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 October 28, 2007
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)
1389 Moffett Park Drive
Sunnyvale, California
(Address of principal executive offices)
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94-3038428
(I.R.S. Employer
Identification No.)
94089
(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 is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
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 November 30, 2007, there were 308,634,829 shares of the registrants common stock, $.001
par value, issued and outstanding.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended October 28, 2007
2
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. We use words like anticipates, believes, plans, expects,
future, intends and similar expressions to identify these forward-looking statements. We have
based these forward-looking statements on our current expectations and projections about future
events; however, our business and operations are subject to a variety of risks and uncertainties,
and, consequently, actual results may materially differ from those projected by any forward-looking
statements. As a result, you should not place undue reliance on these forward-looking statements
since they may not occur.
Certain factors that could cause actual results to differ from those projected are discussed
in Item 1A. Risk Factors. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or future events.
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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October 28, 2007 |
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April 30, 2007 |
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(In thousands, except share and per share data) |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
46,249 |
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$ |
56,106 |
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Short-term available-for-sale investments |
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59,768 |
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56,511 |
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Restricted investments, short-term |
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625 |
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Accounts receivable, net of allowance for doubtful accounts of $1,408 and $1,607 at
October 28, 2007 and April 30, 2007 |
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54,463 |
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55,969 |
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Accounts receivable, other |
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7,584 |
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7,752 |
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Inventories |
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78,557 |
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77,670 |
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Prepaid expenses |
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4,751 |
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4,553 |
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Total current assets |
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251,372 |
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259,186 |
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Long-term available-for-sale investments |
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13,472 |
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19,855 |
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Property, plant and improvements, net |
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84,246 |
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84,071 |
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Purchased technology, net |
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14,893 |
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18,351 |
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Other purchased intangible assets, net |
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4,667 |
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5,647 |
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Goodwill |
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128,949 |
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128,949 |
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Minority investments |
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11,250 |
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11,250 |
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Other assets |
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20,018 |
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19,363 |
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Total assets |
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$ |
528,867 |
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$ |
546,672 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
31,117 |
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$ |
40,187 |
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Accrued compensation |
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10,475 |
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10,550 |
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Other accrued liabilities |
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15,932 |
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12,590 |
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Deferred revenue |
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5,543 |
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5,473 |
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Current portion of other long-term liabilities |
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2,344 |
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2,255 |
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Convertible notes, net of beneficial conversion feature of $4,731 and $0 at
October 28, 2007 and April 30, 2007 |
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112,469 |
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66,950 |
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Non-cancelable purchase obligations |
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2,426 |
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2,798 |
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Total current liabilities |
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180,306 |
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140,803 |
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Long-term liabilities: |
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Convertible notes, net of beneficial conversion feature of $0 and $7,184 at
October 28, 2007 and April 30, 2007 |
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150,000 |
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193,066 |
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Other long-term liabilities |
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19,633 |
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21,042 |
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Deferred income taxes |
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7,178 |
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6,090 |
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Total long-term liabilities |
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176,811 |
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220,198 |
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Commitments and contingent liabilities |
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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 October 28, 2007 and April 30, 2007 |
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Common stock, $0.001 par value, 750,000,000 shares authorized, 308,634,829 shares issued and
outstanding at October 28, 2007 and 308,632,366 shares issued and outstanding at April 30, 2007 |
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309 |
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309 |
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Additional paid-in capital |
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1,534,718 |
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1,529,322 |
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Accumulated other comprehensive income |
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8,936 |
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11,162 |
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Accumulated deficit |
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(1,372,213 |
) |
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(1,355,122 |
) |
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Total stockholders equity |
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171,750 |
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185,671 |
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Total liabilities and stockholders equity |
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$ |
528,867 |
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$ |
546,672 |
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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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Six Months Ended |
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October 28, |
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October 29, |
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October 28, |
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October 29, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenues |
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Optical subsystems and components |
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$ |
90,930 |
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$ |
99,009 |
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$ |
187,290 |
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$ |
195,052 |
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Network test and monitoring systems |
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9,769 |
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9,180 |
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19,144 |
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19,380 |
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Total revenues |
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100,699 |
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108,189 |
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206,434 |
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214,432 |
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Cost of revenues |
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67,180 |
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68,995 |
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138,883 |
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139,716 |
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Amortization of acquired developed technology |
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1,729 |
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1,505 |
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3,458 |
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3,024 |
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Gross profit |
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31,790 |
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37,689 |
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64,093 |
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71,692 |
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Operating expenses: |
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Research and development |
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17,630 |
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16,000 |
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35,132 |
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30,395 |
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Sales and marketing |
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9,178 |
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9,439 |
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19,234 |
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18,273 |
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General and administrative |
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10,871 |
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7,092 |
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18,862 |
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14,606 |
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Amortization of purchased intangibles |
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490 |
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313 |
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980 |
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612 |
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Total operating expenses |
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38,169 |
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32,844 |
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74,208 |
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63,886 |
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Income (loss) from operations |
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(6,379 |
) |
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4,845 |
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(10,115 |
) |
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7,806 |
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Interest income |
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1,537 |
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1,399 |
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2,952 |
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2,654 |
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Interest expense |
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(4,358 |
) |
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(3,900 |
) |
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(8,604 |
) |
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(7,821 |
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Loss on convertible debt exchange |
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(31,606 |
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(31,606 |
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Other income (expense), net |
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85 |
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(440 |
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(48 |
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(810 |
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Loss before income taxes and cumulative effect of
change in accounting principle |
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(9,115 |
) |
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(29,702 |
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(15,815 |
) |
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(29,777 |
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Provision for income taxes |
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655 |
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627 |
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1,276 |
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1,258 |
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Loss before cumulative effect of change in accounting
principle |
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(9,770 |
) |
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(30,329 |
) |
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(17,091 |
) |
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(31,035 |
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Cumulative effect of change in accounting principle |
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(1,213 |
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Net loss |
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$ |
(9,770 |
) |
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$ |
(30,329 |
) |
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$ |
(17,091 |
) |
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$ |
(29,822 |
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Net loss per share basic and diluted: |
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Before effect of change in accounting principle |
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$ |
(0.03 |
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$ |
(0.10 |
) |
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$ |
(0.06 |
) |
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$ |
(0.10 |
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Cumulative effect of change in accounting principle |
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$ |
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$ |
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$ |
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$ |
(0.00 |
) |
Net loss |
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$ |
(0.03 |
) |
|
$ |
(0.10 |
) |
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$ |
(0.06 |
) |
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$ |
(0.10 |
) |
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Shares used in computing net loss per share basic
and diluted |
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308,635 |
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307,558 |
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308,634 |
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307,027 |
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See accompanying notes.
5
FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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Six Months Ended |
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October 28, |
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October 29, |
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2007 |
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2006 |
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Operating activities |
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Net loss |
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$ |
(17,091 |
) |
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$ |
(29,822 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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13,414 |
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13,419 |
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Stock-based compensation expense |
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5,290 |
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6,570 |
|
Amortization of beneficial conversion feature of convertible notes |
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|
2,453 |
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|
2,358 |
|
Amortization of purchased technology and other purchased intangibles |
|
|
980 |
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|
612 |
|
Amortization of acquired developed technology |
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|
3,458 |
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|
3,024 |
|
Amortization of discount on restricted securities |
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(11 |
) |
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(56 |
) |
Loss (gain) on sale or retirement of equipment |
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(290 |
) |
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|
519 |
|
Share of losses of equity investee |
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|
237 |
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Gain on sale of equity investment |
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(184 |
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Loss on debt extenguishment |
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|
31,606 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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1,506 |
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(7,299 |
) |
Inventories |
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(663 |
) |
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(5,317 |
) |
Other assets |
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|
(2,415 |
) |
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|
(5,103 |
) |
Deferred income taxes |
|
|
1,088 |
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|
1,088 |
|
Accounts payable |
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|
(9,070 |
) |
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|
3,286 |
|
Accrued compensation |
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(75 |
) |
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|
717 |
|
Other accrued liabilities |
|
|
3,139 |
|
|
|
(329 |
) |
Deferred revenue |
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|
59 |
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(208 |
) |
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Net cash provided by operating activities |
|
|
1,588 |
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|
15,302 |
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Investing activities |
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Purchases of property, equipment and improvements |
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(11,020 |
) |
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|
(11,202 |
) |
Proceeds from sale of property and equipment |
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|
420 |
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|
107 |
|
Purchase of short-term and long-term investments |
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(920 |
) |
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|
(15,677 |
) |
Maturity of restricted securities |
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|
625 |
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|
4,326 |
|
Proceeds from sale of equity investments |
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|
556 |
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Net cash used in investing activities |
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|
(10,339 |
) |
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|
(22,446 |
) |
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Financing activities |
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Repayments of liability related to sale-leaseback of building |
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(172 |
) |
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|
(141 |
) |
Repayments of borrowings |
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(934 |
) |
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|
(1,064 |
) |
Proceeds from exercise of stock options and employee stock purchase plan |
|
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|
3,532 |
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|
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|
Net cash provided by (used in) financing activities |
|
|
(1,106 |
) |
|
|
2,327 |
|
|
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|
|
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|
Net decrease in cash and cash equivalents |
|
|
(9,857 |
) |
|
|
(4,817 |
) |
Cash and cash equivalents at beginning of period |
|
|
56,106 |
|
|
|
63,361 |
|
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Cash and cash equivalents at end of period |
|
$ |
46,249 |
|
|
$ |
58,544 |
|
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|
Supplemental disclosure of cash flow information |
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Cash paid for interest |
|
$ |
4,717 |
|
|
$ |
4,770 |
|
Cash paid for taxes |
|
$ |
297 |
|
|
$ |
98 |
|
See accompanying notes.
6
FINISAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Description of Business
Finisar Corporation is a leading provider of optical subsystems and components that connect
local area networks, or LANs, storage area networks, or SANs, and metropolitan area networks, or
MANs. Our optical subsystems consist primarily of transceivers which provide the fundamental
optical-electrical interface for connecting the equipment used in building these networks. These
products rely on the use of digital 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 using a wide range of network protocols,
transmission speeds and physical configurations over distances of 70 meters to 200 kilometers. Our
line of optical components consists primarily of packaged lasers and photodetectors used in
transceivers, primarily for LAN and SAN applications. Our manufacturing operations are vertically
integrated and include internal manufacturing, assembly and test capability. We sell our optical
subsystem and component products to manufacturers of storage and networking equipment such as
Brocade, Cisco Systems, EMC, Emulex, Hewlett-Packard Company, Huawei and Qlogic.
We also provide network performance test and monitoring systems to original equipment
manufacturers for testing and validating equipment designs and, to a lesser degree, to operators of
networking and storage data centers for testing, monitoring and troubleshooting the performance of
their installed systems. We sell these products primarily to leading storage equipment
manufacturers such as Brocade, EMC, Emulex, Hewlett-Packard Company, IBM and Qlogic.
Finisar Corporation was incorporated in California in April 1987 and reincorporated in
Delaware in November 1999. Finisars principal executive offices are located at 1389 Moffett Park
Drive, Sunnyvale, California 94089, and its telephone number at that location is (408) 548-1000.
Interim Financial Information and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of October 28, 2007,
and for the three and six month periods ended October 28, 2007 and October 29, 2006, 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, 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 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 October 28, 2007 and its operating results and cash flows for the three and six month periods
ended October 28, 2007 and October 29, 2006. 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, 2007.
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).
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from these
estimates.
Stock-Based Compensation Expense
The Company accounts for stock-based compensation in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123R) which requires the
measurement and recognition of compensation expense for all stock-based payment awards made to
employees and directors including employee stock options and employee stock purchases
7
under the Companys Employee Stock Purchase Plan based on estimated fair values. SFAS 123R
requires companies to estimate the fair value of stock-based payment awards on the date of grant
using an option pricing model. The Company uses the Black-Scholes option pricing model to determine
the fair value of stock based awards under SFAS 123R. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service periods in the
Companys consolidated statements of operations.
Stock-based compensation expense recognized in the Companys condensed consolidated statements
of operations for the three and six months ended October 28, 2007 and October 29, 2006 included
compensation expense for stock-based payment awards granted prior to, but not yet vested as of the
adoption of SFAS 123R, based on the grant date fair value estimated in accordance with the
provisions of SFAS 123 and compensation expense for the stock-based payment awards granted
subsequent to April 30, 2006 based on the grant date fair value estimated in accordance with the
provisions of SFAS 123R. Compensation expense for expected-to-vest stock-based awards that were
granted on or prior to April 30, 2006 was valued under the multiple-option approach and will
continue to be amortized using the accelerated attribution method. Subsequent to April 30, 2006,
compensation expense for expected-to-vest stock-based awards is valued under the single-option
approach and amortized on a straight-line basis, net of estimated forfeitures.
Revenue Recognition
The
Companys revenue transactions consist predominantly of sales of products to customers.
The Company follows the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB)
No. 104 Revenue Recognition and Emerging Issues Task Force (EITF) Issue 00-21 Revenue
Arrangements with Multiple Deliverables. Specifically, the Company recognizes revenue when
persuasive evidence of an arrangement exists, title and risk of loss have passed to the customer,
generally upon shipment, the price is fixed or determinable, and collectability is reasonably
assured. For those arrangements with multiple elements, or in related arrangements with the same
customer, the arrangement is divided into separate units of accounting if certain criteria are met,
including whether the delivered item has stand-alone value to the customer and whether there is
objective and reliable evidence of the fair value of the undelivered items. The consideration
received is allocated among the separate units of accounting based on their respective fair values,
and the applicable revenue recognition criteria are applied to each of the separate units. In cases
where there is objective and reliable evidence of the fair value of the undelivered item in an
arrangement but no such evidence for the delivered item, the residual method is used to allocate
the arrangement consideration. For units of accounting which include more than one deliverable, the
Company generally recognizes all revenue and cost of revenue for the unit of accounting during the
period in which the last undelivered item is delivered.
At the time revenue is recognized, the Company establishes an accrual for estimated warranty
expenses associated with sales, recorded as a component of cost of revenues. The Companys
customers and distributors generally do not have return rights. However, the Company has
established an allowance for estimated customer returns, based on historical experience, which is
netted against revenue.
Sales to certain distributors are made under agreements providing distributor price
adjustments and rights of return under certain circumstances. Revenue and costs relating to
distributor sales are deferred until products are sold by the distributors to end customers.
Revenue recognition depends on notification from the distributor that product has been sold to the
end customer. Also reported by the distributor are product resale price, quantity and end customer
shipment information, as well as inventory on hand. Deferred revenue on shipments to distributors
reflects the effects of distributor price adjustments and the amount of gross margin expected to
be realized when distributors sell-through products purchased from the Company. Accounts receivable
from distributors are recognized and inventory is relieved when title to inventories transfers,
typically upon shipment from the Company at which point the Company has a legally enforceable right
to collection under normal payment terms.
Segment Reporting
Statement of Financial Accounting Standards (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. SFAS 131 also establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it operates in two segments
consisting of optical subsystems and components and network test and monitoring systems.
Concentrations of Credit Risk
Financial instruments which potentially subject Finisar to concentrations of credit risk
include cash, cash equivalents, available-for-sale and restricted investments and accounts
receivable. Finisar places its cash, cash equivalents, available-for-sale and restricted
investments with high-credit quality financial institutions. Such investments are generally in
excess of FDIC insurance limits.
8
Concentrations of credit risk, with respect to accounts receivable, exist to the extent of
amounts presented in the financial statements. Generally, Finisar does not require collateral or
other security to support customer receivables. Finisar performs periodic credit evaluations of its
customers and maintains an allowance for potential credit losses based on historical experience and
other information available to management. Losses to date have not been material. The Companys
five largest customers represented 39.2% and 33.3% of total accounts receivable at October 28, 2007
and April 30, 2007, respectively.
Current Vulnerabilities Due to Certain Concentrations
During the three and six months ended October 28, 2007, sales to the top five customers
represented 42.1% and 43.3% of total revenues, respectively. During the three and six months ended
October 29, 2006, sales to the top five customers represented 45.9% and 44.9% of total revenues,
respectively. One customer represented more than 10% of total revenues during each of these
periods.
Included in the Companys condensed consolidated balance sheet at October 28, 2007, are the
net assets of the Companys manufacturing operations, substantially all of which are located in
Malaysia and which total approximately $66.6 million.
Foreign Currency Translation
The functional currency of the Companys foreign subsidiaries is the local currency. Assets
and liabilities denominated in foreign currencies are translated using the exchange rate on the
balance sheet dates. Revenues and expenses are translated using average exchange rates prevailing
during the year. Any translation adjustments resulting from this process are shown separately as a
component of accumulated other comprehensive income. Foreign currency transaction gains and losses
are included in the determination of net loss.
Research and Development
Research and development expenditures are charged to operations as incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising is used infrequently in marketing the
Companys products. Advertising costs were $12,500 and $25,500 in the three and six months ended
October 28, 2007, respectively and $24,500 and $33,000 in the three and six months ended October
29, 2006, respectively.
Shipping and Handling Costs
The Company records costs related to shipping and handling in cost of sales for all periods
presented.
Cash and Cash Equivalents
Finisars cash equivalents consist of money market funds and highly liquid short-term
investments with qualified financial institutions. Finisar considers all highly liquid investments
with an original maturity from the date of purchase of three months or less to be cash equivalents.
Investments
Available-for-Sale
Available-for-sale investments consist of interest bearing securities with maturities of
greater than three months from the date of purchase and equity securities. Pursuant to SFAS No. 115
Accounting for Certain Investments in Debt and Equity Securities, the Company has classified its
investments as available-for-sale. Available-for-sale securities are stated at market value, which
approximates fair value, and unrealized holding gains and losses, net of the related tax effect,
are excluded from earnings and are reported as a separate component of accumulated other
comprehensive income until realized. A decline in the market value of the security below cost that
is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost
basis for the security.
9
Restricted Investments
Restricted investments consist of interest bearing securities with maturities of greater than
three months from the date of purchase and investments held in escrow under the terms of the
Companys convertible subordinated notes. In accordance with SFAS 115, the Company has classified
its restricted investments as held-to-maturity. Held-to-maturity securities are stated at amortized
cost.
Other
The Company uses the cost method of accounting for investments in companies that do not have a
readily determinable fair value in which it holds an interest of less than 20% and over which it
does not have the ability to exercise significant influence. For entities in which the Company
holds an interest of greater than 20% or in which the Company does have the ability to exercise
significant influence, the Company uses the equity method. In determining if and when a decline in
the market value of these investments below their carrying value is other-than-temporary, the
Company evaluates the market conditions, offering prices, trends of earnings and cash flows, price
multiples, prospects for liquidity and other key measures of performance. The Companys policy is
to recognize an impairment in the value of its minority equity investments when clear evidence of
an impairment exists, such as (a) the completion of a new equity financing that may indicate a new
value for the investment, (b) the failure to complete a new equity financing arrangement after
seeking to raise additional funds or (c) the commencement of proceedings under which the assets of
the business may be placed in receivership or liquidated to satisfy the claims of debt and equity
stakeholders. The Companys minority investments in private companies are generally made in
exchange for preferred stock with a liquidation preference that is intended to help protect the
underlying value of its investment.
Fair Value of Financial Instruments
The carrying amounts of certain of the Companys financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued
liabilities, approximate fair value because of their short maturities. As of October 28, 2007 and
April 30, 2007, the fair value of the Companys convertible subordinated debt was approximately
$255.5 million and $285.2 million, respectively.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or
market.
The Company permanently writes down the cost of inventory that the Company specifically
identifies and considers obsolete or excessive to fulfill future sales estimates. The Company
defines obsolete inventory as inventory that will no longer be used in the manufacturing process.
Excess inventory is generally defined as inventory in excess of projected usage and is determined
using managements best estimate of future demand, based upon information then available to the
Company. The Company also considers: (1) parts and subassemblies that can be used in alternative
finished products, (2) parts and subassemblies that are likely to be engineered out of the
Companys products, and (3) known design changes which would reduce the Companys ability to use
the inventory as planned.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Property and equipment are depreciated on a straight-line basis over the estimated useful lives of
the assets, generally three years to seven years except for buildings, which are depreciated over
40 years. Land is carried at acquisition cost and not depreciated. Leased land costs are
depreciated over the life of the lease.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets result from acquisitions accounted for under the purchase
method. Amortization of intangibles has been provided on a straight-line basis over periods ranging
from one to nine years. The amortization of goodwill ceased with the adoption of SFAS No. 142
beginning in the first quarter of fiscal 2003.
Accounting for the Impairment of Long-Lived Assets
The Company periodically evaluates whether changes have occurred to long-lived assets that
would require revision of the remaining estimated useful life of the assets or render them not
recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted value of
expected future operating cash flows to determine whether the long-lived assets are impaired. If
the aggregate undiscounted cash flows are less than the carrying amount of the assets, the
resulting impairment charge to be recorded
10
is calculated based on the excess of the carrying value of the assets over the fair value of
such assets, with the fair value determined based on an estimate of discounted future cash flows.
Computation of Net Loss Per Share
Basic
and diluted net loss per share is calculated in accordance with SFAS No. 128 Earnings Per
Share for all periods presented. Basic net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period. Diluted net 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.
The following table presents the calculation of basic and diluted net loss per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,770 |
) |
|
$ |
(30,329 |
) |
|
$ |
(17,091 |
) |
|
$ |
(29,822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding basic and diluted |
|
|
308,635 |
|
|
|
307,558 |
|
|
|
308,634 |
|
|
|
307,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.03 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents related to
potentially dilutive securities
excluded from computation above because they
are anti-dilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
14,041 |
|
|
|
15,401 |
|
|
|
15,559 |
|
|
|
16,233 |
|
Conversion of convertible subordinated notes |
|
|
31,657 |
|
|
|
35,263 |
|
|
|
31,657 |
|
|
|
35,263 |
|
Conversion of convertible notes |
|
|
7,825 |
|
|
|
|
|
|
|
7,825 |
|
|
|
|
|
Warrants |
|
|
465 |
|
|
|
470 |
|
|
|
465 |
|
|
|
470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities |
|
|
53,988 |
|
|
|
51,134 |
|
|
|
55,506 |
|
|
|
51,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
SFAS No. 130 Reporting Comprehensive Income establishes rules for reporting and display of
comprehensive income and its components. SFAS No. 130 requires unrealized gains or losses on the
Companys available-for-sale securities and foreign currency translation adjustments to be included
in comprehensive income.
The components of comprehensive loss for the three and six months ended October 28, 2007 and
October 29, 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(9,770 |
) |
|
$ |
(30,329 |
) |
|
$ |
(17,091 |
) |
|
$ |
(29,822 |
) |
Foreign currency translation adjustment |
|
|
1,441 |
|
|
|
330 |
|
|
|
1,459 |
|
|
|
(255 |
) |
Change in unrealized gain (loss) on securities,
net of
reclassification adjustments for realized loss |
|
|
(3,357 |
) |
|
|
(6,845 |
) |
|
|
(3,685 |
) |
|
|
5,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(11,686 |
) |
|
$ |
(36,844 |
) |
|
$ |
(19,317 |
) |
|
$ |
(24,937 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The components of accumulated other comprehensive income, net of taxes, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 28, 2007 |
|
|
April 30, 2007 |
|
Net
unrealized gains/(losses) on available-for-sale securities |
|
$ |
1,384 |
|
|
$ |
5,069 |
|
Cumulative translation adjustment |
|
|
7,552 |
|
|
|
6,093 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
8,936 |
|
|
$ |
11,162 |
|
|
|
|
|
|
|
|
Income Taxes
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes An
interpretation of FASB Statement No. 109, (FIN 48) on May 1, 2007. FIN 48 is an interpretation of
FASB Statement 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition in accounting for income taxes. FIN
48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position that an entity takes or expects to take in a tax
return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. Under FIN 48, an entity may
only recognize or continue to recognize tax positions that meet a more likely than not threshold.
In accordance with our accounting policy, we recognize accrued interest and penalties related to
unrecognized tax benefits as a component of tax expense. This policy did not change as a result of
our adoption on FIN 48.
3. Convertible Debt
The Companys convertible subordinated and senior subordinated note balances as of October 28,
2007 and April 30, 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
Amount |
|
|
Interest Rate |
|
|
Due In Fiscal Year |
|
As of October 28, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2008
|
|
|
100,250 |
|
|
|
5.25 |
% |
|
|
2009 |
|
Convertible subordinated notes due 2010
|
|
|
50,000 |
|
|
|
2.50 |
% |
|
|
2011 |
|
Convertible senior subordinated notes due 2010
|
|
|
100,000 |
|
|
|
2.50 |
% |
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
250,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2008
|
|
|
100,250 |
|
|
|
5.25 |
% |
|
|
2009 |
|
Convertible subordinated notes due 2010
|
|
|
50,000 |
|
|
|
2.50 |
% |
|
|
2011 |
|
Convertible subordinated notes due 2010
|
|
|
100,000 |
|
|
|
2.50 |
% |
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
250,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys convertible subordinated and senior subordinated notes are due by fiscal year as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ending April 30, |
|
|
Total |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes |
|
$ |
250,250 |
|
|
$ |
|
|
|
$ |
100,250 |
|
|
$ |
|
|
|
$ |
150,000 |
|
As of October 28, 2007 and April 30, 2007, the fair value of the Companys convertible
subordinated and senior subordinated notes was approximately $255.5 million and $285.2 million,
respectively.
12
Convertible Subordinated Notes due 2008
As of October 28, 2007, $100.3 million of the Companys convertible subordinated notes due in
2008 were classified as current convertible notes on the condensed consolidated balance sheet as
these notes are due and payable on October 15, 2008. As of April 30, 2007, these notes were
classified as long-term convertible notes.
Convertible Subordinated Notes due 2010
As of October 28, 2007, due to the expiration of a one day put option at the discretion of the
holders of the notes on October 15, 2007, $50.0 million of the Companys convertible subordinated
notes due and payable on October 15, 2010 were reclassified to long-term convertible notes on the
condensed consolidated balance sheet. As of April 30, 2007, these notes were classified as current
convertible notes as a result of the put option.
4. Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 28, 2007 |
|
|
April 30, 2007 |
|
Raw materials |
|
$ |
19,772 |
|
|
$ |
21,597 |
|
Work-in-process |
|
|
31,839 |
|
|
|
27,336 |
|
Finished goods |
|
|
26,946 |
|
|
|
28,737 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
78,557 |
|
|
$ |
77,670 |
|
|
|
|
|
|
|
|
During the three and six months ended October 28, 2007, the Company recorded charges of $3.6
million and $7.4 million, respectively, for excess and obsolete inventory, and sold inventory that
was written-off in previous periods with an approximate cost of $1.7 million and $3.4 million,
respectively. As a result, cost of revenue associated with the sale of this inventory was zero.
During the three and six months ended October 29, 2006, the Company recorded charges of $2.5
million and $5.9 million, respectively, for excess and obsolete inventory, and sold inventory that
was written-off in previous periods with an approximate cost of $700,000 and $1.8 million,
respectively. As a result, cost of revenue associated with the sale of this inventory was zero.
5. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 28, 2007 |
|
April 30, 2007 |
|
|
|
Land |
|
$ |
9,747 |
|
|
$ |
9,747 |
|
Buildings |
|
|
11,538 |
|
|
|
11,365 |
|
Computer equipment |
|
|
39,064 |
|
|
|
37,475 |
|
Office equipment, furniture and fixtures |
|
|
3,241 |
|
|
|
3,196 |
|
Machinery and equipment |
|
|
144,131 |
|
|
|
135,238 |
|
Leasehold improvements |
|
|
13,881 |
|
|
|
12,795 |
|
Contruction-in-process |
|
|
240 |
|
|
|
444 |
|
|
|
|
Total |
|
|
221,842 |
|
|
|
210,260 |
|
Accumulated depreciation and
amortization |
|
|
(137,596 |
) |
|
|
(126,189 |
) |
|
|
|
Property, equipment and improvements
(net) |
|
$ |
84,246 |
|
|
$ |
84,071 |
|
|
|
|
6. Income Taxes
The Company recorded a provision for income taxes of $655,000 and $1.3 million for the three
and six months, respectively, ended October 28, 2007 compared to
$627,000 and $1.3 million for the
three and six months, respectively, ended October 29, 2006. The provision for income tax expense
for the three months ended October 28, 2007 and October 29, 2006 includes non-cash charges of
$544,000 for deferred tax liabilities that were recorded for tax amortization of goodwill for which
no financial statement amortization has occurred under generally accepted accounting principles, as
promulgated by SFAS 142.
13
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 October 28, 2007 have been fully offset by a valuation allowance.
A portion of the valuation allowance for deferred tax assets at October 28, 2007 relates to
tax net operating loss carry forwards and other tax attributes of acquired companies the tax
benefit of which, when realized, will first reduce goodwill, then other non-current intangible
assets arising from the acquired companies, and thereafter, income tax expense.
Effective
May 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. FIN 48 prescribes a
recognition threshold that a tax position is required to meet before being recognized in the
financial statements and provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition rules.
The adoption of FIN 48 did not result in an adjustment to beginning retained earnings and did
not have any impact on the Companys results of operations. As of the date of adoption, the Company had $9.6
million of unrecognized tax benefits. Excluding the effects of recorded valuation allowances for
deferred tax assets, $7.2 million of the unrecognized tax benefits would favorably impact the
effective tax rate in future periods if recognized and $1.5 million of unrecognized tax benefits
would reduce goodwill if recognized.
As
of date of adoption, the Company has not recorded any income tax liabilities for
unrecognized tax positions as no cash payments were anticipated. There have been no significant
changes during the quarter ended October 28, 2007.
The Company records interest and penalties related to unrecognized tax benefits in income tax
expense. As of date of adoption, there were no accrued interest or penalties related to uncertain
tax positions.
As
a result of the Companys global operations, the Company or its subsidiaries file income tax returns
in various jurisdictions including U.S. federal, U.S. state, and certain foreign jurisdictions. The
Companys U.S. federal and state income tax returns are generally not subject to examination by the
tax authorities for tax years before 2003. For all federal and state net operating loss and credit
carryovers, the statute of limitations does not begin until the carryover items are utilized. The
taxing authorities can examine the validity of the carryover items
and, if necessary, adjustments
may be made to the carryover items. The Companys Malaysia, Singapore, and China income tax returns
are generally not subject to examination by the tax authorities for tax years before 2003, 2001,
and 2003, respectively. For state purposes, we are currently under
examination; however, the Company does not
expect any significant change to its unrecognized state tax benefits within the next year.
There
were no unrecognized tax benefits at October 28, 2007 related to tax positions, interest,
and penalty for which it is reasonably possible that the statute of limitations will expire within
the next twelve months.
7. Purchased Intangible Assets
The
following table reflects intangible assets subject to amortization as
of October 28, 2007
and April 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2007 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
111,846 |
|
|
|
($96,953 |
) |
|
$ |
14,893 |
|
Trade name |
|
|
3,697 |
|
|
|
(3,261 |
) |
|
|
436 |
|
Customer relationships |
|
|
6,964 |
|
|
|
(2,733 |
) |
|
|
4,231 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
122,507 |
|
|
|
($102,947 |
) |
|
$ |
19,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2007 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
111,846 |
|
|
|
($93,495 |
) |
|
$ |
18,351 |
|
Trade name |
|
|
3,697 |
|
|
|
(3,171 |
) |
|
|
526 |
|
Customer relationships |
|
|
6,964 |
|
|
|
(1,843 |
) |
|
|
5,121 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
122,507 |
|
|
|
($98,509 |
) |
|
$ |
23,998 |
|
|
|
|
|
|
|
|
|
|
|
14
Estimated remaining amortization expense for each of the next five fiscal years ending April
30, is as follows (in thousands):
|
|
|
|
|
Year |
|
Amount |
|
2008 |
|
$ |
3,811 |
|
2009 |
|
|
5,481 |
|
2010 |
|
|
3,811 |
|
2011 |
|
|
3,336 |
|
2012 and beyond |
|
|
3,121 |
|
|
|
|
|
|
|
$ |
19,560 |
|
|
|
|
|
15
8. Investments
Available-for-Sale Securities
The following is a summary of the Companys available-for-sale investments as of October 28,
2007 and April 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
Investment Type |
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
|
As of October 28, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
68,431 |
|
|
$ |
48 |
|
|
$ |
(24 |
) |
|
$ |
68,455 |
|
Government agency |
|
|
6,824 |
|
|
|
66 |
|
|
|
(1 |
) |
|
|
6,889 |
|
Mortgage-backed |
|
|
3,372 |
|
|
|
4 |
|
|
|
(14 |
) |
|
|
3,362 |
|
Municipal |
|
|
300 |
|
|
|
|
|
|
|
(1 |
) |
|
|
299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,927 |
|
|
|
118 |
|
|
|
(40 |
) |
|
|
79,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
3,234 |
|
|
$ |
1,306 |
|
|
$ |
|
|
|
$ |
4,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
82,161 |
|
|
$ |
1,424 |
|
|
$ |
(40 |
) |
|
$ |
83,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
10,305 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10,305 |
|
Short-term investments |
|
|
59,753 |
|
|
|
42 |
|
|
|
(27 |
) |
|
|
59,768 |
|
Long-term investments |
|
|
12,103 |
|
|
|
1,382 |
|
|
|
(13 |
) |
|
|
13,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,161 |
|
|
$ |
1,424 |
|
|
$ |
(40 |
) |
|
$ |
83,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
62,643 |
|
|
$ |
9 |
|
|
$ |
(94 |
) |
|
$ |
62,558 |
|
Government agency |
|
|
12,200 |
|
|
|
26 |
|
|
|
(18 |
) |
|
|
12,208 |
|
Mortgage-backed |
|
|
3,626 |
|
|
|
1 |
|
|
|
(21 |
) |
|
|
3,606 |
|
Municipal |
|
|
300 |
|
|
|
|
|
|
|
(3 |
) |
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
78,769 |
|
|
$ |
36 |
|
|
$ |
(136 |
) |
|
$ |
78,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
3,607 |
|
|
$ |
5,169 |
|
|
$ |
|
|
|
$ |
8,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
$ |
82,376 |
|
|
$ |
5,205 |
|
|
$ |
(136 |
) |
|
$ |
87,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
11,079 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,079 |
|
Short-term investments |
|
|
56,603 |
|
|
|
3 |
|
|
|
(95 |
) |
|
|
56,511 |
|
Long-term investments |
|
|
14,694 |
|
|
|
5,202 |
|
|
|
(41 |
) |
|
|
19,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,376 |
|
|
$ |
5,205 |
|
|
$ |
(136 |
) |
|
$ |
87,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross realized losses for the three and six months ended October 28, 2007 and October 29,
2006 were immaterial. Realized gains and losses were calculated based on the specific
identification method.
16
Restricted Securities
The Company had purchased and pledged to a collateral agent, as security for the exclusive
benefit of the holders of the Companys 2 1/2% convertible subordinated notes, U.S. government
securities, which would be sufficient upon receipt of scheduled principal and interest payments
thereon, to provide for the payment in full of the first eight scheduled interest payments due on
such outstanding convertible subordinated notes. During the second quarter of fiscal 2008, all of
these restricted securities had matured and the remaining collateral securing the interest payments
on these notes had been paid to the holders of the notes.
9. Minority Investments
Minority investments is comprised of investments in three companies accounted for under the
cost method.
10. Employee Benefit Plans
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, which includes its sub-plan, the
International Employee Stock Purchase Plan (together the Purchase Plan), under which 16,750,000
shares of the Companys common stock have been reserved for issuance. Eligible employees may
purchase a limited number of shares of common stock at a discount of 15% to the market value at
certain plan-defined dates. During the three and six months ended
October 28, 2007 and the three months ended October 29, 2006, the Company
did not issue any shares under this plan. During the six months ended October 29, 2006,
the Company issued 860,025 shares under this plan. At October 28, 2007, 11,060,097 shares were
available for issuance under the Purchase Plan.
The Purchase Plan permits eligible employees to purchase Finisar common stock through payroll
deductions, which may not exceed 20% of the employees total compensation. Stock may be purchased
under the plan at a price equal to 85% of the fair market value of Finisar common stock on either
the first or the last day of the offering period, whichever is lower.
Employee Stock Option Plans
During fiscal 1989, Finisar adopted the 1989 Stock Option Plan (the 1989 Plan). The 1989
Plan expired in April 1999 and no further option grants have been made under the 1989 Plan since
that time. Options granted under the 1989 Plan had an exercise price of not less than 85% of the
fair value of a share of common stock on the date of grant (110% of the fair value in certain
instances) as determined by the board of directors. Options generally vested over five years and
had a maximum term of 10 years.
Finisars 1999 Stock Option Plan was adopted by the board of directors and approved by the
stockholders in September 1999. An amendment and restatement of the 1999 Stock Option Plan,
including renaming it the 2005 Stock Incentive Plan (the 2005 Plan), was approved by the board of
directors in September 2005 and by the stockholders in October 2005. A total of 21,000,000 shares
of common stock were initially reserved for issuance under the 2005 Plan. The share reserve
automatically increases on May 1 of each calendar year by a number of shares equal to 5% of the
number of shares of Finisars common stock issued and outstanding as of the immediately preceding
April 30, subject to certain restrictions on the aggregate maximum number of shares that may be
issued pursuant to incentive stock options. The types of stock-based awards available under the 2005
Plan includes stock options, stock appreciation rights, restricted stock units and other
stock-based awards which vest upon the attainment of designated performance goals or the
satisfaction of specified service requirements or, in the case of certain restricted stock units or
other stock-based awards, become payable upon the expiration of a designated time period following
such vesting events. To date, only stock options have been granted under the 2005 Plan. Options
generally vest over five years and have a maximum term of 10 years. As of October 28, 2007 there
were no shares subject to repurchase.
17
A summary of activity under the Companys employee stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Available |
|
|
|
|
for Grant |
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
Remaining |
|
Aggregate |
Options for Common Stock |
|
Number of Shares |
|
Number of Shares |
|
Exercise Price |
|
Contractual Term |
|
Intrinsic Value (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years) |
|
|
($000s |
) |
Balance at April 30, 2007 |
|
|
28,815,162 |
|
|
|
46,119,115 |
|
|
$ |
2.58 |
|
|
|
|
|
|
|
|
|
Increase in authorized shares |
|
|
15,431,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(8,316,261 |
) |
|
|
8,316,261 |
|
|
$ |
3.05 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
|
|
|
|
(3,533,802 |
) |
|
$ |
2.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 28, 2007 |
|
|
35,930,642 |
|
|
|
50,901,574 |
|
|
$ |
2.65 |
|
|
|
7.12 |
|
|
$ |
19,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the
difference between the
exercise price and the value
of Finisar common stock at
October 26, 2007. |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic
value, based on the Companys closing stock price of $2.24 as of October 28, 2007, which would have
been received by the option holders had all option holders exercised their options as of that date.
The weighted-average remaining contractual life of options exercisable is 5.8 years. The total
number of shares of common stock subject to in-the-money options
exercisable as of October 28, 2007 was approximately 20.3 million.
Valuation and Expense Information under SFAS 123(R)
The following table summarizes stock-based compensation expense related to employee stock
options and employee stock purchases under SFAS 123(R) for the three and six months ended October
28, 2007 and October 29, 2006 which was reflected in the
Companys operating results as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
$ |
703 |
|
|
$ |
899 |
|
|
$ |
1,425 |
|
|
$ |
2,034 |
|
Research and
development |
|
|
1,036 |
|
|
|
1,090 |
|
|
|
1,991 |
|
|
|
2,266 |
|
Sales and marketing |
|
|
442 |
|
|
|
505 |
|
|
|
893 |
|
|
|
1,034 |
|
General and
administrative |
|
|
350 |
|
|
|
629 |
|
|
|
981 |
|
|
|
1,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,531 |
|
|
$ |
3,123 |
|
|
$ |
5,290 |
|
|
$ |
6,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total stock-based compensation capitalized as part of inventory as of October 28, 2007 was
$517,000.
As of October 28, 2007, total compensation cost related to unvested stock options not yet
recognized was $23.2 million which is expected to be recognized over the next 36 months on a
weighted-average basis.
18
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model and the straight-line attribution approach with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Option Plans |
|
Employee Stock Purchase Plan |
|
|
October 28, |
|
October 29, |
|
October 28, |
|
October 29, |
|
|
2007 |
|
2006 |
|
2007 (1) |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair
value per share |
|
$ |
2.21 |
|
|
$ |
2.40 |
|
|
|
n/a |
|
|
$ |
0.90 |
|
Expected term (in years) |
|
|
5.44 |
|
|
|
5.28 |
|
|
|
n/a |
|
|
|
0.50 |
|
Volatility |
|
|
87 |
% |
|
|
99 |
% |
|
|
n/a |
|
|
|
69 |
% |
Risk-free interest rate |
|
|
4.20 |
% |
|
|
4.64 |
% |
|
|
n/a |
|
|
|
4.45 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
n/a |
|
|
|
0.00 |
% |
|
|
|
(1) |
|
During the quarter ended October 28, 2007, purchases of
stock under the
Companys Purchase Plan was suspended. |
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, the stock-based compensation expense
could be materially different.
11. Segments and Geographic Information
The Company designs, develops, manufactures and markets optical subsystems, components and
test and monitoring systems for high-speed data communications. The Company views its business as
having two principal operating segments, consisting of optical subsystems and components and
network test and monitoring systems.
Optical subsystems consist primarily of transceivers sold to manufacturers of storage and
networking equipment for storage area networks (SANs) and local area networks (LANs) and
metropolitan access network (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. Network test and monitoring systems include products
designed to test the reliability and performance of equipment for a variety of protocols including
Fibre Channel, Gigabit Ethernet, 10 Gigabit Ethernet, iSCSI, SAS and SATA. These test and
monitoring systems are sold to both manufacturers and end-users of the equipment.
Both of the Companys operating segments and its corporate sales function report to the
President and Chief Executive Officer. Where appropriate, the Company charges specific costs to
these segments where they can be identified and allocates certain manufacturing costs, research and
development, sales and marketing and general and administrative costs to these operating segments,
primarily on the basis of manpower levels. The Company does not allocate income taxes,
non-operating income or interest income and expense to its operating segments. The accounting
policies of the segments are the same as those described in the summary of significant accounting
policies. Inter-segment sales, if any, are eliminated in consolidation.
19
Information about reportable segment revenues and income/(losses) are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 28, 2007 |
|
|
October 29, 2006 |
|
|
October 28, 2007 |
|
|
October 29, 2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
90,930 |
|
|
$ |
99,009 |
|
|
$ |
187,290 |
|
|
$ |
195,052 |
|
Network test and monitoring systems |
|
|
9,769 |
|
|
|
9,180 |
|
|
|
19,144 |
|
|
|
19,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
100,699 |
|
|
$ |
108,189 |
|
|
$ |
206,434 |
|
|
$ |
214,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
6,305 |
|
|
$ |
6,423 |
|
|
$ |
12,843 |
|
|
$ |
12,847 |
|
Network test and monitoring systems |
|
|
294 |
|
|
|
288 |
|
|
|
571 |
|
|
|
572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
expense |
|
$ |
6,599 |
|
|
$ |
6,711 |
|
|
$ |
13,414 |
|
|
$ |
13,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
|
(3,613 |
) |
|
$ |
7,845 |
|
|
|
(4,054 |
) |
|
$ |
12,815 |
|
Network test and monitoring systems |
|
|
(547 |
) |
|
|
(1,182 |
) |
|
|
(1,623 |
) |
|
|
(1,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss) |
|
|
(4,160 |
) |
|
|
6,663 |
|
|
|
(5,677 |
) |
|
|
11,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired developed
technology |
|
|
(1,729 |
) |
|
|
(1,505 |
) |
|
|
(3,458 |
) |
|
|
(3,024 |
) |
Amortization of purchased intangibles |
|
|
(490 |
) |
|
|
(313 |
) |
|
|
(980 |
) |
|
|
(612 |
) |
Loss on debt extinguishment |
|
|
|
|
|
|
(31,606 |
) |
|
|
|
|
|
|
(31,606 |
) |
Interest income (expense), net |
|
|
(2,821 |
) |
|
|
(2,501 |
) |
|
|
(5,652 |
) |
|
|
(5,167 |
) |
Other non-operating income (expense), net |
|
|
85 |
|
|
|
(440 |
) |
|
|
(48 |
) |
|
|
(810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated amounts |
|
|
(4,955 |
) |
|
|
(36,365 |
) |
|
|
(10,138 |
) |
|
|
(41,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
(9,115 |
) |
|
$ |
(29,702 |
) |
|
$ |
(15,815 |
) |
|
$ |
(29,777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of total assets by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 28, |
|
|
April 30, |
|
|
|
2007 |
|
|
2007 |
|
Optical
subsystems and components |
|
$ |
380,711 |
|
|
$ |
392,260 |
|
Network test
and monitoring systems |
|
|
83,927 |
|
|
|
76,885 |
|
Other assets |
|
|
64,229 |
|
|
|
77,527 |
|
|
|
|
|
|
|
|
|
|
$ |
528,867 |
|
|
$ |
546,672 |
|
|
|
|
|
|
|
|
Short-term, restricted and minority investments are the primary components of other assets in
the above table.
20
The following is a summary of operations within geographic areas based on the location of the
entity purchasing the Companys products (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
October 28, |
|
|
October 29, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenues from sales
to unaffiliated
customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
31,077 |
|
|
$ |
36,914 |
|
|
$ |
65,253 |
|
|
$ |
77,339 |
|
Rest of the world |
|
|
69,622 |
|
|
|
71,275 |
|
|
|
141,181 |
|
|
|
137,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100,699 |
|
|
$ |
108,189 |
|
|
$ |
206,434 |
|
|
$ |
214,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 within geographic areas based on the location
of the assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 28, |
|
|
April 30, |
|
|
|
2007 |
|
|
2007 |
|
Long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
232,142 |
|
|
$ |
237,691 |
|
Malaysia |
|
|
28,316 |
|
|
|
26,589 |
|
Rest of the world |
|
|
3,565 |
|
|
|
3,351 |
|
|
|
|
|
|
|
|
|
|
$ |
264,023 |
|
|
$ |
267,631 |
|
|
|
|
|
|
|
|
The following is a summary of capital expenditures by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
October 28, |
|
|
October 29, |
|
|
|
2007 |
|
|
2006 |
|
Optical subsystems and
components |
|
$ |
10,870 |
|
|
$ |
11,042 |
|
Network test and monitoring
systems |
|
|
150 |
|
|
|
160 |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
11,020 |
|
|
$ |
11,202 |
|
|
|
|
|
|
|
|
12. Warranty
The Company generally offers a one-year limited warranty for all of its products. The specific
terms and conditions of these warranties vary depending upon the product sold and the end customer.
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 number of units sold, historical and anticipated rates of
warranty claims and cost per claim. 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):
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
October 28, 2007 |
|
Beginning balance at April 30, 2007 |
|
$ |
1,818 |
|
Additions during the period based upon product sold |
|
|
1,136 |
|
Settlements |
|
|
926 |
|
Changes in liability for pre-existing warranties, including expirations |
|
|
(1,572 |
) |
|
|
|
|
Ending balance at October 28, 2007 |
|
$ |
2,308 |
|
|
|
|
|
21
13. Sales of Accounts Receivable
The Company has an agreement with Silicon Valley Bank to sell certain trade receivables. In
these non-recourse sales, the Company removes the 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 SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. During the three and six months ended October
28, 2007, the Company sold approximately $5.1 and $10.4 million, respectively, of its trade
receivables. During the three and six months ended October 29, 2006, the Company sold
approximately $0 and $4.2 million of its trade receivables, respectively.
14. Restructuring
As of October 28, 2007, $791,000 of committed facility payments remain accrued and are
expected to be fully utilized by the end of fiscal 2011. This amount relates to restructuring
activities associated with the Companys Scotts Valley facility that took place in fiscal 2006.
15. Pending Litigation
Matters Related to Historical Stock Option Grant Practices
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 differ 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, and
related delays in filing the Companys quarterly reports on Form 10-Q for the quarters ended
October 29, 2006 (the October 10-Q), January 28, 2007 (the January 10-Q) and July 29, 2007 (the
July 10-Q) and its annual report on Form 10-K for the fiscal year ended April 30, 2007 (the 2007
10-K), have resulted in the initiation of regulatory proceedings as well as civil litigation and
claims. On December 4, 2007, the Company filed the October10-Q, the January 10-Q, the July 10-Q, and the 2007 10-K, which included
revised financial information for the fiscal years ended April 30, 2006, April 30, 2005, April 30, 2004, April 30, 2003, April 30, 2002, April 30, 2001
and April 30, 2000, as well as quarterly financial information for the interim periods of fiscal 2006 and the first quarter of fiscal 2007.
Nasdaq Determination of Non-compliance
On December 13, 2006, the Company received a Staff Determination notice from the Nasdaq Stock
Market stating that the Company was not in compliance with Marketplace Rule 4310(c)(14) because it
did not timely file the October 10-Q and, therefore, that its common stock was subject to delisting
from the Nasdaq Global Select Market. The Company received similar Staff Determination Notices
with respect to its failure to timely file the January 10-Q, the July 10-Q and the 2007 10-K. In
response to the original Staff Determination Notice, the Company requested a hearing before a
Nasdaq Listing Qualifications Panel (the Panel) to review the Staff Determination and to request
additional time to comply with the filing requirements pending completion of the Audit Committees
investigation. The hearing was held on February 15, 2007. The Company thereafter supplemented its
previous submission to Nasdaq to include the subsequent periodic reports in its request for
additional time to make required filings. On April 4,
2007, the Panel granted the Company additional time to comply with the filing requirements
until June 11, 2007 for the October 10-Q and until July 3, 2007 for the January 10-Q. The Company
appealed the Panels decision to the Nasdaq Listing and Hearing Review Counsel (the Listing
Council), seeking additional time to make the filings. On May 18, 2007, the Listing Council
agreed to review the Panels April 4, 2007 decision and stayed that decision pending review of the
Companys appeal. On October 5, 2007, the Listing Council granted the Company an exception until
December 4, 2007 to file its delinquent periodic reports and restatement. On December 5, 2007, the Company received a letter
from the Listing Council confirming that the filing of the Companys previously delayed 2007 10-K, October 10-Q, January 10-Q and July 10-Q
demonstrated the Companys compliance with Nasdaqs filing requirements under its Marketplace rules and that its common stock will continue to
be listed on the Nasdaq Global Select Market.
Securities and Exchange Commission Inquiry
In November 2006, the Company informed the staff of the Securities and Exchange Commission
(the SEC) of the voluntary investigation that had been undertaken by the Audit Committee of the
Board of Directors. The Company was subsequently notified by the SEC that the SEC was conducting
an informal inquiry regarding the Companys historical stock option grant practices. The Company
is cooperating with the SECs review.
22
Stock Option Derivative Litigation
Following the announcement by the Company 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 for the State of California for the County of Santa Clara.
Plaintiffs in all cases have alleged that certain current or former officers and directors of the
Company caused it 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. A hearing on the motions has been set for January 11,
2008.
Trust Indenture Litigation
On January 4, 2007, the Company received three substantially identical purported notices of
default from U.S. Bank Trust National Association, as trustee (the Trustee) for the Companys 2
1/2% Convertible Senior Subordinated Notes due 2010, its 2 1/2% Convertible Subordinated Notes due
2010 and its 5 1/4% Convertible Subordinated Notes due 2008 (collectively, the Notes). The
notices asserted that the Companys failure to timely file the October 10-Q with the SEC and to
provide a copy to the Trustee constituted a default under each of the three indentures between the
Company and the Trustee governing the respective series of Notes (the Indentures). The notices
each indicated that, if the Company did not cure the purported default within 60 days, an Event of
Default would occur under the respective Indenture. As previously reported, the Company had
delayed filing the October 10-Q pending the completion of the review of its historical stock option
grant practices conducted by the Audit Committee of its Board of Directors.
The Company believes that it is not in default under the terms of the Indentures. The Company
contends that the plain language of each Indenture requires only that the Company file with the
Trustee reports that have actually been filed with the SEC, and that, since the October 10-Q had
not yet been filed with the SEC, the Company was under no obligation to file it with the Trustee.
In anticipation of the expiration of the 60-day cure period under the notices on March 5,
2007, and the potential assertion by the Trustee or the noteholders that an Event of Default had
occurred and a potential attempt to accelerate payment on one or more series of the Notes, on March
2, 2007, the Company filed a lawsuit in the Superior Court for the State of California for the
County of Santa Clara against U.S. Bank Trust National Association, solely in its capacity as
Trustee under the Indentures, seeking a judicial declaration that the Company is not in default
under the three Indentures, based on the Companys position as described above. The Trustee filed
an answer to the complaint generally denying all allegations and also filed a notice of removal of
the state case to the United States District Court for the Northern District of California. On
October 12, 2007, the action was remanded back to the state court in which it was commenced because
the Trustees notice of removal was not timely.
As expected, on March 16, 2007, the Company received three additional notices from the Trustee
asserting that Events of Default under the Indentures had occurred and were continuing based on
the Companys failure to cure the alleged default within the 60-day cure period.
On April 24, 2007, the Company received three substantially identical purported notices of
default from the Trustee for each of the Indentures, asserting that the Companys failure to timely
file the January 10-Q with the SEC and to provide a copy to the Trustee constituted a default under
each of the Indentures. The notices each indicated that, if the Company did not cure the purported
default within 60 days, an Event of Default would occur under the respective Indenture. The
Company believes that it is not in default under the terms of the Indentures for the reasons
described above.
On June 21, 2007, the Company filed a second declaratory relief action against the Trustee in
the Superior Court of California for the County of Santa Clara. The second action is essentially
identical to the first action filed on March 2, 2007 except that it covers the notices asserting
Events of Default received in April 2007 and any other notices of default that the Trustee may
deliver in the future with respect to the Companys delay in filing, and providing copies to the
Trustee, of periodic reports with the SEC. The Trustee filed an answer to the complaint generally
denying all allegations and filed a notice of removal to the United States District Court for the
Northern District of California. The Companys motion to remand
the action to state court was denied on
December 7, 2007.
On July 9, 2007, the Company received three substantially identical purported notices of
default from the Trustee for each of the Indentures, asserting that the Companys failure to timely
file this Form 10-K report with the SEC and to provide a copy to the
23
Trustee constituted a default
under each of the Indentures. As before, the notices each indicated that, if the Company did not
cure the purported default within 60 days, an Event of Default would occur under the respective
Indenture. The Company believes that it is not in default under the terms of the Indentures for
the reasons described above.
On December 4, 2007,
the Company filed with the SEC and provided to the Trustee the October
10-Q, the January 10-Q, the July 10-Q and the 2007 Form 10-K. To date, neither the Trustee nor the holders of at
least 25% in aggregate principal amount of one or more series of the Notes have declared all unpaid
principal, and any accrued interest, on the Notes to be due and payable, although the Trustee
stated in the notices that it reserved the right to exercise all available remedies. As of October 31,
2007, there is $250.3 million in aggregate principal amount of Notes outstanding and an aggregate
of approximately $558,000 in accrued interest.
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 (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 in the
amount of 6% compounded annually from April 4, 1999, amounting to approximately $13.4 million.
Finally, the Court awarded the Company costs of $147,282 associated with the litigation. The Court
declined to award the Company its attorneys fees. The Court denied the Companys motion for
injunctive relief, but ordered DirecTV to pay a compulsory ongoing license fee to the 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. The Court entered
final judgment in favor of the Company and against DirecTV on July 7, 2006. On September 1, 2006,
the Court denied DirecTVs post-trial motions seeking to have the jury verdict set aside or
reversed and requesting a new trial on a number of grounds. In another written post-trial motion,
DirecTV asked the Court to allow DirecTV to place any amounts owed the Company under the compulsory
license into an escrow account pending the outcome of any appeal and for those amounts to be
refundable in the event that DirecTV prevails on appeal. The Court granted DirecTVs motion and
payments under the compulsory license are being made into an escrow account pending the outcome of
the appeal. As of October 12, 2007, DirecTV has deposited approximately $28 million into escrow.
These escrowed funds represent DirecTVs compulsory royalty payments for the period from June 17,
2006 through September 30, 2007.
DirecTV has 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 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 have been consolidated. The parties were ordered to participate in the
appellate courts mandatory mediation program, which occurred on February 13, 2007 without
resolution. The parties have filed their respective briefs with the appellate court. A neutral
third party, New York Intellectual Property Law Association (NYIPLA) filed an amicus brief urging
the appellate court to vacate the portion of trial courts judgment denying the Companys motion
for a permanent injunction and ordering DirecTV to pay royalties pursuant to a compulsory license.
Over DirecTVs objection, the appellate court accepted NYIPLAs amicus brief. On November 19,
2007, the Court of Appeals denied NYIPLAs motion to file a
reply brief. Oral arguments in the case have been set for January 7, 2008. Subsequent to the
oral arguments, it is anticipated that a decision from the appellate court will issue between March
2008 and November 2008.
Comcast Litigation
On July 7, 2006, Comcast Cable Communications Corporation, LLC (Comcast) filed a complaint
against the Company in the United States District Court, Northern District of California, San
Francisco Division. Comcast seeks a declaratory judgment that the Companys 505 patent is not
infringed and is invalid. The 505 patent is the same patent alleged by the Company in its lawsuit
against DirecTV. The Companys motion to dismiss the declaratory judgment action was denied on
November 9, 2006. As a result, on November 22, 2006, the Company filed an answer and counterclaim
alleging that Comcast infringes the 505 patent and seeking
24
damages to be proven at trial. The
court held a claim construction hearing and, on April 6, 2007, issued its claim construction
ruling. Discovery has closed. On December 4, 2007, the Court partially stayed the case
pending the Federal Circuits decision in the DirecTV appeal, but ordered briefing on the issues
that are not implicated by the DirecTV appeal to continue. On December 6, 2007, Comcast filed
summary judgment motions on those issues, to which the Company will
respond. The parties have been ordered to a mediation and settlement conference on December 13, 2007. A jury trial has been scheduled
for March 3, 2008.
EchoStar Litigation
On July 10, 2006, EchoStar Satellite LLC, EchoStar Technologies Corporation and NagraStar LLC
(collectively EchoStar) filed an action against the Company in the United States District Court
for the District of Delaware seeking a declaration that EchoStar does not infringe, and has not
infringed, any valid claim of the Companys 505 patent. The 505 patent is the same patent that
is in dispute in the DirecTV, Comcast and XM/Sirius lawsuits. On October 24, 2006, the Company filed a motion
to dismiss the action for lack of a justiciable controversy. The Court denied the
Companys motion on September 25, 2007. The Company filed its answer and counterclaim on October
10, 2007. On December 4, 2007, the Court approved the parties stipulation to stay the case
pending the Federal Circuits decision in the DirecTV case. No scheduling order has been entered
in the case, and discovery has not yet begun.
XM/Sirius Litigation
On April 27, 2007, the Company filed an action for patent infringement in the United States
District Court for the Eastern District of Texas, Lufkin Division, against XM Satellite Radio
Holdings, Inc., XM Satellite Radio, Inc., and XM Radio, Inc. (collectively, XM), and Sirius
Satellite Radio, Inc. and Satellite CD Radio, Inc. (collectively, Sirius). Judge Clark, the same
judge who presided over the DirecTV trial, has been assigned to the case. The lawsuit alleges that
XM and Sirius have infringed and continue to infringe the Companys 505 patent and seeks an
injunction to prevent further infringement, actual damages to be proven at trial, enhanced damages
for willful infringement and attorneys fees. The defendants filed an answer denying infringement
of the 505 patent and asserting invalidity and other defenses. The defendants also moved to stay
the case pending the outcome of the DirectTV appeal and the re-examination of the 505 patent
described below. Judge Clark denied defendants motion for a stay and subsequently issued a
scheduling order. On October 22, 2007 the Court held its initial case management conference.
Discovery is now underway. The claim construction hearing has been set for February 6, 2008, and
the trial has been set for September 15, 2008.
Requests for Re-Examination of the 505 Patent
Three requests for re-examination of the Companys 505 patent have been filed with the United
States Patent and Trademark Office (PTO). The 505 patent is the patent that is in dispute in
the DirecTV, EchoStar, Comcast and XM/Sirius lawsuits. On December 11, 2006, the PTO entered an
order granting the first request and, on March 21, 2007, the PTO entered an order granting the
second request. The third request, filed on August 1, 2007, was partially granted on September 28,
2007. Based on communications with the PTO, the Company expects that the PTO will take steps to
consolidate these requests into one request for re-examination. During the re-examination, some or
all of the claims in the 505 patent could be invalidated or revised to narrow their scope, either
of which could have a material adverse impact on the Companys position in the related 505
lawsuits. The PTO has yet to issue a substantive office action in these proceedings. Resolution
of one or more re-examination requests of the 505 Patent is likely to take more than 15 months.
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 Finisar, Jerry S. Rawls, the Companys President and Chief Executive Officer, Frank H.
Levinson, the Companys former Chairman of the Board and Chief Technical Officer, Stephen K.
Workman, the Companys 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 July 2004, the Company
and the
25
individual defendants accepted a settlement proposal made to all of the issuer defendants.
Under the terms of the settlement, the plaintiffs would dismiss and release all claims against
participating defendants in exchange for a contingent payment guaranty by the insurance companies
collectively responsible for insuring the issuers in all related cases, and the assignment or
surrender to the plaintiffs of certain claims the issuer defendants may have against the
underwriters. Under the guaranty, the insurers would be required to pay the amount, if any, by
which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the
underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment
is required under the guaranty, the Company would be responsible to pay its pro rata portion of the
shortfall, up to the amount of the self-insured retention under the Companys insurance policy,
which may be up to $2 million. The timing and amount of payments that the Company could be
required to make under the proposed settlement would depend on several factors, principally the
timing and amount of any payment that the insurers may be required to make pursuant to the $1
billion guaranty. The Court gave preliminary approval to the settlement in February 2005 and held
a hearing in April 2006 to consider final approval of the settlement. Before the Court issued a
final decision on the settlement, on December 5, 2006, the United States Court of Appeals for the
Second Circuit vacated the class certification of plaintiffs claims against the underwriters in
six cases designated as focus or test cases. Thereafter, on December 14, 2006, the Court ordered a
stay of all proceedings in all of the lawsuits pending the outcome of the plaintiffs petition to
the Second Circuit Court of Appeals for a rehearing en banc and resolution of the class
certification issue. On April 6, 2007, the Second Circuit Court of Appeals denied the plaintiffs
petition for a rehearing, but clarified that the plaintiffs may seek to certify a more limited
class. Subsequently, and consistent with these developments, the Court entered an order, at the
request of the plaintiffs and issuers, to deny approval of the settlement, and the plaintiffs filed
an amended complaint in an attempt to comply with the decision of the Second Circuit Court of
Appeals. The Plaintiffs and issuers have stated that they are
prepared to discuss how the settlement might be amended or
renegotiated to
comply with the Second Circuit decision.
If an amended or modified settlement is not reached, and thereafter approved by the
Court, the Company intends to defend the lawsuit vigorously. Because of the inherent uncertainty
of litigation, however, the Company cannot predict its outcome. If, as a result of this dispute,
the Company is required to pay significant monetary damages, its business would be substantially
harmed.
The Company cannot predict the outcome of the legal proceedings discussed above. No amount of
loss, if any, is considered probable or measurable and no loss contingency has been recorded at the
balance sheet date.
16. 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 minimal.
Accordingly, the Company has not recorded any liabilities for these agreements as of October 28,
2007. To date, the Company has not incurred material costs to defend lawsuits or settle claims
related to these indemnification agreements.
17. Subsequent Events
Future Impact of Certain Stock Option Restatement Items
Because virtually all holders of options issued by the Company were neither involved in nor
aware of its accounting treatment of stock options, the Company has taken and intends to take
actions to deal with certain adverse tax consequences that may be incurred by the holders of
certain incorrectly priced options. The primary adverse tax consequence is that incorrectly priced
stock options vesting after December 31, 2004 may subject the option holder to a penalty tax under
Internal Revenue Code Section 409A (and, as applicable, similar penalty taxes under California and
other state tax laws). The Company presently estimates that it will incur a liability to option
holders of approximately $7.0 million, of which approximately $5.7 million will be recognized as
additional stock based compensation expense in future periods.
26
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 set forth 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
Finisar Corporation is a leading provider of optical subsystems and components that connect
local area networks, or LANs, storage area networks, or SANs, and metropolitan area networks, or
MANs. Our optical subsystems consist primarily of transceivers which provide the fundamental
optical-electrical interface for connecting the equipment used in building these networks. These
products rely on the use of digital 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 using a wide range of network protocols,
transmission speeds and physical configurations over distances of 70 meters to 200 kilometers. Our
line of optical components consists primarily of packaged lasers and photodetectors used in
transceivers, primarily for LAN and SAN applications. Our manufacturing operations are vertically
integrated and include internal manufacturing, assembly and test capability. We sell our optical
subsystem and component products to manufacturers of storage and networking equipment such as
Brocade, Cisco Systems, EMC, Emulex, Hewlett-Packard Company, Huawei and Qlogic.
We also provide network performance test and monitoring systems to original equipment
manufacturers for testing and validating equipment designs and, to a lesser degree, to operators of
networking and storage data centers for testing, monitoring and troubleshooting the performance of
their installed systems. We sell these products primarily to leading storage equipment
manufacturers such as Brocade, EMC, Emulex, Hewlett-Packard Company, IBM and Qlogic.
Critical Accounting Policies
The preparation of our financial statements and related disclosures require that we make
estimates, assumptions and judgments that can have a significant impact on our net revenue and
operating results, as well as on the value of certain assets, contingent assets and liabilities on
our balance sheet. We believe that the estimates, assumptions and judgments involved in the
accounting policies described below have the greatest potential impact on our financial statements
and, therefore, consider these to be our critical accounting policies. See Note 1 to our condensed
consolidated financial statements included elsewhere in this report for more information about
these critical accounting policies, as well as a description of other significant accounting
policies.
Income Taxes
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes An
interpretation of FASB Statement No. 109, (FIN 48) on May 1, 2007. FIN 48 is an interpretation of
FASB Statement 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition in accounting for income taxes. FIN
48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position that an entity takes or expects to take in a tax
return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. Under FIN 48, an entity may
only recognize or continue to recognize tax positions that meet a more likely than not threshold.
In accordance with our accounting policy, we recognize accrued interest and penalties related to
unrecognized tax benefits as a component of tax expense. This policy did not change as a result of
our adoption on FIN 48.
27
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 |
|
Six Months Ended |
|
|
October 28, |
|
October 29, |
|
October 28, |
|
October 29, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Unaudited, in thousands) |
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
|
90.3 |
% |
|
|
91.5 |
% |
|
|
90.7 |
% |
|
|
91.0 |
% |
Network test and monitoring systems |
|
|
9.7 |
|
|
|
8.5 |
|
|
|
9.3 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenues |
|
|
66.7 |
|
|
|
63.8 |
|
|
|
67.3 |
|
|
|
65.2 |
|
Amortization of acquired developed technology |
|
|
1.7 |
|
|
|
1.4 |
|
|
|
1.7 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
31.6 |
|
|
|
34.8 |
|
|
|
31.0 |
|
|
|
33.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
17.5 |
|
|
|
14.8 |
|
|
|
17.0 |
|
|
|
14.2 |
|
Sales and marketing |
|
|
9.1 |
|
|
|
8.7 |
|
|
|
9.3 |
|
|
|
8.5 |
|
General and administrative |
|
|
10.8 |
|
|
|
6.6 |
|
|
|
9.1 |
|
|
|
6.8 |
|
Amortization of purchased intangibles |
|
|
0.5 |
|
|
|
0.3 |
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
37.9 |
|
|
|
30.4 |
|
|
|
35.9 |
|
|
|
29.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(6.3 |
) |
|
|
4.4 |
|
|
|
(4.9 |
) |
|
|
3.6 |
|
Interest income |
|
|
1.5 |
|
|
|
1.3 |
|
|
|
1.4 |
|
|
|
1.2 |
|
Interest expense |
|
|
(4.3 |
) |
|
|
(3.6 |
) |
|
|
(4.2 |
) |
|
|
(3.6 |
) |
Loss on convertible debt exchange |
|
|
0.0 |
|
|
|
(29.2 |
) |
|
|
0.0 |
|
|
|
(14.7 |
) |
Other income (expense), net |
|
|
0.1 |
|
|
|
(0.3 |
) |
|
|
0.0 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative
effect of change in accounting principle |
|
|
(9.0 |
) |
|
|
(27.4 |
) |
|
|
(7.7 |
) |
|
|
(13.9 |
) |
Provision for income taxes |
|
|
0.7 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in
accounting principle |
|
|
(9.7 |
) |
|
|
(28.0 |
) |
|
|
(8.3 |
) |
|
|
(14.5 |
) |
Cumulative effect of change in accounting principle |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(9.7 |
)% |
|
|
(28.0 |
)% |
|
|
(8.3 |
)% |
|
|
(13.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues decreased $7.5 million, or 6.9%, to $100.7 million in the quarter ended
October 28, 2007 compared to $108.2 million in the quarter ended October 29, 2006. Sales of optical
subsystems and components and network test and monitoring systems represented 90.3% and 9.7%,
respectively, of total revenues in the quarter ended October 28, 2007, compared to 91.5% and 8.5%,
respectively, in the quarter ended October 29, 2006.
Revenues
decreased $8.0 million, or 3.7%, to $206.4 million in the six months ended October
28, 2007 compared to $214.4 million in the six months ended October 29, 2006. Sales of optical
subsystems and components and network test and monitoring systems represented 90.7% and 9.3%,
respectively, of total revenues in the six months ended
October 28, 2007, compared to 91.0% and
9.0%, respectively, in the six months ended October 29, 2006.
Optical subsystems and
components revenues decreased $8.1 million, or 8.2%, to $90.9 million
in the quarter ended October 28, 2007 compared to $99.0 million in the quarter ended October 29,
2006. While total optical subsystem revenue was down compared to the
prior years quarter, we experienced large
fluctuations in our broad product categories. Sales for products for short distance LAN/SAN
applications decreased $11.9 million, or 19.0%, to $50.7 million in the quarter ended October 28,
2007 compared to $62.6 million in the quarter ended October 29, 2006. The decline in products for
LAN/SAN applications was primarily the result of a broad slowdown in unit sales to our SAN
customers combined with competitive pricing pressure. Sales of products for longer distance MAN
applications increased $3.8 million, or 10.5%, to $40.2 million in the quarter ended October 28,
2007 compared to $36.4 million in the quarter ended October 29, 2006. The increase in sales for MAN
products was primarily the result of increased sales of our products for 10Gbps applications.
Optical subsystems and
components revenues decreased $7.7 million, or 4.0%, to $187.3 million
in the six months ended October 28, 2007 compared to $195.1 million in the six months ended October
29, 2006. While total optical subsystem revenue was down compared to
the six month period in the prior year, we
experienced large fluctuations in our broad product categories. Sales for products for short
distance LAN/SAN applications decreased $25.1 million, or 20.0%, to $100.1 million in the six
months ended October 28, 2007 compared to $125.2 million in the six months ended October 29, 2006.
The decline in products for LAN/SAN applications was primarily the result of a broad slowdown in
unit sales to our SAN customers combined with competitive pricing pressure. Sales of products for
longer distance MAN applications increased $17.4 million, or 24.8%, to $87.2 million in the six
months ended October 28, 2007 compared to $69.8 million in the six months ended October 29, 2006.
The increase in sales for MAN products was primarily the result of increased sales of our products
for 10Gbps applications.
28
Network test and monitoring systems revenues increased $589,000, or 6.4%, to $9.8 million in
the quarter ended October 28, 2007 compared to $9.2 million in the quarter ended October 29 2006.
Network test and monitoring systems revenues increased $236,000, or 1.2%, to $19.1 million in the
six months ended October 28, 2007 compared to $19.4 million in the six months ended October 29
2006.
Amortization of Acquired Developed Technology. Amortization of acquired developed technology,
a component of cost of revenues, increased $224,000, or 14.9%, in the quarter ended October 28,
2007 to $1.7 million compared to $1.5 million in the quarter ended October 29, 2006 and increased
$434,000, or 14.4%, in the six months ended October 28, 2007 to $3.5 million compared to $3.0
million in the six months ended October 29, 2006. The increase was the result of amortizing
purchased technology acquired with the acquisitions of AZNA LLC and Kodeos Communications in the
fourth quarter of fiscal 2007.
Gross Profit. Gross profit decreased $5.9 million, or 15.7%, to $31.8 million in the quarter
ended October 28, 2007 compared to $37.7 million in the quarter ended October 29, 2006. Gross
profit as a percentage of total revenue was 31.6% in the quarter ended October 28, 2007 compared to
34.8% in the quarter ended October 29, 2006. We recorded charges of $3.6 million for obsolete and
excess inventory in the quarter ended October 28, 2007 compared to $2.5 million in the quarter
ended October 29, 2006. We sold inventory that was written-off in previous periods resulting in a
benefit of $1.7 million in the quarter ended October 28, 2007 and $700,000 in the quarter ended
October 29, 2006. As a result, we recognized a net charge of $1.9 million in the quarter ended
October 28, 2007 compared to $1.8 million in the quarter ended October 29, 2006. Manufacturing
overhead includes stock-based compensation charges of $703,000 in the quarter ended October 28,
2007 and $899,000 in the quarter ended October 29, 2006. 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 $36.1 million, or 35.9% of revenue, in the
quarter ended October 28, 2007 compared to $41.9 million,
or 38.7% of revenue, in the quarter ended
October 29, 2006. The decrease in the adjusted gross profit margin was primarily due to the 6.9%
decrease in revenue offset by a slight decrease in manufacturing overhead spending of 5.6%
(excluding non-cash stock-based compensation charges) combined with decreases in material costs.
Gross profit decreased $7.6 million, or 10.6%, to $64.1 million in the six months ended
October 28, 2007 compared to $71.7 million in the six months ended October 29, 2006. Gross profit
as a percentage of total revenue was 31.0% in the six months ended October 28, 2007 compared to
33.4% in the six months ended October 29, 2006. We recorded charges of $7.4 million for obsolete
and excess inventory in the six months ended October 28, 2007 and $5.9 million in the six months
ended October 29, 2006. We sold inventory that was written-off in previous periods resulting in a
benefit of $3.4 million in the six months ended October 28, 2007 and $1.8 million in the six months
ended October 29, 2006. As a result, we recognized a net charge of $4.0 million in the six months
ended October 28, 2007 compared to $4.1 million in the six months ended October 29, 2006.
Manufacturing overhead includes stock-based compensation charges of $1.4 million in the six months
ended October 28, 2007 and $2.0 million in the six months ended October 29, 2006. 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 $73.0 million, or 35.4%
of revenue, in the six months ended October 28, 2007 compared to
$80.8 million, or 37.7% of revenue,
in the six months ended October 29, 2006. The decrease in the adjusted gross profit margin was
primarily due to the 3.7% decrease in revenue offset by a slight decrease in manufacturing overhead
spending of 2.0% (excluding non-cash stock-based compensation charges) combined with decreases in
material costs.
Research and Development Expenses. Research and development expenses increased $1.6 million,
or 10.2%, to $17.6 million in the quarter ended October 28, 2007 compared to $16.0 million in the
quarter ended October 29, 2006. The increase was primarily due to an increase in employee related
expenses of $1.0 million and project materials, consulting services and new product development
scrap of $599,000. The increase in employee related spending included $867,000 as a result of our
acquisitions of AZNA and Kodeos in the fourth quarter of fiscal 2007.
The remainder of the
increase was primarily related to new product development efforts, primarily for 10Gbps products.
Included in research and development expenses were stock-based compensation charges of $1.0 million
in each of the quarters ended October 28, 2007 and October 29, 2006. Research and development expenses as a percent
of revenues increased to 17.5% in the quarter ended October 28, 2007 compared to 14.8% in the
quarter ended October 29, 2006.
Research and development expenses increased $4.7 million, or 15.6%, to $35.1 million in the
six months ended October 28, 2007 compared to $30.4 million in the six months ended October 29,
2006. The increase was primarily due to an increase in employee related expenses of $2.8 million
and an increase in project materials, project services and new product development scrap of $1.5
million. The increase in employee related spending included $1.6 million as a result of our
acquisitions of AZNA and Kodeos in the fourth quarter of fiscal 2007.
The remainder of the
increase was primarily related to new product development efforts, primarily for 10Gbps products.
Included in research and development expenses were stock-based compensation charges of $2.0 million
in the six months ended October 28, 2007 and $2.3 million in the six months ended October 29, 2006.
Research and development expenses as a percent of revenues increased to 17.0% in the six months
ended October 28, 2007 compared to 14.2% in the six months ended October 29, 2006.
Sales and Marketing Expenses. Sales and marketing expenses decreased $261,000, or 2.8%, to
$9.2 million in the quarter ended October 28, 2007 compared to $9.4 million in the quarter ended
October 29, 2006. The decrease was primarily due to lower
29
commissions related to the decrease in revenue. Included in sales and marketing expenses were
stock-based compensation charges of $442,000 in the quarter ended October 28, 2007 and $505,000 in
the quarter ended October 29, 2006. Sales and marketing expenses as a percent of revenues increased
to 9.1% in the quarter ended October 28, 2007 compared to 8.7% in the quarter ended October 29,
2006.
Sales and marketing expenses increased $961,000, or 5.3%, to $19.2 million in the six months
ended October 28, 2007 compared to $18.3 million in the six months ended October 29, 2006. The
increase was primarily due to employee related expenses of $837,000. The increase in sales and
marketing expenses was made to support and generate anticipated revenue growth. Included in sales
and marketing expenses were stock-based compensation charges of $893,000 in the six months ended
October 28, 2007 and $1.0 million in the six months ended October 29, 2006. Sales and marketing
expenses as a percent of revenues increased to 9.3% in the six months ended October 28, 2007
compared to 8.5% in the six months ended October 29, 2006.
General and Administrative Expenses. General and administrative expenses increased $3.8
million, or 53.3%, to $10.9 million in the quarter ended October 28, 2007 compared to $7.1 million
in the quarter ended October 29, 2006. The increase was primarily due to costs associated with our
stock option investigation of $3.1 million and an increase in our non-cash allowance for aged
receivables of $417,000. Included in general and administrative expenses were stock-based
compensation charges of $350,000 in the quarter ended October 28, 2007 and $629,000 in the quarter
ended October 29, 2006. General and administrative expenses as a percent of revenues increased to
10.8% in the quarter ended October 28, 2007 compared to 6.6% in the quarter ended October 29, 2006.
General and administrative expenses increased $4.3 million, or 29.1%, to $18.9 million in the
six months ended October 28, 2007 compared to $14.6 million in the six months ended October 29,
2006. The increase was primarily due to costs associated with our stock option investigation of
$4.3 million. Included in general and administrative expenses were stock-based compensation charges
of $981,000 in the six months ended October 28, 2007 and
$1.2 million in the six months ended October
29, 2006. General and administrative expenses as a percent of revenues increased to 9.1% in the six
months ended October 28, 2007 compared to 6.8% in the six months ended October 29, 2006.
Amortization of Purchased Intangibles. Amortization of purchased intangibles increased
$177,000, or 56.5%, to $490,000 in the quarter ended October 28, 2007 compared to $313,000 in the
quarter ended October 29, 2006 and increased $368,000, or 60.1%, to $980,000 in the six months
ended October 28, 2007 compared to $612,000 in the six months ended October 29, 2006. The increases
were due to the acquisitions of AZNA and Kodeos in the fourth quarter of
fiscal 2007.
Interest Income. Interest income increased $138,000, or 9.9%, to $1.5 million in the quarter
ended October 28, 2007 compared to $1.4 million in the quarter ended October 29, 2006 and increased
$298,000, or 11.2%, to $3.0 million in the six months ended October 28, 2007 compared to $2.7
million in the six months ended October 29, 2006. The increases were due to increased investment
balances and higher interest rates.
Interest Expense. Interest expense increased $458,000, or 11.7%, to $4.4 million in the
quarter ended October 28, 2007 compared to $3.9 million in the quarter ended October 29, 2006. The
increase was primarily related to the interest charges on the $17.0 million in convertible notes
issued in the fourth quarter of fiscal 2007 in connection with our acquisition of AZNA. Of the
total interest expense included in each of the quarters ended
October 28, 2007 and October 29, 2006,
approximately $2.3 million was related to our convertible subordinated notes due in 2008 and 2010,
and $1.2 million represented a non-cash charge to amortize the beneficial conversion feature of the
notes due in 2008.
Interest expense increased $783,000, or 10.0%, to $8.6 million in the six months ended October
28, 2007 compared to $7.8 million in the six months ended October 29, 2006. The increase was
primarily related to the interest charges on the $17.0 million in convertible notes issued in the
fourth quarter of fiscal 2007 in connection with our acquisition of AZNA. Of the total interest
expense included in each of the six month periods ended
October 28, 2007 and October 29, 2006, approximately
$4.5 million was related to our convertible subordinated notes due in 2008 and 2010, and $2.4
million represented a non-cash charge to amortize the beneficial conversion feature of the notes
due in 2008.
Loss on Convertible Debt Exchange. On October 6, 2006, we exchanged $100 million of our 2 1/2%
convertible subordinated notes due in 2010 for $100 million of new 2 1/2% convertible senior
subordinated notes also due in 2010. Among other features, the new notes eliminated a put option
that would have allowed the holders of the original notes to require the redemption of the notes on
October 15, 2007 for cash or shares of our common stock. As a result of the exchange, we recorded a
non-cash charge for the extinguishment of the original notes of
$31.6 million in the quarter and six
month period ended October 29, 2006.
Other Income (Expense), Net. Other income was $85,000 in the quarter ended October 28, 2007
compared to expense of $440,000 in the quarter ended October 29,
2006 other expense was $48,000 in
the six months ended October 28, 2007 compared to $810,000 in the six months ended October 29,
2006. Other expense in fiscal 2008 primarily consists of amortization of subordinated loan costs
30
offset by gains in sales of equipment. Other expense in fiscal 2007 primarily consists of
amortization of subordinated loan costs and our proportional share of losses for an equity
investment.
Provision for Income Taxes. We recorded income tax provisions of $655,000 and $627,000,
respectively, for the quarters ended October 28, 2007 and October 29, 2006 and $1.3 million for
each of the six month periods ended October 28, 2007 and October 29, 2006. The income tax provision
for each of these periods is primarily the result of establishing a deferred tax liability to
reflect tax amortization of goodwill for which no book amortization has occurred. Due to the
uncertainty regarding the timing and extent of our future profitability, we have recorded a
valuation allowance to offset potential income tax benefits associated with our operating losses.
As a result, we did not record any income tax benefit in the three or six month periods ended
October 28, 2007 or October 29, 2006. There can be no assurance that deferred tax assets subject to the valuation
allowance will ever be realized.
Cumulative Effect of Adoption of SFAS 123(R). Upon the adoption of Statement of Financial
Accounting Standards, or SFAS, 123R on May 1, 2006, we recorded an additional $1.2 million
cumulative benefit from change in accounting principle, net of tax, reflecting the net cumulative
impact of estimated forfeitures related to unvested stock options as of May 1, 2006 that were
previously not included in the determination of historic stock-based compensation expense under APB
25 in periods prior to May 1, 2006.
Liquidity and Capital Resources
At October 28, 2007, cash, cash equivalents and short-term and long-term available-for-sale
investments were $119.5 million compared to $132.5 million at April 30, 2007. Of this amount,
long-term available-for-sale investments totaled $13.5 million
of which $9.0 million was related
to debt securities which were readily saleable and $4.5 million was related to the conversion of an
equity method investment to available-for-sale. There are market restrictions on our ability to
sell the security underlying this investment. At October 28, 2007, total short and long term debt
was $269.1 million, compared to $267.6 million at April 30, 2007.
Net cash provided in operating activities totaled $1.6 million in the six months ended October
28, 2007, compared to $15.3 million in the six months ended October 29, 2006. Cash provided by
operating activities in the six months ended October 28, 2007 primarily consisted of operating
losses adjusted for depreciation, amortization and non-cash related items in the income statement
totaling $8.0 million offset by $6.4 million in additional working capital which was primarily
related to a decrease in accounts payable. Cash provided by operating activities in the six months
ended October 29, 2006 primarily consisted of operating losses adjusted for depreciation,
amortization and non-cash related items in the income statement totaling $28.5 million offset by
$13.2 million in additional working capital which was primarily related to increases in accounts
receivable, inventory and other assets, offset by a decrease in accounts payable.
Net cash used in investing activities totaled $10.4 million in the six months ended October
28, 2007 compared to $22.4 million in the six months ended October 29, 2006. Cash invested in the
six months ended October 28, 2007 and October 29, 2006 was primarily related to equipment purchases
to support production expansion at our Texas and Malaysia facilities and the purchase of short-term
investments.
Net cash used in financing activities totaled $1.1 million in the six months ended October 28,
2007 compared to cash provided by financing activities of $2.3 million in the six months ended
October 29, 2006. Cash used in financing activities for the six months ended October 28, 2007 was
primarily due to repayments on borrowings. Cash provided by financing
activities in the six months
ended October 29, 2006 was primarily due to proceeds from the exercise of stock options and sales
of stock under the employee stock purchase plan of $3.5 million, partially offset by repayments on
borrowings.
We believe that our existing balances of cash, cash equivalents and short-term investments,
together with the cash expected to be generated from our future operations, will be sufficient to
meet our cash needs for working capital and capital expenditures for at least the next 12 months.
We may however require additional financing to fund our operations in the future. 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.
31
Contractual Obligations and Commercial Commitments
At October 28, 2007, we had contractual obligations of $342.2 million as shown in the
following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
5 Years |
|
|
Short-term debt |
|
$ |
1,953 |
|
|
$ |
1,953 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term debt |
|
|
4,647 |
|
|
|
|
|
|
|
4,268 |
|
|
|
379 |
|
|
|
|
|
Convertible debt |
|
|
267,200 |
|
|
|
117,200 |
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
Interest on debt |
|
|
17,728 |
|
|
|
9,914 |
|
|
|
7,811 |
|
|
|
3 |
|
|
|
|
|
Lease commitment under
sale-leaseback
agreement |
|
|
43,932 |
|
|
|
3,131 |
|
|
|
6,475 |
|
|
|
6,770 |
|
|
|
27,556 |
|
Operating leases |
|
|
4,352 |
|
|
|
2,118 |
|
|
|
2,184 |
|
|
|
50 |
|
|
|
|
|
Purchase obligations |
|
|
2,426 |
|
|
|
2,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations |
|
$ |
342,238 |
|
|
$ |
136,742 |
|
|
$ |
170,738 |
|
|
$ |
7,202 |
|
|
$ |
27,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt of $2.0 million represents the current portion of a note payable to a
financial institution.
Long-term debt consists of the long-term portion of a note payable to a financial institution
in the principal amount of $4.6 million.
Convertible debt consists of a series of convertible subordinated notes in the aggregate
principal amount of $100.3 million due October 15, 2008, and two series of convertible subordinated
notes in the aggregate principal amount of $150.0 million due October 15, 2010. The notes are
convertible by the holders of the notes at any time prior to maturity into shares of Finisar common
stock at specified conversion prices. The notes are redeemable by us, in whole or in part. Annual
interest payments on the convertible subordinated notes are approximately $9.0 million annually.
Interest on debt consists of the scheduled interest payments on our short-term, long-term, and
convertible debt.
The lease commitment under sale-leaseback agreement includes the principal amount of $11.7
million related to the sale-leaseback of our corporate office building, which we entered into in
the fourth quarter of fiscal 2005.
Operating lease obligations consist primarily of base rents for facilities we occupy at
various locations.
Purchase obligations consist of standby repurchase obligations and are related to materials
purchased and held by subcontractors on our behalf to fulfill the subcontractors purchase order
obligations at their facilities. Our repurchase obligations of $2.4 million have been expensed and
recorded on the balance sheet as non-cancelable purchase obligations as of October 28, 2007.
On
November 1, 2007, we entered into an amended letter of credit reimbursement
agreement with Silicon Valley Bank that will be available to us through October 26, 2008.
The terms of the new amended agreement are substantially unchanged
from the previous agreement.
Under the terms of the amended agreement, Silicon Valley Bank is
providing a $15 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 us. Outstanding
letters of credit secured by this agreement at October 28, 2007 totaled $10.4 million.
Off-Balance-Sheet Arrangements
At October 28, 2007 and April 30, 2007, 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.
32
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, 2007.
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 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 Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the second quarter
of fiscal 2008 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The material changes to our legal proceedings from those previously disclosed in our fiscal
2007 Form 10-K, which was filed on December 4, 2007, are as follows:
Matters Related to Historical Stock Option Grant Practices
On November 30, 2006, we announced that we had undertaken a voluntary review of our historical
stock option grant practices subsequent to our 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 our 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 we would likely need to restate our 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 differ from the recorded grant dates for such awards. Our
management, in conjunction with the Audit Committee, conducted a further review to finalize revised
measurement dates and determine the appropriate accounting adjustments to our historical financial
statements. The announcement of the investigation, and related delays in filing our quarterly
reports on Form 10-Q for the quarters ended October 29, 2006 (the October 10-Q), January 28, 2007
(the January 10-Q) and July 29, 2007 (the July 10-Q) and our annual report on Form 10-K for the
fiscal year ended April 30, 2007 (the 2007 10-K), have resulted in the initiation of regulatory
proceedings as well as civil litigation and claims. On December 4, 2007, we filed the October10-Q, the January 10-Q, the July 10-Q,
and the 2007 10-K, which included revised financial information for the fiscal years ended April 30, 2006, April 30, 2005, April 30, 2004, April 30,
2003, April 30, 2002, April 30, 2001 and April 30, 2000, as well as quarterly financial information for the interim periods of fiscal 2006 and the first quarter of fiscal 2007.
33
Nasdaq Determination of Non-compliance
On December 13, 2006, we received a Staff Determination notice from the Nasdaq Stock Market
stating that the Company was not in compliance with Marketplace Rule 4310(c)(14) because we did not
timely file the October 10-Q and, therefore, that our common stock was subject to delisting from
the Nasdaq Global Select Market. We received similar Staff Determination Notices with respect to
our failure to timely file the January 10-Q, the July 10-Q and the 2007 10-K. In response to the
original Staff Determination Notice, we requested a hearing before a Nasdaq Listing Qualifications
Panel (the Panel) to review the Staff Determination and to request additional time to comply
with the filing requirements pending completion of the Audit Committees investigation. The
hearing was held on February 15, 2007. The Company thereafter supplemented its previous submission
to Nasdaq to include the subsequent periodic reports in its request for additional time to make
required filings. On April 4, 2007, the Panel granted us additional time to comply with the filing
requirements until June 11, 2007 for the October 10-Q and until July 3, 2007 for the January 10-Q.
We appealed the Panels decision to the Nasdaq Listing and Hearing Review Counsel (the Listing
Council), seeking additional time to make the filings. On May 18, 2007, the Listing Council
agreed to review the Panels April 4, 2007 decision and stayed that decision pending review of our
appeal. On October 5, 2007, the Listing Council granted us an exception until December 4, 2007 to
file our delinquent periodic reports and restatement. On December 5, 2007, we received a letter from the Listing Council
confirming that the filing of the Companys previously delayed 2007 10-K, the October 10-Q, the January 10-Q and the July 10-Q
demonstrated our compliance with Nasdaqs filing requirements under its Marketplace rules and that our common stock will continue
to be listed on the Nasdaq Global Select Market.
Securities and Exchange Commission Inquiry
In November 2006, we informed the staff of the Securities and Exchange Commission (the SEC)
of the voluntary investigation that had been undertaken by the Audit Committee of our Board of
Directors. We were subsequently notified by the SEC that the SEC was conducting an informal
inquiry regarding our historical stock option grant practices. We are cooperating with the SECs
review.
Stock Option Derivative Litigation
Following the announcement by us on November 30, 2006 that the Audit Committee of our Board of
Directors had voluntarily commenced an investigation of our historical stock option grant
practices, we were 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 for the State of California for the County of Santa Clara. Plaintiffs in all cases have
alleged that certain current or former officers and directors of ours caused it to grant stock
options at less than fair market value, contrary to our public statements (including its financial
statements), and that, as a result, those officers and directors are liable to us. No specific
amount of damages has been alleged, and by the nature of the lawsuits no damages will be alleged,
against us. 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 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, we and the
individual defendants filed motions to dismiss the complaint. A hearing on the motions has been
set for January 11, 2008.
Trust Indenture Litigation
On January 4, 2007, we received three substantially identical purported notices of default
from U.S. Bank Trust National Association, as trustee (the Trustee) for our 2 1/2% Convertible
Senior Subordinated Notes due 2010, our 2 1/2% Convertible
Subordinated Notes due 2010 and our 5
1/4% Convertible Subordinated Notes due 2008 (collectively, the Notes). The notices asserted
that our failure to timely file the October 10-Q with the SEC and to provide a copy to the Trustee
constituted a default under each of the three indentures between us and the Trustee governing the
respective series of Notes (the Indentures). The notices each indicated that, if we did not cure
the purported default within 60 days, an Event of Default would occur under the respective
Indenture. As previously reported, we had delayed filing the October 10-Q pending the completion
of the review of our historical stock option grant practices conducted by the Audit Committee of
our Board of Directors.
We believe that we are not in default under the terms of the Indentures. We contend that the
plain language of each Indenture requires only that we file with the Trustee reports that have
actually been filed with the SEC, and that, since the October 10-Q had not yet been filed with the
SEC, we were under no obligation to file it with the Trustee.
In anticipation of the expiration of the 60-day cure period under the notices on March 5,
2007, and the potential assertion by the Trustee or the noteholders that an Event of Default had
occurred and a potential attempt to accelerate payment on one or more series of the Notes, on March
2, 2007, we filed a lawsuit in the Superior Court for the State of California for the County of
Santa Clara against U.S. Bank Trust National Association, solely in its capacity as Trustee under
the Indentures, seeking a judicial declaration that
34
we are not in default under the three Indentures, based on our position as described above.
The Trustee filed an answer to the complaint generally denying all allegations and also filed a
notice of removal of the state case to the United States District Court for the Northern District
of California. On October 12, 2007, the action was remanded back to the state court in which it was
commenced because the Trustees notice of removal was not timely.
As expected, on March 16, 2007, we received three additional notices from the Trustee
asserting that Events of Default under the Indentures had occurred and were continuing based on
our failure to cure the alleged default within the 60-day cure period.
On April 24, 2007, we received three substantially identical purported notices of default from
the Trustee for each of the Indentures, asserting that our failure to timely file the January 10-Q
with the SEC and to provide a copy to the Trustee constituted a default under each of the
Indentures. The notices each indicated that, if we did not cure the purported default within 60
days, an Event of Default would occur under the respective Indenture. We believe that we are not
in default under the terms of the Indentures for the reasons described above.
On June 21, 2007, we filed a second declaratory relief action against the Trustee in the
Superior Court of California for the County of Santa Clara. The second action is essentially
identical to the first action filed on March 2, 2007 except that it covers the notices asserting
Events of Default received in April 2007 and any other notices of default that the Trustee may
deliver in the future with respect to our delay in filing, and providing copies to the Trustee, of
periodic reports with the SEC. The Trustee filed an answer to the complaint generally denying all
allegations and filed a notice of removal to the United States District Court for the Northern
District of California. Our motion to remand the action to state
court was denied on December 7, 2007.
On July 9, 2007, we received three substantially identical purported notices of default from
the Trustee for each of the Indentures, asserting that our failure to timely file our Form 10-K
report with the SEC and to provide a copy to the Trustee constituted a default under each of the
Indentures. As before, the notices each indicated that, if we did not cure the purported default
within 60 days, an Event of Default would occur under the respective Indenture. We believe that
we are not in default under the terms of the Indentures for the reasons described above.
On
December 4, 2007, we filed with the SEC and provided to the
Trustee the October 10-Q, the January
10-Q, the July 10-Q and the 2007 10-K. To date, neither the Trustee nor the holders of at least 25% in
aggregate principal amount of one or more series of the Notes have declared all unpaid principal,
and any accrued interest, on the Notes to be due and payable, although the Trustee stated in the
notices that it reserved the right to exercise all available remedies. As of October 31, 2007, there is $250.3 million in
aggregate principal amount of Notes outstanding and an aggregate of approximately $558,000 in
accrued interest.
Patent Litigation
DirecTV Litigation
On April 4, 2005, we 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 our U.S. Patent No. 5,404,505 (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 our patent had been willfully infringed and awarded us 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 us pre-judgment interest on the jurys verdict in the amount of 6% compounded annually from
April 4, 1999, amounting to approximately $13.4 million. Finally, the Court awarded us costs of
$147,282 associated with the litigation. The Court declined to award us our attorneys fees. The
Court denied our motion for injunctive relief, but ordered DirecTV to pay a compulsory ongoing
license fee to us 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.
The Court entered final judgment in our favor and against DirecTV on July 7, 2006. On September 1,
2006, the Court denied DirecTVs post-trial motions seeking to have the jury verdict set aside or
reversed and requesting a new trial on a number of grounds. In another written post-trial motion,
DirecTV asked the Court to allow DirecTV to place any amounts owed us under the compulsory license
into an escrow account pending the outcome of any appeal and for those amounts to be refundable in
the event that DirecTV prevails on appeal. The Court granted DirecTVs motion and payments under
the compulsory license are being made into an escrow account pending the outcome of the appeal. As
of October 12, 2007, DirecTV has deposited approximately $28 million into escrow. These escrowed
funds represent DirecTVs compulsory royalty payments for the period from June 17, 2006 through
September 30, 2007.
35
DirecTV has 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. We cross-appealed raising issues related to the denial of our
motion for 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 have been consolidated. The parties were ordered to participate in the
appellate courts mandatory mediation program, which occurred on February 13, 2007 without
resolution. The parties have filed their respective briefs with the appellate court. A neutral
third party, New York Intellectual Property Law Association (NYIPLA) filed an amicus brief urging
the appellate court to vacate the portion of trial courts judgment denying our motion for a
permanent injunction and ordering DirecTV to pay royalties pursuant to a compulsory license. Over
DirecTVs objection, the appellate court accepted NYIPLAs amicus brief. On November 19, 2007, the
Court of Appeals denied NYIPLAs motion to file a reply brief. Oral arguments in the case have been set for January 7, 2008. Subsequent to the oral
arguments, it is anticipated that a decision from the appellate court will issue between March 2008
and November 2008.
Comcast Litigation
On July 7, 2006, Comcast Cable Communications Corporation, LLC (Comcast) filed a complaint
against us in the United States District Court, Northern District of California, San Francisco
Division. Comcast seeks a declaratory judgment that our 505 patent is not infringed and is
invalid. The 505 patent is the same patent alleged by us in our lawsuit against DirecTV. Our
motion to dismiss the declaratory judgment action was denied on November 9, 2006. As a result, on
November 22, 2006, we filed an answer and counterclaim alleging that Comcast infringes the 505
patent and seeking damages to be proven at trial. The court held a claim construction hearing and,
on April 6, 2007, issued its claim construction ruling. Discovery has closed. On December 4,
2007, the Court partially stayed the case pending the Federal Circuits decision in the DirecTV
appeal, but ordered briefing on the issues that are not implicated by the DirecTV appeal to
continue. On December 6, 2007, Comcast filed summary judgment motions on those issues, to which we
will respond. The parties have been ordered to a mediation and settlement
conference on December 13, 2007. A
jury trial has been scheduled for March 3, 2008.
EchoStar Litigation
On July 10, 2006, EchoStar Satellite LLC, EchoStar Technologies Corporation and NagraStar LLC
(collectively EchoStar) filed an action against us in the United States District Court for the
District of Delaware seeking a declaration that EchoStar does not infringe, and has not infringed,
any valid claim of our 505 patent. The 505 patent is the same patent that is in dispute in the
DirecTV, Comcast and XM/Sirius lawsuits. On October 24, 2006, we filed a motion to dismiss the action for
lack of a justiciable controversy. The Court denied our motion on September 25, 2007. We
filed our answer and counterclaim on October 10, 2007. On December 4, 2007, the Court approved the
parties stipulation to stay the case pending the Federal Circuits decision in the DirecTV case.
No scheduling order has been entered in the case, and discovery has not yet begun.
XM/Sirius Litigation
On April 27, 2007, we filed an action for patent infringement in the United States District
Court for the Eastern District of Texas, Lufkin Division, against XM Satellite Radio Holdings,
Inc., XM Satellite Radio, Inc., and XM Radio, Inc. (collectively, XM), and Sirius Satellite
Radio, Inc. and Satellite CD Radio, Inc. (collectively, Sirius). Judge Clark, the same judge who
presided over the DirecTV trial, has been assigned to the case. The lawsuit alleges that XM and
Sirius have infringed and continue to infringe our 505 patent and seeks an injunction to prevent
further infringement, actual damages to be proven at trial, enhanced damages for willful
infringement and attorneys fees. The defendants filed an answer denying infringement of the 505
patent and asserting invalidity and other defenses. The defendants also moved to stay the case
pending the outcome of the DirectTV appeal and the re-examination of the 505 patent described
below. Judge Clark denied defendants motion for a stay and subsequently issued a scheduling
order. On October 22, 2007 the Court held its initial case management conference. Discovery is
now underway. The claim construction hearing has been set for February 6, 2008, and the trial has
been set for September 15, 2008.
Requests for Re-Examination of the 505 Patent
Three requests for re-examination of our 505 patent have been filed with the United States
Patent and Trademark Office (PTO). The 505 patent is the patent that is in dispute in the
DirecTV, EchoStar, Comcast and XM/Sirius lawsuits. On December 11, 2006, the PTO entered an order
granting the first request and, on March 21, 2007, the PTO entered an order granting the second
request. The third request, filed on August 1, 2007, was partially granted on September 28, 2007.
Based on communications with the PTO, we expect that the PTO will take steps to consolidate these
requests into one request for re-examination. During the re-examination, some or all of the claims
in the 505 patent could be invalidated or revised to narrow their scope, either of which could
36
have a material adverse impact on our position in the related 505 lawsuits. The PTO has yet
to issue a substantive office action in these proceedings. Resolution of one or more
re-examination requests of the 505 Patent is likely to take more than 15 months.
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 our
common stock from November 17, 1999 through December 6, 2000. The complaint named as defendants
us, Jerry S. Rawls, our President and Chief Executive Officer, Frank H. Levinson, our former
Chairman of the Board and Chief Technical Officer, Stephen K. Workman, our Senior Vice President
and Chief Financial Officer, and an investment banking firm that served as an underwriter for our
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 our stock sold in the offerings and (ii) the
underwriter had entered into agreements with customers whereby the underwriter agreed to allocate
shares of our stock sold in the offerings to those customers in exchange for which the customers
agreed to purchase additional shares of our 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
July 2004, we and the individual defendants accepted a settlement proposal made to all of the
issuer defendants. Under the terms of the settlement, the plaintiffs would dismiss and release all
claims against participating defendants in exchange for a contingent payment guaranty by the
insurance companies collectively responsible for insuring the issuers in all related cases, and the
assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against
the underwriters. Under the guaranty, the insurers would be required to pay the amount, if any, by
which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the
underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment
is required under the guaranty, we would be responsible to pay our pro rata portion of the
shortfall, up to the amount of the self-insured retention under our insurance policy, which may be
up to $2 million. The timing and amount of payments that we could be required to make under the
proposed settlement would depend on several factors, principally the timing and amount of any
payment that the insurers may be required to make pursuant to the $1 billion guaranty. The Court
gave preliminary approval to the settlement in February 2005 and held a hearing in April 2006 to
consider final approval of the settlement. Before the Court issued a final decision on the
settlement, on December 5, 2006, the United States Court of Appeals for the Second Circuit vacated
the class certification of plaintiffs claims against the underwriters in six cases designated as
focus or test cases. Thereafter, on December 14, 2006, the Court ordered a stay of all proceedings
in all of the lawsuits pending the outcome of the plaintiffs petition to the Second Circuit Court
of Appeals for a rehearing en banc and resolution of the class certification issue. On April 6,
2007, the Second Circuit Court of Appeals denied the plaintiffs petition for a rehearing, but
clarified that the plaintiffs may seek to certify a more limited class. Subsequently, and
consistent with these developments, the Court entered an order, at the request of the plaintiffs
and issuers, to deny approval of the settlement, and the plaintiffs filed an amended complaint in
an attempt to comply with the decision of the Second Circuit Court of
Appeals. The plaintiffs and issuers have stated that they are
prepared to discuss how the settlement might be amended or
renegotiated to comply with the Second Circuit decision. If an amended or
modified settlement is not reached, and thereafter approved by the Court, we intend to defend the
lawsuit vigorously. Because of the inherent uncertainty of litigation, however, we cannot predict
its outcome. If, as a result of this dispute, we are required to pay significant monetary damages,
our business would be substantially harmed.
We cannot predict the outcome of the legal proceedings discussed above. No amount of loss, if
any, is considered probable or measurable and no loss contingency has been recorded at the balance
sheet date.
Item 1A. Risk Factors
There
have been no material changes in the risk factors previously
disclosed in Item 1A of Part I of our Annual Report on Form 10-K for
the fiscal year ended April 30, 2007, since the report was filed on December 4, 2007.
37
Item 6. Exhibits
The following exhibits are filed herewith:
31.1 |
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
|
31.2 |
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
|
32.1 |
|
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 |
32.2 |
|
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 |
38
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.
|
|
|
|
|
|
FINISAR CORPORATION
|
|
|
By: |
/s/ JERRY S. RAWLS
|
|
|
|
Jerry S. Rawls |
|
|
|
Chairman of the Board, President and Chief Executive Officer |
|
|
|
|
|
|
By: |
/s/ STEPHEN K. WORKMAN
|
|
|
|
Stephen K. Workman |
|
|
|
Senior Vice President, Finance, Chief Financial Officer and Secretary |
|
|
Dated: December 12, 2007 |
|
|
|
|
39
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
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 |
|
|
|
32.2
|
|
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 |