e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the Quarterly Period Ended January 27, 2008
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 |
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94-3038428 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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1389 Moffett Park Drive
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94089 |
Sunnyvale, California
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(Zip Code) |
(Address of principal executive offices)
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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,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company 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 February 29, 2008, there were 308,777,134 shares of the registrants common stock, $.001
par value, issued and outstanding.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended January 27, 2008
2
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. We use words like anticipates, believes, plans, expects,
future, intends and similar expressions to identify these forward-looking statements. We have
based these forward-looking statements on our current expectations and projections about future
events; however, our business and operations are subject to a variety of risks and uncertainties,
and, consequently, actual results may materially differ from those projected by any forward-looking
statements. As a result, you should not place undue reliance on these forward-looking statements
since they may not occur.
Certain factors that could cause actual results to differ from those projected are discussed
in Item 1A. Risk Factors. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or future events.
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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January 27, 2008 |
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April 30, 2007 |
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(In thousands, except share and per |
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share data) |
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(Unaudited) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
75,437 |
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$ |
56,106 |
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Short-term available-for-sale investments |
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38,096 |
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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 $758 and $1,607 at
January 27, 2008 and April 30, 2007 |
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55,035 |
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55,969 |
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Accounts receivable, other |
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8,701 |
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7,752 |
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Inventories |
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83,220 |
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77,670 |
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Prepaid expenses |
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5,586 |
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4,553 |
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Total current assets |
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266,075 |
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259,186 |
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Long-term available-for-sale investments |
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12,602 |
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19,855 |
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Property, plant and improvements, net |
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85,710 |
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84,071 |
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Purchased technology, net |
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13,163 |
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18,351 |
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Other purchased intangible assets, net |
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4,179 |
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5,647 |
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Goodwill |
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128,852 |
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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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20,886 |
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19,363 |
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Total assets |
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$ |
542,717 |
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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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$ |
37,100 |
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$ |
40,187 |
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Accrued compensation |
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14,970 |
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10,550 |
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Other accrued liabilities |
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24,584 |
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12,590 |
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Deferred revenue |
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5,135 |
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5,473 |
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Current portion of other long-term liabilities |
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2,390 |
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2,255 |
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Convertible notes, net of beneficial conversion feature of $3,477 and $0 at
January 27, 2008 and April 30, 2007 |
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113,722 |
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66,950 |
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Non-cancelable purchase obligations |
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2,787 |
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2,798 |
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Total current liabilities |
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200,688 |
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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
January 27, 2008 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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18,861 |
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21,042 |
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Deferred income taxes |
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7,872 |
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6,090 |
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Total long-term liabilities |
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176,733 |
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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 January 27, 2008 and April 30, 2007 |
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Common stock, $0.001 par value, 750,000,000 shares authorized, 308,716,634 shares issued and
outstanding at January 27, 2008 and 308,632,366 shares issued and outstanding at April 30, 2007 |
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309 |
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309 |
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Additional paid-in capital |
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1,537,057 |
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1,529,322 |
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Accumulated other comprehensive income |
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10,780 |
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11,162 |
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Accumulated deficit |
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(1,382,850 |
) |
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(1,355,122 |
) |
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Total stockholders equity |
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165,296 |
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185,671 |
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Total liabilities and stockholders equity |
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$ |
542,717 |
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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 share and per share data)
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Three Months Ended |
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Nine Months Ended |
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January 27, |
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January 28, |
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January 27, |
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January 28, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues |
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Optical subsystems and components |
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$ |
102,957 |
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$ |
98,007 |
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$ |
290,247 |
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$ |
293,059 |
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Network test and monitoring systems |
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9,784 |
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9,512 |
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28,928 |
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28,892 |
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Total revenues |
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112,741 |
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107,519 |
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319,175 |
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321,951 |
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Cost of revenues |
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73,396 |
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66,634 |
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212,279 |
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206,350 |
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Amortization of acquired developed technology |
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1,729 |
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1,512 |
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5,187 |
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4,536 |
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Gross profit |
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37,616 |
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39,373 |
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101,709 |
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111,065 |
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Operating expenses: |
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Research and development |
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21,218 |
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16,593 |
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56,350 |
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46,988 |
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Sales and marketing |
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10,492 |
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9,068 |
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29,726 |
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27,341 |
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General and administrative |
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12,768 |
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8,871 |
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31,630 |
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23,477 |
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Amortization of purchased intangibles |
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488 |
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925 |
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1,468 |
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1,537 |
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Total operating expenses |
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44,966 |
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35,457 |
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119,174 |
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99,343 |
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Income (loss) from operations |
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(7,350 |
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3,916 |
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(17,465 |
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11,722 |
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Interest income |
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1,501 |
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1,668 |
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4,453 |
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4,322 |
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Interest expense |
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(4,291 |
) |
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(4,071 |
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(12,895 |
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(11,892 |
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Loss on convertible debt exchange |
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(31,606 |
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Other income (expense), net |
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310 |
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(345 |
) |
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262 |
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(1,155 |
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Income (loss) before income taxes and cumulative effect of
change in accounting principle |
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(9,830 |
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1,168 |
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(25,645 |
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(28,609 |
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Provision for income taxes |
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807 |
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772 |
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2,083 |
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2,030 |
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Income
(loss) before cumulative effect of change in accounting principle |
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(10,637 |
) |
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396 |
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(27,728 |
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(30,639 |
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Cumulative effect of change in accounting principle |
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(1,213 |
) |
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Net income (loss) |
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$ |
(10,637 |
) |
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$ |
396 |
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$ |
(27,728 |
) |
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$ |
(29,426 |
) |
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Net income (loss) per share basic: |
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Before effect of change in accounting principle |
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$ |
(0.03 |
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$ |
0.00 |
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$ |
(0.09 |
) |
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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 income (loss) |
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$ |
(0.03 |
) |
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$ |
0.00 |
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$ |
(0.09 |
) |
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$ |
(0.10 |
) |
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Net income (loss) per share diluted: |
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Before effect of change in accounting principle |
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$ |
(0.03 |
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$ |
0.00 |
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$ |
(0.09 |
) |
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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 income (loss) |
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$ |
(0.03 |
) |
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$ |
0.00 |
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$ |
(0.09 |
) |
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$ |
(0.10 |
) |
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Shares used in computing net income (loss) per share basic |
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308,663 |
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308,538 |
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308,645 |
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307,528 |
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Shares used in computing net income (loss) per share diluted |
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308,663 |
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324,350 |
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308,645 |
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307,528 |
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See accompanying notes.
5
FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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Nine Months Ended |
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January 27, 2008 |
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January 28, 2007 |
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(Unaudited, in thousands) |
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Operating activities |
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Net loss |
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$ |
(27,728 |
) |
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$ |
(29,426 |
) |
Adjustments to reconcile net loss to net cash provided by operating
activities: |
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Depreciation and amortization |
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20,518 |
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20,275 |
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Stock-based compensation expense |
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8,585 |
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9,424 |
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Amortization of beneficial conversion feature of convertible notes |
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3,706 |
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3,568 |
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Amortization of purchased technology and other purchased intangibles |
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1,469 |
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1,537 |
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Amortization of acquired developed technology |
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5,187 |
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4,536 |
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Amortization of discount on restricted securities |
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(11 |
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(78 |
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Loss (gain) on sale or retirement of equipment |
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(455 |
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596 |
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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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(205 |
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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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934 |
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(6,764 |
) |
Inventories |
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(3,558 |
) |
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(8,351 |
) |
Other assets |
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(6,159 |
) |
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(4,710 |
) |
Deferred income taxes |
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|
1,782 |
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|
1,632 |
|
Accounts payable |
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(2,990 |
) |
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(1,825 |
) |
Accrued compensation |
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|
4,420 |
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|
1,661 |
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Other accrued liabilities |
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|
10,682 |
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|
2,038 |
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Deferred revenue |
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(391 |
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|
638 |
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Net cash provided by operating activities |
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15,786 |
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26,594 |
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Investing activities |
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Purchases of property, equipment and improvements |
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(17,693 |
) |
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(16,808 |
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Proceeds from sale of property and equipment |
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|
558 |
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306 |
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Proceeds from sale of equity investment |
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|
648 |
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Sale (purchase) of available-for-sale investments |
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20,993 |
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(17,772 |
) |
Maturity of restricted securities |
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|
625 |
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4,326 |
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Net cash provided by (used in) investing activities |
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5,131 |
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(29,948 |
) |
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Financing activities |
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Repayments of liability related to sale-leaseback of building |
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(260 |
) |
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(214 |
) |
Repayments of borrowings |
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(1,412 |
) |
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(1,579 |
) |
Proceeds from exercise of stock options and employee stock purchase plan |
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|
86 |
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|
4,107 |
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Net cash provided by (used in) financing activities |
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(1,586 |
) |
|
|
2,314 |
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Net increase (decrease) in cash and cash equivalents |
|
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19,331 |
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(1,040 |
) |
Cash and cash equivalents at beginning of period |
|
|
56,106 |
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|
63,361 |
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Cash and cash equivalents at end of period |
|
$ |
75,437 |
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$ |
62,321 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
|
$ |
4,811 |
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$ |
4,892 |
|
Cash paid for taxes |
|
$ |
336 |
|
|
$ |
429 |
|
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 January 27, 2008,
and for the three and nine month periods ended January 27, 2008 and January 28, 2007, 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 January 27, 2008 and its operating results and cash flows for the three and nine month periods
ended January 27, 2008 and January 28, 2007. 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 (SFAS) 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
7
purchases 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 nine months ended January 27, 2008 and January 28, 2007 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 predominately 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
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 that subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents, investments and accounts receivable. The Company maintains
its cash and cash equivalents and investments in fixed income securities with high-quality
institutions and only invests in high quality credit instruments. As of January 27, 2008, the
Company did not own any auction rate securities. Deposits held with banks, including those held in
foreign branches of global banks, may exceed the amount of insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand and therefore
bear minimal risk. Concentrations of credit risk, with respect to accounts
receivable, exist to the extent of amounts presented in the financial statements.
8
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 44.3% and 33.3% of total accounts receivable at January 27, 2008 and April
30, 2007, respectively.
Current Vulnerabilities Due to Certain Concentrations
During the three and nine months ended January 27, 2008, sales to the Companys five largest
customers represented 45.0% and 43.9% of total revenues, respectively. During the three and nine
months ended January 28, 2007, sales to the five largest customers represented 43.6% and 44.4% 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 January 27, 2008, are the
net assets of the Companys manufacturing operations, substantially all of which are located in
Malaysia and which total approximately $65.7 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 $4,000 and $30,000 in the three and nine months ended
January 27, 2008, respectively and $20,000 and $53,000 in the three and nine months ended January
28, 2007, 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 Investments
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.
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.
9
Other Investments
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 January 27, 2008 and
April 30, 2007, the fair value of the Companys convertible subordinated debt was approximately
$233.7 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 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.
10
Computation of Net Loss Per Share
Basic and diluted net loss per share is presented 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. For the three and nine month periods ended January 27,
2008 and the nine month period ended January 28, 2007, there was no
dilutive impact on earnings per share with respect to employee stock
options or outstanding warrants due to a net loss recorded in each of
those periods.
The following table presents the calculation of basic and diluted net loss per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 27, |
|
|
January 28, |
|
|
January 27, |
|
|
January 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,637 |
) |
|
$ |
396 |
|
|
$ |
(27,728 |
) |
|
$ |
(29,426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding total |
|
|
308,663 |
|
|
|
308,548 |
|
|
|
308,645 |
|
|
|
307,538 |
|
Weighted-average shares outstanding subject to repurchase |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding outstanding warrants |
|
|
308,663 |
|
|
|
308,538 |
|
|
|
308,645 |
|
|
|
307,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding subject to repurchase |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding employee stock options |
|
|
|
|
|
|
15,497 |
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding outstanding warrants |
|
|
|
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding diluted |
|
|
308,663 |
|
|
|
324,350 |
|
|
|
308,645 |
|
|
|
307,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.03 |
) |
|
$ |
0.00 |
|
|
$ |
(0.09 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(0.03 |
) |
|
$ |
0.00 |
|
|
$ |
(0.09 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents related to potentially dilutive securities
excluded from computation above because they are anti-dilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
3,434 |
|
|
|
|
|
|
|
12,950 |
|
|
|
15,969 |
|
Stock subject to repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Conversion of convertible subordinated notes |
|
|
31,657 |
|
|
|
31,657 |
|
|
|
31,657 |
|
|
|
31,657 |
|
Conversion
of convertible promissory notes for AZNA LLC acquisition |
|
|
10,955 |
|
|
|
|
|
|
|
10,955 |
|
|
|
|
|
Warrants |
|
|
455 |
|
|
|
40 |
|
|
|
455 |
|
|
|
470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities |
|
|
46,501 |
|
|
|
31,697 |
|
|
|
56,017 |
|
|
|
48,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
SFAS No. 130 Reporting Comprehensive Income establishes rules for reporting and display of
comprehensive income or loss 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 or loss.
11
The components of comprehensive income (loss) for the three and nine months ended January 27,
2008 and January 28, 2007 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 27, |
|
|
January 28, |
|
|
January 27, |
|
|
January 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
(10,637 |
) |
|
$ |
396 |
|
|
$ |
(27,728 |
) |
|
$ |
(29,426 |
) |
Foreign currency translation adjustment |
|
|
2,402 |
|
|
|
2,550 |
|
|
|
3,861 |
|
|
|
2,294 |
|
Change in unrealized gain (loss) on securities,
net of reclassification adjustments for
realized loss |
|
|
(558 |
) |
|
|
(239 |
) |
|
|
(4,243 |
) |
|
|
4,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(8,793 |
) |
|
$ |
2,707 |
|
|
$ |
(28,110 |
) |
|
$ |
(22,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The components of accumulated other comprehensive income, net of taxes, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
January 27, 2008 |
|
|
April 30, 2007 |
|
Net unrealized gains/(losses) on available-for-sale securities |
|
$ |
826 |
|
|
$ |
5,069 |
|
Cumulative translation adjustment |
|
|
9,954 |
|
|
|
6,093 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
10,780 |
|
|
$ |
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.
Recent Accounting Pronouncements
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of Accounting Research Bulletin No. 51 (FAS 160). FAS 160
addresses the accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the parent and
to the noncontrolling interest, changes in a parents ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated. FAS 160 also
establishes disclosure requirements that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners. FAS 160 is effective for fiscal years
beginning after December 15, 2008, and will be adopted by the Company in 2009. The Company is
currently assessing the impact of this standard on its future consolidated results of operations
and financial condition.
In December 2007, the FASB issued FAS No. 141R, Business Combinations (FAS 141R). FAS 141R
establishes principles and requirements for how the acquirer of a business recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statement to evaluate the nature and financial effects of
the business combination. FAS 141R is effective for financial statements issued for fiscal years
beginning after December 15, 2008. Accordingly, any business combinations the Company engages in
will be recorded and disclosed following existing GAAP until May 1, 2009. The Company expects FAS
No. 141R will have an impact on its consolidated financial statements when effective, but the
nature and magnitude of the specific effects will depend upon the nature, terms and size of the
acquisitions it consummates after the effective date. The Company is currently assessing the impact
of this standard on its future consolidated results of operations and financial condition.
In June 2007, the FASB ratified EITF 07-3, Accounting for Non-Refundable Advance Payments for
Goods or Services Received for Use in Future Research and Development Activities (EITF 07-3).
EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred, capitalized and recognized as
an expense as the goods are delivered or the related services are performed. EITF 07-3 is
effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The Company
will adopt EITF 07-3 on May 1, 2008 and does not expect any material impact on its consolidated
results of operations and financial condition.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities-including an amendment of FASB Statement No. 115 (FAS 159). FAS 159 expands
the use of fair value accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. The objective of FAS 159 is to improve financial reporting
by providing companies with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. Under FAS 159, an entity may elect to use fair value to measure eligible
items including accounts receivable, available-for-sale and held-to-maturity securities, equity
method investments, accounts payable, guarantees, and issued debt. The adoption of FAS No. 159 is
not expected to have a significant impact on the Companys consolidated financial statements.
13
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements (FAS 157). FAS 157
defines fair value, establishes a framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value measurements. Under this guidance,
fair value measurements would be separately disclosed by level within the fair value hierarchy. FAS
157 is effective for financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff
Position No. FAS 157-2, Effective Date of FASB Statement No. 157, (FSP FAS 157-2). FSP FAS 157-2
amends FAS 157 to delay the effective date of FAS 157 for non-financial assets and non-financial
liabilities until fiscal years beginning after November 15, 2008, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. The Company
will adopt the effective portion of FAS 157 on May 1, 2008 and does not expect any material impact
on its consolidated results of operations and financial condition. The Company is currently
assessing the impact of applying FAS 157 to its non-financial assets and liabilities on its future
consolidated results of operations and financial condition.
2. Convertible Debt
The Companys convertible subordinated and convertible senior subordinated note balances as of
January 27, 2008 and April 30, 2007 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due In Fiscal |
|
Description |
|
Amount |
|
|
Interest Rate |
|
|
Year |
|
As of January 27, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
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 convertible 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 January 27, 2008 and April 30, 2007, the fair value of the Companys convertible
subordinated and convertible senior subordinated notes was
approximately $233.7 million and $285.2
million, respectively.
Convertible Subordinated Notes due 2008
As of January 27, 2008, $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 January 27, 2008, 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 as 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.
14
3. Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 27, 2008 |
|
|
April 30, 2007 |
|
Raw materials |
|
$ |
19,832 |
|
|
$ |
21,597 |
|
Work-in-process |
|
|
35,623 |
|
|
|
27,336 |
|
Finished goods |
|
|
27,765 |
|
|
|
28,737 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
83,220 |
|
|
$ |
77,670 |
|
|
|
|
|
|
|
|
During the three and nine months ended January 27, 2008, the Company recorded charges of $2.9
million and $10.2 million, respectively, for excess and obsolete inventory, and sold inventory that
was written-off in previous periods with an approximate cost of $1.6 million and $5.0 million,
respectively. As a result, cost of revenue associated with the sale of this inventory was zero.
During the three and nine months ended January 28, 2007, the Company recorded charges of $3.0
million and $8.9 million, respectively, for excess and obsolete inventory, and sold inventory that
was written-off in previous periods with an approximate cost of $1.0 and $2.8 million,
respectively. As a result, cost of revenue associated with the sale of this inventory was zero.
4. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 27, 2008 |
|
April 30, 2007 |
|
|
|
Land |
|
$ |
9,747 |
|
|
$ |
9,747 |
|
Buildings |
|
|
11,793 |
|
|
|
11,365 |
|
Computer equipment |
|
|
40,384 |
|
|
|
37,475 |
|
Office equipment, furniture and fixtures |
|
|
3,250 |
|
|
|
3,196 |
|
Machinery and equipment |
|
|
150,964 |
|
|
|
135,238 |
|
Leasehold improvements |
|
|
14,189 |
|
|
|
12,795 |
|
Contruction-in-process |
|
|
173 |
|
|
|
444 |
|
|
|
|
Total |
|
|
230,500 |
|
|
|
210,260 |
|
Accumulated depreciation and amortization |
|
|
(144,790 |
) |
|
|
(126,189 |
) |
|
|
|
Property, equipment and improvements (net) |
|
$ |
85,710 |
|
|
$ |
84,071 |
|
|
|
|
5. Income Taxes
The Company recorded a provision for income taxes of $807,000 and $2.1 million for the three
and nine months, respectively, ended January 27, 2008 compared to $772,000 and $2.0 million for the
three and nine months, respectively, ended January 28, 2007. The provision for income tax expense
for the three months ended January 27, 2008 and January 28, 2007 includes non-cash charges of
$694,000 and $544,000, respectively, 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.
The Company records a valuation allowance against its deferred tax assets for each period in
which management concludes that it is more likely than not that the deferred tax assets will not be
realized. Realization of the Companys net deferred tax assets is dependent upon future taxable
income the amount and timing of which are uncertain. Accordingly, the Companys net deferred tax
assets as of January 27, 2008 have been fully offset by a valuation allowance.
A portion of the valuation allowance for deferred tax assets at January 27, 2008 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 FIN 48. FIN 48 prescribes a
recognition threshold that a tax position is required to meet before
15
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 the date of adoption of FIN 48, the Company had 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 January 27, 2008.
The Company records interest and penalties related to unrecognized tax benefits in income tax
expense. As of the date of adoption of FIN 48, 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. The Companys tax return for the tax year 2001 is
currently under examination by tax authorities in the state of New Jersey; however, the Company
does not expect any significant change to its unrecognized state tax benefits within the next year.
There are no unrecognized tax benefits at January 27, 2008 related to tax positions, interest,
and penalty for which it is reasonably possible that the amounts will significantly increase or
decrease within the next twelve months.
6. Purchased Intangible Assets
The following table reflects intangible assets subject to amortization as of January 27, 2008
and April 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 27, 2008 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
111,846 |
|
|
$ |
( 98,683 |
) |
|
$ |
13,163 |
|
Trade name |
|
|
3,697 |
|
|
|
(3,306 |
) |
|
|
391 |
|
Customer relationships |
|
|
6,964 |
|
|
|
(3,176 |
) |
|
|
3,788 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
122,507 |
|
|
$ |
( 105,165 |
) |
|
$ |
17,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
16
Estimated remaining amortization expense for each of the next five fiscal years ending April
30, is as follows (in thousands):
|
|
|
|
|
Year |
|
Amount |
|
2008 |
|
$ |
1,593 |
|
2009 |
|
|
5,481 |
|
2010 |
|
|
3,811 |
|
2011 |
|
|
3,336 |
|
2012 and beyond |
|
|
3,121 |
|
|
|
|
|
|
|
$ |
17,342 |
|
|
|
|
|
17
7. Investments
Available-for-Sale Securities
The following is a summary of the Companys available-for-sale investments as of January 27,
2008 and April 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
Investment Type |
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
As of January 27, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
70,977 |
|
|
$ |
127 |
|
|
$ |
(18 |
) |
|
$ |
71,086 |
|
Government agency |
|
|
6,332 |
|
|
|
140 |
|
|
|
|
|
|
|
6,472 |
|
Mortgage-backed |
|
|
2,760 |
|
|
|
13 |
|
|
|
(3 |
) |
|
|
2,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,069 |
|
|
|
280 |
|
|
|
(21 |
) |
|
|
80,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
3,163 |
|
|
$ |
567 |
|
|
$ |
|
|
|
$ |
3,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
83,232 |
|
|
$ |
847 |
|
|
$ |
(21 |
) |
|
$ |
84,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
33,359 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
33,360 |
|
Short-term investments |
|
|
37,981 |
|
|
|
133 |
|
|
|
(18 |
) |
|
|
38,096 |
|
Long-term investments |
|
|
11,892 |
|
|
|
713 |
|
|
|
(3 |
) |
|
|
12,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83,232 |
|
|
$ |
847 |
|
|
$ |
(21 |
) |
|
$ |
84,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 gains and losses for the three and nine months ended January 27, 2008 and
January 28, 2007 were immaterial. Realized gains and losses were calculated based on the specific
identification method.
Restricted Securities
The Company 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
18
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 fiscal
quarter of 2008, all of these restricted securities had matured and the remaining collateral
securing the interest payments on these notes was paid to the holders of the notes.
8. Minority Investments
Minority investments is comprised of investments in three companies accounted for under the
cost method.
9. 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 nine months ended January 27, 2008 and the three
months ended January 28, 2007, the Company did not issue any shares under the Purchase Plan.
During the nine months ended January 28, 2007, the Company issued 860,025 shares under this plan.
At January 27, 2008, 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 include 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 January 27, 2008 there
were no shares subject to repurchase.
19
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 |
|
|
(23,403,391 |
) |
|
|
23,403,391 |
|
|
$ |
2.43 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(81,805 |
) |
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
16,382,216 |
|
|
|
(16,382,216 |
) |
|
$ |
2.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 27, 2008 |
|
|
37,225,728 |
|
|
|
53,058,485 |
|
|
$ |
2.65 |
|
|
|
6.58 |
|
|
$ |
4,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the difference between the exercise price and the value of Finisar common stock at January 25, 2008. |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic
value, based on the Companys closing stock price of $1.62 as of January 25, 2008, 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 5.14 years. The total
number of shares of common stock subject to in-the-money options exercisable as of January 27, 2008
was approximately 9.5 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 nine months ended
January 27, 2008 and January 28, 2007 which was reflected in the Companys operating results (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 27, |
|
|
January 28, |
|
|
January 27, |
|
|
January 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Cost of revenues |
|
$ |
895 |
|
|
$ |
843 |
|
|
$ |
2,320 |
|
|
$ |
2,877 |
|
Research and development |
|
|
1,247 |
|
|
|
965 |
|
|
|
3,237 |
|
|
|
3,230 |
|
Sales and marketing |
|
|
673 |
|
|
|
462 |
|
|
|
1,566 |
|
|
|
1,497 |
|
General and administrative |
|
|
481 |
|
|
|
584 |
|
|
|
1,462 |
|
|
|
1,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,296 |
|
|
$ |
2,854 |
|
|
$ |
8,585 |
|
|
$ |
9,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total stock-based compensation capitalized as part of inventory as of January 27, 2008 was
$465,000.
As of January 27, 2008, total compensation cost related to unvested stock options not yet
recognized was approximately $21.3 million which is expected to be recognized over the next 37
months on a weighted-average basis.
20
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 |
|
|
January 27, |
|
January 28, |
|
January 27, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Weighted average fair value per share |
|
$ |
2.12 |
|
|
$ |
2.71 |
|
|
$ |
0.50 |
|
|
$ |
0.90 |
|
Expected term (in years) |
|
|
5.44 |
|
|
|
5.24 |
|
|
|
0.75 |
|
|
|
0.50 |
|
Volatility |
|
|
86 |
% |
|
|
100 |
% |
|
|
57 |
% |
|
|
69 |
% |
Risk-free interest rate |
|
|
4.07 |
% |
|
|
4.78 |
% |
|
|
3.34 |
% |
|
|
4.45 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Accuracy of Fair Value Estimates
The Black-Scholes option valuation model requires the input of highly subjective assumptions,
including the expected life of the stock-based award and the stock price volatility. The
assumptions listed above represent managements best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result, if other
assumptions had been used, the Companys recorded stock-based compensation expense could have been
materially different from that depicted above. In addition, the Company is required to estimate
the expected forfeiture rate and only recognize expense for those shares expected to vest. If the
Companys actual forfeiture rate is materially different from the estimate, stock-based
compensation expense could be materially different.
Extension of Stock Option Exercise Periods for Former Employees
The Company could not
issue shares of its common stock under its registration statements on Form S-8
during the period in which it was not current in its obligations to file periodic reports under the
Securities Exchange Act of 1934 due to the pendency of an investigation into its historical stock option grant
practices, as more fully described in Note 14. Pending Litigation. As a
result, during parts of 2006 and 2007, options vested and held by certain former employees of the
Company could not be exercised until the completion of the Companys stock option investigation and
the Companys filing obligations had been met. The Company extended
the expiration date of these stock options to June 30, 2008. This extension was treated as a
modification of the award in accordance with FAS 123R. As a result of this modification, the
Company recorded additional stock-based compensation expense of $386,000 for the three and nine
months ended January 27, 2008. As a result of the extension, the fair
value of $991,000 related to these stock options has been reclassified to current liabilities subsequent to the
modification and is subject to mark-to-market provisions at the end of each reporting period
until the earlier of the final settlement or June 30, 2008. The
change in fair value of these options from the modification date to
January 27, 2008 was not significant.
Amendment of Certain Stock Options
During the quarter ended January 27, 2008, the Company completed a tender offer to holders of
certain options granted under the 1999 Stock Plan and the 2005 Plan that had original exercise
prices per share that were less than the fair market value per share of the common stock underlying
the option on the options grant date, as determined by the Company for financial accounting
purposes. Under this offer, employees subject to taxation in the United States had the opportunity
to cancel these options and exchange them for new options with an adjusted exercise price equal to
the fair market value per share of the Companys common stock on the corrected date of grant so as to avoid unfavorable tax
consequences under Internal Revenue Code Section 409A. The Company also committed to issue
restricted stock units (RSUs) to those optionees accepting the offer whose new options have
exercise prices that exceed the exercise price of the cancelled options, in order to compensate the
optionees for the increase in the exercise price. In connection with the offer, the Company
canceled and replaced options to purchase 14.2 million shares of its common stock and committed to
issue 301,197 RSUs to offer participants. The Company recorded a charge of $371,000 related to the
issuance of the RSUs, which was recorded as operating expense for the three and nine months ended
January 27, 2008.
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 due to an investigation into its historical stock option grant
practices, as more fully described in Note 14. Pending Litigation. 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). During the quarter ended January
27, 2008, the Company recorded a charge of $3.9 million representing the employee tax liability
that has been assumed by the Company related to the option exchange program, which was designed to
avoid the adverse consequences of Section 409A.
21
10. 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.
22
Information about reportable segment revenues and income/(losses) are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
January 27, |
|
January 28, |
|
January 27, |
|
January 28, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
102,957 |
|
|
$ |
98,007 |
|
|
$ |
290,247 |
|
|
$ |
293,059 |
|
Network test and monitoring systems |
|
|
9,784 |
|
|
|
9,512 |
|
|
|
28,928 |
|
|
|
28,892 |
|
|
|
|
|
|
Total revenues |
|
$ |
112,741 |
|
|
$ |
107,519 |
|
|
$ |
319,175 |
|
|
$ |
321,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
6,807 |
|
|
$ |
6,576 |
|
|
$ |
19,650 |
|
|
$ |
19,423 |
|
Network test and monitoring systems |
|
|
297 |
|
|
|
280 |
|
|
|
868 |
|
|
|
852 |
|
|
|
|
|
|
Total depreciation and amortization expense |
|
$ |
7,104 |
|
|
$ |
6,856 |
|
|
$ |
20,518 |
|
|
$ |
20,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
|
(3,660 |
) |
|
|
7,886 |
|
|
$ |
(7,812 |
) |
|
$ |
20,701 |
|
Network test and monitoring systems |
|
|
(1,473 |
) |
|
|
(1,533 |
) |
|
|
(2,998 |
) |
|
|
(2,906 |
) |
|
|
|
|
|
Total operating income (loss) |
|
|
(5,133 |
) |
|
|
6,353 |
|
|
|
(10,810 |
) |
|
|
17,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired developed technology |
|
|
(1,729 |
) |
|
|
(1,512 |
) |
|
|
(5,187 |
) |
|
|
(4,536 |
) |
Amortization of purchased intangibles |
|
|
(488 |
) |
|
|
(925 |
) |
|
|
(1,468 |
) |
|
|
(1,537 |
) |
Impairment of acquired developed technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,606 |
) |
Interest income (expense), net |
|
|
(2,790 |
) |
|
|
(2,403 |
) |
|
|
(8,442 |
) |
|
|
(7,570 |
) |
Other non-operating income (expense), net |
|
|
310 |
|
|
|
(345 |
) |
|
|
262 |
|
|
|
(1,155 |
) |
|
|
|
|
|
Total unallocated amounts |
|
|
(4,697 |
) |
|
|
(5,185 |
) |
|
|
(14,835 |
) |
|
|
(46,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative
effect of change in accounting principle |
|
$ |
(9,830 |
) |
|
$ |
1,168 |
|
|
$ |
(25,645 |
) |
|
$ |
(28,609 |
) |
|
|
|
|
|
The following is a summary of total assets by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 27, |
|
|
April 30, |
|
|
|
2008 |
|
|
2007 |
|
Optical subsystems and components |
|
$ |
390,551 |
|
|
$ |
392,260 |
|
Network test and monitoring systems |
|
|
83,909 |
|
|
|
76,885 |
|
Other assets |
|
|
68,257 |
|
|
|
77,527 |
|
|
|
|
|
|
|
|
|
|
$ |
542,717 |
|
|
$ |
546,672 |
|
|
|
|
|
|
|
|
Short-term, restricted and minority investments are the primary components of other assets in
the above table.
23
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 |
|
|
Nine Months Ended |
|
|
|
January 27, |
|
|
January 28, |
|
|
January 27, |
|
|
January 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues from sales to unaffiliated customers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
37,659 |
|
|
$ |
37,084 |
|
|
$ |
102,646 |
|
|
$ |
114,423 |
|
Rest of the world |
|
|
75,082 |
|
|
|
70,345 |
|
|
|
216,529 |
|
|
|
207,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
112,741 |
|
|
$ |
107,429 |
|
|
$ |
319,175 |
|
|
$ |
321,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
generated in the United States are all from sales to customers located in the United
States based on a ship-to location for each order. This definition
tends to elevate the amount of business categorized as the rest
of the world in those cases where a U.S. equipment supplier
utilizes the services of a foreign contract manufacturer who actually
places an order with the Company.
The following is a summary of long-lived assets within geographic areas based on the location
of the assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 27, |
|
|
April 30, |
|
|
|
2008 |
|
|
2007 |
|
Long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
229,195 |
|
|
$ |
237,691 |
|
Malaysia |
|
|
30,707 |
|
|
|
26,589 |
|
Rest of the world |
|
|
4,138 |
|
|
|
3,351 |
|
|
|
|
|
|
|
|
|
|
$ |
264,040 |
|
|
$ |
267,631 |
|
|
|
|
|
|
|
|
The following is a summary of capital expenditures by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
January 27, |
|
|
January 28, |
|
|
|
2008 |
|
|
2007 |
|
Optical subsystems and components |
|
$ |
17,509 |
|
|
$ |
16,565 |
|
Network test and monitoring systems |
|
|
184 |
|
|
|
243 |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
17,693 |
|
|
$ |
16,808 |
|
|
|
|
|
|
|
|
11. 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):
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
January 27, 2008 |
|
Beginning balance at April 30, 2007 |
|
$ |
1,818 |
|
Additions during the period based upon product sold |
|
|
1,970 |
|
Settlements |
|
|
(409 |
) |
Changes in liability for pre-existing warranties, including expirations |
|
|
(1,014 |
) |
|
|
|
|
Ending balance at January 27, 2008 |
|
$ |
2,365 |
|
|
|
|
|
24
12. 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 nine months ended
January 27, 2008, the Company sold approximately $5.2 million and $15.6 million, respectively, of
its trade receivables. During the three and nine months ended January 28, 2007, the Company sold
approximately $5.3 million and $9.5 million of its trade receivables, respectively.
13. Restructuring
As of January 27, 2008, $736,000 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 a facility the Company leases in Scotts
Valley, California that took place in fiscal 2006.
14. 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 its 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), ),
resulted in the initiation of regulatory proceedings as well as civil litigation and claims. On
December 4, 2007, the Company filed the October 10-Q, the January 10-Q, the July 10-Q and the 2007
10-K which included revised financial statements.
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 the
Company 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 periodic reports had
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 its
Board of Directors. The Company was subsequently notified by the SEC that the SEC was conducting
an informal inquiry regarding its historical stock option grant practices. The Company is
cooperating with the SECs review.
25
Stock Option Derivative Litigation
Following the announcement by the Company on November 30, 2006 that the Audit Committee of its
Board of Directors had voluntarily commenced an investigation of its 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 its public statements (including its
financial statements), and that, as a result, those officers and directors are liable to the
Company. No specific amount of damages has been alleged, and by the nature of the lawsuits no
damages will be alleged, against the Company. On May 22, 2007, the state court granted the
Companys motion to stay the state court action pending resolution of the consolidated federal
court action. On June 12, 2007, the plaintiffs in the federal court case filed an amended
complaint to reflect the results of the stock option investigation announced by the Audit Committee
in June 2007. On August 28, 2007, the Company and the individual defendants filed motions to
dismiss the complaint. On January 11, 2008, the court granted the motions to dismiss,
although the plaintiffs will have the opportunity to file an amended
complaint.
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 its 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 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.
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 was not in default
under the three Indentures.
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 its failure
to cure the alleged default within the 60-day cure period.
On April 23, 2007, the Company received three substantially identical purported notices of
default from the Trustee for each of the Indentures, asserting that its failure to timely file the
January 10-Q with the SEC 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.
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 removed this action to the United States
District Court for the Northern District of California.
On July 16, 2007, the Company received three substantially identical purported notices of
default from the Trustee for each of the Indentures, asserting that its failure to timely file the
2007 10-K 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 the Company did not cure the purported
default within 60 days, an Event of Default would occur under the respective Indenture.
On
December 4, 2007, the Company filed with the SEC, and provided
to the Trustee, the October
and January 10-Qs, as well as the 2007
10-K.
The Company does not believe that any default under the terms of the Indentures ever occurred.
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,
which was done.
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
26
notices that it reserved the
right to exercise all available remedies. In addition to contending that no such declaration could
properly have been made because the Company was not in default under the Indentures, the Company
also contends that the plain language of the Indentures would not permit such a declaration now to
be made, based on delays in filing the October and January 10-Qs or the 2007 10-K, because all
those reports have now been filed.
On
January 2, 2008, the Company received an additional notice from
the Trustee alleging that the Company had defaulted under the
Indentures by failing to reimburse the Trustee for attorney and other
fees and expenses it has incurred in the dispute. To forestall any
efforts by the Trustee to declare an acceleration based on this
alleged default, the Company has paid the fees and expenses as
demanded by the Trustee, under protest and subject to reservation of
rights to seek recovery of all amounts paid.
The
court has directed the Company and the Trustee to file summary
judgment motions in the federal court action.
As of January 27, 2008, there is $250.3 million in aggregate principal amount of Notes
outstanding and an aggregate of approximately $3.0 million 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 the Companys 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 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 January 14, 2008, DirecTV has deposited approximately $32 million into escrow.
These escrowed funds represent DirecTVs compulsory royalty payments for the period from October 1,
2006 through December 31, 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 its 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 Finisars 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 January 7, 2008, a
three-judge panel of the Court of Appeals for the Federal Circuit heard oral arguments from both
parties.
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 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 pending appeal to continue. On December 6, 2007, Comcast filed summary
judgment motions on those issues. These motions sought summary judgment of invalidity and
non-infringement of the patent as well as a limitation on damages until after the commencement of
the lawsuit on July 7, 2006. Oral argument on these issues took place on January 10, 2008.
Determination of the validity and infringement issues has been deferred until the issuance of the
Federal Circuit decision in the DirecTV appeal. Summary judgment on the issue of laches was
granted, limiting damages to the period after November 22, 2006, the date the Company filed its
cross-complaint. Post-complaint alleged damages are still very substantial.
27
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 its 505 patent. The 505 patent is the same patent that is in
dispute in the DirecTV and Comcast 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. Discovery is now underway.
The claim construction hearing was held on February 5, 2008, and the trial has been set for
September 15, 2008. Judge Clark indicated that he will delay entering a claims construction order,
in anticipation of an opinion from the Federal Circuit in the DirecTV appeal in March or April
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. The PTO granted the requests, and the three
proceedings have been combined into a single re-examination. The PTO has also now issued an office
action rejecting 17 of the 48 claims of the reexamined patent. A response to the office action is
due April 19, 2008. 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. Resolution of the re-examination of
the 505 Patent is likely to take more than six 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 the Company, Jerry S. Rawls, its President and Chief Executive Officer, Frank H.
Levinson, its former Chairman of the Board and Chief Technical Officer, Stephen K. Workman, its
Senior Vice President and Chief Financial Officer, and an investment banking firm that served as an
underwriter for its 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 its 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 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
28
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 its 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 modified 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.
Section 16(b) Lawsuit
A lawsuit was filed on October 3, 2007 in the United States District Court for the Western
District of Washington by Vanessa Simmonds, a purported stockholder of the Company, against two
investment banking firms that served as underwriters for the initial public offering of the
Companys common stock in November 1999. On February 28, 2008, the plaintiff filed an amended
complaint. The complaint, as amended, alleges that: (i) the defendants, other underwriters of the
offering, and unspecified officers, directors and principal shareholders of the Company constituted
a group that owned in excess of 10% of the Companys outstanding common stock between November
11, 1999 and November 20, 2000; (ii) the defendants were therefore subject to the short swing
prohibitions of Section 16(b) of the Securities Exchange Act of 1934; and (iii) the defendants
engaged in purchases and sales, or sales and purchases, of the Companys common stock within
periods of less than six months in violation of the provisions of Section 16(b). The complaint
seeks disgorgement of all profits allegedly received by the defendants, with interest and attorneys
fees, for transactions in violation of Section 16(b). The Company, as the statutory beneficiary of
any potential Section 16(b) recovery, is named as a nominal defendant in the complaint. A number
of similar lawsuits against underwriters of other public offerings have recently been filed by the
same plaintiff and law firm. The litigation is in the preliminary stage, and we cannot predict its
outcome.
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.
15. 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 January 27,
2008. To date, the Company has not incurred material costs to defend lawsuits or settle claims
related to these indemnification agreements.
29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ substantially from those anticipated in these
forward-looking statements as a result of many factors, including those referred to in Part II,
Item 1A. Risk Factors below. The following discussion should be read together with our
consolidated financial statements and related notes thereto included elsewhere in this report.
Business Overview
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
and Part II, Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations of our Annual
Report on Form 10-K for the fiscal year ended April 30, 2007 for more information about
these critical accounting policies, as well as a description of other significant accounting
policies. In addition, subsequent to the end of fiscal 2007, we
adopted the following accounting policy.
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.
30
Results of Operations
The following table sets forth certain statement of operations data as a percentage of
revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
January 27, |
|
|
January 28, |
|
|
January 27, |
|
|
January 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited, in thousands) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
|
91.3 |
% |
|
|
91.2 |
% |
|
|
90.9 |
% |
|
|
91.0 |
% |
Network test and monitoring systems |
|
|
8.7 |
|
|
|
8.8 |
|
|
|
9.1 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenues |
|
|
65.1 |
|
|
|
62.0 |
|
|
|
66.5 |
|
|
|
64.1 |
|
Amortization of acquired developed technology |
|
|
1.5 |
|
|
|
1.4 |
|
|
|
1.6 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
33.4 |
|
|
|
36.6 |
|
|
|
31.9 |
|
|
|
34.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
18.8 |
|
|
|
15.4 |
|
|
|
17.7 |
|
|
|
14.6 |
|
Sales and marketing |
|
|
9.3 |
|
|
|
8.4 |
|
|
|
9.3 |
|
|
|
8.5 |
|
General and administrative |
|
|
11.4 |
|
|
|
8.3 |
|
|
|
9.9 |
|
|
|
7.3 |
|
Amortization of purchased intangibles |
|
|
0.4 |
|
|
|
0.9 |
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
39.9 |
|
|
|
33.0 |
|
|
|
37.4 |
|
|
|
30.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(6.5 |
) |
|
|
3.6 |
|
|
|
(5.5 |
) |
|
|
3.6 |
|
Interest income |
|
|
1.3 |
|
|
|
1.6 |
|
|
|
1.4 |
|
|
|
1.3 |
|
Interest expense |
|
|
(3.8 |
) |
|
|
(3.8 |
) |
|
|
(4.0 |
) |
|
|
(3.7 |
) |
Loss on convertible debt exchange |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
(9.8 |
) |
Other income (expense), net |
|
|
0.3 |
|
|
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and cumulative effect of change in accounting principle |
|
|
(8.7 |
) |
|
|
1.1 |
|
|
|
(8.0 |
) |
|
|
(8.9 |
) |
Provision for income taxes |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change
in accounting principle |
|
|
(9.4 |
) |
|
|
0.4 |
|
|
|
(8.7 |
) |
|
|
(9.5 |
) |
Cumulative effect of change in accounting principle |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) |
|
|
(9.4) |
% |
|
|
0.4 |
% |
|
|
(8.7) |
% |
|
|
(9.1) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased $5.2 million, or 4.9%, to $112.7 million in the quarter ended
January 27, 2008 compared to $107.5 million in the quarter ended January 28, 2007. Sales of optical
subsystems and components and network test and monitoring systems represented 91.3% and 8.7%,
respectively, of total revenues in the quarter ended January 27, 2008, compared to 91.2% and 8.8%,
respectively, in the quarter ended January 28, 2007.
Revenues decreased $2.8 million, or 0.9%, to $319.2 million in the nine months ended January
27, 2008 compared to $322.0 million in the nine months ended January 28, 2007. Sales of optical
subsystems and components and network test and monitoring systems represented 90.9% and 9.1%,
respectively, of total revenues in the nine months ended January 27, 2008, compared to 91.0% and
9.0%, respectively, in the nine months ended January 28, 2007.
Optical subsystems and components revenues increased $5.0 million, or 5.1%, to $103.0 million
in the quarter ended January 27, 2008 compared to $98.0 million in the quarter ended January 28,
2007. While total optical subsystem revenues increased, we experienced large fluctuations within
individual product categories. Sales of products for short distance LAN/SAN applications decreased
$210,000, or 0.4%, to $55.3 million in the quarter ended January 27, 2008 compared to $55.5 million
in the quarter ended January 28, 2007. While sales of products for short distance LAN/SAN
applications decreased slightly overall, sales of 8-10 Gbps products increased $11.1 million, to
$12.2 million in the quarter ended January 28, 2007 from $1.1 million in the quarter
ended January
28, 2007, and sales of 1-4 Gbps products declined by a similar amount. The decline in sales of
products for LAN/SAN applications was primarily the result of a slowdown in unit sales to our
SAN customers following a significant increase in sales of these
products during the four quarters ended January 28, 2007, combined with competitive
pricing pressure. Sales of products for longer distance MAN
applications increased $5.2 million, or 12.1%, to $47.7 million in the quarter ended January 27,
2008 compared to $42.5 million in the quarter ended January 28, 2007. The increase in sales of MAN
products was primarily the result of increased sales of our products
for 10 Gbps applications.
Optical subsystems and components revenues decreased $2.8 million, or 1.0%, to $290.2 million
in the nine months ended January 27, 2008 compared to $293.1 million in the nine months ended
January 28, 2007. While total optical subsystem revenues increased,
we experienced large fluctuations within individual product categories. Sales of products for
short distance LAN/SAN applications decreased $25.3 million, or 14.0%, to $155.4 million in the
nine months ended January 27, 2008 compared to $180.7 million in the nine months ended January 28,
2007. While sales of products for short distance LAN/SAN applications decreased overall, sales of
8-10 Gbps products increased $19.6 million, to $21.1 million in the nine months ended January 28,
2007 from $1.5 million in the nine months ended January 28, 2007, and sales of 1-4 Gbps products
declined by a slightly larger amount. The decline in sales of products
31
for LAN/SAN applications was
primarily the result of a slowdown in unit sales to our SAN customers combined with
competitive pricing pressure. Sales of products for longer distance MAN applications increased
$22.5 million, or 20.0%, to $134.9 million in the nine months ended January 27, 2008 compared to
$112.4 million in the nine months ended January 28, 2007. The increase in sales of MAN products was
primarily the result of increased sales of our products for 10 Gbps applications.
Network test and monitoring systems revenues increased $272,000, or 2.9%, to $9.8 million in
the quarter ended January 27, 2008 compared to $9.5 million in the quarter ended January 28, 2007.
Network test and monitoring systems revenues remained flat at $28.9 million for both the nine
months ended January 27, 2008 and the nine months ended January 28, 2007.
Amortization of Acquired Developed Technology. Amortization of acquired developed technology,
a component of cost of revenues, increased $217,000, or 14.4%, in the quarter ended January 27,
2008 to $1.7 million compared to $1.5 million in the quarter ended January 28, 2007 and increased
$651,000, or 14.4%, in the nine months ended January 27, 2008 to $5.2 million compared to $4.5
million in the nine months ended January 28, 2007. 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 $1.8 million, or 4.5%, to $37.6 million in the quarter
ended January 27, 2008 compared to $39.4 million in the quarter ended January 28, 2007. Gross
profit as a percentage of total revenue was 33.4% in the quarter ended January 27, 2008 compared to
36.6% in the quarter ended January 28, 2007. We recorded charges of $2.9 million for obsolete and
excess inventory in the quarter ended January 27, 2008 compared to $3.0 million in the quarter
ended January 28, 2007. We sold inventory that was written-off in previous periods resulting in a
benefit of $1.6 million in the quarter ended January 27, 2008 and $1.0 million in the quarter ended
January 28, 2007. As a result, we recognized a net charge of $1.3 million in the quarter ended
January 27, 2008 compared to $2.0 million in the quarter ended January 28, 2007. Manufacturing
overhead includes stock-based compensation charges of $895,000 in the quarter ended January 27,
2008 and $843,000 in the quarter ended January 28, 2007. Additionally, manufacturing overhead
includes other charges related to the completion of our previously reported stock option
investigation of $1.1 million in the quarter ended January 27, 2008. Excluding amortization of
acquired developed technology, the net impact of excess and obsolete inventory charges, stock-based
compensation charges and other stock option related charges, gross profit would have been $42.7
million, or 37.8% of revenue, in the quarter ended January 27, 2008 compared to $43.7 million, or
40.7% of revenue in the quarter ended January 28, 2007. The decrease in the adjusted gross profit
margin was primarily due to a $1.7 million, or 7.3%, increase in manufacturing overhead spending
(excluding non-cash stock-based compensation charges and other stock option investigation related
charges) combined with decreases in unit sales prices.
Gross profit decreased $9.4 million, or 8.4%, to $101.8 million in the nine months ended
January 27, 2008 compared to $111.1 million in the nine months ended January 28, 2007. Gross profit
as a percentage of total revenue was 31.9% in the nine months ended January 27, 2008 compared to
34.5% in the nine months ended January 28, 2007. We recorded charges of $10.2 million for obsolete
and excess inventory in the nine months ended January 27, 2008 and $8.9 million in the nine months
ended January 27, 2007. We sold inventory that was written-off in previous periods resulting in a
benefit of $5.0 million in the nine months ended January 27, 2008 and $2.8 million in the nine
months ended January 28, 2007. As a result, we recognized a net charge of $5.2 million in the nine
months ended January 27, 2008 compared to $6.1 million in the nine months ended January 28, 2007.
Manufacturing overhead includes stock-based compensation charges of $2.3 million in the nine months
ended January 27, 2008 and $2.9 million in the nine months ended January 28, 2007. Additionally,
manufacturing overhead includes other charges related to the completion of our previously reported
stock option investigation of $1.1 million in the quarter ended January 27, 2008. Excluding the
amortization of acquired developed technology, the net impact of excess and obsolete inventory
charges, stock-based compensation charges and other stock option related charges, gross profit
would have been $115.6 million, or 36.2% of revenue, in the nine months ended January 27, 2008
compared to $124.6 million, or 38.7% of revenue in the nine months ended January 28, 2007. The
decrease in the adjusted gross profit margin was primarily due to a $848,000, or 1.2%, increase in
manufacturing overhead spending (excluding non-cash stock-based compensation charges and other
stock option investigation related charges) combined with decreases
in unit sales prices.
Research and Development Expenses. Research and development expenses increased $4.6 million,
or 27.9%, to $21.2 million in the quarter ended January 27, 2008 compared to $16.6 million in the
quarter ended January 28, 2007. The increase was primarily due to an increase in employee related
expenses of $4.6 million. The increase in employee related spending included $2.5 million as a
result of our acquisitions of AZNA and Kodeos in the fourth quarter of fiscal 2007 and $1.6 million
of non-recurring expenses related to the option exchange offer that was undertaken to avoid the unfavorable
consequences of Section 409A of the Internal Revenue Code. Included in research and development
expenses were stock-based compensation charges of $1.2 million in the quarter ended January 27,
2008 and $1.0 million in the quarter ended January 28, 2007. Research and development expenses as a
percent of revenues increased to 18.8% in the quarter ended January 27, 2008 compared to 15.4% in
the quarter ended January 28, 2007.
Research and development expenses increased $9.4 million, or 19.9%, to $56.4 million in the
nine months ended January 27, 2008 compared to $47.0 million in the nine months ended January 28,
2007. The increase was primarily due to an increase in employee related expenses of $7.8 million
and an increase in project materials, project services and new product development scrap of $1.3
million. The increase in employee related spending included $5.9 million as a result of our
acquisitions of AZNA and Kodeos in the
32
fourth quarter of fiscal 2007
and $1.6 million of non-recurring expenses
related to Section 409A remediation. The remainder of the increase was primarily related to new
product development efforts, primarily for 10 Gbps products. Included in research and development
expenses were stock-based compensation charges of $3.2 million in each of the nine month periods
ended January 27, 2008 and January 28, 2007. Research and development expenses as a percent of
revenues increased to 17.7% in the nine months ended January 27, 2008 compared to 14.6% in the nine
months ended January 28, 2007.
Sales and Marketing Expenses. Sales and marketing expenses increased $1.4 million, or 15.7%,
to $10.5 million in the quarter ended January 27, 2008 compared to $9.1 million in the quarter
ended January 28, 2007. The increase was primarily due to employee related expenses of $1.3
million. Also contributing to the increase were higher commissions related to an increase in
revenue. The increase in employee related spending included $742,000
for non-recurring Section 409A remediation
matters, $211,000 of additional stock-based compensation, and $391,000 to support and generate
anticipated revenue growth. Included in sales and marketing expenses were stock-based compensation
charges of $673,000 in the quarter ended January 27, 2008 and $462,000 in the quarter ended January
28, 2007. Sales and marketing expenses as a percent of revenues increased to 9.3% in the quarter
ended January 27, 2008 compared to 8.4% in the quarter ended January 28, 2007.
Sales and marketing expenses increased $2.4 million, or 8.7%, to $29.7 million in the nine
months ended January 27, 2008 compared to $27.3 million in the nine months ended January 28, 2007.
The increase was primarily due to employee related expenses of $2.1 million. The increase in sales
and marketing expenses included $1.2 million to support and generate anticipated revenue growth in
addition to $742,000 for non-recurring Section 409A remediation matters. Included in sales and marketing expenses
were stock-based compensation charges of $1.6 million in the nine months ended January 27, 2008 and
$1.5 million in the nine months ended January 28, 2007. Sales and marketing expenses as a percent
of revenues increased to 9.3% in the nine months ended January 27, 2008 compared to 8.5% in the
nine months ended January 28, 2007.
General and Administrative Expenses. General and administrative expenses increased $3.9
million, or 43.9%, to $12.8 million in the quarter ended January 27, 2008 compared to $8.9 million
in the quarter ended January 28, 2007. The increase was primarily due to costs associated with our
stock option investigation of $1.7 million, legal costs of ongoing litigation of approximately $1.0
million, $835,000 for non-recurring Section 409A remediation matters, and an increase in our non-cash allowance
for aged receivables of $344,000. Included in general and administrative expenses were stock-based
compensation charges of $481,000 in the quarter ended January 27, 2008 and $584,000 in the quarter
ended January 28, 2007. General and administrative expenses as a percent of revenues increased to
11.4% in the quarter ended January 27, 2008 compared to 8.3% in the quarter ended January 28, 2007.
General and administrative expenses increased $8.1 million, or 34.7%, to $31.6 million in the
nine months ended January 27, 2008 compared to $23.5 million in the nine months ended January 28,
2007. The increase was primarily due to costs associated with our stock option investigation of
$6.0 million. Also contributing to the increase were $835,000
for non-recurring Section 409A remediation matters
and an increase in our non-cash allowance for aged receivables of $696,000. Included in general
and administrative expenses were stock-based compensation charges of $1.5 million in the nine
months ended January 27, 2008 and $1.8 million in the quarter ended January 28, 2007. General and
administrative expenses as a percent of revenues increased to 9.9% in the nine months ended January
27, 2008 compared to 7.3% in the nine months ended January 28, 2007.
Amortization of Purchased Intangibles. Amortization of purchased intangibles decreased
$437,000, or 47.2%, to $488,000 in the quarter ended January 27, 2008 compared to $925,000 in the
quarter ended January 28, 2007 and decreased $69,000, or 4.5%, to $1,468,000 in the nine months
ended January 27, 2008 compared to $1,538,000 in the nine months ended January 28, 2007. The
decreases were due to the amortization of intangibles from the acquisitions of AZNA LLC and Kodeos
Communications Inc. in the fourth quarter of fiscal 2007 offset by the write-off of assets acquired
in the May 2005 acquisition of InterSAN, Inc. in the prior year.
Interest Income. Interest income decreased $167,000, or 10.0%, to $1.5 million in the quarter
ended January 27, 2008 compared to $1.7 million in the quarter ended January 28, 2007 and increased
$131,000, or 3.0%, to $4.5 million in the nine months ended January 27, 2008 compared to $4.3
million in the nine months ended January 28, 2007. The decrease in the quarter ended January 27,
2008 was due to a decrease in interest rates partially offset by increased investment balances.
The increase during the nine months ended January 27, 2008 was due to increased investment balances
partially offset by lower interest rates.
Interest Expense. Interest expense increased $220,000, or 5.4%, to $4.3 million in the
quarter ended January 27, 2008 compared to $4.1 million in the quarter ended January 28, 2007. 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 LLC. Of the
total interest expense for the quarters ended January 27, 2008 and January 28, 2007, approximately
$2.3 million in each period was related to our
convertible subordinated notes due in 2008 and 2010 and $1.3 million and $1.2 million,
respectively, represented a non-cash charge to amortize the beneficial conversion feature of the
notes due in 2008.
Interest expense increased $1.0 million, or 8.4%, to $12.9 million in the nine months ended
January 27, 2008 compared to $11.9 million in the nine months ended January 28, 2007. The increase
was primarily related to the interest charges on the $17.0 million
33
in convertible notes issued in
the fourth quarter of fiscal 2007 in connection with our acquisition of AZNA LLC. Of the total
interest expense for the nine months ended January 27, 2008 and January 28, 2007, approximately
$4.5 million in each period was related to our convertible subordinated notes due in 2008 and 2010
and $3.7 million and $3.6 million, respectively, 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 nine months
ended January 28, 2007.
Other
Income (Expense), Net. Other income was $310,000 in the quarter ended January 27, 2008
compared to other expense of $345,000 in the quarter ended January 28, 2007. Other income was
$262,000 in the nine months ended January 28, 2008 compared to other expense of $1.2 million in the
nine months ended January 28, 2007. Other income in the fiscal 2008 periods primarily consisted of
a refund of value added tax, royalty payments received and gains from the sale of equipment and
equity investments, partially offset by the amortization of subordinated loan costs. Other expense
in the fiscal 2007 periods primarily consisted of amortization of subordinated loan costs, losses
related to the sales of equipment, and our pro rata share of losses for an equity investee.
Provision for Income Taxes. We recorded income tax provisions of $807,000 and $772,000,
respectively, for the quarters ended January 27, 2008 and January 28, 2007 and $2.1 million and
$2.0 million, respectively, for the nine month periods ended January 27, 2008 and January 28, 2007.
The income tax provision for each of these periods was 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 our deferred tax assets which represent future income
tax benefits associated with our operating losses. As a result, we did not record any income tax
benefit in the three or nine month periods ended January 27, 2008 and January 28, 2007. There can
be no assurance that our 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 January 27, 2008, cash, cash equivalents and short-term and long-term available-for-sale
investments were $126.1 million compared to $132.5 million at April 30, 2007. Of this amount,
long-term available-for-sale investments totaled $12.6 million of which $8.9 million consisted of
debt securities which were readily saleable and $3.7 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 January 27, 2008, total short and long term debt
was $269.8 million, compared to $267.6 million at April 30, 2007.
Net cash provided by operating activities totaled $15.8 million in the nine months ended
January 27, 2008, compared to $26.6 million in the nine months ended January 28, 2007. Cash
provided by operating activities in the nine months ended January 27, 2008 primarily consisted of
operating losses adjusted for depreciation, amortization and non-cash related items in the income
statement totaling $11.1 million and by $4.7 million in additional working capital which was
primarily related to increases in inventory and other assets and a decrease in accounts payable,
offset by increase in accrued compensation and other accrued liabilities. Cash provided by
operating activities in the nine months ended January 28, 2007 primarily consisted of operating
losses adjusted for depreciation, amortization and non-cash related items in the income statement
totaling $42.3 million offset by $15.7 million in additional working capital which was primarily
related to an increase in accounts receivable and inventory.
Net cash provided by investing activities totaled $5.1 million in the nine months ended
January 27, 2008 compared to net cash used in investing activities of $29.9 million in the nine
months ended January 28, 2007. Net cash provided by investing activities in the nine months ended
January 27, 2008 was primarily related to the net maturities of short-term available-for-sale
investments offset by purchases of equipment to support production expansion. Net cash used in
investing activities during the nine months ended January 28, 2007 was primarily related to
equipment purchases to support production expansion and the purchase of investments.
Net cash used in financing activities totaled $1.6 million in the nine months ended
January 27, 2008 compared to cash provided by financing activities of $2.3 million in the nine
months ended January 28, 2007. Cash used in financing activities for the nine months ended
January 27, 2008 was primarily due to repayments on borrowings, partially offset by the exercise of
stock options. Cash provided by financing activities in the nine months ended January 28, 2007 was
primarily due to proceeds from the exercise of stock options and sales of stock under the employee
stock purchase plan, partially offset by repayments on borrowings.
34
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.
Contractual Obligations and Commercial Commitments
At January 27, 2008, we had contractual obligations of $341.0 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 |
|
$ |
1,982 |
|
|
$ |
1,982 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term debt |
|
|
4,140 |
|
|
|
|
|
|
|
4,140 |
|
|
|
|
|
|
|
|
|
Convertible debt |
|
|
267,200 |
|
|
|
117,200 |
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
Interest on debt |
|
|
17,916 |
|
|
|
10,168 |
|
|
|
7,748 |
|
|
|
|
|
|
|
|
|
Lease
commitment under sale-leaseback agreement |
|
|
43,160 |
|
|
|
3,148 |
|
|
|
6,511 |
|
|
|
6,807 |
|
|
|
26,694 |
|
Operating leases |
|
|
3,789 |
|
|
|
1,964 |
|
|
|
1,825 |
|
|
|
|
|
|
|
|
|
Purchase obligations |
|
|
2,787 |
|
|
|
2,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
340,974 |
|
|
$ |
137,249 |
|
|
$ |
170,224 |
|
|
$ |
6,807 |
|
|
$ |
26,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt 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 $4.1 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. Also
included in convertible debt are convertible notes in the aggregate principal amount of $16.9
million issued in conjunction with the acquisition of AZNA LLC which bear interest at the rate of
7% per annum.
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 $2.8 million have been expensed and
recorded on the balance sheet as non-cancelable purchase obligations as of January 27, 2008.
On November 1, 2007, we entered into an amended letter of credit reimbursement agreement with
Silicon Valley Bank that will be available to the Company through October 26, 2008. The terms of
the 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 January 27,
2008 totaled $10.4 million.
35
Off-Balance-Sheet Arrangements
At January 27, 2008 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.
36
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 third 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
Reference is made to Part I, Item I, Financial Statements Note 14. Pending Litigation for
a description of pending legal proceedings, including material developments in certain of those
proceedings during the quarter ended January 27, 2008.
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: March 7, 2008
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 |