |
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3,400 |
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Short-term available-for-sale investments |
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67 |
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92 |
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Accounts receivable, net of allowance for doubtful accounts
of $1,936 at January 31, 2010 and $1,069 at April 30, 2009 |
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116,399 |
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81,820 |
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Accounts receivable, other |
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8,456 |
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10,033 |
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Inventories |
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122,680 |
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107,764 |
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Prepaid expenses |
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7,024 |
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6,795 |
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Current assets associated with discontinued operations |
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4,863 |
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Total current assets |
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333,540 |
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248,496 |
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Property, plant and improvements, net |
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83,926 |
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81,606 |
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Purchased technology, net |
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12,882 |
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16,459 |
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Other intangible assets, net |
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12,115 |
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13,427 |
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Minority investments |
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12,289 |
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14,289 |
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Other assets |
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5,961 |
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2,584 |
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Non-current assets associated with discontinued operations |
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3,527 |
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Total assets |
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$ |
460,713 |
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$ |
380,388 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
65,124 |
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$ |
48,421 |
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Accrued compensation |
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12,698 |
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11,428 |
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Other accrued liabilities (Note 12) |
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21,059 |
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30,513 |
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Deferred revenue |
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5,516 |
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1,703 |
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Short- term debt (Note 15) |
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14,500 |
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Current portion of convertible debt (Note 13) |
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28,480 |
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Current portion of long-term debt (Note 14) |
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4,000 |
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6,107 |
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Non-cancelable purchase obligations |
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521 |
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2,965 |
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Current liabilities associated with discontinued operations |
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3,160 |
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Total current liabilities |
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151,898 |
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104,297 |
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Long-term liabilities: |
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Convertible notes, net of current portion (Note 13) |
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100,000 |
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134,255 |
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Long-term debt, net of current portion (Note 14) |
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10,750 |
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15,305 |
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Other non-current liabilities |
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6,008 |
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2,511 |
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Deferred income taxes |
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1,136 |
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1,149 |
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Non-current liabilities associated with discontinued operations |
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650 |
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Total liabilities |
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269,792 |
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258,167 |
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Stockholders equity: |
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Preferred stock, $0.001 par value, 5,000,000 shares authorized,
no shares issued and outstanding at January 31, 2010 and April 30, 2009 |
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Common stock, $0.001 par value, 750,000,000 shares authorized,
65,433,790 shares issued and outstanding at January 31, 2010
and 59,686,507 shares issued and outstanding at April 30, 2009 |
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65 |
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60 |
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Additional paid-in capital |
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1,892,186 |
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1,831,224 |
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Accumulated other comprehensive income |
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10,431 |
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2,662 |
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Accumulated deficit |
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(1,711,761 |
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(1,711,725 |
) |
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Total stockholders equity |
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190,921 |
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122,221 |
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Total liabilities and stockholders equity |
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$ |
460,713 |
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$ |
380,388 |
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* |
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The condensed consolidated balance sheet at April 30, 2009 has been derived from audited
consolidated financial statements at that date. See accompanying notes. |
4
FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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January 31, 2010 |
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February 1, 2009 |
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January 31, 2010 |
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February 1, 2009 |
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Revenues |
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$ |
166,935 |
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$ |
126,081 |
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$ |
441,390 |
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$ |
389,601 |
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Cost of revenues |
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114,048 |
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89,789 |
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316,923 |
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270,460 |
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Amortization of acquired developed technology |
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1,192 |
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1,455 |
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3,577 |
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3,558 |
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Gross profit |
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51,695 |
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34,837 |
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120,890 |
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115,583 |
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Operating expenses: |
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Research and development |
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24,892 |
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21,181 |
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67,514 |
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60,368 |
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Sales and marketing |
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7,922 |
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7,043 |
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22,054 |
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21,822 |
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General and administrative |
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9,329 |
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9,050 |
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27,127 |
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28,099 |
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Acquired in-process research and development |
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10,500 |
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Restructuring charges |
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4,173 |
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Amortization of purchased intangibles |
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426 |
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702 |
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1,645 |
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1,445 |
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Impairment of goodwill and intangible assets |
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46,534 |
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225,302 |
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Total operating expenses |
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42,569 |
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84,510 |
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122,513 |
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347,536 |
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Income (loss) from operations |
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9,126 |
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(49,673 |
) |
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(1,623 |
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(231,953 |
) |
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Interest income |
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85 |
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119 |
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104 |
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1,744 |
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Interest expense |
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(2,241 |
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(2,724 |
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(6,842 |
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(12,080 |
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Gain (loss) on debt extinguishment |
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28 |
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3,295 |
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(25,039 |
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3,064 |
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Other income (expense), net |
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(961 |
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(744 |
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(2,899 |
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(3,692 |
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Income
(loss) from continuing operations before income taxes |
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6,037 |
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(49,727 |
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(36,299 |
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(242,917 |
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Provision (benefit) for income taxes |
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421 |
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(432 |
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618 |
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(7,429 |
) |
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Income (loss) from continuing operations |
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$ |
5,616 |
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$ |
(49,295 |
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$ |
(36,917 |
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$ |
(235,488 |
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Income
(loss) from discontinued operations, net of income taxes |
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$ |
(131 |
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$ |
(87 |
) |
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$ |
36,881 |
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$ |
903 |
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Net income (loss) |
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$ |
5,485 |
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$ |
(49,382 |
) |
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$ |
(36 |
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$ |
(234,585 |
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Basic: |
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Income (loss) per share from continuing operations |
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$ |
0.09 |
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$ |
(0.83 |
) |
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$ |
(0.58 |
) |
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$ |
(4.20 |
) |
Income (loss) per share from discontinued operations |
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$ |
(0.00 |
) |
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$ |
(0.00 |
) |
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$ |
0.58 |
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$ |
0.02 |
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Net income (loss) per share |
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$ |
0.09 |
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$ |
(0.83 |
) |
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$ |
(0.00 |
) |
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$ |
(4.18 |
) |
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Diluted: |
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Income (loss) per share from continuing operations |
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$ |
0.08 |
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$ |
(0.83 |
) |
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$ |
(0.58 |
) |
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$ |
(4.20 |
) |
Income (loss) per share from discontinued operations |
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$ |
(0.00 |
) |
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$ |
(0.00 |
) |
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$ |
0.58 |
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$ |
0.02 |
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Net income (loss) per share |
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$ |
0.08 |
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$ |
(0.83 |
) |
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$ |
(0.00 |
) |
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$ |
(4.18 |
) |
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Weighted average number of common shares
outstanding: |
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Basic |
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65,113 |
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59,350 |
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63,131 |
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56,039 |
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Diluted |
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66,719 |
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59,350 |
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63,131 |
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56,039 |
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See accompanying notes.
5
FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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Nine
Months Ended |
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January 31, 2010 |
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February 1, 2009 |
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Operating activities |
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Net loss |
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$ |
(36 |
) |
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$ |
(234,585 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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22,710 |
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22,381 |
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Stock-based compensation expense |
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12,322 |
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10,960 |
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Amortization of beneficial conversion feature of convertible notes |
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1,817 |
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Non-cash interest cost on 2.5% convertible senior subordinated notes |
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2,674 |
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3,725 |
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Amortization of purchased technology and finite lived intangibles |
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1,722 |
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1,862 |
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Amortization of acquired developed technology |
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3,747 |
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4,454 |
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Impairment of minority investments |
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2,000 |
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Loss on sale or retirement of assets |
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327 |
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|
539 |
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Loss (gain) on debt extinguishment |
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23,552 |
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(3,063 |
) |
Gain on remeasurement of derivative liability |
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(1,135 |
) |
Loss (gain) on sale of equity investment |
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(375 |
) |
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12 |
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Loss (gain) on sale of a product line |
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(1,250 |
) |
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|
919 |
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Gain on sale of discontinued operations |
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(36,053 |
) |
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Other than temporary decline in fair market value of equity security |
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1,920 |
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Impairment of goodwill |
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225,302 |
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Acquired in-process research and development |
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10,500 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(34,579 |
) |
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(7,057 |
) |
Inventories |
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(12,432 |
) |
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(3,476 |
) |
Other assets |
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(1,198 |
) |
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|
978 |
|
Deferred income taxes |
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|
(13 |
) |
|
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(7,846 |
) |
Accounts payable |
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16,703 |
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(22,917 |
) |
Accrued compensation |
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|
924 |
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|
(3,214 |
) |
Other accrued liabilities |
|
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(6,113 |
) |
|
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(12,782 |
) |
Deferred revenue |
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|
3,611 |
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(289 |
) |
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Net cash used in operating activities |
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(1,757 |
) |
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(10,995 |
) |
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Investing activities |
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Purchases of property, equipment and improvements |
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(21,419 |
) |
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(20,653 |
) |
Sale of short and long-term investments, net |
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38 |
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37,861 |
|
Proceeds from sale of equity investment |
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375 |
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|
90 |
|
Purchase of intangible assets |
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(375 |
) |
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Proceeds from disposal of product line |
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1,250 |
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Proceeds from sale of discontinued operation |
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40,683 |
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Purchases of subsidiaries, net of cash assumed |
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30,137 |
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Net cash provided by investing activities |
|
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20,552 |
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|
47,435 |
|
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Financing activities |
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Borrowings under line of credit |
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10,000 |
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Restricted cash and cash equivalents |
|
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(3,400 |
) |
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Proceeds from term loan |
|
|
4,500 |
|
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|
25,000 |
|
Issuance of 5% convertible notes |
|
|
98,057 |
|
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|
Repayment of convertible notes issued in connection with acquisition |
|
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|
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|
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(11,918 |
) |
Repayments of long-term debt |
|
|
(6,663 |
) |
|
|
(2,734 |
) |
Repayment of convertible notes |
|
|
(87,951 |
) |
|
|
(95,956 |
) |
Proceeds from exercise of stock options and stock purchase plan, net of
repurchase of unvested shares |
|
|
5,047 |
|
|
|
4,371 |
|
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|
Net cash provided by (used in) financing activities |
|
|
19,590 |
|
|
|
(81,237 |
) |
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
January 31, 2010 |
|
|
February 1, 2009 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
38,385 |
|
|
|
(44,797 |
) |
Cash and cash equivalents at beginning of period |
|
|
37,129 |
|
|
|
79,442 |
|
Cash and cash equivalents at end of period |
|
$ |
75,514 |
|
|
$ |
34,645 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,488 |
|
|
|
3,838 |
|
Cash paid for taxes |
|
$ |
408 |
|
|
|
898 |
|
Issuance of common stock and assumption of options and
warrants in connection with merger |
|
$ |
|
|
|
|
251,382 |
|
Issuance of common stock for repayment of convertible debt |
|
$ |
16,383 |
|
|
|
|
|
See accompanying notes.
7
FINISAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
Description of Business
Finisar Corporation (the Company) was incorporated in California in April 1987 and
reincorporated in Delaware in November 1999. The Company is a leading provider of optical
subsystems and components that are used to interconnect equipment in local area networks, or LANs,
storage area networks, or SANs, metropolitan area networks, or MANs, fiber-to-home networks, or
FTTx, cable television networks, or CATV, and wide area networks, or WANs. The Companys optical
subsystems consist primarily of transmitters, receivers, transceivers and transponders which
provide the fundamental optical-electrical interface for connecting various types of equipment used
in building these networks, including switches, routers and file servers used in wireline networks
as well as antennas and base stations for wireless networks. These products rely on the use of
digital and analog RF semiconductor lasers in conjunction with integrated circuit design and novel
packaging technology to provide a cost-effective means for transmitting and receiving digital
signals over fiber optic cable at speeds ranging from less than 1 Gbps to 40Gbps using a wide range
of network protocols and physical configurations over distances from 70 meters up to 200
kilometers. The Company supplies optical transceivers and transponders that allow point-to-point
communications on a fiber using a single specified wavelength or, bundled with multiplexing
technologies, can be used to supply multi-gigabit bandwith over several wavelengths on the same
fiber. The Company also provides products for dynamically switching network traffic from one
optical link to another across multiple wavelengths without first converting to an electrical
signal known as reconfigurable optical add/drop multiplexers, or ROADMs. The Companys line of
optical components consists primarily of packaged lasers and photodetectors used in transceivers,
primarily for LAN and SAN applications, and passive optical components used in building MANs.
Demand for the Companys products is largely driven by the continually growing need for additional
bandwidth created by the ongoing proliferation of data and video traffic that must be handled by
both wireline and wireless networks. The Companys manufacturing operations are vertically
integrated and include integrated circuit design and internal assembly and test capabilities for
the Companys optical subsystem products, as well as key
components used in those subsystems. The Company utilizes its
internal sources for many of the key components used in making its
products including lasers, photodetectors and integrated circuits, or
ICs designed by its own internal IC engineering teams. The
Company sells its optical subsystem and component products to manufacturers of storage systems,
networking equipment and telecommunication equipment or their contract manufacturers, such as
Alcatel-Lucent, Brocade, Cisco Systems, EMC, Emulex, Ericsson, Hewlett-Packard Company, Huawei,
IBM, Juniper, Qlogic, Siemens and Tellabs. These customers in turn sell their systems to businesses
and to wireline and wireless telecommunications service providers and cable TV operators,
collectively referred to as carriers.
The Company formerly provided network performance test systems through its Network Tools
Division. On July 15, 2009, the Company consummated the sale of substantially all of the assets of
the Network Tools Division to JDS Uniphase Corporation (JDSU). In accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 205-20, Presentation
of Financial Statements, Discontinued Operations (formerly referenced as Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long Lived
Assets), the operating results of this business and the associated assets and liabilities are
reported as discontinued operations in the accompanying condensed consolidated financial statements
for all periods presented. See Note 6 for further details regarding the sale of the division.
The accompanying unaudited condensed consolidated financial statements as of January 31, 2010
and for the three and nine month periods ended January 31, 2010 and February 1, 2009, have been
prepared in accordance with U.S. generally accepted accounting principles for interim financial
statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC), and include the accounts of Finisar Corporation and its wholly-owned subsidiaries
(collectively, Finisar or the Company). Inter-company accounts and transactions have been
eliminated in consolidation. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with U.S. generally accepted accounting
principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. In
the opinion of management, the unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of
the Companys financial position at January 31, 2010 and its operating results and cash flows for
the three and nine month periods ended January 31, 2010 and February 1, 2009. These unaudited
condensed consolidated financial statements should be read in conjunction with the Companys
audited financial statements and notes for the fiscal year ended April 30, 2009.
FASB Accounting Standards Codification
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles (GAAP)a replacement of SFAS No. 162
(SFAS 168), which establishes the FASB ASC as the source of authoritative U.S. GAAP recognized by
the FASB to be applied by non-governmental entities. This guidance is effective for interim periods
and fiscal years ending after September 15, 2009. On July 1, 2009, the Company adopted the
provisions of this guidance and as a result, the majority of references to historically issued
accounting pronouncements are now superseded by references to the FASB ASC. Certain accounting
pronouncements, such as SFAS 168, will remain authoritative until they are integrated into the FASB
ASC.
8
Fiscal Periods
The Company maintains 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).
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to
the current year presentation. These changes had no impact on the Companys previously reported
financial position, results of operations and cash flows.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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.
Convertible Senior Subordinated Notes
In May 2008, the FASB issued FASB ASC 470-20, Debt with Conversion and Other Options (ASC
470-20) (formerly referenced as FASB Staff Position (FSP) Accounting Principles Board Opinion
No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (FSP APB 14-1)). This standard addresses instruments commonly
referred to as Instrument C which requires the issuer to settle the principal amount in cash and
the conversion spread in cash or net shares at the issuers option. It requires that issuers of
these instruments account for their liability and equity components separately by bifurcating the
conversion option from the debt instrument, classifying the conversion option in equity and then
accreting the resulting discount on the debt as additional interest expense over the expected life
of the debt. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years and requires retrospective application to all periods presented.
On May 1, 2009, the Company adopted the provisions of ASC 470-20 on a retrospective basis and as a
result has recorded additional interest expense of $383,000 and $1.3 million for the three months
ended January 31, 2010 and February 1, 2009, respectively, and $2.7 million and $3.7 million for
the nine months ended January 31, 2010 and February 1, 2009, respectively, in its condensed
consolidated statement of operations. In addition, the retrospective adoption of ASC 470-20
decreased debt issuance costs included in other assets by an aggregate of $313,000, decreased
convertible senior notes, net included in long-term liabilities by $7.7 million, and increased
total stockholders equity by $7.4 million after a charge of $12.1 million to accumulated deficit
on its condensed consolidated balance sheet as of April 30, 2009. See Note 13 for the impact of the
adoption of ASC 470-20 on prior period balances.
Reverse Stock Split
On September 25, 2009, the Company effected a 1-for-8 reverse split of its common stock,
pursuant to previously obtained stockholder authorization. The number of authorized shares of
common stock was not changed. The reverse stock split reduced the Companys issued and outstanding
shares of common stock as of September 25, 2009 from approximately 517,161,351 shares of Common
Stock to approximately 64,645,169 shares.
All share and per-share information in the accompanying financial statements have been
restated retroactively to reflect the reverse stock split. The common stock and additional paid-in
capital accounts at April 30, 2009 were adjusted retroactively to reflect the reverse stock split.
2. Summary of Significant Accounting Policies
For a description of significant accounting policies, see Note 2, Summary of Significant
Accounting Policies, to the consolidated financial statements included in the Companys annual
report on Form 10-K for the fiscal year ended April 30, 2009. There have been no material changes
to the Companys significant accounting policies since the filing of the annual report on Form
10-K, except as noted below.
Segment Reporting
FASB ASC 280, Segment Reporting (formerly referenced as SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information) establishes standards for the way that public
business enterprises report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating segments in interim
financial reports. ASC 280 also establishes standards for related disclosures about products and
services, geographic areas and major customers. Prior to the first quarter of fiscal 2010, the
Company had determined that it operated in two segments consisting of optical subsystems and
components and network test systems. After the sale of the assets of the Network Tools Division to
JDSU in the first
9
quarter of fiscal 2010, the Company has one reportable segment comprising optical
subsystems and components. Optical subsystems
consist primarily of transceivers sold to manufacturers of storage and networking equipment
for SANs and LANs and MAN applications. Optical subsystems also include multiplexers,
de-multiplexers and optical add/drop modules for use in MAN applications. Optical components
consist primarily of packaged lasers and photo-detectors which are incorporated in transceivers,
primarily for LAN and SAN applications.
Recent Adoption of New Accounting Standards
As discussed earlier, the Company has adopted SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles (GAAP) a Replacement
of FASB Statement No. 162 (SFAS 168) and provides references to the topics of the codification in
this report alongside references to the previous standards.
In the first quarter of fiscal 2010, the Company adopted FASB ASC 470-20 which specifies that
issuers of convertible debt instruments that may be settled in cash upon conversion should
separately account for the liability and equity components in a manner that will reflect the
entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
See Note 13 for the impact of the adoption of ASC 470-20 on the Companys financial position and
results of operations.
In May 2009, the FASB issued FASB ASC 855, Subsequent Events (ASC 855) (formerly referenced
as SFAS No. 165, Subsequent Events). ASC 855 requires an entity to recognize in the financial
statements the effects of all subsequent events that provide additional evidence about conditions
that existed at the date of the balance sheet. For nonrecognized subsequent events that must be
disclosed to keep the financial statements from being misleading, an entity will be required to
disclose the nature of the event as well as an estimate of its financial effect, or a statement
that such an estimate cannot be made. In addition, ASC 855 requires an entity to disclose the date
through which subsequent events have been evaluated. ASC 855 is effective for the Company beginning
in the first quarter of fiscal 2010 and is required to be applied prospectively. The implementation
of this standard did not have any impact on the financial statements of the Company. Subsequent
events through the filing date of this Form 10-Q report have been evaluated for disclosure and
recognition.
In April 2009, the FASB issued FASB ASC 825-10, Financial Instruments (ASC 825-10) (formerly
referenced as SFAS No. 107-1) and FASB ASC 270-10-05-01, Interim Reporting (ASC 270-10-05-01)
(formerly referenced as Accounting Principle Board Opinion No. 28-1, Interim Disclosures About
Fair Value of Financial Instrument). ASC 825-10 and ASC 270-10-05-01 require fair value
disclosures in both interim and annual financial statements in order to provide more timely
information about the effects of current market conditions on financial instruments. ASC 825-10 and
ASC 270-10-05-01 are effective for interim and annual periods ending after June 15, 2009. The
Company adopted these standards as of May 1, 2009. As ASC 825-10 and ASC 270-10-05-01 relate
specifically to disclosures, these standards had no impact on the Companys financial condition,
results of operations or cash flows. See Note 19 for further discussion.
In December 2007, the FASB issued FASB ASC 810, Consolidation, Non-Controlling Interests (ASC
810) (formerly referenced as SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of Accounting Research Bulletin No. 51). ASC 810 addresses the accounting
and reporting standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest, and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated. ASC 810 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. ASC 810 is effective for fiscal years beginning after
December 15, 2008. The adoption of this standard had no impact on the Companys financial
condition, results of operations or cash flows.
In December 2007, the FASB issued FASB ASC 805, Business Combinations (ASC 805) (formerly
referenced as SFAS No. 141 (revised 2007), Business Combinations) which established principles and
requirements for how the acquirer of a business recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to enable users of the
financial statement to evaluate the nature and financial effects of the business combination. ASC
805 is effective for financial statements issued for fiscal years beginning after December 15,
2008. Accordingly, any business combinations the Company engages in subsequent to May 1, 2009 will
be accounted for in accordance with ASC 805. The Company expects ASC 805 will have an impact on its
consolidated financial statements but the nature and magnitude of the specific effects will depend
upon the nature, terms and size of any acquisitions it may consummate after the effective date.
There were no business combinations consummated in the first nine months of fiscal 2010 by the
Company.
Pending Adoption of New Accounting Standards
In January 2010, the FASB issued ASU 2009-14, Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements. ASU 2009-14 provides new disclosure
requirements and clarification for existing
10
disclosures requirements. More specifically, this
update will require (a) an entity to disclose separately the amounts of significant
transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for
the transfers; and (b) information about purchases, sales, issuances and settlements to be
presented separately (i.e. present the activity on a gross basis rather than net) in the
reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs).
This guidance clarifies existing disclosure requirements for the level of disaggregation used for
classes of assets and liabilities measured at fair value and requires disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair
value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of
existing disclosure are effective for fiscal years beginning after December 15, 2009, except for
the disclosure requirements related to the purchases, sales, issuances and settlements in the
rollforward activity of Level 3 fair value measurements. Those disclosure requirements are
effective for fiscal years ending after December 31, 2010. The Company does not believe the
adoption of this guidance will have a material impact on its consolidated financial statements.
In September 2009, the FASB amended the ASC as summarized in Accounting Standard Update
(ASU) 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements,
and ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As
summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry
specific revenue accounting guidance for software and software related transactions, tangible
products containing software components and non-software components that function together to
deliver the products essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been
amended (1) to provide updated guidance on whether multiple deliverables exist, how the
deliverables in an arrangement should be separated, and the consideration allocated; (2) to require
an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a
vendor does not have vendor-specific objective evidence (VSOE) or third-party evidence of selling
price; and (3) to eliminate the use of the residual method and require an entity to allocate
revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14
and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early
adoption permitted. Adoption may either be on a prospective basis or by retrospective application.
The Company believes the adoption of this guidance will not have a material impact on its financial
condition, results of operations or cash flows.
In June 2009, the FASB issued FASB ASC 860, Transfers and Servicing (ASC 860) (formerly
referenced as SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities). The
FASBs objective in issuing ASC 860 was to improve the relevance, representational faithfulness,
and comparability of the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial position,
financial performance, and cash flows; and a transferors continuing involvement, if any, in
transferred financial assets. ASC 860 must be applied as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. ASC 860 must be applied to transfers occurring on or after the
effective date. The Company is currently evaluating the potential impact, if any, of the adoption
of ASC 860 on its consolidated results of operations and financial condition.
3. Computation of Net Income (Loss) Per Share
Basic net income (loss) per share has been computed using the weighted-average number of
shares of common stock outstanding during the period. Diluted net income (loss) per share has been
computed using the weighted-average number of shares of common stock and dilutive potential common
shares from options and warrants (under the treasury stock method) and convertible notes (on an
as-if-converted basis) outstanding during the period.
11
The following table presents the calculation of basic and diluted net income (loss) per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
February 1, |
|
|
January 31, |
|
|
February 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Numerator for basic and diluted income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
5,616 |
|
|
$ |
(49,295 |
) |
|
$ |
(36,917 |
) |
|
$ |
(235,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic income (loss) per share from |
|
|
65,113 |
|
|
|
59,350 |
|
|
|
63,131 |
|
|
|
56,039 |
|
continuing operations- weighted average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and restricted stock units |
|
|
1,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
1,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income(loss) from continuing operations |
|
|
66,719 |
|
|
|
59,350 |
|
|
|
63,131 |
|
|
|
56,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share from continuing operations |
|
$ |
0.09 |
|
|
$ |
(0.83 |
) |
|
$ |
(0.58 |
) |
|
$ |
(4.20 |
) |
Diluted income (loss) per share from continuing operations |
|
$ |
0.08 |
|
|
$ |
(0.83 |
) |
|
$ |
(0.58 |
) |
|
$ |
(4.20 |
) |
The following table presents common stock equivalents related to potentially dilutive
securities excluded from the calculation of diluted net income (loss) per share from continuing
operations because they are anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
February 1, |
|
|
January 31, |
|
|
February 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Employee stock options and restricted stock units |
|
|
|
|
|
|
3,569 |
|
|
|
1,450 |
|
|
|
3,898 |
|
Conversion of convertible subordinated notes |
|
|
9,498 |
|
|
|
13,495 |
|
|
|
3,808 |
|
|
|
30,166 |
|
Warrants |
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,498 |
|
|
|
17,064 |
|
|
|
5,293 |
|
|
|
34,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Comprehensive Income (Loss)
The components of comprehensive income (loss) for the three and nine months ended January 31,
2010 and February 1, 2009 were as follows (in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
February 1, |
|
|
January 31, |
|
|
February 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
5,485 |
|
|
$ |
(49,382 |
) |
|
$ |
(36 |
) |
|
$ |
(234,585 |
) |
Foreign currency translation adjustment |
|
|
(589 |
) |
|
|
(1,382 |
) |
|
|
(7,751 |
) |
|
|
(10,563 |
) |
Change in unrealized gain (loss) on securities, net of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification adjustments for realized loss |
|
|
(2 |
) |
|
|
83 |
|
|
|
(18 |
) |
|
|
(983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
4,894 |
|
|
$ |
(50,681 |
) |
|
$ |
(7,805 |
) |
|
$ |
(246,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income, net of taxes, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
April 30, 2009 |
|
Net unrealized losses on available-for-sale securities |
|
$ |
(3 |
) |
|
$ |
(21 |
) |
Cumulative translation adjustment |
|
|
10,434 |
|
|
|
2,683 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
10,431 |
|
|
$ |
2,662 |
|
|
|
|
|
|
|
|
5. Business Combination
On August 29, 2008, the Company consummated a combination with Optium Corporation, a leading
designer and manufacturer of high performance optical subsystems for use in telecommunications and
cable TV network systems, through the merger of Optium with a wholly-owned subsidiary of the
Company. The Companys management and board of directors believe that the combination of the two
companies created the worlds largest supplier of optical components, modules and subsystems for
the communications industry and will leverage the Companys leadership position in the storage and
data networking sectors of the industry and Optiums leadership position in the telecommunications
and CATV sectors to create a more competitive industry participant. In addition, as a result of the
combination, management believes that the Company should be able to realize cost synergies related
to operating expenses and manufacturing costs resulting from (1) the transfer of production to
lower cost locations, (2) improved purchasing power associated with being a larger company and (3)
cost synergies associated with the integration of internally manufactured components into product
designs in place of components previously purchased by Optium in the open market. The Company has
accounted for the combination using the purchase method of accounting and as a result has included
the operating results of Optium in its consolidated financial results since the August 29, 2008
consummation date. The following table summarizes the components of the total purchase price (in
thousands):
|
|
|
|
|
Fair value of Finisar common stock issued |
|
$ |
242,821 |
|
Fair value of vested Optium stock options and warrants assumed |
|
|
8,561 |
|
Direct transaction costs |
|
|
2,431 |
|
|
|
|
|
Total purchase price |
|
$ |
253,813 |
|
|
|
|
|
At the closing of the merger, the Company issued 20,101,082 shares of its common stock valued
at approximately $242.8 million for all of the outstanding common stock of Optium. The value of the
shares issued was calculated using the five day average of the closing price of the Companys
common stock from the second trading day before the merger announcement date on May 16, 2008
through the second trading day following the announcement, or $12.08 per share. There were
approximately 2,150,325 shares of the Companys common stock issuable upon the exercise of the
outstanding options, warrants and restricted stock awards it assumed in accordance with the terms
of the merger agreement. The number of shares was calculated based on the fixed conversion ratio of
0.7827 shares of Finisar common stock for each share of Optium common stock. The purchase price
includes $8.6 million representing the fair market value of the vested options and warrants
assumed.
The Company also expects to recognize approximately $5.1 million of non-cash stock-based
compensation expense related to the unvested options assumed on the acquisition date. This expense
will be recognized beginning from the acquisition date over the remaining service periods of the
options. As of January 31, 2010, $1.7 million of this expense remained unrecognized and is expected
to be recognized over the weighted average remaining recognition period of 12 months. The
stock options and warrants were valued using the Black-Scholes option pricing model based on the
following weighted average assumptions:
|
|
|
|
|
Interest rate |
|
|
2.17 4.5 |
% |
Volatility |
|
|
47 136 |
% |
Expected life |
|
1 6 years |
|
Expected dividend yield |
|
|
0 |
% |
13
Direct transaction costs include estimated legal and accounting fees and other external costs
directly related to the merger.
Purchase Price Allocation
The purchase price was allocated to tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values at the acquisition date of August 29, 2008. The excess
of the purchase price over the fair value of the net assets acquired was allocated to goodwill. The
Company believes the fair value assigned to the assets acquired and liabilities assumed was based
on reasonable assumptions. The total purchase price has been allocated to the fair value of assets
acquired and liabilities assumed as follows (in thousands):
|
|
|
|
|
Tangible assets acquired and liabilities assumed: |
|
|
|
|
Cash and short-term investments |
|
$ |
31,825 |
|
Other current assets |
|
|
64,233 |
|
Fixed assets |
|
|
19,129 |
|
Other non-current assets |
|
|
889 |
|
Accounts payable and accrued liabilities |
|
|
(47,005 |
) |
Other liabilities |
|
|
(973 |
) |
|
|
|
|
Net tangible assets |
|
|
68,098 |
|
Identifiable intangible assets |
|
|
25,100 |
|
In-process research and development |
|
|
10,500 |
|
Goodwill |
|
|
150,115 |
|
|
|
|
|
Total purchase price allocation |
|
$ |
253,813 |
|
|
|
|
|
Identifiable Intangible Assets
Intangible assets consist primarily of developed technology, customer relationships and
trademarks. Developed technology is comprised of products that have reached technological
feasibility and are a part of Optiums product lines. This proprietary know-how can be leveraged to
develop new technology and products and improve our existing products. Customer relationships
represent Optiums underlying relationships with its customers. Trademarks represent the fair value
of brand name recognition associated with the marketing of Optiums products. The fair values of
identified intangible assets were calculated using an income approach and estimates and assumptions
provided by both Finisar and Optium management. The rates utilized to discount net cash flows to
their present values were based on the Companys weighted average cost of capital and ranged from
15% to 30%. This discount rate was determined after consideration for the Companys rate of return
on debt capital and equity and the weighted average return on invested capital. The amounts
assigned to developed technology, customer relationships, and trademarks were $12.1 million, $11.9
million and $1.1 million, respectively. The Company expects to amortize developed technology,
customer relationships, and trademarks on a straight-line basis over their weighted average
expected useful life of 10, 5, and 1 years, respectively. Developed technology is amortized into
cost of sales while customer relationships and trademarks are amortized into operating expenses.
In-Process Research and Development
The Company expensed in-process research and development (IPR&D) upon acquisition as it
represented incomplete Optium research and development projects that had not reached technological
feasibility and had no alternative future use as of the date of the merger. Technological
feasibility is established when an enterprise has completed all planning, designing, coding, and
testing activities that are necessary to establish that a product can be produced to meet its
design specifications including functions, features, and technical performance requirements. The
value assigned to IPR&D of $10.5 million was determined by considering the importance of each
project to the Companys overall development plan, estimating costs to develop the purchased IPR&D
into commercially viable products, estimating the resulting net cash flows from the projects when
completed and discounting the net cash flows to their present values based on the percentage of
completion of the IPR&D projects as of the date of the merger.
Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of
operations of the Company and Optium on a pro forma basis after giving effect to the merger at the
beginning of the fiscal year in which the merger was
consummated. The pro forma information is for informational purposes only and is not
necessarily indicative of the results of operations that would have been achieved if the merger had
happened at the beginning of the fiscal year in which the merger was consummated.
The unaudited pro forma financial information for the nine months ended February 1, 2009
combines the historical results of the Company for the nine months ended February 1, 2009 with the
historical results of Optium for the four months ended August 29, 2008.
14
The following pro forma financial information includes purchase accounting
adjustments for amortization charges from acquired identifiable intangible assets and depreciation
on acquired property and equipment (in thousands, except per share information):
|
|
|
|
|
|
|
Nine months ended |
|
|
|
February 1, 2009 |
|
Net revenue |
|
$ |
441,593 |
|
Net loss |
|
|
(245,287 |
) |
Net loss per share basic and diluted |
|
$ |
(4.38 |
) |
6. Discontinued Operations
During the three months ended August 2, 2009, the Company completed the sale of substantially
all of the assets of its Network Tools Division to JDSU. The Company received $40.6 million in cash
and recorded a net gain on sale of the business of $35.9 million before income taxes, which is
included in income from discontinued operations, net of tax, in the Companys condensed
consolidated statements of operations. In accordance with FASB ASC 360, Property, Plant and
Equipment- Impairment or Disposal of Long Lived Assets (ASC 360) (formerly referenced as SFAS
144, Accounting for the Impairment or Disposal of Long Lived Assets), the operating results of this
business, through January 31, 2010 and for all applicable prior periods, are reported as
discontinued operations in the condensed consolidated financial statements. The assets and
liabilities related to this business have been classified as discontinued operations in the
consolidated financial statements for all periods presented. As a result, the prior period
comparative financial statements have been restated. In accordance with FASB ASC 230, Statement of
Cash Flows (formerly referenced as SFAS No. 95, Statement of Cash Flows), the Company has elected
not to separately disclose the cash flows associated with the discontinued operations in the
condensed consolidated statements of cash flows.
The following table summarizes results from discontinued operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
February 1, |
|
|
January 31, |
|
|
February 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net revenue |
|
$ |
|
|
|
$ |
10,274 |
|
|
$ |
6,753 |
|
|
$ |
34,972 |
|
Gross profit |
|
|
|
|
|
|
6,322 |
|
|
|
4,892 |
|
|
|
23,141 |
|
Income (loss) from discontinued operations |
|
|
(131 |
) |
|
|
(87 |
) |
|
|
36,881 |
|
|
|
903 |
|
Gain (loss) on sale of discontinued operations |
|
|
(165 |
) |
|
|
|
|
|
|
35,888 |
|
|
|
|
|
The following table summarizes assets and liabilities classified as discontinued operations
(in thousands):
15
|
|
|
|
|
|
|
April 30, 2009 |
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Prepaid expenses |
|
$ |
327 |
|
Inventories |
|
|
4,536 |
|
|
|
|
|
Total current assets |
|
|
4,863 |
|
|
|
|
|
|
Purchased technoloy, net |
|
$ |
204 |
|
Other intangible assets, net |
|
|
889 |
|
Property, plant and improvements, net |
|
|
2,434 |
|
|
|
|
|
Total assets of discontinued operations |
|
$ |
8,390 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities: |
|
|
|
|
Warranty accrual |
|
|
200 |
|
Deferred revenue |
|
|
2,960 |
|
|
|
|
|
|
|
|
3,160 |
|
Non-current liabilities associated with discontinued operations |
|
|
|
|
Deferred Revenue |
|
|
650 |
|
|
|
|
|
Total liabilities of discontinued operations |
|
$ |
3,810 |
|
|
|
|
|
The following table summarizes the gain on sale of discontinued operations (in thousands):
|
|
|
|
|
Gross proceeds from sale |
|
$ |
40,683 |
|
Assets sold |
|
|
|
|
Inventory |
|
|
(4,814 |
) |
Property and equipment |
|
|
(2,460 |
) |
Intangibles |
|
|
(845 |
) |
Liabilities transferred |
|
|
|
|
Deferred revenue |
|
|
3,102 |
|
Other accruals |
|
|
312 |
|
Other charges |
|
|
(90 |
) |
|
|
|
|
|
|
$ |
35,888 |
|
|
|
|
|
In connection with the sale of the assets of the Network Tools Division, the Company entered
into a transition services agreement with the buyer. Under this agreement, the Company will provide
manufacturing services to the buyer for a period which is not expected to be more than one year.
The buyer will reimburse the Company for material costs plus 10% for the first six months, plus 12%
for the first three months of any extension and plus 15% for the second three months of any
extension. The buyer will also pay the Company a fixed fee of $50,000 per month to cover
manufacturing overhead and direct labor costs. Under the agreement, the buyer will also pay a fixed
fee for leasing the Companys facilities and a service fee for the use of the Companys information
technology, communication services and employee services. The duration for which these services
will be provided is not expected to be more than twelve months. During the second quarter of fiscal
2010, the Company incurred net operating expense of $67,000 for providing manufacturing services to
the buyer. During the third quarter of fiscal 2010, the Company incurred net operating expense of
$131,000 for providing manufacturing services to the buyer which included an immaterial adjustment
of $165,000 recorded as adjustment to the gain on sale of discontinued operations. Total operating
expenses incurred in relation to the transition services agreement from July 15, 2009 through
January 31, 2010 were $33,000.
7. Inventories
Inventories consist of the following (in thousands):
16
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
April 30, 2009 |
|
Raw materials |
|
$ |
38,798 |
|
|
$ |
36,153 |
|
Work-in-process |
|
|
49,204 |
|
|
|
36,042 |
|
Finished goods |
|
|
34,678 |
|
|
|
35,569 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
122,680 |
|
|
$ |
107,764 |
|
|
|
|
|
|
|
|
During the three and nine months ended January 31, 2010, the Company recorded charges of $4.1
million and $18.9 million, respectively, for excess and obsolete inventory, and sold inventory of
$4.3 million and $11.4 million, respectively, that was written-off in previous periods and
therefore had an associated cost of revenue of zero.
During the three and nine months ended February 1, 2009, the Company recorded charges of $3.6
million and $9.5 million, respectively, for excess and obsolete inventory, and sold inventory of
$3.0 million and $5.8 million, respectively that was written-off in previous periods and therefore
had an associated cost of revenue of zero..
8. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
April 30, 2009 |
|
Buildings |
|
$ |
7,807 |
|
|
$ |
7,416 |
|
Computer equipment |
|
|
34,517 |
|
|
|
33,232 |
|
Office equipment, furniture and fixtures |
|
|
3,572 |
|
|
|
3,739 |
|
Machinery and equipment |
|
|
169,248 |
|
|
|
154,505 |
|
Leasehold improvements |
|
|
18,069 |
|
|
|
17,246 |
|
Construction-in-process |
|
|
2,817 |
|
|
|
445 |
|
|
|
|
Total |
|
|
236,030 |
|
|
|
216,583 |
|
Accumulated depreciation and amortization |
|
|
(152,104 |
) |
|
|
(134,977 |
) |
|
|
|
Property, equipment and improvements (net) |
|
$ |
83,926 |
|
|
$ |
81,606 |
|
|
|
|
17
9. Intangible Assets Including Goodwill
Intangible Assets
The following table reflects intangible assets subject to amortization as of January 31, 2010
and April 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
75,936 |
|
|
$ |
(63,054 |
) |
|
$ |
12,882 |
|
Purchased trade name |
|
|
1,172 |
|
|
|
(1,172 |
) |
|
|
|
|
Purchased customer relationships |
|
|
15,970 |
|
|
|
(4,186 |
) |
|
|
11,784 |
|
Purchased patents |
|
|
375 |
|
|
|
(44 |
) |
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
93,453 |
|
|
$ |
(68,456 |
) |
|
$ |
24,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2009 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
75,936 |
|
|
$ |
(59,478 |
) |
|
$ |
16,458 |
|
Purchased trade name |
|
|
1,172 |
|
|
|
(805 |
) |
|
|
367 |
|
Purchased customer relationships |
|
|
15,970 |
|
|
|
(2,909 |
) |
|
|
13,061 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
93,078 |
|
|
$ |
(63,192 |
) |
|
$ |
29,886 |
|
|
|
|
|
|
|
|
|
|
|
Estimated remaining amortization expense for each of the next five fiscal years ending April
30, is as follows (in thousands):
|
|
|
|
|
Year |
|
Amount |
|
2010 |
|
$ |
1,592 |
|
2011 |
|
|
6,222 |
|
2012 |
|
|
5,405 |
|
2013 |
|
|
3,993 |
|
2014 and beyond |
|
|
7,785 |
|
|
|
|
|
Total |
|
$ |
24,997 |
|
|
|
|
|
Goodwill Impairment
During the second quarter of fiscal 2009, the Company performed a goodwill impairment analysis
as it concluded that there were sufficient indicators to require an interim goodwill impairment
analysis. Among these indicators were a significant deterioration in the macroeconomic environment
largely caused by the widespread unavailability of business and consumer credit, a significant
decrease in the Companys market capitalization as a result of a decrease in the trading price of
its common stock to $4.88 at the end of the quarter and a decrease in internal expectations for
near term revenues, especially those expected to result from the Optium merger. For the purposes of
this analysis, the Companys estimates of fair value were based on a combination of the income
approach, which estimates the fair value of its reporting units based on future discounted cash
flows, and the market approach, which estimates the fair value of its reporting units based on
comparable market prices. As of the filing of its quarterly report on Form 10-Q for the second
quarter of fiscal 2009, the Company had not completed its analysis due to the complexities involved
in determining the implied fair value of the goodwill for the optical subsystems and components
reporting unit, which is based on the determination of the fair value of all assets and liabilities
of this reporting unit. However, based on the work performed through the date of the filing of the
quarterly report for the second quarter of fiscal 2009, the Company concluded that an impairment
loss was probable and could be reasonably estimated. Accordingly, it recorded a $178.8 million
non-cash goodwill impairment charge, representing its best estimate of the impairment loss during
the second quarter of fiscal 2009.
While finalizing its impairment analysis during the third quarter of fiscal 2009, the Company
concluded that there were additional indicators sufficient to require another interim goodwill
impairment analysis. Among these indicators were a worsening of the macroeconomic environment
largely caused by the unavailability of business and consumer credit, an additional decrease in the
Companys market capitalization as a result of a decrease in the trading price of its common stock
to $4.08 at the end of the quarter
18
and a further decrease in internal expectations for near term
revenues. For the purposes of this analysis, the Companys estimates of fair value were again based
on a combination of the income approach and the market approach. As of the filing of its quarterly
report on Form 10-Q for the third quarter of fiscal 2009, the Company had not completed its
analysis due to the complexities involved in determining the implied fair value of the goodwill for
the optical subsystems and components reporting unit, which is based on the determination of the
fair value of all assets and liabilities of this reporting unit. However, based on the work
performed through the date of the filing of the quarterly report for the third quarter of fiscal
2009, the Company concluded that an impairment loss was probable and could be reasonably estimated.
Accordingly, it recorded an additional $46.5 million non-cash goodwill impairment charge,
representing its best estimate of the impairment loss during the third quarter of fiscal 2009.
Giving effect to the impairment charges, the remaining balance of goodwill at February 1, 2009 was
$13.9 million, all of which related to the optical subsystems and components reporting unit. No
adjustments were subsequently made to the initial estimates of goodwill impairment loss and the
remaining balance of goodwill as of February 1, 2009 of $13.9 million was determined to be
impaired and was recorded as an impairment loss in the fourth quarter of fiscal 2009.
19
10. Investments
Available-for-Sale Investments
The following table presents a summary of the Companys available-for-sale investments
measured at fair value on a recurring basis as of January 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Active |
|
|
Other |
|
|
|
|
|
|
|
|
|
Markets For |
|
|
Observable |
|
|
Significant |
|
|
|
|
|
|
Identical |
|
|
Remaining |
|
|
Unobservable |
|
|
|
|
Assets Measured at Fair Value on a Recurring Basis |
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Total |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
Cash equivalents and available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
342 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
342 |
|
Mortgage-backed debt |
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
67 |
|
|
|
|
Total cash equivalents and available-for-sale investments |
|
$ |
342 |
|
|
$ |
67 |
|
|
$ |
|
|
|
$ |
409 |
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,172 |
|
Restricted cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
78,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
75,514 |
|
Restricted cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,400 |
|
Short-term available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
78,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a summary of the Companys available-for-sale investments
measured at fair value on a recurring basis as of April 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Active |
|
|
Other |
|
|
|
|
|
|
|
|
|
Markets For |
|
|
Observable |
|
|
Significant |
|
|
|
|
|
|
Identical |
|
|
Remaining |
|
|
Unobservable |
|
|
|
|
Assets Measured at Fair Value on a Recurring Basis |
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Total |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
Cash equivalents, and available-for-sales investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
25 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
25 |
|
Mortgage-backed debt |
|
|
|
|
|
$ |
92 |
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents and available-for-sale investments |
|
$ |
25 |
|
|
$ |
92 |
|
|
$ |
|
|
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,129 |
|
Short-term available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the Companys available-for-sale investments by contractual
maturity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
April 30, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Market |
|
|
Amortized |
|
|
Unrealized |
|
|
Market |
|
|
|
Cost |
|
|
Loss |
|
|
Value |
|
|
Cost |
|
|
Loss |
|
|
Value |
|
Mature in less than one year |
|
$ |
70 |
|
|
$ |
3 |
|
|
$ |
67 |
|
|
$ |
113 |
|
|
$ |
21 |
|
|
$ |
92 |
|
Gross realized gains and losses for the three and nine months ended January 31, 2010 and
February 1, 2009 were calculated based on the specific identification method and were immaterial.
Sale of an Available-for-Sale Equity Security
During fiscal 2008, the Company granted an option to a third party to acquire 3.8 million
shares of stock of a publicly-held company held by the Company. The Company determined that this
option should be accounted for under the provisions of FASB ASC
20
815, Derivatives and Hedging
(formerly referenced as SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities), which requires the Company to calculate the fair value of the option at the end of
each reporting period, upon the exercise of the option or at the time the option expires and
recognize the change in fair value through other income (expense), net. As of April 30, 2008, the
Company had recorded a current liability of $1.1 million related to the fair value of this option.
During the first quarter of fiscal 2009, the third party did not exercise its option to purchase
any of the shares and the option expired. Accordingly, the Company reduced the carrying value of
the option liability to zero and recorded $1.1 million of other income during the first quarter of
fiscal 2009. During the second quarter of fiscal 2009, the Company sold 300,000 shares of this
investment for $90,000 resulting in a realized loss of $12,000. As of November 2, 2008, the Company
classified the remaining 3.5 million shares as available-for-sale securities in accordance with
FASB ASC 320, Investments- Debt and Equity Securities (formerly referenced as SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities). The Company determined that the
full carrying value of these shares was other-than-temporarily impaired and it recorded a loss of
$1.2 million during the second quarter of fiscal 2009.
11. Minority Investments
The carrying value of the Companys minority investments at April 30, 2009 was $14.3 million
and was comprised of minority investment in four privately held companies accounted for under the
cost method. The Company concluded that there were sufficient indicators during the second quarter
of fiscal 2010 to require an investment impairment analysis of its investment in one of these
companies. Among these indicators was the completion of a new round of equity financing by the
investee and the resultant conversion of the Companys preferred stock holdings to common stock.
The Company determined that the value of its minority equity investment was impaired and recorded a
$2.0 million impairment loss as other expense on the condensed consolidated statement of
operations. At January 31, 2010 the carrying value of minority investments was $12.3 million and
was comprised of the Companys minority investment in three privately held companies.
During the first half of fiscal 2009, the Company completed the sale of a product line to a
third party in exchange for an 11% equity interest in the acquiring company in the form of
preferred stock and a note convertible into preferred stock. This product line was related to the
Companys Network Tools Division, the remaining assets of which were sold to JDSU in the first
quarter of fiscal 2010 and accounted for as discontinued operations. For accounting purposes, no
value was originally placed on the equity interest due to the uncertainty in the recoverability of
this investment and note. The sale included the transfer of certain assets and liabilities and the
retention of certain obligations related to the sale of the product line resulting in a net loss of
approximately $919,000 which was included in operating expenses. In the first quarter of fiscal
2010, the Company sold the note and all of the preferred stock back to the buyer of the product
line for $1.2 million in cash and recorded the $1.2 million as income from discontinued operations.
12. Other Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
April 30, 2009 |
|
Warranty accrual (Note 18) |
|
$ |
6,036 |
|
|
$ |
6,413 |
|
Other liabilities |
|
|
15,023 |
|
|
|
24,100 |
|
|
|
|
|
|
|
|
Total |
|
$ |
21,059 |
|
|
$ |
30,513 |
|
|
|
|
|
|
|
|
13. Convertible Debt
5.0% Convertible Senior Notes due 2029
On October 15, 2009, the Company sold $100 million aggregate principal amount of 5.0%
Convertible Senior Notes due 2029. The notes will mature on October 15, 2029, unless earlier
repurchased, redeemed or converted. Interest on the notes will be payable semi-annually in arrears
at a rate of 5.0% per annum on each April 15 and October 15, beginning on April 15, 2010. The notes
are senior unsecured and unsubordinated obligations of the Company, and rank equally in right of
payment with the Companys other unsecured and unsubordinated indebtedness, but are effectively
subordinated to the Companys secured indebtedness and liabilities to the extent of the value of
the collateral securing those obligations, and structurally subordinated to the indebtedness and
other liabilities of the Companys subsidiaries. Holders may convert the notes into shares of the
Companys common stock, at their option at any time prior to the close of business on the trading
day before the stated maturity date. The initial conversion rate is 93.6768 shares of Common Stock
per $1,000 principal amount of the notes (equivalent to an initial conversion price of
approximately $10.68 per share of common stock), subject to adjustment upon the occurrence of
certain events. Upon conversion of the notes, holders will
21
receive shares of common stock unless
the Company obtains consent from a majority of the holders to deliver cash or a combination of cash
and shares of common stock in satisfaction of its conversion obligation. If a holder elects to
convert the notes in connection with a fundamental change (as defined in the indenture) that
occurs prior to October 15, 2014, the conversion rate applicable to the notes will be increased as
provided in the indenture.
Holders may require the Company to redeem, for cash, all or part of their notes upon a
fundamental change at a redemption price equal to 100% of the principal amount of the notes being
redeemed plus accrued and unpaid interest up to, but excluding, the redemption date. Holders may
also require the Company to redeem, for cash, any of their notes on October 15, 2014, October 15,
2016, October 15, 2019 and October 15, 2024 at a redemption price equal to 100% of the principal
amount of the Notes being redeemed plus accrued and unpaid interest up to, but excluding, the
redemption date.
The Company has the right to redeem the notes in whole or in part at a redemption price equal
to 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest to,
but excluding, the redemption date, at any time on or after October 22, 2014 if the last reported
sale price per share of the Companys common stock exceeds 130% of the conversion price for at
least 20 trading days within a period of 30 consecutive trading days ending within five trading
days of the date on which the Company provides the notice of redemption.
Convertible Debt Balances
The Companys convertible senior notes, convertible subordinated notes and convertible senior
subordinated notes as of January 31, 2010 and April 30, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Interest |
|
|
Due in |
|
Description |
|
Amount |
|
|
Rate |
|
|
Fiscal year |
|
As of January 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes |
|
$ |
100,000 |
|
|
|
5.00 |
% |
|
|
2030 |
|
Convertible subordinated notes |
|
|
3,900 |
|
|
|
2.50 |
% |
|
|
2011 |
|
Convertible senior subordinated notes |
|
|
25,681 |
|
|
|
2.50 |
% |
|
|
2011 |
|
Unamortized debt discount |
|
|
(1,101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior subordinated notes, net |
|
|
24,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
128,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes |
|
$ |
50,000 |
|
|
|
2.50 |
% |
|
|
2011 |
|
Convertible senior subordinated notes |
|
|
92,000 |
|
|
|
2.50 |
% |
|
|
2011 |
|
Unamortized debt discount |
|
|
(7,745 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior subordinated notes, net |
|
|
84,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
134,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 1, the Company adopted the provisions of FASB ASC 470-20 in the first
quarter of fiscal 2010. The provisions of this ASC apply to the Companys 2 1/2% Convertible Senior
Subordinated Notes due 2010, and the Company has accounted for the debt and equity components of
the notes to reflect the estimated nonconvertible debt borrowing rate at the date of issuance of
8.59%. The following table presents the previously reported amounts, along with the adjusted
amounts reflecting the adoption of ASC 470-20.
22
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Operations (Unaudited) |
|
|
|
|
As Reported |
|
|
As Adjusted |
|
|
Effect of Change |
|
|
|
(in thousands, except per share data) |
|
Three Months Ended February 1, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
1,469 |
|
|
$ |
2,724 |
|
|
$ |
1,255 |
|
Loss from continuing operations |
|
|
(47,270 |
) |
|
|
(49,295 |
) |
|
|
(2,025 |
) |
Net loss |
|
|
(47,357 |
) |
|
|
(49,382 |
) |
|
|
(2,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(0.80 |
) |
|
|
(0.83 |
) |
|
|
(0.03 |
) |
Diluted |
|
|
(0.80 |
) |
|
|
(0.83 |
) |
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported |
|
|
As Adjusted |
|
|
Effect of Change |
|
|
|
(in thousands, except per share data) |
|
Nine Months Ended February 1, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
8,355 |
|
|
$ |
12,080 |
|
|
$ |
3,725 |
|
Loss from continuing operations |
|
|
(231,085 |
) |
|
|
(235,488 |
) |
|
|
(4,403 |
) |
Net loss |
|
|
(230,182 |
) |
|
|
(234,585 |
) |
|
|
(4,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(4.12 |
) |
|
|
(4.20 |
) |
|
|
(0.08 |
) |
Diluted |
|
|
(4.12 |
) |
|
|
(4.20 |
) |
|
|
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheet (Unaudited) |
|
|
|
|
As Reported |
|
|
As Adjusted |
|
|
Effect of Change |
|
|
|
(in thousands) |
|
As of April 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
$ |
2,897 |
|
|
$ |
2,584 |
|
|
$ |
(313 |
) |
Convertible notes |
|
|
142,000 |
|
|
|
134,255 |
|
|
|
(7,745 |
) |
Additional paid in capital |
|
|
1,811,298 |
|
|
|
1,831,224 |
* |
|
|
19,926 |
|
Accumulated deficit |
|
|
(1,699,648 |
) |
|
|
(1,711,725 |
) |
|
|
(12,077 |
) |
|
|
|
* |
|
Includes adjustment of $417,000 due to reverse split |
Interest (cash interest cost) on the 2 1/2% Convertible Senior Subordinated Notes is payable
semiannually on April 15 and October 15. The notes become convertible, at the option of the holder,
upon the trading price of the Companys common stock reaching $39.36 for a period of time at a
conversion price of $26.24 per share, which is equal to a rate of approximately 38.1097 shares of
common stock per $1,000 principal amount of the notes. The conversion price is subject to
adjustment. The notes contain a net share settlement feature which requires that, upon conversion
of the notes into common stock, Finisar will pay holders in cash for up to the principal amount of
the converted notes and that any amounts in excess of the cash amount will be settled in shares of
common stock. At January 31, 2010 the if-converted value of the 2 1/2% Convertible Senior
Subordinated Notes did not exceed the principal balance.
At January 31, 2010 the $1.1 million unamortized debt discount had a remaining amortization
period of approximately 9 months.
The following table provides additional information about the Companys 2 1/2% Convertible
Senior Subordinated Notes that may be settled for cash (dollars in thousands):
23
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
April 30, 2009 |
|
Carrying amount of the equity component |
|
$ |
19,283 |
|
|
$ |
19,509 |
|
|
|
|
|
|
|
|
|
|
Effective interest rate on liability component |
|
|
8.59 |
% |
|
|
8.59 |
% |
The following table presents the associated interest expense related to the Companys 2 1/2%
Convertible Senior Subordinated Notes that may be settled in cash, which consists of both the
contractual interest coupon (cash interest cost) and amortization of the discount on the liability
(non-cash interest cost) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
February 1, |
|
|
January 31, |
|
|
February 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Non-cash interest cost |
|
$ |
383 |
|
|
$ |
1,255 |
|
|
$ |
2,674 |
|
|
$ |
3,725 |
|
Cash interest cost |
|
|
171 |
|
|
|
613 |
|
|
|
1,256 |
|
|
|
1,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
554 |
|
|
$ |
1,868 |
|
|
$ |
3,930 |
|
|
$ |
5,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of Exchange Offers
On August 11, 2009, the Company exchanged $47,504,000 aggregate principal amount of its 2 1/2%
Convertible Senior Subordinated Notes due 2010 and its 2 1/2% Convertible Subordinated Notes due
2010 pursuant to exchange offers which commenced on July 9, 2009 at a price of $870 for each $1,000
principal amount of notes. The consideration for the exchange consisted of (i) $525 in cash and
(ii) 596 shares of the Companys common stock per $1,000 principal amount of notes. The Company
issued approximately 3.5 million shares of common stock and paid out approximately $24.9 million in
cash to the former holders of notes validly tendered and not withdrawn in the exchange offers. The
Company settled $33,100,000, or 66.2%, of the $50,000,000 aggregate outstanding principal amount of
2 1/2% Convertible Subordinated Notes due 2010; and $14,404,000, or approximately 15.7%, of the
$92,000,000 aggregate outstanding principal amount of 2 1/2% Convertible Senior Subordinated Notes
due 2010. The total consideration paid in the exchange was approximately $4.7 million less than the par value of the notes retired.
In accordance with the provisions of ASC 470-20, this exchange was considered to be an
induced conversion
and the retirement of the notes was accounted for as if they had been converted according to
their original terms, with that value compared to the fair value of the consideration paid in
the exchange offers. The original conversion price of the notes was $30.08 per share.
The Company incurred $1.5 million of
expenses in connection with the exchange offers which was recorded as loss on debt extinguishment
in the condensed consolidated statement of operations.
Repurchases of Convertible Senior Subordinated Notes
During the first nine months of fiscal 2010, the Company repurchased an aggregate of $51.9
million principal amount of its 2 1/2% Senior Subordinated Notes due 2010 in privately negotiated
transactions for a total purchase price of $50.3 million plus accrued interest of $183,000 and
recorded a loss on debt extinguishment of $1.3 million in connection with these transactions.
Repurchase of Convertible Subordinated Notes
During the first nine months of fiscal 2010, the Company repurchased $13.0 million principal
amount of the 2 1/2% Subordinated Notes due 2010 in privately negotiated transactions for a total
purchase price of $12.7 million plus accrued interest of $11,000 and recorded a gain on debt
extinguishment of $308,000 in connection with these transactions.
14. Long-term Debt
In December 2005, the Company entered into a note and security agreement with a financial
institution. Under this agreement, the Company borrowed $9.9 million at an interest rate of 5.9%
per annum. The note was payable in 60 equal monthly installments beginning in January 2006 and was
secured by certain property and equipment of the Company. In January 2009, the agreement was
amended to increase the rate of interest from 5.9% to 12.9% per annum. In November 2009, the
Company repaid the outstanding balance of this loan in full.
24
In July 2008, the Companys Malaysian subsidiary entered into two separate loan agreements
with a Malaysian bank. Under these agreements, the Companys Malaysian subsidiary borrowed a total
of $20 million at an initial interest rate of 5.05% per annum. The first loan is payable in 20
equal quarterly installments of $750,000 beginning in January 2009, and the second loan is payable
in 20 equal quarterly installments of $250,000 beginning in October 2008. Both loans are secured by
certain property of the Companys Malaysian subsidiary, guaranteed by the Company and subject to
certain covenants. The Company was in compliance with all covenants associated with these loans as
of January 31, 2010 and April 30, 2009. The following table provides information regarding the
current and long-term portion of the remaining principal outstanding under these notes as of the
respective dates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
Current portion of long-term debt |
|
$ |
4,000 |
|
|
$ |
4,000 |
|
Long-term debt, net of current portion |
|
|
10,750 |
|
|
|
13,750 |
|
|
|
|
|
|
|
|
Total |
|
$ |
14,750 |
|
|
$ |
17,750 |
|
|
|
|
|
|
|
|
15. Short- term Debt
Chinese Bank Loan
In January 2010, the Companys Chinese subsidiary entered into a loan agreement with a bank in
China. Under this agreement, the Companys Chinese subsidiary borrowed a total of $4.5 million at
an initial interest rate of 2.6% per annum. The loan is payable on January 6, 2013. The Bank has
the right to terminate the agreement on January 6 of each year, with or without reason, in which
case the outstanding balance would become due and payable. Interest is payable quarterly.
Former Credit Facility
On October 23, 2009, the Company terminated its revolving line of credit agreement with
Silicon Valley Bank. This line of credit agreement allowed for advances in the aggregate amount of
$25 million subject to certain restrictions and limitations. Borrowings under this line were
collateralized by substantially all of the Companys assets except its intellectual property rights
and bore interest, at the Companys option, at either the banks prime rate plus 0.5% or LIBOR plus
3%. There were no outstanding borrowings under this revolving line as of April 30, 2009 or on the
date of termination of the agreement.
New Credit Facility
On October 2, 2009, the Company entered into an agreement with Wells Fargo Foothill, LLC to
establish a new four-year $70 million senior secured revolving credit facility. Borrowings under
the credit facility bear interest at rates based on the prime rate and LIBOR plus variable margins,
under which applicable interest rates currently range from 5.75% to 7.00% per annum. Borrowings are
guaranteed by the Companys U.S. subsidiaries and secured by substantially all of the assets of the
Company and its U.S. subsidiaries. The credit facility matures four years following the date of the
agreement, subject to certain conditions. The Company was in compliance with all covenants
associated with this facility as of January 31, 2010. The Company had $10 million of outstanding
borrowings under this revolving line of credit at January 31, 2010 which were subsequently repaid.
As of January 31, 2010, the availability of credit under the facility was reduced by $1.6 million
due to certain loan reserves and by $3.5 million for outstanding letters of credit secured under
this agreement.
16. Letter of Credit Reimbursement Agreement
In April 2005, the Company entered into a letter of credit reimbursement agreement with
Silicon Valley Bank. Several amendments were made to the agreement subsequently. The last amendment
was on April 30, 2009. Under the terms of the amended agreement, Silicon Valley Bank agreed to
provide to the Company, through October 24, 2009, a $4.0 million letter of credit facility covering
existing letters of credit issued by Silicon Valley Bank and any other letters of credit that may
be required by the Company. The cost related to the credit facility consisted of the banks out of
pocket expenses associated with the credit facility. The credit facility was unsecured but included
a negative pledge that prohibited the Company from creating a security interest in any of its
assets in favor of a subsequent creditor without the approval of Silicon Valley Bank. Outstanding
letters of credit secured under this agreement at April 30, 2009 totaled $3.4 million. On October
23, 2009, the Company terminated this letter of credit agreement. As of January 31, 2010, the $3.4
million of letters of credit issued by Silicon Valley Bank remained outstanding, as the Company was
in the process of obtaining new replacement letters of credit through Wells Fargo Bank. Following
the termination of the agreement, the Company secured the outstanding letters of credit with
restricted certificates of deposit of $3.4 million which are
presented on the condensed consolidated balance sheet as restricted cash and cash equivalents.
25
17. Non-recourse Accounts Receivable Purchase Agreement
On October 28, 2004, the Company entered into a non-recourse accounts receivable purchase
agreement with Silicon Valley Bank. Several amendments were subsequently made to the agreement. The
last amendment was on October 28, 2008. Under the terms of the amended agreement, the Company could
sell to Silicon Valley Bank, through October 24, 2009 up to $16 million of qualifying receivables
whereby all right, title and interest in the Companys invoices were purchased by Silicon Valley
Bank. In these non-recourse sales, the Company removed sold receivables from its books and records
no liability related to the sale, as the Company has assessed that the sales should be accounted
for as true sales in accordance with FASB ASC 860, Transfers and Servicing. The discount interest
for the facility is based on the number of days in the discount period multiplied by Silicon Valley
Banks prime rate plus 0.25% and a non-refundable administrative fee of 0.25% of the face amount of
each invoice. During the three and nine months ended February 1, 2009 the Company sold
approximately $12.1 million and $27.3 million, respectively of its trade receivables. During
the first half of fiscal 2010, the Company did not sell any receivables under the facility. On
October 23, 2009, the Company terminated this non-recourse accounts receivable purchase agreement
with Silicon Valley Bank.
18. Warranty
The Company generally offers a one-year limited warranty for its products. The specific terms
and conditions of these warranties vary depending upon the product sold. The Company estimates the
costs that may be incurred under its basic limited warranty and records a liability in the amount
of such costs based on revenue recognized. Factors that affect the Companys warranty liability
include the historical and anticipated rates of warranty claims. The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Companys warranty liability during the following period were as follows (in
thousands):
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
January 31, 2010 |
|
Beginning balance at April 30, 2009 |
|
$ |
6,413 |
|
Additions during the period based on product sold |
|
|
2,795 |
|
Settlements |
|
|
(1,067 |
) |
Changes in liability for pre-existing warranties, including expirations |
|
|
(2,105 |
) |
|
|
|
|
Ending balance at January 31, 2010 |
|
$ |
6,036 |
|
|
|
|
|
19. Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments presents amounts
that have been determined using available market information and appropriate valuation
methodologies. The estimated fair values of the Companys financial instruments as of January 31,
2010 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
|
Carrying Amount |
|
|
Fair value |
|
Financial assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
75,514 |
|
|
$ |
75,514 |
|
Restricted cash and cash equivalents |
|
|
3,400 |
|
|
|
3,400 |
|
Short-term available-for-sale investments |
|
|
67 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
Convertible notes |
|
|
128,480 |
|
|
|
149,305 |
|
Short-term debt |
|
|
14,500 |
|
|
|
14,500 |
|
Long-term debt |
|
|
14,750 |
|
|
|
12,890 |
|
Cash and cash equivalents The fair value of cash and cash equivalents approximates its carrying
value.
Restricted cash and cash equivalents The fair value of restricted cash and cash equivalents
approximates its carrying value.
26
Short-term available-for-sale investments The fair value of short-term available-for-sale
investments approximates their carrying value.
Convertible
notes The fair value of subordinated and senior subordinated convertible notes is
estimated using the price from the repurchase transaction that the Company completed during
November 2009. The fair value of the 5.0% Senior Convertible Notes due 2029 is based on its market
price in open market as on January 31, 2010.
Short-term debt The fair value of short-term debt approximates its carrying value.
Long-term debt The fair value of long-term debt is determined by discounting the contractual
cash flows at the current rates charged for similar debt instruments.
The Company has not estimated the fair value of its minority investments as it is not
practicable to estimate the fair value of these investments because of the lack of a quoted market
price and the inability to estimate fair value without incurring excessive costs. As of January 31,
2010 the carrying value of its minority investments is $12.3 million which management believes is
not impaired as of January 31, 2010.
20. Stockholders Equity
Valuation and Expense
The following table summarizes stock-based compensation expense related to employee stock
options, restricted stock awards and employee stock purchases under FASB ASC 718 for the three and
nine months ended January 31, 2010 and February 1, 2009 which was reflected in the Companys
operating results (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
February 1, |
|
|
January 31, |
|
|
February 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Cost of revenues |
|
$ |
909 |
|
|
$ |
777 |
|
|
$ |
3,228 |
|
|
$ |
2,438 |
|
Research and development |
|
|
1,364 |
|
|
|
1,659 |
|
|
|
4,375 |
|
|
|
4,028 |
|
Sales and marketing |
|
|
463 |
|
|
|
454 |
|
|
|
1,472 |
|
|
|
1,221 |
|
General and administrative |
|
|
776 |
|
|
|
890 |
|
|
|
2,540 |
|
|
|
2,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,512 |
|
|
$ |
3,780 |
|
|
$ |
11,615 |
|
|
$ |
9,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total stock-based compensation capitalized as part of inventory as of January 31, 2010 was
$606,277.
27
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes single option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Option Plans |
|
Employee Stock Purchase Plan |
|
Employee Stock Option Plans |
|
Employee Stock Purchase Plan |
|
|
Three months ended |
|
Nine months ended |
|
|
January 31, 2010 |
|
February 1, 2009 |
|
January 31, 2010 |
|
February 1, 2009 |
|
January 31, 2010 |
|
February 1, 2009 |
|
January 31, 2010 |
|
February 1, 2009 |
Weighted average
fair value per share |
|
$ |
5.65 |
|
|
$ |
2.16 |
|
|
$ |
4.1 |
|
|
$ |
1.6 |
|
|
$ |
5.55 |
|
|
$ |
2.65 |
|
|
$ |
1.4 $4.1 |
|
|
$ |
1.6 $4.1 |
|
Expected term (in years) |
|
|
5.26 |
|
|
|
5.28 |
|
|
|
0.75 |
|
|
|
0.73 |
|
|
|
5.23 |
|
|
|
5.26 |
|
|
|
0.73 0.75 |
|
|
|
0.73 0.74 |
|
Volatility |
|
|
83 |
% |
|
|
79 |
% |
|
|
93%109 |
% |
|
|
102 |
% |
|
|
83 |
% |
|
|
78 |
% |
|
|
93% 109 |
% |
|
|
58% 102 |
% |
Risk-free interest rate |
|
|
2.3 |
% |
|
|
1.9 |
% |
|
|
0.20.3 |
% |
|
|
0.5 |
% |
|
|
2.4 |
% |
|
|
2.0 |
% |
|
|
0.2 0.5 |
% |
|
|
0.5% 3.3 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
During the three and nine months ended January 31, 2010, 455,053 and 1,256,600 shares of
common stock were issued under the Companys Employee Stock Purchase Plan, respectively, and 64,764
and 396,190 stock options were exercised, respectively. The number of restricted stock units
released during the three and nine months ended January 31, 2010 were 114,004 and 556,597. As of
January 31, 2010, total compensation cost related to unvested stock options and restricted stock
units not yet recognized was approximately $22.2 million which is expected to be recognized over
the weighted average remaining recognition period of 37 months.
Accuracy of Fair Value Estimates
The Black-Scholes option valuation model requires the input of highly subjective assumptions,
including the expected life of the stock-based award and the stock price volatility. The
assumptions listed above represent managements best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result, if other
assumptions had been used, the Companys recorded stock-based compensation expense could have been
materially different from that depicted above. In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to vest. If the
Companys actual forfeiture rate is materially different from the estimate, stock-based
compensation expense could be materially different.
21. Income Taxes
The Company recorded a provision for income taxes of $420,000 and a benefit for income taxes
of $432,000 for the three months ended January 31, 2010 and February 1, 2009, respectively and an
income tax provision of $617,000 and an income tax benefit of $7.4 million, respectively, for the
nine months ended January 31, 2010 and February 1, 2009. The income tax provision for the three
months and nine months ended January 31, 2010 included federal alternative minimum tax and minimum
state taxes, federal refundable credits and foreign income taxes arising in certain foreign
jurisdictions in which the Company conducts business. The income tax benefit for the three and nine
months ended February 1, 2009 included a non-cash benefit arising from the reversal of the
previously recorded deferred tax liabilities related to tax amortization of goodwill for which no
financial statement amortization had occurred.
The Company records a valuation allowance against its deferred tax assets for each period in
which management concludes that it is more likely than not that the deferred tax assets will not be
realized. Realization of the Companys net deferred tax assets is dependent upon future taxable
income the amount and timing of which are uncertain. Accordingly, the Companys net deferred tax
assets as of January 31, 2010 have been fully offset by a valuation allowance.
A portion of the valuation allowance for deferred tax assets at January 31, 2010 relates to
the stock option deductions, the tax benefit of which will be credited to paid-in capital if and
when realized, and, thereafter, to income tax expense.
Utilization of the Companys net operating loss and tax credit carryforwards may be subject to
a substantial annual limitation due to the ownership change limitations set forth by Internal
Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in
the expiration of the net operating loss and tax credit carryforwards before utilization.
The Companys total gross unrecognized tax benefits as of May 1, 2009 and January 31, 2010
were $12.5 million. There was no change in the uncertain tax position. Excluding the effects of
recorded valuation allowances for deferred tax assets, $10.5 million of the unrecognized tax
benefits would favorably impact the effective tax rate in future periods if recognized.
Due to the Companys taxable loss position since inception, all tax years are subject to
examination in the U.S. and state jurisdictions. The Company is also subject to examination in
various foreign jurisdictions, none of which are individually material. It is the Companys belief
that no significant changes in the unrecognized tax benefit positions will occur within 12 months
of April 30, 2009.
28
The Company records interest and penalties related to unrecognized tax benefits in income tax
expense. At January 31, 2010, there were no accrued interest or penalties related to uncertain tax
positions. The Company recorded no interest or penalties for the quarter ended January 31, 2010.
22. Geographic Information
The following is a summary of revenues within geographic areas based on the location of the
entity purchasing the Companys products (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
February 1, |
|
|
January 31, |
|
|
February 1, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues from sales to unaffiliated customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
61,685 |
|
|
$ |
39,108 |
|
|
$ |
165,616 |
|
|
$ |
109,969 |
|
Malaysia |
|
|
33,738 |
|
|
|
19,949 |
|
|
|
81,757 |
|
|
|
74,210 |
|
China |
|
|
22,503 |
|
|
|
17,775 |
|
|
|
57,707 |
|
|
|
52,564 |
|
Rest of the world |
|
|
49,009 |
|
|
|
49,249 |
|
|
|
136,310 |
|
|
|
152,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
166,935 |
|
|
$ |
126,081 |
|
|
$ |
441,390 |
|
|
$ |
389,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues generated in the United States are all from sales to customers located in the United
States.
The following is a summary of long-lived assets of continuing operations within geographic
areas based on the location of the assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
April 30, |
|
|
|
2010 |
|
|
2009 |
|
Long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
73,323 |
|
|
$ |
83,119 |
|
Malaysia |
|
|
32,794 |
|
|
|
28,067 |
|
Rest of the world |
|
|
21,056 |
|
|
|
17,180 |
|
|
|
|
|
|
|
|
|
|
$ |
127,173 |
|
|
$ |
128,366 |
|
|
|
|
|
|
|
|
23. Restructuring Charges
During the second quarter of fiscal 2006, the Company consolidated its Sunnyvale facilities
into one building and permanently exited a portion of its Scotts Valley facility. As a result of
these activities, the Company recorded restructuring charges of approximately $3.1 million. These
restructuring charges included $290,000 of miscellaneous costs required to effect the closures and
approximately $2.8 million of non-cancelable facility lease payments. Of the $3.1 million in
restructuring charges, $1.9 million related to the Companys optical subsystems and components
segment and $1.2 million related to discontinued operations. During the first quarter of fiscal
2009, the Company recorded additional restructuring charges of $600,000 for lease payments for the
remaining portion of the Scotts Valley facility that had been used for a product line of its
discontinued operations which was sold in first quarter of fiscal 2009. During the second quarter
of fiscal 2010, the Company recorded restructuring charges of $4.2 million for the non-cancelable
facility lease relating to the abandoned and unused portion of its facility in Allen, Texas.
The following table summarizes the activities of the restructuring accrual during the first
nine months of fiscal 2010 (in thousands):
29
|
|
|
|
|
Balance as of April 30, 2009 |
|
$ |
850 |
|
Charges |
|
|
4,173 |
|
Adjustment to deferred rent |
|
|
297 |
|
Cash payments |
|
|
(456 |
) |
|
|
|
|
Balance as of January 1, 2010 |
|
|
4,864 |
|
|
|
|
|
As of January 31, 2010, $4.9 million of committed facilities payments related to restructuring
activities remained accrued, of which $711,000 is expected to be fully utilized in the next twelve
months and $4.1 million to be paid out from fiscal 2010 through fiscal 2020.
24. Pending Litigation
Stock Option Derivative Litigation
On November 30, 2006, the Company announced that it had undertaken a voluntary review of its
historical stock option grant practices subsequent to its initial public offering in November 1999.
The review was initiated by senior management, and preliminary results of the review were discussed
with the Audit Committee of the Companys board of directors. Based on the preliminary results of
the review, senior management concluded, and the Audit Committee agreed, that it was likely that
the measurement dates for certain stock option grants differed from the recorded grant dates for
such awards and that the Company would likely need to restate its historical financial statements
to record non-cash charges for compensation expense relating to some past stock option grants. The
Audit Committee thereafter conducted a further investigation and engaged independent legal counsel
and financial advisors to assist in that investigation. The Audit Committee concluded that
measurement dates for certain option grants differed from the recorded grant dates for such awards.
The Companys management, in conjunction with the Audit Committee, conducted a further review to
finalize revised measurement dates and determine the appropriate accounting adjustments to its
historical financial statements. The announcement of the investigation resulted in delays in filing
the Companys quarterly reports on Form 10-Q for the quarters ended October 29, 2006, January 28,
2007, and January 27, 2008, and the Companys annual report on Form 10-K for the fiscal year ended
April 30, 2007. On December 4, 2007, the Company filed all four of these reports which included
revised financial statements.
Following the Companys announcement on November 30, 2006 that the Audit Committee of the
board of directors had voluntarily commenced an investigation of the Companys historical stock
option grant practices, the Company was named as a nominal defendant in several shareholder
derivative cases. These cases have been consolidated into two proceedings pending in federal and
state courts in California. The federal court cases have been consolidated in the United States
District Court for the Northern District of California. The state court cases have been
consolidated in the Superior Court of California for the County of Santa Clara. The plaintiffs in
all cases have alleged that certain of the Companys current or former officers and directors
caused the Company to grant stock options at less than fair market value, contrary to the Companys
public statements (including its financial statements), and that, as a result, those officers and
directors are liable to the Company. No specific amount of damages has been alleged, and by the
nature of the lawsuits, no damages will be alleged against the Company. On May 22, 2007, the state
court granted the Companys motion to stay the state court action pending resolution of the
consolidated federal court action. On June 12, 2007, the plaintiffs in the federal court case filed
an amended complaint to reflect the results of the stock option investigation announced by the
Audit Committee in June 2007. On August 28, 2007, the Company and the individual defendants filed
motions to dismiss the complaint. On January 11, 2008, the Court granted the motions to dismiss,
with leave to amend. On May 12, 2008, the plaintiffs filed an amended complaint. The Company and
the individual defendants filed motions to dismiss the amended complaint on July 1, 2008. The Court
granted the motions to dismiss on September 22, 2009, and entered judgment in favor of the
defendants. The plaintiffs have appealed the judgment to the United States Court of Appeal for the
Ninth Circuit.
505 Patent Litigation
DirecTV Litigation
On April 4, 2005, the Company filed an action for patent infringement in the United States
District Court for the Eastern District of Texas against the DirecTV Group, Inc., DirecTV Holdings,
LLC, DirecTV Enterprises, LLC, DirecTV Operations, LLC, DirecTV, Inc., and Hughes Network Systems,
Inc. (collectively, DirecTV). The lawsuit involves the Companys U.S. Patent No. 5,404,505, or
the 505 patent, which relates to technology used in information transmission systems to provide
access to a large database of information. On June 23, 2006, following a jury trial, the jury
returned a verdict that the Companys patent had been willfully infringed and awarded the Company
damages of $78,920,250. In a post-trial hearing held on July 6, 2006, the Court determined that,
due to DirecTVs willful infringement, those damages would be enhanced by an additional $25
million. Further, the Court awarded the Company pre-judgment interest on the jurys verdict and
court costs in the aggregate amount of approximately $13.5 million. The
Court denied the Companys motion for injunctive relief, but ordered DirecTV to pay a
compulsory ongoing license fee to the
30
Company at the rate of $1.60 per set-top box activated by or
on behalf of DirecTV for the period beginning June 16, 2006 through the duration of the patent,
which expires in April 2012.
DirecTV appealed to the United States Court of Appeals for the Federal Circuit. In its appeal,
DirecTV raised issues related to claim construction, infringement, invalidity, willful infringement
and enhanced damages. The Company cross-appealed raising issues related to the denial of the
Companys motion for a permanent injunction, the trial courts refusal to enhance future damages
for willfulness and the trial courts determination that some of the asserted patent claims are
invalid. The appeals were consolidated.
On April 18, 2008, the appeals court issued its decision affirming in part, reversing in part,
and remanding the case for further proceedings before the trial court in Texas. Specifically, the
appeals court ruled that the lower courts interpretation of some of the patent claim terms was too
broad and issued its own, narrower interpretation of those terms. The appeals court also determined
that one of the seven patent claims (Claim 16) found infringed by the jury was invalid, that
DirecTVs infringement of the 505 patent was not willful, and that the trial court did not err in
its determination that various claims of the 505 patent were invalid for indefiniteness. As a
result, the judgment, including the compulsory license, was vacated and the case was remanded to
the trial court to reconsider infringement and validity of the six remaining patent claims and
releasing to DirecTV the escrow funds it had deposited.
On December 1, 2008, both parties filed motions for summary judgment on the issue of validity
in the trial court. On May 19, 2009, the Court granted DirecTVs motions for summary judgment and
entered final judgment in the case in favor of DirecTV. The Company appealed this ruling. On
January 8, 2010, the Court of Appeals for the Federal Circuit affirmed the grant of summary
judgment in favor of DirectTV. The Company will not appeal this decision.
Requests for Re-Examination of the 505 Patent
Four requests for re-examination of the Companys 505 patent have been filed with the U. S.
Patent and Trademark Office. The 505 patent is the patent that was in dispute in the DirecTV
lawsuit. The PTO granted each of these requests and combined these proceedings into a single
re-examination. On October 9, 2009, the PTO issued a final office action invalidating all other
claims in the 505 patent. In light of the decision of the Court of Appeals in the Direct TV case,
the Company has abandoned its appeal of the final office action.
Securities Class Action
A securities class action lawsuit was filed on November 30, 2001 in the United States District
Court for the Southern District of New York, purportedly on behalf of all persons who purchased the
Companys common stock from November 17, 1999 through December 6, 2000. The complaint named as
defendants the Company, Jerry S. Rawls, its President and Chief Executive Officer, Frank H.
Levinson, its former Chairman of the Board and Chief Technical Officer, Stephen K. Workman, its
Senior Vice President and Chief Financial Officer, and an investment banking firm that served as an
underwriter for the Companys initial public offering in November 1999 and a secondary offering in
April 2000. The complaint, as subsequently amended, alleges violations of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(b) of the Securities Exchange Act of 1934, on the
grounds that the prospectuses incorporated in the registration statements for the offerings failed
to disclose, among other things, that (i) the underwriter had solicited and received excessive and
undisclosed commissions from certain investors in exchange for which the underwriter allocated to
those investors material portions of the shares of the Companys stock sold in the offerings and
(ii) the underwriter had entered into agreements with customers whereby the underwriter agreed to
allocate shares of the Companys stock sold in the offerings to those customers in exchange for
which the customers agreed to purchase additional shares of the Companys stock in the aftermarket
at pre-determined prices. No specific damages are claimed. Similar allegations have been made in
lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, which
were consolidated for pretrial purposes. In October 2002, all claims against the individual
defendants were dismissed without prejudice. On February 19, 2003, the Court denied defendants
motion to dismiss the complaint.
In February 2009, the parties reached an understanding regarding the principal elements of a
settlement, subject to formal documentation and Court approval. Under the settlement, the
underwriter defendants will pay a total of $486 million, and the issuer defendants and their
insurers will pay a total of $100 million to settle all of the cases. On August 25, 2009, the
Company funded approximately $327,000 with respect to its pro rata share of the issuers
contribution to the settlement and certain costs. This amount was accrued in the financial
statements during the first quarter of fiscal 2010. On October 2, 2009, the Court granted approval
of the settlement. The order approving the settlement has been appealed by certain individual class
members.
Section 16(b) Lawsuit
A lawsuit was filed on October 3, 2007 in the United States District Court for the Western
District of Washington by Vanessa Simmonds, a purported holder of the Companys common stock
against two investment banking firms that served as underwriters for the initial public offering of
the Companys common stock in November 1999. None of the Companys officers, directors or employees
were named as defendants in the complaint. On February 28, 2008, the plaintiff filed an amended
complaint. The complaint, as amended, alleges that: (i) the defendants, other underwriters of the
offering, and unspecified officers, directors and the Companys principal shareholders constituted
a group that owned in excess of 10% of the Companys outstanding common stock
between November 11, 1999 and November 20, 2000; (ii) the defendants were therefore subject to
the short swing prohibitions of
31
Section 16(b) of the Securities Exchange Act of 1934; and (iii)
the defendants engaged in purchases and sales, or sales and purchases, of the Companys common
stock within periods of less than six months in violation of the provisions of Section 16(b). The
complaint seeks disgorgement of all profits allegedly received by the defendants, with interest and
attorneys fees, for transactions in violation of Section 16(b). The Company, as the statutory
beneficiary of any potential Section 16(b) recovery, is named as a nominal defendant in the
complaint.
This case is one of 54 lawsuits containing similar allegations relating to initial public
offerings of technology company issuers, which were coordinated (but not consolidated) by the
Court. On July 25, 2008, the real defendants in all 54 cases filed a consolidated motion to
dismiss, and a majority of the nominal defendants (including the Company) filed a consolidated
motion to dismiss, the amended complaints. On March 19, 2009, the Court dismissed the amended
complaints naming the nominal defendants that had moved to dismiss, without prejudice, because the
plaintiff had not properly demanded action by their respective boards of directors before filing
suit; and dismissed the amended complaints naming nominal defendants that had not moved to dismiss,
with prejudice, finding the claims time-barred by the applicable statute of limitation. Also on
March 19, 2009, the Court entered judgment against the plaintiff in all 54 cases. The plaintiff has
appealed the order and judgments. The real defendants have cross-appealed the dismissal of certain
amended complaints without prejudice, contending that dismissal should have been with prejudice
because those amended complaints are barred by the applicable statute of limitation.
JDSU/Emcore Patent Litigation
On September 11, 2006, JDS Uniphase Corporation (JDSU) and Emcore Corporation filed a
complaint in the United States District Court for the Western District of Pennsylvania alleging
that certain cable television transmission products acquired in connection with the Companys
acquisition of Optium Corporation, specifically the Companys 1550 nm HFC externally modulated
transmitter, in addition to possibly products as yet unidentified, infringe on two U.S. patents,
referred to as the 003 and 071 Patents. On March 14, 2007, JDSU and Emcore filed a second
complaint in the United States District Court for the Western District of Pennsylvania alleging
that the Companys 1550 nm HFC quadrature amplitude modulated transmitter used in cable television
applications, in addition to possibly products as yet unidentified, infringes on another U.S.
patent, referred to as the 374 Patent. On December 10, 2007, the Company filed a complaint in
the United States District Court for the Western District of Pennsylvania seeking a declaration
that the patents asserted against the Companys HFC externally modulated transmitter are
unenforceable due to inequitable conduct committed by the patent applicants and/or the attorneys or
agents during prosecution. On February 18, 2009, the Court granted JDSUs and Emcores motion for
summary judgment dismissing the Companys declaratory judgment action on inequitable conduct. The
Company has appealed this ruling.
A trial with respect to the remaining two actions was held in October 2009. On November 1,
2009, the jury delivered its verdict that the Company had infringed the 003 and the 071 Patents
as well as the 374 Patent. In addition, the jury found that the Companys infringement of the 003
and the 071 Patents was willful. The jury determined that, with respect to the 003 and the 071
Patents, Emcore was entitled to $974,364 in damages and JDSU was entitled to $622,440 in damages,
and, with respect to the 374 Patent, Emcore was entitled to $1,800,000 in damages. The Court has
not yet ruled on the amount, if any, by which the damages award with respect to the 003 and 071
Patents should be enhanced as a result of the jurys determination that the Companys infringement
of the 003 and the 071 Patents was willful. In addition, the plaintiffs have requested that the
Court issue a permanent injunction against further manufacture or sale of the products found to
have infringed the patents-in-suit. The Company has filed motions for a new trial and,
alternatively, the vacating of the jurys verdict. The Court has not yet ruled on these motions.
Based on the Companys review of the record in this case, including discussion with and
analysis by counsel of the bases for the Companys appeal, the Company has determined that it has a
number of strong arguments available on appeal and, although there can be no assurance as to the
ultimate outcome, the Company is confident that the judgment against it will ultimately be
reversed, or remanded for a new trial in which the Company believes it would prevail. As a result,
the Company concluded that it is not probable that Emcore and JDSU will ultimately prevail in this
matter; therefore, the Company has not recorded any liability for this judgment.
Digital Diagnostics Patent Litigation
On January 5, 2010, the Company filed a complaint for patent infringement in United States
District Court for the Northern District of California. The complaint alleges that certain
optoelectronic transceivers from Source Photonics, Inc., MRV Communications, Inc., Neophotonics
Corp., and Oplink Communications, Inc. infringe eleven Finisar patents.
The complaint asks the Court to enter judgment (a) that the defendants have infringed, actively
induced infringement of, and/or contributorily infringed the patents-in-suit, (b) preliminarily and
permanently enjoining the defendants from further infringement of the patents-in-suit, or, to the
extent not so enjoined, ordering the defendants to pay compulsory ongoing royalties for any
continuing infringement of the patents-in-suit, (c) ordering that the defendants account, and pay
actual damages (but no less than a reasonable royalty), to the Company for the defendants
infringement of the patents-in-suit, (d) declaring that the defendants are willfully infringing one
or more of the patents-in-suit and ordering that the defendants pay treble damages to the Company,
(e) ordering that the defendants pay the Companys costs, expenses, and interest, including
prejudgment interest, (f) declaring that this is an exceptional case and awarding the Company its
attorneys fees and expenses, and (g) granting the Company such other and further relief as the
Court deems just and appropriate, or that the Company may be entitled to as a matter of law or
equity. The defendants answers to the complaint are currently due on March 12, 2010.
32
Export Compliance
During mid-2007, Optium became aware that certain of its analog RF over fiber products may,
depending on end use and customization, be subject to the International Traffic in Arms
Regulations, or ITAR. Accordingly, Optium filed a detailed voluntary disclosure with the United
States Department of State describing the details of possible inadvertent ITAR violations with
respect to the export of a limited number of certain prototype products, as well as related
technical data and defense services. Optium may have also made unauthorized transfers of
ITAR-restricted technical data and defense services to foreign persons in the workplace. Additional
information has been provided upon request to the Department of State with respect to this matter.
In late 2008, a grand jury subpoena from the office of the U.S. Attorney for the Eastern District
of Pennsylvania was received requesting documents from 2005 through the present referring to,
relating to or involving the subject matter of the above referenced voluntary disclosure and export
activities.
While the Department of State encourages voluntary disclosures and generally affords parties
mitigating credit under such circumstances, the Company nevertheless could be subject to continued
investigation and potential regulatory consequences ranging from a no-action letter, government
oversight of facilities and export transactions, monetary penalties, and in extreme cases,
debarment from government contracting, denial of export privileges and criminal sanctions, any of
which would adversely affect the Companys results of operations and cash flow. The Department of
State and U.S. Attorney inquiries may require the Company to expend significant management time and
incur significant legal and other expenses. The Company cannot predict how long it will take or how
much more time and resources it will have to expend to resolve these government inquiries, nor can
it predict the outcome of these inquiries.
Other Litigation
In the ordinary course of business, the Company is a party to litigation, claims and
assessments in addition to those described above. Based on information currently available,
management does not believe the impact of these other matters will have a material adverse effect
on its business, financial condition, results of operations or cash flows of the Company.
25. Guarantees and Indemnifications
In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the
fair value of the obligations it assumes under that guarantee. As permitted under Delaware law and
in accordance with the Companys Bylaws, the Company indemnifies its officers and directors for
certain events or occurrences, subject to certain limits, while the officer or director is or was
serving at the Companys request in such capacity. The term of the indemnification period is for
the officers or directors lifetime. The Company may terminate the indemnification agreements with
its officers and directors upon 90 days written notice, but termination will not affect claims for
indemnification relating to events occurring prior to the effective date of termination. The
maximum amount of potential future indemnification is unlimited; however, the Company has a
director and officer insurance policy that may enable it to recover a portion of any future amounts
paid.
The Company enters into indemnification obligations under its agreements with other companies
in its ordinary course of business, including agreements with customers, business partners, and
insurers. Under these provisions the Company generally indemnifies and holds harmless the
indemnified party for losses suffered or incurred by the indemnified party as a result of the
Companys activities or the use of the Companys products. These indemnification provisions
generally survive termination of the underlying agreement. In some cases, the maximum potential
amount of future payments the Company could be required to make under these indemnification
provisions is unlimited. The Company believes the fair value of these indemnification agreements is
not material. Accordingly, the Company has not recorded any liabilities for these agreements as of
January 31, 2010. To date, the Company has not incurred material costs to defend lawsuits or settle
claims related to these indemnification agreements and payments under the loans are expected to be
paid when due.
During the first quarter of fiscal 2009, the Companys Malaysian subsidiary entered into loan
agreements with a Malaysian bank (See Note 14. Long-term Debt) for which the Company has provided
corporate guarantees. The Company guaranteed loan payments of up to $23.1 million in the event of
non-payment by its Malaysian subsidiary. These guarantees are effective during the term of these
loans. The principal balance of this loan outstanding as of January 31, 2010, was $14.8 million.
26. Related Party Transactions
Frank H. Levinson, the Companys former Chairman of the Board and Chief Technical Officer and
a member of the Companys board of directors until August 29, 2008, is a member of the board of
directors of Fabrinet, Inc., a privately held contract manufacturer. In June 2000, the Company
entered into a volume supply agreement, at rates which the Company believes to be market, with
Fabrinet under which Fabrinet serves as a contract manufacturer for the Company. In addition,
Fabrinet purchases certain products from the Company. The Company recorded purchases of $28.5
million from Fabrinet during the four month period ended August 29, 2008 and Fabrinet purchased
products from the Company totaling to $16.2 million during the same period.
During the three months and nine months ended January 31, 2010, the Company paid a sales and
marketing consultant, who is the brother of the Chief Executive Officer of the Company, $41,000 and
$116,542 in cash compensation, respectively.
Amounts paid to related parties represented values considered by management to be fair and
reasonable, reflective of an arms length transaction.
33
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
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 referred to in Part II,
Item 1A. Risk Factors below. The following discussion should be read together with our
consolidated financial statements and related notes thereto included elsewhere in this report.
Business Overview
We are a leading provider of optical subsystems and components that are used to interconnect
equipment in short-distance local area networks, or LANs, and storage area networks, or SANs, and
longer distance metropolitan area networks, or MANs, fiber-to-home networks, or FTTx, cable television networks, or CATV and wide area networks, or WANs. Our optical
subsystems consist primarily of transmitters, receivers, transceivers and transponders which
provide the fundamental optical-electrical interface for connecting the equipment various types of
equipment used in building these networks, including switches, routers and file servers used in
wireline networks as well as antennas and base stations for wireless networks. These products rely
on the use of semiconductor lasers and photodetectors in conjunction with integrated circuit design
and novel packaging technology to provide a cost-effective means for transmitting and receiving
digital signals over fiber optic cable at speeds ranging from less than 1Gbps to 40Gbps, using a
wide range of network protocols and physical configurations over distances of 70 meters to 200
kilometers. We supply optical transceivers and transponders that allow point-to-point
communications on a fiber using a single specified wavelength or, bundled with multiplexing
technologies, can be used to supply multi-gigabit bandwidth over several wavelengths on the same
fiber. We also provide products for dynamically switching network traffic from one optical
wavelength to another across multiple wavelengths without first converting to an electrical signal known as reconfigurable optical add/drop
multiplexers, or ROADMs. Our line of optical components consists primarily of packaged lasers and
photodetectors used in transceivers, primarily for LAN and SAN applications, and passive optical
components used in building MANs. Demand for the Companys products is largely driven by the
continually growing need for additional bandwidth created by the ongoing proliferation of data and
video traffic that must be handled by both wireline and wireless networks. Our manufacturing
operations are vertically integrated and include integrated circuit design and we utilize internal sources for many of the key components
used in making our products including lasers, photodetectors and integrated circuits, or ICs,
designed by our own internal IC engineering teams. We also have internal assembly and test
capabilities that make use of internally designed equipment for the automated testing of our
optical subsystems and components.
We sell our optical products to manufacturers of storage systems, networking equipment and
telecommunication equipment or their contract manufacturers, such as Alcatel-Lucent, Brocade, Cisco
Systems, EMC, Emulex, Ericsson, Hewlett-Packard Company, Huawei, IBM, Juniper, Qlogic, Siemens and
Tellabs. These customers, in turn, sell their systems to businesses and to wireline and wireless
telecommunications service providers and cable TV operators, collectively referred to as carriers.
Recent Developments
Combination with Optium Corporation
On August 29, 2008, we completed a business combination with Optium Corporation, a leading
designer and manufacturer of high performance optical subsystems for use in telecommunications and
cable TV network systems, through the merger of Optium with a wholly-owned subsidiary of Finisar.
We believe that the combination of the two companies created the worlds largest supplier of
optical components, modules and subsystems for the communications industry and will leverage
Finisars leadership position in the storage and data networking sectors of the industry and
Optiums leadership position in the telecommunications and CATV sectors to create a more
competitive industry participant. In addition, as a result of the combination, we expect to realize
cost synergies related to operating expenses and manufacturing costs resulting from (1) the
transfer of production to lower cost locations, (2) improved purchasing power associated with being
a larger company and (3) cost synergies associated with the integration of internally manufactured
components into product designs in place of components previously purchased by Optium in the open
market. At the closing of the merger, we issued 20,101,082 shares of Finisar common stock, valued
at approximately $242.8 million, in exchange for all of the outstanding common stock of Optium.
We have accounted for the combination using the purchase method of accounting and as a result
have included the operating results of Optium in our consolidated financial results since the
August 29, 2008 consummation date.
34
Sale of Network Tools Division
In the first quarter of fiscal 2010, we sold substantially all of the assets of our Network
Tools Division to JDSU for $40.6 million in cash. We recorded a net gain on sale of the business of
$35.9 million before income taxes, which is included in income from discontinued operations, net of
income tax, in our condensed consolidated statements of operations. In accordance with FASB ASC
205-20, Presentation of Financial Statements, Discontinued Operations, the assets and liabilities,
results of operations related to the business, have been classified as discontinued operations in
the condensed consolidated financial statements for all periods presented. In accordance with FASB
ASC 230, Statement of Cash Flows, we elected not to separately disclose the cash flows associated
with the discontinued operations in the condensed consolidated statements of cash flow.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make judgments, estimates and assumptions in the preparation of
our consolidated financial statements and accompanying notes. Actual results could differ from
those estimates. We believe there have been no significant changes in our critical accounting
policies as discussed in our annual report on Form 10-K for the year ended April 30, 2009 other
than the adoption of FASB ASC 470-20 (see Note 1 to condensed consolidated financial statements).
Results of Operations
The following table sets forth certain statement of operations data as a percentage of
revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
January 31, |
|
February 1, |
|
January 31, |
|
February 1, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
68.3 |
|
|
|
71.2 |
|
|
|
71.8 |
|
|
|
69.4 |
|
Amortization of acquired developed technology |
|
|
0.7 |
|
|
|
1.2 |
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
31.0 |
|
|
|
27.6 |
|
|
|
27.4 |
|
|
|
29.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
14.9 |
|
|
|
16.8 |
|
|
|
15.3 |
|
|
|
15.5 |
|
Sales and marketing |
|
|
4.7 |
|
|
|
5.6 |
|
|
|
5.0 |
|
|
|
5.6 |
|
General and administrative |
|
|
5.6 |
|
|
|
7.2 |
|
|
|
6.1 |
|
|
|
7.2 |
|
Acquired in-process research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.7 |
|
Restructuring charges |
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
Amortization of purchased intangibles |
|
|
0.3 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.4 |
|
Impairment of goodwill and intangible assets |
|
|
|
|
|
|
36.9 |
|
|
|
0.0 |
|
|
|
57.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
25.5 |
|
|
|
67.0 |
|
|
|
27.7 |
|
|
|
89.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
5.5 |
|
|
|
(39.4 |
) |
|
|
(0.3 |
) |
|
|
(59.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
0.4 |
|
Interest expense |
|
|
(1.3 |
) |
|
|
(2.1 |
) |
|
|
(1.6 |
) |
|
|
(3.1 |
) |
Gain (loss) on debt extinguishment |
|
|
|
|
|
|
2.6 |
|
|
|
(5.7 |
) |
|
|
0.8 |
|
Other income (expense), net |
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
(0.7 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income taxes |
|
|
3.7 |
|
|
|
(39.4 |
) |
|
|
(8.3 |
) |
|
|
(62.3 |
) |
Provision (benefit) for income taxes |
|
|
0.3 |
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
3.4 |
|
|
|
(39.1 |
) |
|
|
(8.4 |
) |
|
|
(60.4 |
) |
Income (loss) from discontinued operations,
net of income taxes |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
8.4 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
3.3 |
% |
|
|
(39.2) |
% |
|
|
0.0 |
% |
|
|
(60.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues from continuing operations increased $40.9 million, or 32.4%, to
$166.9 million in the quarter ended January 31, 2010 compared to $126.1 million in the quarter
ended February 1, 2009. The increase reflects the impact of a combination of factors including
increased spending on infrastructure by business enterprises and telecommunications companies as
they deal with the ongoing growth in bandwidth through their networks, an improvement in general
economic conditions that contributed to an increase in infrastructure spending. In addition, we
believe that we experienced an increase in our market share, particularly for higher speed
products, due in part to the qualification of several products for higher speed applications at
certain customers and our entry into new markets.
Revenues from continuing operations increased $51.8 million, or 13.3%, to $441.4 million in the
nine months ended January 31, 2010 compared to $389.6 million in the nine months ended February 1,
2009. Of the year-to-date increase, $32.8 million was related to the sale of pre-merger Optium
products and reflected sales during the nine month period ended January 31, 2010, as compared to
only five months in the nine months ended February 1, 2009. The increase in revenue from the sale
of pre-merger Finisar products totaled approximately $19.0 million, or 6%, over the prior year
period, principally as a result of factors discussed above.
35
The following table sets forth the changes in revenues from continuing operations by market
segment and speed (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
January 31, |
|
|
February 1, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
Transceivers, transponders & components |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
10 Gbps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LAN/SAN |
|
$ |
25,665 |
|
|
$ |
9,225 |
|
|
$ |
16,440 |
|
|
|
178.2 |
% |
Metro/Telecom |
|
|
41,708 |
|
|
|
39,879 |
|
|
|
1,829 |
|
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
67,373 |
|
|
|
49,104 |
|
|
|
18,269 |
|
|
|
37.2 |
% |
Less than 10
Gbps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LAN/SAN |
|
|
48,496 |
|
|
|
44,151 |
|
|
|
4,345 |
|
|
|
9.8 |
% |
Metro/Telecom |
|
|
26,098 |
|
|
|
23,253 |
|
|
|
2,845 |
|
|
|
12.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
74,594 |
|
|
$ |
67,404 |
|
|
$ |
7,190 |
|
|
|
10.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transceivers, transponders & components |
|
141,967 |
|
|
116,508 |
|
|
|
25,459 |
|
|
|
21.9 |
% |
ROADM linecards and WSS modules |
|
|
19,140 |
|
|
|
6,224 |
|
|
|
12,916 |
|
|
|
207.5 |
% |
CATV |
|
|
5,828 |
|
|
|
3,349 |
|
|
|
2,479 |
|
|
|
74.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
166,935 |
|
|
$ |
126,081 |
|
|
$ |
40,854 |
|
|
|
32.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
January 31, |
|
|
February 1, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
Transceivers, transponders & components |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than
10 Gbps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LAN/SAN |
|
$ |
55,606 |
|
|
$ |
28,155 |
|
|
$ |
27,451 |
|
|
|
97.5 |
% |
Metro/Telecom |
|
|
118,986 |
|
|
|
137,226 |
|
|
|
(18,240 |
) |
|
|
-13.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
174,592 |
|
|
|
165,381 |
|
|
|
9,211 |
|
|
|
5.6 |
% |
Less than 10
Gbps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LAN/SAN |
|
|
129,444 |
|
|
|
149,381 |
|
|
|
(19,937 |
) |
|
|
-13.3 |
% |
Metro/Telecom |
|
|
77,169 |
|
|
|
53,011 |
|
|
|
24,158 |
|
|
|
45.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
206,613 |
|
|
$ |
202,392 |
|
|
$ |
4,221 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transceivers, transponders & components |
|
|
381,205 |
|
|
|
367,773 |
|
|
|
13,432 |
|
|
|
3.7 |
% |
ROADM linecards and WSS modules |
|
|
45,549 |
|
|
|
15,028 |
|
|
|
30,521 |
|
|
|
203.1 |
% |
CATV |
|
|
14,636 |
|
|
|
6,800 |
|
|
|
7,836 |
|
|
|
115.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
441,390 |
|
|
$ |
389,601 |
|
|
$ |
51,789 |
|
|
|
13.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Acquired Developed Technology. Amortization of acquired developed
technology related to continuing operations, a component of cost of revenues, decreased $263,000,
or 18.1%, to $1.2 million in the quarter ended January 31, 2010 compared to $1.5 million in the
quarter ended February 1, 2009 and increased $19,000, or 0.5% , to $3.6 million in the nine months
ended January 31, 2010 compared to $3.6 million in the nine months ended February 1, 2009. The
decrease for the quarter was primarily due to the full amortization during fiscal 2009 of certain
assets associated with our Honeywell and Kodeos acquisitions. The increase for the nine month
period was primarily due to nine months of amortization of the Optium assets in fiscal 2010
compared to five months in fiscal 2009.
Gross Profit. Gross profit from continuing operations increased $16.9 million, or 48.4%, to
$51.7 million in the quarter ended January 31, 2010 compared to $34.8 million in the quarter ended
February 1, 2009. The increase in gross profit was primarily due to the $40.9 million increase in
revenue. Gross profit as a percentage of revenue was 31.0% in the quarter ended January 31, 2010
compared to 27.6% in the quarter ended February 1, 2009. We recorded charges of $4.1 million
for obsolete and excess inventory in the quarter ended January 31, 2010 compared to $3.6 million in
the quarter ended February 1, 2009. We sold inventory that was written-off in previous periods
resulting in a benefit of $4.3 million in the quarter ended January 31, 2010 and $3.0 million in
the quarter ended February 1, 2009. As a result, we recognized a net benefit of $200,000 in the
quarter ended January 31, 2010 compared to a net charge of $600,000 in the quarter ended February
1, 2009. Manufacturing overhead includes stock-based compensation charges of $909,000 in the
quarter ended January 31, 2010 and $776,000 in the quarter ended February 1, 2009. Excluding
amortization of acquired developed technology, the net impact of excess and obsolete inventory
charges and stock-based compensation charges, gross profit would have been $53.6 million, or 32.1%
of revenues, in the quarter ended January 31, 2010 compared to $37.7 million, or 29.9% of revenues,
in the quarter ended February 1, 2009. The increase in gross margin percentage primarily reflects
the cost benefits associated with spreading relatively fixed manufacturing costs over a larger
number of units and a favorable product mix, partially offset by the impact of reductions in
pricing of some products.
36
Gross profit from continuing operations increased $5.3 million, or 4.6%, to $120.9 million in
the nine months ended January 31, 2010 compared to $115.6 million in the nine months ended February
1, 2009. The increase in gross profit was primarily due to the $51.8 million increase in revenue.
Gross profit as a percentage of total revenue was 27.4% in the nine months ended January 31, 2010
compared to 29.7% in the nine months ended February 1, 2009. We recorded charges of $18.9 million
for obsolete and excess inventory in the nine months ended January 31, 2010 compared to $9.5
million in the nine months ended February 1, 2009. We sold inventory that was written-off in
previous periods resulting in a benefit of $11.4 million in the nine months ended January 31, 2010
and $5.8 million in the nine months ended February 1, 2009. As a result, we recognized a net charge
of $7.5 million in the nine months ended January 31, 2010 compared to $3.7 million in the nine
months ended February 1, 2009. Manufacturing overhead includes stock-based compensation charges of
$3.2 million in the nine months ended January 31, 2010 and $2.4 million in the nine months ended
February 1, 2009. Excluding amortization of acquired developed technology, the net impact of excess
and obsolete inventory charges and stock-based compensation charges, gross profit would have been
$135.2 million, or 30.6% of revenue, in the nine months ended January 31, 2010 compared to $125.3
million, or 32.2% of revenue in the nine months ended February 1, 2009. The lower gross margin
percentage primarily reflects the unfavorable impact of lower pricing on some products, lower
manufacturing yields on certain new higher speed components and modules and the impact of selling
certain lower margin Optium products for the full nine month period compared to only five months in
the prior year period.
Research and Development Expenses. Research and development expenses from continuing
operations increased $3.7 million, or 17.5%, to $24.9 million in the quarter ended January 31, 2010
compared to $21.2 million in the quarter ended February 1, 2009. Included in research and
development expenses were stock-based compensation charges of $1.4 million in the quarter ended
January 31, 2010 and $1.7 million in the quarter ended February 1, 2009. Research and development
expenses as a percent of revenues decreased to 14.9% in the quarter ended January 31, 2010 compared
to 16.8% in the quarter ended February 1, 2009.
Research and development expenses from continuing operations increased $7.1 million, or 11.8%,
to $67.5 million in the nine months ended January 31, 2010 compared to $60.4 million in the nine
months ended February 1, 2009. The increase was primarily due to the additional four months of
expenses from Optium operations following the merger which are included in the 2010 balances.
Included in research and development expenses were stock-based compensation charges of $4.4 million
in the nine months ended January 31, 2010 and $4.0 million in the nine months ended February 1,
2009. Research and development expenses as a percent of revenues decreased slightly to 15.3% in the
nine months ended January 31, 2010 compared to 15.5% in the nine months ended February 1, 2009.
Sales and Marketing Expenses. Sales and marketing expenses from continuing operations
increased $879,000, or 12.5%, to $7.9 million in the quarter ended January 31, 2010 compared to
$7.0 million in the quarter ended February 1, 2009. The increase was primarily due to increased
sales commissions as a result of the increase in revenue. Included in sales and marketing expenses
were stock-based compensation charges of $463,000 in the quarter ended January 31, 2010 and
$454,000 in the quarter ended February 1, 2009. Sales and marketing expenses as a percent of
revenues decreased to 4.7% in the quarter ended January 31, 2010 compared to 5.6% in the quarter
ended February 1, 2009.
Sales and marketing expenses from continuing operations increased $232,000, or 1.1%, to $22.1
million in the nine months ended January 31, 2010 compared to $21.8 million in the nine months
ended February 1, 2009. The slight increase was primarily due increased sales commissions as a
result of the increase in revenue, offset by cost synergies realized as a result of the Optium
merger. Included in sales and marketing expenses were stock-based compensation charges of $1.5
million in the nine months ended January 31, 2010 and $1.2 million in the nine months ended
February 1, 2009. Sales and marketing expenses as a percent of revenues decreased to 5.0% in the
nine months ended January 31, 2010 compared to 5.6% in the nine months ended February 1, 2009.
General and Administrative Expenses. General and administrative expenses from continuing
operations increased $279,000, or 3.1%, to $9.3 million in the quarter ended January 31, 2010
compared to $9.0 million in the quarter ended February 1, 2009. Included in general and
administrative expenses were stock-based compensation charges of $779,000 in the quarter ended
January 31, 2010 and $888,000 in the quarter ended February 1, 2009. General and administrative
expenses as a percent of revenues decreased to 5.6% in the quarter ended January 31, 2010 compared
to 7.2% in the quarter ended February 1, 2009.
General and administrative expenses from continuing operations decreased $972,000, or 3.5%, to
$27.1 million in the nine months ended January 31, 2010 compared to $28.1 million in the nine
months ended February 1, 2009, although a full nine months of expenses related to the Optium
operations were included in the later period compared to five months in the prior year period. The
decrease was primarily due to cost synergies realized as a result of the Optium merger. Included in
general and administrative expenses were stock-based compensation charges of $2.5 million in the
nine months ended January 31, 2010 and $2.1 million in the nine months ended February 1, 2009.
General and administrative expenses as a percent of revenues decreased to 6.1% in the nine months
ended January 31, 2010 compared to 7.2% in the nine months ended February 1, 2009.
Acquired In-process Research and Development. In-process research and development, or IPR&D,
expenses were $10.5 million in the nine month period ended February 1, 2009, compared to $0 in the
nine month period ended January 31, 2010. The IPR&D charges were related to the Optium merger.
37
Amortization of Purchased Intangibles. Amortization of purchased intangibles decreased
$276,000, or 39.3%, to $426,000 in the quarter ended January 31, 2010 compared to $702,000 in the
quarter ended February 1, 2009 and increased $200,000, or 13.8%, to $1.6 million in the nine months
ended January 31, 2010 compared to $1.4 million in the nine months ended February 1, 2009. The
decrease for the quarter was due to the full amortization of certain trademarks related to the
Optium merger. The increase for the nine month period was primarily due the inclusion of four
additional months of amortization of assets acquired in the Optium merger.
Impairment of Goodwill. As a result of the financial liquidity crisis, the economic recession,
reductions in our internal revenue and operating forecasts and a substantial reduction in our
market capitalization, during the quarter ended November 2, 2008, we performed an analysis to
determine if there was an indication of impairment of our intangible assets. Based on this
analysis, we determined that the goodwill related to our optical subsystems and components
reporting unit was impaired and had an implied fair value of $59.6 million compared to a carrying
value of $238.4 million. Accordingly, we recorded an estimated impairment charge of $178.8 million
during the quarter ended November 2, 2008. Following the completion of goodwill impairment
analyses, we recorded additional charges of $46.5 million in the quarter ended February 1, 2009 and
$13.2 million in the quarter ended April 30, 2009. As a result of these impairment charges, as of
April 30, 2009 the carrying value of our goodwill was zero.
Restructuring Costs. As a result of moving certain manufacturing activities from our facility
in Allen, Texas to our lower cost manufacturing facility in Ipoh, Malaysia, we have determined that
approximately 32% of the space in the Allen facility is no longer required for manufacturing. As a
result, we closed that portion of the facility in the quarter ended November 1, 2009 and are
actively searching for a tenant to sub-lease the vacated space. As a result, we recorded a
restructuring charge of $4.2 million in the quarter ended November 1, 2009 which represents the
present value of that portion of the lease payments we are obligated to make over the remaining
lease term.
Interest Income. Interest income decreased $34,000, or 28.6%, to $84,000 in the quarter ended
January 31, 2010 compared to $119,000 in the quarter ended February 1, 2009 and decreased $1.6
million, or 94.0%, to $104,000 in the nine months ended January 31, 2010 compared to $1.7 million
in the nine months ended February 1, 2009. These decreases were due primarily to a decrease in our
cash balance as a result of the principal repayment in the second quarter of fiscal 2009 of $92.0
million of our 5 1/4% Convertible Subordinated Notes due 2008.
Interest Expense. Interest expense decreased $483,000, or 17.7%, to $2.2 million in the
quarter ended January 31, 2010 compared to $2.7 million in the quarter ended February 1, 2009. The
decrease was primarily related to the principal repayment in the second quarter of fiscal 2009 of
$92.0 million on our 5 1/4% Convertible Subordinated Notes due 2008. Included in interest expense
were non-cash charges of $383,000 and $1.3 million related to the accounting for our senior
convertible notes in the quarters ended January 31, 2010 and February 1, 2009, respectively. The
lower non-cash charge for the quarter ended January 31, 2010 was due to the exchange and repurchase
of an aggregate of $66.3 million of the senior convertible notes in the first nine months of fiscal
2010.
Interest expense decreased $5.2 million, or 43.4%, to $6.8 million in the nine months ended
January 31, 2010 compared to $12.1 million in the nine months ended February 1, 2009. The decrease
was primarily related to the principal repayment in the second quarter of fiscal 2009 of $92.0
million of our 5 1/4% Convertible Subordinated Notes due 2008. Included in interest expense for the
nine months ended January 31, 2010 was non-cash charges of $2.7 million related to the accounting
for our senior convertible notes. Included in interest expense for the nine months ended February
1, 2009 was a non-cash charge of $3.7 million related to the accounting for our senior convertible
notes and a non-cash charge of $1.8 million to amortize the beneficial conversion feature of the
convertible notes due in October 2008.
Gain and Loss on Repurchase/Purchase of Convertible Notes. During the nine months ended
January 31, 2010, we recorded a $25.1 million loss related to the repurchase of certain convertible
notes. On August 11, 2009, we retired $33,100,000, or 66.2%, of the $50,000,000 aggregate
outstanding principal amount of our 2 1/2% Convertible Subordinated Notes due 2010 and $14,404,000,
or approximately 15.7%, of the $92,000,000 aggregate outstanding principal amount of our 2 1/2%
Convertible Senior Subordinated Notes due 2010 pursuant to exchange offers which commenced on July
9, 2009. The consideration for the exchange consisted of (i) $525 in cash and (ii) 596 shares of
the Companys common stock per $1,000 principal amount of notes. We issued approximately 3.5
million shares of common stock and paid out approximately $24.9 million in cash to the former
holders of notes in the exchange offers. The total consideration paid in the exchange was
approximately $4.7 million less than the par value of the notes retired. In
accordance with the provisions of ASC 470-20, this exchange was considered to be an induced
conversion and the retirement of the notes was accounted for as if they had been converted
according to their original terms, with that value compared to the fair value of the consideration
paid in the exchange offers. The original conversion price of the notes was $30.08 per share.
Accordingly, although the trading price of our common stock was $5.04 at the time of the exchange,
we recorded a loss on debt extinguishment of $23.7 million in the quarter ended November 1, 2009.
The additional $1.4 million of loss on debt extinguishment was primarily due to expenses incurred
in connection with the exchange offers.
During the nine months ended February 1, 2009, we recorded a $3.1 million gain on the
repurchase of certain convertible notes. The gain was primarily related to the repurchase of $8.0
million in principal amount of our 2.5% convertible notes due October 15, 2010 that we purchased at
a discount to par value of 50.1%.
38
Other Income (Expense), Net. Other expense was $961,000 in the quarter ended January 31, 2010
compared to $744,000 in the quarter ended February 1, 2009. Other expense was $2.9 million in the
nine months ended January 31, 2010 compared to $3.7 million in the nine months ended February 1,
2009. Other expense in the quarter and nine months ended January 31, 2010 was primarily related to
a $2 million other-than-temporary write-down of a minority interest investment. Other expense in
the quarter and nine months ended February 1, 2009 was primarily related to a $1.7 million non-cash
foreign exchange loss due to the re-measurement of a $19.8 million note re-payable in U.S. dollars
which is recorded on the books of our subsidiary in Malaysia whose functional currency is the
Malaysian ringgit and a $1.2 million other-than-temporary write-down of a minority investment
during the period.
Provision for Income Taxes. We recorded an income tax provision of $421,000 and an income tax
benefit of $432,000, respectively, for the quarters ended January 31, 2010 and February 1, 2009 and
an income tax provision of $617,000 and an income tax benefit of $7.4 million, respectively, for
the nine months ended January 31, 2010 and February 1, 2009. The income tax provision for the three
months and nine months ended January 31, 2010 included minimum state taxes, federal refundable
credits and foreign income taxes arising in certain foreign jurisdictions in which the Company
conducts business. The income tax benefit for the three and nine months ended February 1, 2009
included a non-cash benefit arising from the reversal of previously recorded deferred tax
liabilities related to tax amortization of goodwill for which no financial statement amortization
had occurred.
Discontinued Operations. As discussed above, on July 15, 2009, we completed the sale of
certain assets related to our Network Tools Division to JDSU. We have agreed to perform certain
manufacturing activities for JDSU under a transition services agreement entered into at the time of
the sale. The expenses associated with the transition services agreement have been classified as
results of discontinued operations. During the three months ended January 31, 2010, we incurred net
operating expenses of $131,000, including an additional adjustment to the gain on the sale of
discontinued operations of $165,000. Accordingly, we recorded a net operating gain of $34,000
during the quarter associated with the transition services agreement. During the nine months ended
January 31, 2010, we incurred net operating income from discontinued operations of $36.9 million,
including a gain on the sale of $35.9 million and a net operating gain of $1.0 million. Net
operating expenses associated with the transition services agreement from July 15, 2009 through
January 31, 2010 were $33,000.
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash used in operating activities in the nine months ended January 31, 2010 totaled $1.8
million, compared to $11.0 million in the nine months ended February 1, 2009. Cash used in
operating activities in the nine months ended January 31, 2010 was due to changes in working
capital which were primarily related to an increase in accounts receivable and inventories offset
by an increase in accounts payable. Accounts receivable increased by $34.6 million primarily due to
the increase in shipments and no sales of accounts receivable under our non-recourse accounts
receivable purchase agreement with Silicon Valley Bank which was terminated in October 2009. We
sold $12.1 million of accounts receivable under this agreement in the third quarter of fiscal 2009.
Inventory increased by $12.4 million and accounts payable increased by $16.7 million due to
increase in purchases to support increased sales. Net cash used by operating activities in the nine
months ended February 1, 2009 primarily consisted of changes in working capital which were
primarily related to increases in inventory and accounts receivable and a decrease in accounts
payable, accrued liabilities and deferred income taxes.
Cash Flows from Investing Activities
Net cash provided by investing activities totaled $20.6 million in the nine months ended
January 31, 2010 compared to $47.4 million in the nine months ended February 1, 2009. Net cash
provided by investing activities in the nine months ended January 31, 2010 was primarily due to the
$40.7 cash received from sale of the assets of our Network Tools Division to JDSU on July 15, 2009.
We also received $1.2 million in cash in the first quarter of fiscal 2010 from the sale a
promissory note and all of the preferred stock that we received as consideration for the sale of a
product line in the first quarter of fiscal 2009. These receipts were partially offset by $21.4
million of expenditures for capital equipment. Net cash provided by investing activities in the
nine months ended February 1, 2009 was primarily related to the net maturities of
available-for-sale investments of $37.9 million and the acquisition of net assets of Optium of
$30.1 million as a result of a business combination, partially offset by $20.7 million purchases of
equipment to support production expansion.
Cash Flows from Financing Activities
Net cash provided by financing activities totaled $19.6 million in the nine months ended
January 31, 2010 compared to net cash used in financing activities of $81.0 million in the nine
months ended February 1, 2009. Cash provided by financing activities for the nine months ended
January 31, 2010 primarily consisted of $98.1 million in proceeds from the issuance of our 5.0%
Convertible Senior Notes, $10.0 million from borrowings under our line of credit facility and $4.5
million from bank borrowings by our Chinese subsidiary, partially offset by $88.0 million of cash
used to purchase outstanding convertible notes and $3.4 million of restricted cash and cash
equivalents. Cash provided by financing activities for the nine months ended February 1, 2009
primarily reflected proceeds of $25.0 million from bank borrowings and proceeds from the exercise
of stock options and purchases under our stock purchase plan
39
totaling $4.4 million, offset by
repayments of $96 million on our outstanding convertible notes on October 15, 2008 and repayment on
borrowings of $14.7 million.
Contractual Obligations and Commercial Commitments
At January 31, 2010 we had contractual obligations of $231.6 million as shown in the following
table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
Short-term debt |
|
$ |
14,500 |
|
|
$ |
10,000 |
|
|
$ |
4,500 |
|
|
$ |
|
|
|
$ |
|
|
Long-term debt |
|
|
14,750 |
|
|
|
4,000 |
|
|
|
8,000 |
|
|
|
2,750 |
|
|
|
|
|
Convertible debt |
|
|
129,581 |
|
|
|
29,581 |
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
Interest on debt |
|
|
27,457 |
|
|
|
6,559 |
|
|
|
10,800 |
|
|
|
10,098 |
|
|
|
|
|
Operating leases (a) |
|
|
44,785 |
|
|
|
7,398 |
|
|
|
10,217 |
|
|
|
7,592 |
|
|
|
19,578 |
|
Purchase obligations |
|
|
521 |
|
|
|
521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
231,594 |
|
|
$ |
58,059 |
|
|
$ |
33,517 |
|
|
$ |
20,440 |
|
|
$ |
119,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes operating lease obligations that have been accrued as restructuring charges. |
At January 31, 2010, total long-term debt and principal amount due under the convertible debt
was $144.3 million, compared to $163.4 million at April 30, 2009.
Short-term debt at January 31, 2010 included of $10.0 million of borrowings under our
revolving credit facility with Wells Fargo Foothill, LLC, bank. These borrowings bear interest at
rates based on the prime rate and LIBOR plus variable margins, under which applicable interest
rates currently range from 5.75% to 7.00% per annum. This $10.0 million was subsequently repaid.
Short-term debt also included borrowings made by our Chinese subsidiary under a loan agreement
with a bank in China. Under this agreement, the Companys Chinese subsidiary borrowed a total of
$4.5 million at an initial interest rate of 2.6% per annum. The loan is payable on January 6, 2013.
The Bank has the right to terminate the agreement on January 6 of each year, with or without
reason, in which case the outstanding balance would become due and payable. Interest is payable
quarterly.
Long-term debt consists of borrowings made by our Malaysian subsidiary under two separate loan
agreements entered into by it with a Malaysian bank in July 2008. The first loan is payable in 20
equal quarterly installments of $750,000 beginning in January 2009 and the second loan is payable
in 20 equal quarterly installments of $250,000 beginning in October 2008. Both loans are secured by
certain property of our Malaysian subsidiary, guaranteed by us and subject to certain covenants. We
and our subsidiary were in compliance with all covenants associated with these loans as of January
31, 2010. At January 31, 2010, the principal balance outstanding under these loans was $14.8
million.
Convertible debt consists of a series of convertible subordinated notes in the aggregate
principal amount of $3.9 million due October 15, 2010, a series of convertible senior subordinated
notes in the aggregate principal amount of $25.7 million due October 15, 2010 and a series of
convertible senior notes in the aggregate principal amount of $100.0 million due October 15, 2029.
The notes are convertible by the holders at any time prior to maturity into shares of our common
stock at specified conversion prices. The notes are redeemable by us, in whole or in part.
Aggregate annual interest payments on all the series of notes are approximately $5.7 million.
Interest on debt consists of the scheduled interest payments on our short-term, long-term, and
convertible debt.
Operating lease obligations consist primarily of base rents for facilities we occupy at
various locations.
Purchase obligations are related to materials purchased and held by subcontractors on our
behalf to fulfill the subcontractors purchase order obligations at their facilities. Our policy
with respect to all purchase obligations is to record losses, if any, when they are probable and
reasonably estimable. We believe we have made adequate provision for potential exposure related to
inventory purchased by subcontractors which may go unused. Our purchase obligations of $521,000
have been expensed and recorded on the condensed consolidated balance sheet as non-cancelable
purchase obligations as of January 31, 2010.
Sources of Liquidity and Capital Resource Requirements
At January 31, 2010, our principal sources of liquidity consisted of $79.0 million of cash,
cash equivalents and available-for-sale investments and an aggregate of $58.4 million available
under our credit facility with Wells Fargo Foothill, LLC, subject to certain restrictions and
limitations.
40
On October 2, 2009, we entered into an agreement with Wells Fargo Foothill, LLC to establish a
new four-year $70 million senior secured revolving credit facility to finance working capital and
to refinance existing indebtedness, including the repurchase or repayment of our remaining
outstanding convertible notes. Borrowings under the credit facility bear interest at rates based on
the prime rate and LIBOR plus variable margins, under which applicable interest rates currently
range from 5.75% to 7.00% per annum. Borrowings will be guaranteed by our U.S. subsidiaries and
secured by substantially all of the assets of Finisar and its U.S. subsidiaries. The credit
facility matures four years following the date of the agreement, subject to certain conditions. As
of January 31, 2010 we had $10.0 million of borrowings outstanding under this facility which was
subsequently repaid. As of January 31, 2010, the availability of credit under the facility was
reduced by $1.6 million for certain loan reserves and by $3.5 million for outstanding letters of
credit secured under this agreement.
On October 23, 2009, we terminated agreements with Silicon Valley Bank under which various
credit facilities had been available to us. As of January 31, 2010, $3.4 million of letters of
credit issued by Silicon Valley Bank remained outstanding as we were in the process of obtaining
new letters of credit through Wells Fargo Bank. Following the termination of the agreement, we
secured the outstanding letters of credit with restricted certificates of deposit of $3.4 million.
We believe that our existing balances of cash, cash equivalents and short-term investments,
together with the cash expected to be generated from future operations and borrowings under our
bank credit facility, will be sufficient to meet our cash needs for working capital and capital
expenditures for at least the next 12 months. We may, however, require additional financing to fund
our operations in the future or to repay or otherwise retire all of our outstanding convertible
debt in the aggregate principal amount of $129.6 million, of which $29.6 million matures in October
2010 and the remaining $100 million is subject to redemption by the holders in October 2014, 2016,
2019 and 2024. A significant contraction in the capital markets, particularly in the technology
sector, may make it difficult for us to raise additional capital if and when it is required,
especially if we experience disappointing operating results. If adequate capital is not available
to us as required, or is not available on favorable terms, our business, financial condition and
results of operations will be adversely affected.
Off-Balance-Sheet Arrangements
At January 31, 2010 and April 30, 2009, we did not have any off-balance sheet arrangements or
relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which are typically established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes.
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Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
Our exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. The primary objective of our investment activities is to preserve principal while
maximizing yields without significantly increasing risk. We place our investments with high credit
issuers in short-term securities with maturities ranging from overnight up to 36 months or have
characteristics of such short-term investments. The average maturity of the portfolio will not
exceed 18 months. The portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. We have no investments denominated in foreign country
currencies and therefore our investments are not subject to foreign exchange risk.
We invest in equity instruments of privately held companies for business and strategic
purposes. These investments are included in other long-term assets and are accounted for under the
cost method when our ownership interest is less than 20% and we do not have the ability to exercise
significant influence. For entities in which we hold greater than a 20% ownership interest, or
where we have the ability to exercise significant influence, we use the equity method. For these
non-quoted investments, our policy is to regularly review the assumptions underlying the operating
performance and cash flow forecasts in assessing the carrying values. We identify and record
impairment losses when events and circumstances indicate that such assets are impaired. If our
investment in a privately-held company becomes marketable equity securities upon the companys
completion of an initial public offering or its acquisition by another company, our investment
would be subject to significant fluctuations in fair market value due to the volatility of the
stock market.
There has been no material change in our interest rate exposure since April 30, 2009.
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Item 4. |
|
Controls and Procedures |
Evaluation of Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chairman,
our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chairman, our
Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this quarterly report.
41
Changes in Internal Control Over Financial Reporting
Cycle counting of parts in inventory is an important financial control process that is
conducted at all of our primary manufacturing facilities throughout the fiscal year. During the
quarter ended February 1, 2009, the cycle counting process at our Ipoh, Malaysia manufacturing
facility was discontinued as a result of discrepancies noted between the actual physical location
of a number of parts compared to their location as indicated by our management information systems.
Because of the failure of this control, we augmented our inventory procedures shortly after the end
of the quarter to include physical inventory counts covering a substantial portion of the inventory
held at this site in order to verify quantities on hand at each period end. We evaluated the cause
of discrepancies in the cycle counting process at the Ipoh facility, made appropriate operational
and system changes and restarted the cycle count process for finished goods during the quarter
ended April 30, 2009. Additional improvements to our inventory systems and controls at our Ipoh
facility and our other facilities were made during the nine months ended January 31, 2010. We will
continue to augment the process with additional physical inventory counts as warranted until the
cycle count process is fully operational once again. Other than these changes in inventory
procedures, there were no changes in our internal control over financial reporting during the
quarter ended January 31, 2010 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings |
Reference is made to Part I, Item I, Financial Statements Note 24. Pending Litigation for
a description of pending legal proceedings, including material developments in certain of those
proceedings during the quarter ended January 31, 2010.
OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS, INCLUDING THOSE DESCRIBED BELOW. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING PRICE OF
OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS
REPORT, INCLUDING OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.
During
the nine months ended January 31, 2010, we (i) completed the exchange of $47.5 million
aggregate principal amount of our outstanding convertible subordinated notes for $24.9 million in
cash and approximately 3.5 million shares of our common stock, (ii) repurchased an additional $64.9
million aggregate principal amount of the notes for cash, (iii) sold $100 million aggregate
principal amount of a new series of 5.0% Convertible Senior Notes due 2029 and (iv) established a
new four-year $70 million senior revolving credit facility. As a result of these transactions, we
substantially reduced the principal amount of our outstanding notes maturing in October 2010 and
substantially improved our liquidity. Accordingly, we have eliminated from the following discussion
the risk factor entitled We may have insufficient cash flow to meet our debt service obligations,
including payments due on our subordinated convertible notes which was included in Item 1A of our
annual report on Form 10-K for the fiscal year ended April 30, 2009 (the 2009 10-K) and have
modified other risk factors relating to our potential need for additional capital. We also added a
risk factor entitled Our ability to use certain net operating loss carryforwards and tax credit
carryforwards may be limited under Section 382 of the Internal Revenue Code. Except for these
changes, the risk factors described below do not include any material changes from those disclosed
in the 2009 10-K.
Our quarterly revenues and operating results fluctuate due to a variety of factors, which may
result in volatility or a decline in the price of our stock.
Our quarterly operating results have varied significantly due to a number of factors, including:
|
|
|
fluctuation in demand for our products; |
|
|
|
|
the timing of new product introductions or enhancements by us and our competitors; |
|
|
|
|
the level of market acceptance of new and enhanced versions of our products; |
|
|
|
|
the timing or cancellation of large customer orders; |
|
|
|
|
the length and variability of the sales cycle for our products; |
|
|
|
|
pricing policy changes by us and our competitors and suppliers; |
42
|
|
|
the availability of development funding and the timing of development revenue; |
|
|
|
|
changes in the mix of products sold; |
|
|
|
|
increased competition in product lines, and competitive pricing pressures; and |
|
|
|
|
the evolving and unpredictable nature of the markets for products incorporating our
optical components and subsystems. |
|
|
|
|
We expect that our operating results will continue to fluctuate in the future as a result of
these factors and a variety of other factors, including: |
|
|
|
|
fluctuations in manufacturing yields; |
|
|
|
|
the emergence of new industry standards; |
|
|
|
|
failure to anticipate changing customer product requirements; |
|
|
|
|
the loss or gain of important customers; |
|
|
|
|
product obsolescence; and |
|
|
|
|
the amount of research and development expenses associated with new product
introductions. |
|
|
|
|
Our operating results could also be harmed by: |
|
|
|
|
the continuation or worsening of the current global economic slowdown or economic
conditions in various geographic areas where we or our customers do business; |
|
|
|
|
acts of terrorism and international conflicts or crises; |
|
|
|
|
other conditions affecting the timing of customer orders; or |
|
|
|
|
a downturn in the markets for our customers products, particularly the data storage and
networking and telecommunications components markets. |
We may experience a delay in generating or recognizing revenues for a number of reasons.
Orders at the beginning of each quarter typically represent a small percentage of expected revenues
for that quarter and are generally cancelable with minimal notice. Accordingly, we depend on
obtaining orders during each 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 timeframes 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 will again decrease from the previous quarter or fall below the expectations of
securities analysts and investors. In this event, it is likely that the trading price of our common
stock would significantly decline.
As a result of these factors, our operating results may vary significantly from quarter to
quarter. 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. Any shortfall in revenues or net income from levels expected by the investment
community could cause a decline in the trading price of our stock.
43
We may lose sales if our suppliers or independent contractors fail to meet our needs or go out of
business.
We currently purchase a number of key components used in the manufacture of our products from
single or limited sources, and we rely on several independent contract manufacturers to supply us
with certain key subassemblies, including lasers, modulators, and printed circuit boards. We depend
on these sources to meet our production needs. Moreover, we depend on the quality of the components
and subassemblies that they supply to us, over which we have limited control. Several of our
suppliers are or may become financially unstable as the result of current global market conditions.
In addition, we have encountered shortages and delays in obtaining components in the past and
expect to encounter additional shortages and delays in the future. Recently, many of our suppliers
have extended lead times for many of their products as the result of significantly reducing
capacity in light of the global slowdown in demand. This reduction in capacity has reduced the
ability of many suppliers to respond to increases in demand. 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 generally have no long-term contracts with any of our
component suppliers or contract manufacturers. As a result, a supplier or contract manufacturer can
discontinue supplying components or subassemblies to us without penalty. If a supplier were to
discontinue supplying a key component or cease operations, our business may be harmed by the
resulting product manufacturing and delivery delays. We are also subject to potential delays in the
development by our suppliers of key components which may affect our ability to introduce new
products. Similarly, disruptions in the services provided by our contract manufacturers or the
transition to other suppliers of these services could lead to supply chain problems or delays in
the delivery of our products. These problems or delays could damage our relationships with our
customers and adversely affect our business.
We use rolling forecasts based on anticipated product orders to determine our component and
subassembly 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 could significantly harm our business.
If we are unable to realize anticipated cost savings from the transfer of certain manufacturing
operations to our overseas locations and increased use of internally-manufactured components our
results of operations could be harmed.
As
part of our initiatives to reduce cost of revenues planned for the next several
quarters, we expect to realize significant cost savings through (i) the transfer of certain product
manufacturing operations to lower cost off-shore locations and (ii) product engineering changes to
enable the broader use of internally-manufactured components. The transfer of production to
overseas locations may be more difficult and costly than we currently anticipate which could result
in increased transfer costs and time delays. Further, following transfer, we may experience lower
manufacturing yields than those historically achieved in our U.S. manufacturing locations. In
addition, the engineering changes required for the use of internally-manufactured components may be
more technically-challenging than we anticipate and customer acceptance of such changes could be
delayed. If we fail to achieve the planned product manufacturing transfer and increase in
internally-manufactured component use within our currently anticipated timeframe, or if our
manufacturing yields decrease as a result, we may be insuccessful in
achieving cost savings or such savings
will be less than anticipated,
and our results of operations could be harmed.
We may not be able to obtain additional capital in the future, and failure to do so may harm our
business.
We believe that our existing balances of cash, cash equivalents and short-term investments,
together with the cash expected to be generated from future operations and borrowings under our
bank credit facility, will be sufficient to meet our cash needs for working capital and capital
expenditures for at least the next 12 months. We may, however, require additional financing to fund
our operations in the future or to repay or otherwise retire all of our outstanding convertible
debt in the aggregate principal amount of $129.6 million, of which $29.6 matures in October 2010
and the remaining $100 million is subject to redemption by the holders in October 2014, 2016, 2019
and 2024. Due to the unpredictable nature of the capital markets, particularly in the technology
sector, we cannot assure you that we will be able to raise additional capital if and when it is
required, especially if we experience disappointing operating results. If adequate capital is not
available to us as required, or is not available on favorable terms, we could be required to
significantly reduce or restructure our business operations. If we do raise additional funds
through the issuance of equity or convertible debt securities, the percentage ownership of our
stockholders could be significantly diluted, and these newly-issued securities may have rights,
preferences or privileges senior to those of existing stockholders.
44
We expect that our revenues and profitability will be adversely affected following our recently
completed sale of our network performance test systems business.
On July 15, 2009, we completed the sale of substantially all of the assets of our Network
Tools Division (excluding accounts receivable and payable) to JDSU for $40.6 million in cash. As a
result of this transaction, we no longer offer network performance test products. These products
accounted for $37.3 million, $38.6 million and $44.2 million in revenues during fiscal 2007, 2008
and 2009, respectively. Gross profit and operating profit margins on sales of network performance
test products were generally higher than on our optical subsystem and component products.
Accordingly, we expect that our revenues and profitability will continue to be lower than
historical levels as a result of the sale unless we are able to sustain significant growth in our
optical subsystems and components business.
Failure to accurately forecast our revenues could result in additional charges for obsolete or
excess inventories or non-cancellable purchase commitments.
We base many of our operating decisions, and enter into purchase commitments, on the basis of
anticipated revenue trends which are highly unpredictable. Some of our purchase commitments are not
cancelable, and in some cases we are required to recognize a charge representing the amount of
material or capital equipment purchased or ordered which exceeds our actual requirements. In the
past, we have sometimes experienced significant growth followed by a significant decrease in
customer demand such as occurred in fiscal 2001, when revenues increased by 181% followed by a
decrease of 22% in fiscal 2002. Based on projected revenue trends during these periods, we acquired
inventories and entered into purchase commitments in order to meet anticipated increases in demand
for our products which did not materialize. As a result, we recorded significant charges for
obsolete and excess inventories and non-cancelable purchase commitments which contributed to
substantial operating losses in fiscal 2002. Should revenues in future periods again fall
substantially below our expectations, or should we fail again to accurately forecast changes in
demand mix, we could be required to record additional charges for obsolete or excess inventories or
non-cancelable purchase commitments.
If we encounter sustained yield problems or other delays in the production or delivery of our
internally-manufactured components or in the final assembly and test of our transceiver products,
we may lose sales and damage our customer relationships.
Our manufacturing operations are highly vertically integrated. In order to reduce our
manufacturing costs, we have acquired a number of companies, and business units of other companies,
that manufacture optical components incorporated in our optical subsystem products and have
developed our own facilities for the final assembly and testing of our products. For example, we
design and manufacture many critical components including all of the short wavelength VCSEL lasers
incorporated in transceivers used for LAN/SAN applications at our wafer fabrication facility in
Allen, Texas and manufacture a portion of our internal requirements for longer wavelength lasers at
our wafer fabrication facility in Fremont, California. We assemble and test most of our transceiver
products at our facility in Ipoh, Malaysia. As a result of this vertical integration, we have
become increasingly dependent on our internal production capabilities. The manufacture of critical
components, including the fabrication of wafers, and the assembly and testing of our products,
involve highly complex processes. For example, minute levels of contaminants in the manufacturing
environment, difficulties in the fabrication process or other factors can cause a substantial
portion of the components on a wafer to be nonfunctional. These problems may be difficult to detect
at an early stage of the manufacturing process and often are time-consuming and expensive to
correct. From time to time, we have experienced problems achieving acceptable yields at our wafer
fabrication facilities, resulting in delays in the availability of components. Moreover, an
increase in the rejection rate of products during the quality control process before, during or
after manufacture, results in lower yields and margins. In addition, changes in manufacturing
processes required as a result of changes in product specifications, changing customer needs and
the introduction of new product lines have historically significantly reduced our manufacturing
yields, resulting in low or negative margins on those products. Poor manufacturing yields over a
prolonged period of time could adversely affect our ability to deliver our subsystem products to
our customers and could also affect our sale of components to customers in the merchant market. Our
inability to supply components to meet our internal needs could harm our relationships with
customers and have an adverse effect on our business.
We are dependent on widespread market acceptance of our optical subsystems and components, and our
revenues will decline if the markets for these products do not expand as expected.
We derive all of our revenue from sales of our optical subsystems and components. Accordingly,
widespread acceptance of these products is critical to our future success. If the market does not
continue to accept our optical subsystems and components, our revenues will decline significantly.
Our future success ultimately depends on the continued growth of the communications industry and,
in particular, the continued expansion of global information networks, particularly those directly
or indirectly dependent upon a fiber optics infrastructure. As part of that growth, we are relying
on increasing demand for voice, video and other data delivered over high-bandwidth network systems
as well as commitments by network systems vendors to invest in the expansion of the global
information network. As network usage and bandwidth demand increase, so does the need for advanced
optical networks to provide the required bandwidth. Without network and bandwidth growth, the need
for optical subsystems and components, and hence our
45
future growth as a manufacturer of these products, and systems that test these products, will
be jeopardized, and our business would be significantly harmed.
Many of these factors are beyond our control. In addition, in order to achieve widespread
market acceptance, we must differentiate ourselves from our 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.
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 consistently accounted for a significant portion of our
revenues. For example, sales to our top five customers represented 43% of our revenues in the first
nine months of fiscal 2010 and 42% of our revenues in fiscal 2009. Our success will depend on our
continued ability to develop and manage relationships with our major customers. Although we are
attempting to expand our customer base, we expect that significant customer concentration will
continue for the foreseeable future. We may not be able to offset any decline in revenues from our
existing major customers with revenues from new customers, and our quarterly results may be
volatile because we are dependent on large orders from these customers that may be reduced or
delayed.
The markets in which we have historically sold our optical subsystems and components products
are dominated by a relatively small number of systems manufacturers, thereby limiting the number of
our potential customers. Recent consolidation of portions of our customer base, including
telecommunications systems manufacturers and potential future consolidation, may have a material
adverse impact on our business. Our dependence on large orders from a relatively small number of
customers makes our relationship with each customer critically important to our business. We cannot
assure you that we will be able to retain our largest customers, that we will be able to attract
additional customers or that our customers will be successful in selling their products that
incorporate our products. We have in the past experienced delays and reductions in orders from some
of our major customers. In addition, our customers have in the past sought price concessions from
us, and we expect that they will continue to do so in the future. Cost reduction measures that we
have implemented over the past several years, and additional action we may take to reduce costs,
may adversely affect our ability to introduce new and improved products which may, in turn,
adversely affect our relationships with some of our key customers. Further, some of our customers
may in the future shift their purchases of products from us to our competitors or to joint ventures
between these customers and our competitors. The loss of one or more of our largest customers, any
reduction or delay in sales to these customers, our inability to successfully develop relationships
with additional customers or future price concessions that we may make could significantly harm our
business.
Because we do not have long-term contracts with our customers, our customers may cease purchasing
our products at any time if we fail to meet our customers needs.
Typically, 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:
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|
|
our customers can stop purchasing our products at any time without penalty; |
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|
|
|
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 inventory hub arrangements under which customers may draw
down inventory to satisfy their demand as needed or pursuant to individual purchase orders, often
with extremely short lead times. If we are unable to fulfill these orders in a timely manner, it is
likely that we will lose sales and customers. If our major customers stop purchasing our products
for any reason, our business and results of operations would be harmed.
46
The markets for our products are 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, substantial capital investment, changes in customer requirements and
evolving industry standards with respect to the protocols used in data communications,
telecommunications and cable TV networks. 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. For example, the market for optical
subsystems is currently characterized by a trend toward the adoption of pluggable modules and
subsystems that do not require customized interconnections and by the development of more complex
and integrated optical subsystems. We expect that new technologies will emerge as competition and
the need for higher and more cost-effective bandwidth increases. The introduction of new and
enhanced products may cause our customers to defer or cancel orders for existing products. In
addition, a slowdown in demand for existing products ahead of a new product introduction could
result in a write-down in the value of inventory on hand related to existing products. We have in
the past experienced a slowdown in demand for existing products and delays in new product
development and such delays may occur in the future. To the extent customers defer or cancel orders
for existing products due to a slowdown in demand or in the expectation of a new product release or
if 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:
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changing product specifications and customer requirements; |
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unanticipated engineering complexities; |
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expense reduction measures we have implemented, and others we may implement, to conserve
our cash and attempt to achieve and sustain profitability; |
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difficulties in hiring and retaining necessary technical personnel; |
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difficulties in reallocating engineering resources and overcoming resource limitations;
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changing market or competitive product requirements. |
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. The introduction of new
products also requires significant investment to ramp up production capacity, for which benefit
will not be realized if customer demand does not develop as expected. Ramping of production
capacity also entails risks of delays which can limit our ability to realize the full benefit of
the new product introduction. We cannot assure you that we will be able to identify, develop,
manufacture, market or support new or enhanced products successfully, if at all, or on a timely
basis. Further, we cannot assure you that our new products will gain market acceptance or that we
will be able to respond effectively to product announcements by competitors, technological changes
or emerging industry standards. Any failure to respond to technological change would significantly
harm our business.
Continued competition in our markets may lead to an accelerated reduction in our prices, revenues
and market share.
The end markets for optical products have experienced significant industry consolidation
during the past few years while the industry that supplies these customers has experienced less consolidation. As a result,
the markets for optical subsystems and components are highly competitive. Our current competitors
include a number of domestic and international companies, many of which have substantially greater
financial, technical, marketing and distribution resources and brand name recognition than we have.
Increased Consolidation in our industry, should it occur, will reduce the number of our competitors but would be likely to further strengthen surviving industry participants. We may not be able to compete successfully against either current or future competitors. Companies
competing with us may introduce products that are competitively priced, have increased performance
or functionality, or incorporate technological advances and may be able to react quicker to
changing customer requirements and expectations. There is also the risk that network systems
vendors may re-enter the subsystem market and begin to manufacture the optical subsystems
incorporated in their network systems. 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 Avago Technologies, Capella
Intelligent Subsystems, CoAdna Photonics, Emcore, Fujitsu Computer Systems, JDS Uniphase, Opnext,
Oplink, StrataLight Communications, Sumitomo, and a number of smaller vendors. BKtel, Emcore, Olson
Technology and Yagi Antenna are our main competitors with respect to our cable TV products. Our
competitors continue to introduce improved products and we will have to do the same to remain
competitive.
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Decreases in average selling prices of our products may reduce our gross margins.
The market for optical subsystems is characterized by declining average selling prices
resulting from factors such as increased competition, overcapacity, the introduction of new
products and increased unit volumes as manufacturers continue to deploy network and storage
systems. We have in the past experienced, and in the future may experience, substantial
period-to-period fluctuations in operating results due to declining average selling prices. We
anticipate that average selling prices will decrease in the future in response to product
introductions by competitors or us, or by other factors, including pricing pressures from
significant customers. Therefore, in order to achieve and sustain profitable operations, we must
continue to develop and introduce on a timely basis new products that incorporate features that can
be sold at higher average selling prices. Failure to do so could cause our revenues and gross
margins to decline, which would result in additional operating losses and 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
and could adversely affect our 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 margins.
Shifts in our product mix may result in declines in gross margins.
Our optical products sold for longer distance MAN and telecom applications typically have
higher gross margins than our products for shorter distance LAN or SAN applications. Gross margins
on individual products fluctuate over the products life cycle. Our overall gross margins have
fluctuated from period to period as a result of shifts in product mix, the introduction of new
products, decreases in average selling prices for older products and our ability to reduce product
costs, and these fluctuations are expected to continue in the future.
Our customers often evaluate our products for long and variable periods, which causes the timing of
our revenues and results of operations to be unpredictable.
The period of time between our initial contact with a customer and the receipt of an actual
purchase order may span a year or more. During this time, customers may perform, or require us to
perform, extensive and lengthy evaluation and testing of our products before purchasing and using
the products in their equipment. These products often take substantial time to develop because of
their complexity and because customer specifications sometimes change during the development cycle.
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 research and development and 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, the agreements that we enter into with our customers typically contain no minimum
purchase commitments. Failure of our customers to incorporate our products into their systems would
significantly harm our business.
We will lose sales if we are unable to obtain government authorization to export certain of our
products, and we would be subject to legal and regulatory consequences if we do not comply with
applicable export control laws and regulations.
Exports of certain of our products are subject to export controls imposed by the U.S.
Government and administered by the United States Departments of State and Commerce. In certain
instances, these regulations may require pre-shipment authorization from the administering
department. For products subject to the Export Administration Regulations, or EAR, administered by
the Department of Commerces Bureau of Industry and Security, the requirement for a license is
dependent on the type and end use of the product, the final destination, the identity of the end
user and whether a license exception might apply. Virtually all exports of products subject to the
International Traffic in Arms Regulations, or ITAR, administered by the Department of States
Directorate of Defense Trade Controls, require a license. Certain of our fiber optics products are
subject to EAR and certain of our RF over fiber products, as well as certain products developed
with government funding, are currently subject to ITAR. Products developed and manufactured in our
foreign locations are subject to export controls of the applicable foreign nation.
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Given the current global political climate, obtaining export licenses can be difficult and
time-consuming. Failure to obtain export licenses for these shipments could significantly reduce
our revenue and materially adversely affect our business, financial condition and results of
operations. Compliance with U.S. Government regulations may also subject us to additional fees and
costs. The absence of comparable restrictions on competitors in other countries may adversely
affect our competitive position.
During mid-2007, Optium became aware that certain of its analog RF over fiber products may,
depending on end use and customization, be subject to ITAR. Accordingly, Optium filed a detailed
voluntary disclosure with the United States Department of State describing the details of possible
inadvertent ITAR violations with respect to the export of a limited number of certain prototype
products, as well as related technical data and defense services. Optium may have also made
unauthorized transfers of ITAR-restricted technical data and defense services to foreign persons in
the workplace. Additional information has been provided upon request to the Department of State
with respect to this matter. In late 2008, a grand jury subpoena from the office of the U.S.
Attorney for the Eastern District of Pennsylvania was received requesting documents from 2005
through the present referring to, relating to or involving the subject matter of the above
referenced voluntary disclosure and export activities.
While the Department of State encourages voluntary disclosures and generally affords parties
mitigating credit under such circumstances, we nevertheless could be subject to continued
investigation and potential regulatory consequences ranging from a no-action letter, government
oversight of facilities and export transactions, monetary penalties, and in extreme cases,
debarment from government contracting, denial of export privileges and criminal sanctions, any of
which would adversely affect our results of operations and cash flow. The Department of State and
U.S. Attorney inquiries may require us to expend significant management time and incur significant
legal and other expenses. We cannot predict how long it will take or how much more time and
resources we will have to expend to resolve these government inquiries, nor can we predict the
outcome of these inquiries.
We depend on facilities located outside of the United States to manufacture a substantial portion
of our products, which subjects us to additional risks.
In addition to our principal manufacturing facility in Malaysia, we operate smaller facilities
in Australia, China, Israel and Singapore. We also rely on several contract manufacturers located
in Asia for our supply of key subassemblies. Each of these facilities and manufacturers subjects us
to additional risks associated with international manufacturing, including:
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unexpected changes in regulatory requirements; |
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legal uncertainties regarding liability, tariffs and other trade barriers; |
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inadequate protection of intellectual property in some countries; |
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greater incidence of shipping delays; |
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greater difficulty in overseeing manufacturing operations; |
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greater difficulty in hiring and retaining direct labor; |
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greater difficulty in hiring talent needed to oversee manufacturing operations; |
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potential political and economic instability; and |
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the outbreak of infectious diseases such as the H1N1 influenza virus and/or severe acute
respiratory syndrome, or SARS, which could result in travel restrictions or the closure of
our facilities or the facilities of our customers and suppliers. |
Any of these factors could significantly impair our ability to source our contract
manufacturing requirements internationally.
Our future operating results may be subject to volatility as a result of exposure to foreign
exchange risks.
We are exposed to foreign exchange risks. Foreign currency fluctuations may affect both our
revenues and our costs and expenses and significantly affect our operating results. Prices for our
products are currently denominated in U.S. dollars for sales to our customers throughout the world.
If there is a significant devaluation of the currency in a specific country relative to the dollar,
the prices of our products will increase relative to that countrys currency, our products may be
less competitive in that country and our revenues may be adversely affected.
Although we price our products in U.S. dollars, portions of both our cost of revenues and
operating expenses are incurred in foreign currencies, principally the Malaysian ringgit, the
Chinese yuan, the Australian dollar and the Israeli shekel. As a result, we bear the risk that the
rate of inflation in one or more countries will exceed the rate of the devaluation of that
countrys currency in relation to the U.S. dollar, which would increase our costs as expressed in
U.S. dollars. To date, we have not engaged in currency hedging transactions to decrease the risk of
financial exposure from fluctuations in foreign exchange rates.
Our business and future operating results are subject to a wide range of uncertainties arising out
of the continuing threat of terrorist attacks and ongoing military actions in the Middle East.
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Like other U.S. companies, our business and operating results are subject to uncertainties
arising out of the continuing threat of terrorist attacks on the United States and ongoing military
actions in the Middle East, including the economic consequences of the war in Afghanistan and Iraq
or additional terrorist activities and associated political instability, and the impact of
heightened security concerns on domestic and international travel and commerce. In particular, due
to these uncertainties we are subject to:
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increased risks related to the operations of our manufacturing facilities in Malaysia; |
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greater risks of disruption in the operations of our China, Singapore and Israeli
facilities and our Asian contract manufacturers and more frequent instances of shipping
delays; and |
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the risk that future tightening of immigration controls may adversely affect the
residence status of non-U.S. engineers and other key technical employees in our U.S.
facilities or our ability to hire new non-U.S. employees in such facilities. |
Past and future acquisitions could be difficult to integrate, disrupt our business, dilute
stockholder value and harm our operating results.
In addition to our combination with Optium, in August 2008, we have completed the acquisition of ten
privately-held companies and certain businesses and assets from six other companies since October
2000. We continue to review opportunities to acquire other businesses, product lines 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, and we from
time to time make proposals and offers, and take other steps, to acquire businesses, products and
technologies.
The Optium merger and several of our other past acquisitions have been material, and
acquisitions that we may complete in the future may be material. In 13 of our 17 acquisitions, we
issued common stock or notes convertible into common stock as all or a portion of the
consideration. The issuance of common stock or other equity securities by us in connection with any future
acquisition would dilute our stockholders percentage ownership.
Other risks associated with acquiring the operations of other companies include:
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problems assimilating the purchased operations, technologies or products; |
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unanticipated costs associated with the acquisition; |
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diversion of managements attention from our core business; |
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adverse effects on existing business relationships with suppliers and customers; |
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risks associated with entering markets in which we have no or limited prior experience;
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potential loss of key employees of purchased organizations. |
Not all of our past acquisitions have been successful. In the past, we have subsequently sold
some of the assets acquired in prior acquisitions, discontinued product lines and closed acquired
facilities. As a result of these activities, we incurred significant restructuring charges and
charges for the write-down of assets associated with those acquisitions. Through fiscal 2009, we
have written off all of the goodwill associated with past acquisitions. We cannot assure you that
we will be successful in overcoming problems encountered in connection with more recently completed
acquisitions or potential future acquisitions, and our inability to do so could significantly harm
our business. In addition, to the extent that the economic benefits associated with any of our
completed or future acquisitions diminish in the future, we may be required to record additional
write downs of goodwill, intangible assets or other assets associated with such acquisitions, which
would adversely affect our operating results.
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We have made and may continue to make strategic investments which may not be successful, may result
in the loss of all or part of our invested capital and may adversely affect our operating results.
Since inception we have made minority equity investments in early-stage technology companies,
totaling approximately $56 million. Our investments in these early stage companies were primarily
motivated by our desire to gain early access to new technology. We intend to review additional
opportunities to make strategic equity investments in pre-public companies where we believe such
investments will provide us with opportunities to gain access to important technologies or
otherwise enhance important commercial relationships. We have little or no influence over the
early-stage companies in which we have made or may make these strategic, minority equity
investments. Each of these investments in pre-public companies involves a high degree of risk. We
may not be successful in achieving the financial, technological or commercial advantage upon which
any given investment is premised, and failure by the early-stage company to achieve its own
business objectives or to raise capital needed on acceptable economic terms could result in a loss
of all or part of our invested capital. Between fiscal 2003 and 2009, we wrote off an aggregate of
$24.8 million in six investments which became impaired and reclassified $4.2 million of another
investment to goodwill as the investment was deemed to have no value. During the second quarter of
fiscal 2010, we wrote off $2.0 million of our investment in another privately held company. We may
be required to write off all or a portion of the $12.3 million in such investments remaining on our
balance sheet as of January 31, 2010 in future periods.
Our ability to utilize certain net operating loss carryforwards and tax credit carryforwards may be
limited under Section 382 of the Internal Revenue Code.
As of April 30, 2009, we had net operating loss, or NOL, carryforward amounts of approximately
$489 million for U.S. federal income tax purposes and $159.8 million for state income tax purposes,
and U.S. federal and state tax credit carryforward amounts of approximately $14.4 million for U.S.
federal income tax purposes and $10.1 million for state income tax purposes.
The federal and state tax credit carryforwards will expire at various
dates beginning in 2010
through 2029 and of such carry forwards $2.5 million will expire in the next five years. The federal and state NOLs
carryforwards will expire at various dates beginning in 2011 through 2029 and of such carry forwards $97.8 million will
expire in the next five years. Utilization
of these NOL and tax credit carryforward amounts may be subject to a substantial annual limitation
if the ownership change limitations under Section 382 of the Internal Revenue Code and similar
state provisions are triggered by changes in the ownership of our capital stock. Such an annual
limitation could result in the expiration of the NOL and tax credit carryforward amounts before
utilization.
Because of competition for technical personnel, we may not be able to recruit or retain necessary
personnel.
We believe our future success will depend in large part upon our ability to attract and retain
highly skilled managerial, technical, sales and marketing, finance and manufacturing personnel. In
particular, we may 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. In making employment decisions, particularly
in the high-technology industries, job candidates often consider the value of the equity they are
to receive in connection with their employment. Therefore, significant volatility in the price of
our common stock may adversely affect our ability to attract or retain technical personnel.
Furthermore, changes to accounting principles generally accepted in the United States relating to
the expensing of stock options may limit our ability to grant the sizes or types of stock awards
that job candidates may require to accept employment with us. Our failure to attract and retain
these qualified employees could significantly harm our business. The loss of the services of any of
our qualified employees, the inability to attract or retain qualified personnel in the future or
delays in hiring required personnel could hinder the development and introduction of and negatively
impact our ability to sell our products. In addition, employees may leave our company and
subsequently compete against us. Moreover, companies in our industry whose employees accept
positions with competitors frequently claim that their competitors have engaged in unfair hiring
practices. We have been subject to claims of this type and may be subject to such claims in the
future as we seek to hire qualified personnel. Some of these claims may result in material
litigation. We could incur substantial costs in defending ourselves against these claims,
regardless of their merits.
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 to establish and protect our proprietary rights. We license certain of our proprietary
technology, including our digital diagnostics technology, to customers who include current and
potential competitors, and we rely largely on provisions of our licensing agreements to protect our
intellectual property rights in this technology. Although a number of patents have been issued to
us, we have obtained a number of other patents as a result of our acquisitions, and we have filed
applications for additional patents, we cannot assure you that any patents will issue as a result
of pending patent applications or that our issued patents will be upheld. Additionally, significant
technology used in our product lines is not the subject of any patent protection, and we may be
unable to obtain patent protection on such technology in the future. 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 and expensive. We are currently engaged
in pending litigation to enforce certain of our patents, and additional litigation may be necessary
in the future to enforce our intellectual
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property rights or to determine the validity and scope of the proprietary rights of others. In
connection with the pending litigation, substantial management time has been, and will continue to
be, expended. In addition, we have incurred, and we expect to continue to incur, substantial legal
expenses in connection with these pending lawsuits. These costs and this diversion of resources
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 have been involved in the past
as a defendant in patent infringement lawsuits, and we were recently found liable in a patent
infringement lawsuit filed against Optium by JDS Uniphase Corporation and Emcore Corporation. 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. 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.
Numerous patents in our industry are held by others, including academic institutions and
competitors. Optical subsystem suppliers may seek to gain a competitive advantage or other third
parties may seek an economic return on their intellectual property portfolios by making
infringement claims against us. In the future, we may need to obtain license rights to patents or
other intellectual property held by others to the extent necessary for our business. Unless we are
able to obtain those licenses on commercially reasonable terms, patents or other intellectual
property held by others could inhibit our development of new products. Licenses granting us the
right to use third party technology may not be available on commercially reasonable terms, if at
all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties
or both. These payments or other terms could have a significant adverse impact on our operating
results.
Our products may contain defects that may cause us to incur significant costs, divert our attention
from product development efforts and result in a loss of customers.
Our products are complex and defects may be found from time to time. Networking products
frequently contain undetected software or hardware defects when first introduced or as new versions
are released. 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.
We are subject to pending shareholder derivative legal proceedings.
We have been named as a nominal defendant in several purported shareholder derivative lawsuits
concerning the granting of stock options. These cases have been consolidated into two proceedings
pending in federal and state courts in California. The plaintiffs in all of these cases have
alleged that certain current or former officers and directors of Finisar caused it to grant stock
options at less than fair market value, contrary to our public statements (including statements in
our financial statements), and that, as a result, those officers and directors are liable to
Finisar. No specific amount of damages has been alleged and, by the nature of the lawsuits no
damages will be alleged, against Finisar. On May 22, 2007, the state court granted our motion to
stay the state court action pending resolution of the consolidated federal court action. On August
28, 2007, we and the individual defendants filed motions to dismiss the complaint which were
granted on January 11, 2008. On May 12, 2008, the plaintiffs filed a further amended complaint in
the federal court action. On July 1, 2008, we and the individual defendants filed motions to
dismiss the amended complaint. On September 22, 2009, the Court granted the motions to dismiss. The
plaintiffs are appealing this order. We will continue to incur legal fees in this case, including
expenses for the reimbursement of legal fees of present and former officers and directors under
indemnification obligations. The expense of continuing to defend such litigation may be
significant. The amount of time to resolve these lawsuits is unpredictable and these actions may
divert managements attention from the day-to-day operations of our business, which could adversely
affect our business, results of operations and cash flows.
Our business and future operating results may be adversely affected by events outside our control.
Our business and operating results are vulnerable to events outside of our control, such as
earthquakes, fire, power loss, telecommunications failures and uncertainties arising out of
terrorist attacks in the United States and overseas. Our corporate headquarters and a portion of
our manufacturing operations are located in California. California in particular has been
vulnerable to natural disasters, such as earthquakes, fires and floods, and other risks which at
times have disrupted the local economy and posed physical risks to our property. We are also
dependent on communications links with our overseas manufacturing locations and would be
significantly harmed if these links were interrupted for any significant length of time. We
presently do not have adequate
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redundant, multiple site capacity if any of these events were to occur, nor can we be certain
that the insurance we maintain against these events would be adequate.
The conversion of our outstanding convertible subordinated notes would result in substantial
dilution to our current stockholders.
As of January 31, 2010, we had outstanding 5.0% Convertible Senior Notes due 2029 in the
principal amount of $100.0 million, 2 1/2% Convertible Senior Subordinated Notes due 2010 in the
principal amount of $25.7 million and 2 1/2% Convertible Subordinated Notes due 2010 in the
principal amount of $3.9 million. The $100.0 million in principal amount of our 5.0% Senior Notes
are convertible, at the option of the holder, at any time on or prior to maturity into shares of
our common stock at a conversion price of $10.68 per share. The $3.9 million in principal amount of
our 2 1/2% Subordinated Notes are convertible, at the option of the holder, at any time on or prior
to maturity into shares of our common stock at a conversion price of $29.64 per share. The $25.7
million in principal amount of our 2 1/2% Senior Subordinated Notes are convertible at a conversion
price of $26.24, with the underlying principal payable in cash, upon the trading price of our
common stock reaching $39.36 for a period of time. An aggregate of approximately 9,821,000 shares
of common stock would be issued upon the conversion of all outstanding convertible notes at these
exchange rates, which would dilute the voting power and ownership percentage of our existing
stockholders. We have previously entered into privately negotiated transactions with certain
holders of our convertible notes for the repurchase of notes in exchange for a greater number of
shares of our common stock than would have been issued had the principal amount of the notes been
converted at the original conversion rate specified in the notes, thus resulting in more dilution.
We may enter into similar transactions in the future and, if we do so, there will be additional
dilution to the voting power and percentage ownership of our existing stockholders.
Delaware law, our charter documents and our stockholder rights plan contain provisions that could
discourage or prevent a potential takeover, even if such a transaction would be beneficial to our
stockholders.
Some provisions of our certificate of incorporation and bylaws, as well as provisions of
Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These include provisions:
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authorizing the board of directors to issue additional preferred stock; |
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prohibiting cumulative voting in the election of directors; |
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limiting the persons who may call special meetings of stockholders; |
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prohibiting stockholder actions by written consent; |
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creating a classified board of directors pursuant to which our directors are elected for
staggered three-year terms; |
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permitting the board of directors to increase the size of the board and to fill
vacancies; |
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requiring a super-majority vote of our stockholders to amend our bylaws and certain
provisions of our certificate of incorporation; and |
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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. |
We are subject to the provisions of Section 203 of the Delaware General Corporation Law which
limit the right of a corporation to engage in a business combination with a holder of 15% or more
of the corporations outstanding voting securities, or certain affiliated persons.
In addition, in September 2002, our board of directors adopted a stockholder rights plan under
which our stockholders received one share purchase right for each share of our common stock held by
them. Subject to certain exceptions, the rights become exercisable when a person or group (other
than certain exempt persons) acquires, or announces its intention to commence a tender or exchange
offer upon completion of which such person or group would acquire, 20% or more of our common stock
without prior board approval. Should such an event occur, then, unless the rights are redeemed or
have expired, our stockholders, other than the acquirer, will be entitled to purchase shares of our
common stock at a 50% discount from its then-Current Market Price (as defined) or, in the case of
certain business combinations, purchase the common stock of the acquirer at a 50% discount.
Although we believe that these charter and bylaw provisions, provisions of Delaware law and
our stockholder rights plan provide an opportunity for the board to assure that our stockholders
realize full value for their investment, they could have the effect of delaying or preventing a
change of control, even under circumstances that some stockholders may consider beneficial.
We do not currently intend to pay dividends on Finisar common stock and, consequently, a
stockholders ability to achieve a return on such stockholders investment will depend on
appreciation in the price of the common stock.
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We have never declared or paid any cash dividends on Finisar common stock and we do not
currently intend to do so for the foreseeable future. We currently intend to invest our future
earnings, if any, to fund our growth. Therefore, a stockholder is not likely to receive any
dividends on such stockholders common stock for the foreseeable future.
Our stock price has been and is likely to continue to be volatile.
The trading price of our common stock has been and is likely to continue to be subject to
large fluctuations. Our stock price may increase or decrease in response to a number of events and
factors, including:
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trends in our industry and the markets in which we operate; |
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changes in the market price of the products we sell; |
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changes in financial estimates and recommendations by securities analysts; |
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acquisitions and financings; |
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quarterly variations in our operating results; |
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the operating and stock price performance of other companies that investors in our common
stock may deem comparable; and |
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purchases or sales of blocks of our common stock. |
Part of this volatility is attributable to the current state of the stock market, in which
wide price swings are common. This volatility may adversely affect the prices of our common stock
regardless of our operating performance. If any of the foregoing occurs, our stock price could fall
and we may be exposed to class action lawsuits that, even if unsuccessful, could be costly to
defend and a distraction to management.
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Item 4. |
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Submission of Matters to a Vote of Security Holders. |
Our annual meeting of stockholders was held on November 18, 2009. At the meeting, the
following matters were submitted to a vote of our stockholders:
Election of Directors. The following persons were elected as Class I directors, to hold office
for three-year terms:
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Shares Voted |
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Name |
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Affirmatively |
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Votes Withheld |
Roger C. Ferguson |
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53,028,179 |
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1,437,516 |
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Larry D. Mitchell |
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53,022,997 |
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1,442,698 |
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Approval of an Amendment to our 1999 Employee Stock Purchase Plan and 1999 International
Employee Stock Purchase Plan. An amendment to our 1999 Employee Stock Purchase Plan and 1999
International Employee Stock Purchase Plan to increase the number of shares of our common stock
reserved for issuance thereunder by 250,000 shares, with such additional shares to be used solely
for issuance to participating employees on December 15, 2009, the next scheduled purchase date
under the plans, was approved by a vote of 31,261,015 shares for; 2,775,713 shares against; 78,529
shares abstaining; and 20,350,438 broker non-votes.
Approval of the Adoption of our 2009 Employee Stock Purchase Plan and 2009 International
Employee Stock Purchase Plan. The adoption of our 2009 Employee Stock Purchase Plan and 2009
International Employee Stock Purchase Plan and authorization to reserve 2,500,000 shares of our
common stock for issuance under such plans and automatic annual increases of 125,000 shares in the
number of shares of our common stock reserved for issuance under such plans on May 1 of each year
beginning with May 1, 2010 and continuing through May 1, 2015, was approved by a vote of 31,319,306
shares for; 2,714,970 shares against; 80,981 shares abstaining; and 20,350,438 broker non-votes.
Ratification of Appointment of Independent Auditors. The appointment of Ernst & Young LLP to
serve as our independent auditors for the fiscal year ending April 30, 2010 was ratified by a vote
of 53,421,341 shares for; 1,000,340 shares against; and 44,014 shares abstaining.
The
exhibits listed in the Exhibit Index are filed as part of this report (see page 56).
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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FINISAR CORPORATION |
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By:
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/s/ JERRY S. RAWLS
Jerry S. Rawls
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Chairman of the Board
(Co-Principal Executive Officer) |
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By:
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/s/ EITAN GERTEL
Eitan Gertel
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Chief Executive Officer
(Co-Principal Executive Officer) |
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By:
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/s/ STEPHEN K. WORKMAN
Stephen K. Workman
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Senior Vice President, Finance and
Chief Financial Officer |
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Dated: March 8, 2010
55
EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
10.1
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First amendment to Credit Agreement dated January 7, 2010 by and among Finisar Corporation, Optium
Corporation and Wells Fargo Foothill, LLC |
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10.2
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Loan Contract dated January 6, 2010 by and between Finisar Shanghai Inc and Xiamen International
Bank, Shanghai Branch |
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31.1
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.3
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Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.3
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
56