e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
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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 August 3, 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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Sunnyvale, California
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94089 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code:
408-548-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions of accelerated
filer, large 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 |
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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 August 31, 2008, there were 472,247,401 shares of the registrants common stock, $.001 par
value, issued and outstanding.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended August 3, 2008
2
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. We use words like anticipates, believes, plans, expects,
future, intends and similar expressions to identify these forward-looking statements. We have
based these forward-looking statements on our current expectations and projections about future
events; however, our business and operations are subject to a variety of risks and uncertainties,
and, consequently, actual results may materially differ from those projected by any forward-looking
statements. As a result, you should not place undue reliance on these forward-looking statements
since they may not occur.
Certain factors that could cause actual results to differ from those projected are discussed
in Item 1A. Risk Factors. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or future events.
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FINISAR
CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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August 3, 2008 |
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April 30, 2008 |
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(In thousands, except share and per share data) |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
96,499 |
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$ |
79,442 |
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Short-term available -for-sale investments |
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21,923 |
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30,577 |
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Accounts receivable, net of allowance for doubtful accounts
of $468 and $635 at August 3, 2008 and April 30, 2008 |
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57,186 |
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48,005 |
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Accounts receivable, other |
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10,936 |
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12,408 |
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Inventories |
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88,823 |
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82,554 |
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Prepaid expenses |
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8,291 |
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7,652 |
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Total current assets |
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283,658 |
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260,638 |
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Long-term available-for-sale investments |
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7,452 |
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9,236 |
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Property, plant and improvements, net |
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75,624 |
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89,847 |
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Purchased technology, net |
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10,604 |
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11,850 |
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Other intangible assets, net |
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17,626 |
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17,183 |
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Goodwill |
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88,242 |
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88,242 |
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Minority investments |
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14,289 |
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13,250 |
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Other assets |
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4,955 |
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3,241 |
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Total assets |
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$ |
502,450 |
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$ |
493,487 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
49,342 |
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$ |
43,040 |
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Accrued compensation |
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13,521 |
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14,397 |
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Other accrued liabilities |
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22,460 |
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23,397 |
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Deferred revenue |
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5,692 |
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5,312 |
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Current portion of other long-term liabilities |
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5,286 |
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2,436 |
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Convertible notes, net of beneficial conversion feature of
$880 and $2,026 at August 3, 2008 and April 30, 2008 |
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91,146 |
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101,918 |
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Non-cancelable purchase obligations |
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1,995 |
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3,206 |
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Total current liabilities |
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189,442 |
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193,706 |
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Long-term liabilities: |
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Convertible notes |
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150,000 |
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150,000 |
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Other long-term liabilities |
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23,569 |
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18,911 |
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Deferred income taxes |
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9,454 |
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8,903 |
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Total long-term liabilities |
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183,023 |
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177,814 |
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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 August 3, 2008 and April
30, 2008 |
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Common stock, $0.001 par value, 750,000,000 shares authorized,
311,407,975 shares issued and outstanding at August 3, 2008
and 308,839,226 shares issued and outstanding at April 30, 2008 |
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311 |
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309 |
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Additional paid-in capital |
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1,546,344 |
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1,540,241 |
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Accumulated other comprehensive income |
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10,170 |
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12,973 |
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Accumulated deficit |
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(1,426,840 |
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(1,431,556 |
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Total stockholders equity |
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129,985 |
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121,967 |
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Total liabilities and stockholders equity |
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$ |
502,450 |
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$ |
493,487 |
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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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August 3, 2008 |
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July 29, 2007 |
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(Unaudited, In thousands, |
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except per share data) |
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Revenues |
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Optical subsystems and components |
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$ |
115,774 |
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$ |
96,360 |
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Network performance test systems |
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12,938 |
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9,375 |
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Total revenues |
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128,712 |
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105,735 |
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Cost of revenues |
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78,044 |
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71,703 |
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Amortization of acquired developed technology |
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1,246 |
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1,729 |
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Gross profit |
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49,422 |
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32,303 |
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Operating expenses: |
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Research and development |
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20,773 |
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17,502 |
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Sales and marketing |
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10,149 |
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10,056 |
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General and administrative |
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9,787 |
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7,991 |
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Amortization of purchased intangibles |
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268 |
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490 |
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Total operating expenses |
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40,977 |
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36,039 |
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Income (loss) from operations |
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8,445 |
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(3,736 |
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Interest income |
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968 |
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1,415 |
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Interest expense |
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(4,008 |
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(4,246 |
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Other income (expense), net |
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57 |
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(133 |
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Income (loss) before income taxes |
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5,462 |
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(6,700 |
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Provision for income taxes |
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746 |
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621 |
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Net income (loss) |
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$ |
4,716 |
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$ |
(7,321 |
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Net income (loss) per share basic |
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$ |
0.02 |
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$ |
(0.02 |
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Net income (loss) per share diluted |
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$ |
0.02 |
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$ |
(0.02 |
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Shares used in computing net loss per share
basic |
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310,133 |
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308,634 |
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Shares used in computing net loss per share
diluted |
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311,614 |
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308,634 |
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See accompanying notes.
5
FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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Three Months Ended |
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August 3, 2008 |
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July 29, 2007 |
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(Unaudited, in thousands) |
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Operating activities |
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Net income (loss) |
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$ |
4,716 |
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$ |
(7,321 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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7,143 |
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6,815 |
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Stock-based compensation expense |
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3,057 |
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2,759 |
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Amortization of beneficial conversion feature of convertible notes |
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1,146 |
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1,196 |
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Amortization of purchased technology and finite lived intangibles |
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268 |
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490 |
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Amortization of acquired developed technology |
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1,246 |
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1,729 |
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Amortization of discount on restricted securities |
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(11 |
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Loss on sale or retirement of assets |
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413 |
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15 |
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Gain on remeasurement of derivative liability |
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(1,135 |
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Gain on sale of equity investment |
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(117 |
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Loss on sale of a product line |
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919 |
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Other than temporary decline in fair market value of equity security |
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735 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(9,181 |
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(2,465 |
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Inventories |
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(8,980 |
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(63 |
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Other assets |
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(1,979 |
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2,822 |
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Deferred income taxes |
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551 |
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544 |
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Accounts payable |
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6,302 |
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(6,910 |
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Accrued compensation |
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(876 |
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2,427 |
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Other accrued liabilities |
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(197 |
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2,216 |
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Deferred revenue |
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523 |
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391 |
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Net cash provided by operating activities |
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4,671 |
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4,517 |
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Investing activities |
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Purchases of property, equipment and improvements |
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(5,643 |
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(6,010 |
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Sale (purchase) of short and long-term investments, net |
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8,852 |
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(1,352 |
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Proceeds from sale of property and equipment |
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38 |
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Proceeds from sale of equity investment |
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323 |
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Purchase of intangible assets |
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(1,367 |
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(983 |
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Net cash provided by (used in) investing activities |
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1,842 |
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(7,984 |
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Financing activities |
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Repayment of convertible notes related to acquisition |
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(11,918 |
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Proceeds from term loan |
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19,968 |
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Repayments of liability related to sale-leaseback of building |
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(101 |
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(86 |
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Repayments of borrowings under notes |
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(492 |
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(463 |
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Proceeds from exercise of stock options and stock purchase plan, net of repurchase of
unvested shares |
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3,087 |
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Net cash provided by (used in) financing activities |
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10,544 |
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(549 |
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Net increase (decrease) in cash and cash equivalents |
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17,057 |
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(4,016 |
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Cash and cash equivalents at beginning of period |
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79,442 |
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56,106 |
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Cash and cash equivalents at end of period |
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$ |
96,499 |
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$ |
52,090 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
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$ |
81 |
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$ |
109 |
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Cash paid for taxes |
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$ |
179 |
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$ |
149 |
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See accompanying notes.
6
FINISAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Description of Business
Finisar Corporation (the Company) 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, IBM and Qlogic.
The Company also provides network performance test systems primarily to leading storage
equipment manufacturers such as Brocade, EMC, Emulex, Hewlett-Packard Company and Qlogic for
testing and validating equipment designs.
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 August 3, 2008
and for the three month periods ended August 3, 2008 and July 29, 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 August 3,
2008 and its operating results and cash flows for the three month periods ended August 3, 2008 and
July 29, 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, 2008.
Fiscal Periods
The Company maintains its financial records on the basis of a fiscal year ending on April 30,
with fiscal quarters ending on the Sunday closest to the end of the period (thirteen-week periods).
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to
the current year presentation. These changes had no impact on the Companys previously reported
financial position, results of operations and cash flows.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
7
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 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 months ended August 3, 2008 and July 29, 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
No. 123, Accounting for Stock-Based Compensation, 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 (SFAS
131), 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 performance test systems.
8
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk
include cash, cash equivalents, available-for-sale and restricted investments and accounts
receivable. The Company places its cash, cash equivalents, available-for-sale and restricted
investments with high-credit quality financial institutions. Such investments are generally in
excess of FDIC insurance limits. Concentrations of credit risk, with respect to accounts
receivable, exist to the extent of amounts presented in the financial statements. Generally, the
Company does not require collateral or other security to support customer receivables. The Company
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 45.0% and 44.0% of
total accounts receivable at August 3, 2008 and April 30, 2008, respectively.
Current Vulnerabilities Due to Certain Concentrations
The Company sells products primarily to customers located in Asia and North America. During
the three months ended August 3, 2008 and July 29, 2007, sales to the Companys five largest
customers represented 39.0% and 45.2% 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 August 3, 2008, are the net
assets of the Companys manufacturing operations, substantially all of which are located in
Malaysia and which total approximately $57.8 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 $6,000 and $13,000 in the three months ended August 3,
2008 and July 29, 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.
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 Accounting
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement No. 115 (SFAS 159). FAS 159 expands the use of fair value accounting to eligible
financial assets and liabilities. SFAS 159 is effective as of the beginning of an entitys first
fiscal year commencing after November 15, 2007. The Company evaluated its existing financial
instruments and elected not to adopt the fair value option to account for its financial
instruments. As a result, SFAS 159 did not have any impact on the Companys financial condition or
results of operations as of and for the three months ended August 3, 2008. However, because the
SFAS 159 election is based on an instrument-by-instrument election at the time the Company first
recognizes an eligible item or enters into an eligible firm commitment, the Company may decide to
elect the fair value option on new items when business reasons support doing so in the future.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157), which
is effective for fiscal years beginning after November 15, 2007 and for interim periods within
those years. This statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. This statement applies to accounting
pronouncements that require or permit fair value measurements with certain exclusions. The
statement provides that a fair value measurement assumes that the transaction to sell an asset or
transfer a liability occurs in the principal market for the asset or liability or, in the absence
of a principal market, the most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS 157 defines fair value based
upon an exit price model.
The Company adopted the effective portions of SFAS 157 on May 1, 2008. In February 2008, the
FASB issued FASB Staff Positions (FSP) 157-1 and 157-2 (FSP 157-1 and FAP 157-2). FSP 157-1
amends SFAS 157 to exclude SFAS No. 13, Accounting for Leases, (SFAS 13) and its related
interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays
the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008
for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis. Non-recurring nonfinancial assets and
nonfinancial liabilities for which the Company has not applied the provisions of SFAS 157 include
those measured at fair value in goodwill impairment testing, intangible assets measured at fair
value for impairment testing, asset retirement obligations initially measured at fair value, and
those initially measured at fair value in a business combination.
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to
measure fair value. Valuation techniques used to measure fair value under SFAS 157 must maximize
the use of observable inputs and minimize the use of unobservable inputs The standard describes a
fair value hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value which are the
following: Level 1 inputs are unadjusted quoted prices in active markets for identical assets or
liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets
or inputs that are observable for the asset or liability, either directly or indirectly through
market corroboration, for substantially the full term of the financial instrument. Level 3 inputs
are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair
value. A financial asset or liabilitys classification within the hierarchy is determined based on
the lowest level input that is significant to the fair value measurement.
For disclosure purposes, the Company is required to measure the fair value of outstanding debt
on a recurring basis. Long-term debt is reported at amortized cost in accordance with SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. As of August 3, 2008 and April 30, 2008, the
fair value of the Companys convertible subordinated debt, based on quoted market prices (Level 1),
was approximately $203.3 million and $200.7 million, respectively. See Note 2 Convertible Debt.
10
The following table provides the assets carried at fair value measured on a recurring basis as
of August 3, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Observable |
|
|
Significant |
|
|
|
|
|
|
For Identical |
|
|
Remaining |
|
|
Unobservable |
|
|
|
|
Assets Measured at Fair Value on a Recurring Basis |
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Total |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
Total cash, cash equivalents, and available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
59,141 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
59,141 |
|
Corporate debt |
|
|
|
|
|
|
18,643 |
|
|
|
|
|
|
|
18,643 |
|
Government agency debt |
|
|
2,791 |
|
|
|
5,070 |
|
|
|
|
|
|
|
7,861 |
|
Mortgage-backed debt |
|
|
|
|
|
|
1,584 |
|
|
|
|
|
|
|
1,584 |
|
Corporate equity securities |
|
|
1,287 |
|
|
|
|
|
|
|
|
|
|
|
1,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents and available-for-sale investments |
|
$ |
63,219 |
|
|
$ |
25,297 |
|
|
$ |
|
|
|
|
88,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
125,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
96,499 |
|
Short-term available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,923 |
|
Long-term available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and available-for-sale investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company classifies investments within Level 1 if quoted prices are available in active
markets. Level 1 assets include instruments valued based on quoted market prices in active markets
which generally include money market funds, corporate publicly traded equity securities on major
exchanges and U.S. Treasury notes with quoted prices on active markets.
The Company classifies items in Level 2 if the investments are valued using observable inputs
to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative
pricing sources with reasonable levels of price transparency. These investments include: government
agencies, corporate bonds and commercial paper.
The Company did not hold financial assets and liabilities which were valued using unobservable
inputs as of August 3, 2008.
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
twenty-five years.
Goodwill and Other Intangible Assets
Goodwill, purchased technology, and other intangible assets result from acquisitions accounted
for under the purchase method. Amortization of purchased technology and other intangibles has been
provided on a straight-line basis over periods ranging from three to seven years. The amortization
of goodwill ceased with the adoption of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
142), beginning in the first quarter of fiscal 2003. Intangible assets with finite lives are
amortized over their estimated useful lives. In addition to acquired intangible assets with finite
lives, the Company capitalizes the external costs, principally legal fees, that it incurs to apply
for and maintain its internally developed patents. The Company amortizes these costs on a
straight-line basis over their expected economic life, generally 10 years.
11
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.
Computation of Net Income (Loss) Per Share
Basic and diluted net income (loss) per share is presented in accordance with SFAS No. 128,
Earnings Per Share, for all periods presented. Basic net income (loss) per share has been computed
using the weighted-average number of shares of common stock outstanding during the period. Diluted
net income (loss) per share has been computed using the weighted-average number of shares of common
stock and dilutive potential common shares from options and warrants (under the treasury stock
method) and convertible notes (on an as-if-converted basis) outstanding during the period.
The following table presents the calculation of basic and diluted net loss per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
August 3, |
|
|
July 29, |
|
|
|
2008 |
|
|
2007 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,716 |
|
|
$ |
(7,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share: |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding total |
|
|
310,133 |
|
|
|
308,634 |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
310,133 |
|
|
|
308,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding employee stock options |
|
|
1,481 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding diluted |
|
|
311,614 |
|
|
|
308,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.02 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.02 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents related to potentially dilutive securities
excluded from computation above because they are anti-dilutive: |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
|
|
|
|
17,017 |
|
Conversion of convertible subordinated notes |
|
|
30,167 |
|
|
|
35,117 |
|
Conversion of convertible notes |
|
|
|
|
|
|
4,661 |
|
Warrants assumed in acquisition |
|
|
21 |
|
|
|
465 |
|
|
|
|
|
|
|
|
Potentially dilutive securities |
|
|
30,188 |
|
|
|
57,260 |
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income (SFAS 130), establishes rules for reporting and
display of comprehensive income or loss and its components. SFAS 130 requires unrealized gains or
losses on the Companys available-for-sale securities and foreign currency translation adjustments
to be included in comprehensive income (loss).
12
The components of comprehensive income (loss) for the three months ended August 3, 2008 and
July 29, 2007 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
August 3, |
|
|
July 29, |
|
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
4,716 |
|
|
$ |
(7,321 |
) |
Foreign currency translation adjustment |
|
|
(1,953 |
) |
|
|
18 |
|
Change in unrealized gain (loss) on securities,
net of
reclassification adjustments for realized loss |
|
|
(850 |
) |
|
|
(328 |
) |
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
1,913 |
|
|
$ |
(7,631 |
) |
|
|
|
|
|
|
|
The components of accumulated other comprehensive income, net of taxes, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
August 3, 2008 |
|
|
April 30, 2008 |
|
Net unrealized gains/(losses) on available-for-sale securities |
|
$ |
54 |
|
|
$ |
904 |
|
Cumulative translation adjustment |
|
|
10,116 |
|
|
|
12,069 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
10,170 |
|
|
$ |
12,973 |
|
|
|
|
|
|
|
|
Income Taxes
We use the liability method to account for income taxes as required by SFAS No. 109,
Accounting for Income Taxes (SFAS 109). As part of the process of preparing our consolidated
financial statements, we are required to estimate income taxes in each of the jurisdictions in
which we operate. This process involves determining our income tax expense together with
calculating the deferred income tax expense related to temporary difference resulting from the
differing treatment of items for tax and accounting purposes, such as deferred revenue or
deductibility of certain intangible assets. These temporary differences result in deferred tax
assets or liabilities, which are included within the consolidated balance sheets.
We record a valuation allowance to reduce our deferred tax assets to an amount that we
estimate is more likely than not to be realized. We consider estimated future taxable income and
prudent tax planning strategies in determining the need for a valuation allowance. When we
determine that it is more likely than not that some or all of our tax attributes will be realizable
by either refundable income taxes or future taxable income, the valuation allowance will be reduced
and the related tax impact will be recorded to the provision in that quarter. Likewise, should we
determine that we are not likely to realize all or part of our deferred tax assets in the future,
an increase to the valuation allowance would be recorded to the provision in the period such
determination was made.
Pending Adoption of New Accounting Standards
In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used in determining the useful life of a recognized intangible asset under
Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets. This new
guidance applies prospectively to intangible assets that are acquired individually or with a group
of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for fiscal
years beginning after December 15, 2008, and early adoption is prohibited. The impact of FSP 142-3
will depend upon the nature, terms, and size of the acquisitions the Company consummates after the
effective date.
13
2. Convertible Debt
The Companys convertible subordinated and convertible senior subordinated note balances as of
August 3, 2008 and April 30, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Fair |
|
|
Interest |
|
Description |
|
Amount |
|
|
Value |
|
|
Rate |
|
As of August 3, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2008 |
|
$ |
92,026 |
|
|
$ |
90,039 |
|
|
|
5.25 |
% |
Convertible subordinated notes due 2010 |
|
|
50,000 |
|
|
|
37,893 |
|
|
|
2.50 |
% |
Convertible senior subordinated notes due 2010 |
|
|
100,000 |
|
|
|
75,319 |
|
|
|
2.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
242,026 |
|
|
$ |
203,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2008 |
|
$ |
92,026 |
|
|
$ |
88,443 |
|
|
|
5.25 |
% |
Convertible subordinated notes due 2010 |
|
|
50,000 |
|
|
|
38,128 |
|
|
|
2.50 |
% |
Convertible senior subordinated notes due 2010 |
|
|
100,000 |
|
|
|
74,157 |
|
|
|
2.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
242,026 |
|
|
$ |
200,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys convertible subordinated and convertible senior subordinated notes are due by
fiscal year as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30, |
|
|
|
Total |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
Convertible notes |
|
$ |
242,026 |
|
|
$ |
92,026 |
|
|
$ |
|
|
|
$ |
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible NoteAcquisition of AZNA LLC
During the first quarter of fiscal 2009, the Company repaid, in cash, the remaining $11.9
million of outstanding principal and $313,000 of accrued interest under the amended convertible
promissory note issued in connection with the acquisition of AZNA LLC.
3. Installment Loans
In July 2008, the Companys Malaysian subsidiary entered into two separate loan agreements
with a Malaysian bank. Under these agreements, the Companys Malaysian subsidiary borrowed a total
of $20 million at an initial interest rate of 5.05% per annum. The first loan is payable in 20
equal quarterly installments of $750,000 beginning in January 2009 and the second loan is payable
in 20 equal quarterly installments of $250,000 beginning in October 2008. Both loans are secured
by certain property of the Companys Malaysian subsidiary, guaranteed by the Company and subject to
certain covenants. The Company was in compliance with all covenants associated with these loans as
of August 3, 2008. At August 3, 2008, the principal balance outstanding under these notes was $20
million.
4. Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 3, 2008 |
|
|
April 30, 2008 |
|
Raw materials |
|
$ |
19,766 |
|
|
$ |
19,540 |
|
Work-in-process |
|
|
32,697 |
|
|
|
30,424 |
|
Finished goods |
|
|
36,360 |
|
|
|
32,590 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
88,823 |
|
|
$ |
82,554 |
|
|
|
|
|
|
|
|
During the three months ended August 3, 2008 and July 29, 2007, the Company recorded charges
of $2.6 million and $3.8 million, respectively, for excess and obsolete inventory, and sold
inventory that was written-off
in previous periods with an approximate cost of $1.8 million and $1.7 million, respectively.
As a result, cost of revenue associated with the sale of this inventory was zero.
14
5. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 3, 2008 |
|
April 30, 2008 |
Land |
|
$ |
|
|
|
$ |
9,747 |
|
Buildings |
|
|
8,176 |
|
|
|
12,019 |
|
Computer equipment |
|
|
38,184 |
|
|
|
40,255 |
|
Office equipment, furniture and fixtures |
|
|
3,486 |
|
|
|
3,383 |
|
Machinery and equipment |
|
|
160,623 |
|
|
|
158,983 |
|
Leasehold improvements |
|
|
14,076 |
|
|
|
14,302 |
|
Contruction-in-process |
|
|
3,332 |
|
|
|
2,941 |
|
|
|
|
Total |
|
|
227,877 |
|
|
|
241,630 |
|
Accumulated depreciation and amortization |
|
|
(152,253 |
) |
|
|
(151,783 |
) |
|
|
|
Property, equipment and improvements (net) |
|
$ |
75,624 |
|
|
$ |
89,847 |
|
|
|
|
6. Sale-leaseback and Impairment of Tangible Assets
During the quarter ended January 31, 2005, the Company recorded an impairment charge of $18.8
million to write down the carrying value of one of its corporate office facilities located in
Sunnyvale, California upon entering into a sale-leaseback agreement. The property was written down
to its appraised value, which was based on the work of an independent appraiser in conjunction with
the sale-leaseback agreement. Due to retention by the Company of an option to acquire the leased
properties at fair value at the end of the fifth year of the lease, the sale-leaseback transaction
was recorded in the Companys quarter ended April 30, 2005 as a financing transaction under which
the sale would not be recorded until the option expired or was otherwise terminated.
During the first quarter of fiscal 2009, the Company amended the sale-leaseback agreement with
the landlord to immediately terminate the Companys option to acquire the leased properties.
Accordingly, the Company finalized the sale of the property by disposing of the remaining net book
value of its corporate office facility in Sunnyvale, California and the corresponding value of the
land resulting in a loss on disposal of approximately $12.2 million. This loss was offset by the
reduction in the carrying value of the financing liability and other related accounts by
approximately $11.9 million, resulting in the recognition of a net loss on the sale of this
property of approximately $343,000 during the three months ended August 3, 2008. As of August 3,
2008, the carrying value of the property and the financing liability have been reduced to zero.
7. Income Taxes
The Company recorded a provision for income taxes of $746,000 and $621,000, respectively, for
the three months ended August 3, 2008 and July 29, 2007. The provision for income taxes for the
three months ended August 3, 2008 and July 29, 2007 includes non-cash charges of $551,000 and
$544,000 for deferred tax liabilities that were recorded for tax amortization of goodwill for which
no financial statement amortization has occurred under generally accepted accounting principles, as
promulgated by SFAS 142, and current tax expense for minimum state taxes and foreign income taxes
arising in certain foreign jurisdictions in which the Company conducts business.
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 August 3, 2008 have been fully offset by a valuation allowance.
A portion of the valuation allowance for deferred tax assets at August 3, 2008 relates to the
tax benefits of stock option deductions the tax benefit of which will be credited to paid-in
capital if and when realized, and thereafter, to income tax expense. In addition, a portion of the
valuation allowance for deferred tax assets at August 3, 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.
Utilization of the Companys net operating loss and tax credit carryforwards may be subject to
a substantial annual limitation due to the ownership change limitations set forth by Internal
Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in
the expiration of the net operating loss and tax credit carryforwards before utilization.
The Companys total gross unrecognized tax benefits as of May 1, 2008 and August 3, 2008 were
$11.7 million. There was no change in the uncertain tax position. Excluding the effects of
recorded valuation allowances for deferred tax assets, $7.8 million of the unrecognized tax
benefits would favorably impact the effective tax rate in future periods if recognized and $1.6
million of unrecognized tax benefits would reduce goodwill if recognized.
15
Due to the Companys taxable loss position since inception, all tax years are subject to
examination in the U.S. and state jurisdictions. The Company is also subject to examination in
various foreign and state jurisdictions, none of which were individually material. It is the
Companys belief that no significant changes in the unrecognized tax benefit positions will occur
within 12 months of April 30, 2008.
The Company records interest and penalties related to unrecognized tax benefits in income tax
expense. At August 3, 2008, there were no accrued interest or penalties related to uncertain tax
positions. The Company recorded no interest or penalties for the quarter ended August 3, 2008.
8. Intangible Assets Including Goodwill
The following table reflects intangible assets subject to amortization as of August 3, 2008
and April 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2008 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
111,846 |
|
|
$ |
(101,242 |
) |
|
$ |
10,604 |
|
Purchased trade name |
|
|
3,697 |
|
|
|
(3,372 |
) |
|
|
325 |
|
Purchased customer relationships |
|
|
6,964 |
|
|
|
(3,658 |
) |
|
|
3,306 |
|
Patents |
|
|
18,165 |
|
|
|
(4,170 |
) |
|
|
13,995 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
140,672 |
|
|
$ |
(112,442 |
) |
|
$ |
28,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2008 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
111,846 |
|
|
$ |
(99,996 |
) |
|
$ |
11,850 |
|
Purchased trade name |
|
|
3,697 |
|
|
|
(3,345 |
) |
|
|
352 |
|
Purchased customer relationships |
|
|
6,964 |
|
|
|
(3,417 |
) |
|
|
3,547 |
|
Patents |
|
|
17,004 |
|
|
|
(3,720 |
) |
|
|
13,284 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
139,511 |
|
|
$ |
(110,478 |
) |
|
$ |
29,033 |
|
|
|
|
|
|
|
|
|
|
|
Estimated remaining amortization expense for each of the next five fiscal years ending April
30, is as follows (in thousands):
|
|
|
|
|
Year |
|
Amount |
|
2009 |
|
$ |
5,305 |
|
2010 |
|
|
5,628 |
|
2011 |
|
|
5,154 |
|
2012 |
|
|
4,071 |
|
2013 and beyond |
|
|
8,072 |
|
|
|
|
|
total |
|
$ |
28,230 |
|
|
|
|
|
Goodwill impairment
The Company performed its annual assessment of goodwill as of the first day of the fourth
quarter of fiscal 2008. The assessment was completed in late June 2008, in connection with the
closing of the Companys 2008 fiscal year and concluded that the carrying
value of its network performance test systems reporting unit exceeded its fair value. This
conclusion was based, among other things, on the assumed disposition of the Companys NetWisdom
product line, which had been planned at the beginning of the fourth quarter (see Note 15,
Restructuring and Product Line Sale). Accordingly, in late June 2008, the Company performed an
additional analysis, as required by SFAS 142, which indicated that an impairment loss was probable
because the implied fair value of goodwill related to its network performance test systems
reporting unit was zero. As a result, the Company recorded an estimated impairment charge of $40.1
million in the fourth quarter of fiscal 2008. The Company completed its determination of the
implied fair value of the affected
goodwill during the first quarter of fiscal 2009, which did not
result in a revision of the estimated charge. At August 3, 2008, the remaining balance of goodwill
was $88.2 million all of which related to the optical subsystems and components reporting unit.
16
9. Investments
Available-for-Sale Securities
The following is a summary of the Companys available-for-sale investments as of August 3,
2008 and April 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
Investment Type |
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
As of August 3, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
59,141 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
59,141 |
|
Corporate debt |
|
|
18,649 |
|
|
|
30 |
|
|
|
(36 |
) |
|
|
18,643 |
|
Government agency debt |
|
|
7,801 |
|
|
|
70 |
|
|
|
(10 |
) |
|
|
7,861 |
|
Mortgage-backed debt |
|
|
1,584 |
|
|
|
8 |
|
|
|
(8 |
) |
|
|
1,584 |
|
Corporate equity securities |
|
|
1,287 |
|
|
|
|
|
|
|
|
|
|
|
1,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
88,462 |
|
|
$ |
108 |
|
|
$ |
(54 |
) |
|
$ |
88,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
59,141 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
59,141 |
|
Short-term investments |
|
|
21,852 |
|
|
|
105 |
|
|
|
(34 |
) |
|
|
21,923 |
|
Long-term investments |
|
|
7,469 |
|
|
|
3 |
|
|
|
(20 |
) |
|
|
7,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
88,462 |
|
|
$ |
108 |
|
|
$ |
(54 |
) |
|
$ |
88,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
Investment Type |
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
As of April 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
65,551 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
65,551 |
|
Corporate debt |
|
|
30,358 |
|
|
|
68 |
|
|
|
(44 |
) |
|
|
30,382 |
|
Government agency debt |
|
|
4,250 |
|
|
|
104 |
|
|
|
|
|
|
|
4,354 |
|
Mortgage-backed debt |
|
|
2,280 |
|
|
|
11 |
|
|
|
(14 |
) |
|
|
2,277 |
|
Corporate equity securities |
|
|
2,022 |
|
|
|
779 |
|
|
|
|
|
|
|
2,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
104,461 |
|
|
$ |
962 |
|
|
$ |
(58 |
) |
|
$ |
105,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
65,552 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
65,552 |
|
Short-term investments |
|
|
29,734 |
|
|
|
873 |
|
|
|
(30 |
) |
|
|
30,577 |
|
Long-term investments |
|
|
9,175 |
|
|
|
89 |
|
|
|
(28 |
) |
|
|
9,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
104,461 |
|
|
$ |
962 |
|
|
$ |
(58 |
) |
|
$ |
105,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross realized gains and losses for the three months ended August 3, 2008 and July 29,
2007 were immaterial. Realized gains and losses were calculated based on the specific
identification method.
Available-for-Sale Equity Securities
During fiscal 2008, the Company granted an option to a third party to acquire 3.8 million
shares of stock of a publicly-held company held by the Company. The Company determined that this
option should be accounted for under the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires the Company to calculate the fair value of the
option at the end of each reporting period, upon the exercise of the option or at the time the
option expires and recognize the change in fair value through other income (expense), net. As of
April 30, 2008, the Company had recorded a current liability of $1.1 million related to the fair
value of this option.
17
During the first quarter of fiscal 2009, the third party did not exercise its option to
purchase any of the shares and the option expired. Accordingly, the Company reduced the carrying
value of the option liability to zero and recorded $1.1 million of other income during the three
months ended August 3, 2008.
As of August 3, 2008, the Company classified the 3.8 million shares as available-for-sale
securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The fair market value of these shares of $1.3 million reflects an other-than-temporary
impairment of $735,000 in the value of these shares that the Company recorded during the first
quarter of fiscal 2009 in accordance with FSP 115-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. As of August 3, 2008 and April 30, 2008, unrealized
gains of $0 and $779,000 are included in accumulated other comprehensive income, respectively.
During the quarter ended August 3, 2008, the Company did not dispose of any shares.
10. Minority Investments
Included in minority investments at August 3, 2008 is $14.3 million representing the carrying
value of the Companys minority investment in four privately held companies accounted for under the
cost method. At April 30, 2008, minority investment of $13.3 million represented the carrying value
of the Companys minority investments in the same companies. The $1 million increase was due to the
conversion of a convertible note of one of these companies, plus accrued interest, into preferred
stock of that company which occurred in the first quarter of fiscal 2009.
11. Stockholders Equity
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. 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. During the three months ended August 3, 2008, the
Company issued 1,947,944 shares under the Purchase Plan. During the three months ended July 29,
2007, the Company did not issue any shares under the Purchase Plan. At August 3, 2008, 9,112,153
shares were available for issuance under the Purchase Plan.
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 (RSUs) 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 RSUs or other stock-based
awards, become payable upon the expiration of a designated time period following such vesting
events. Options generally vest over five years and have a maximum term of 10 years. As of August
3, 2008, there were no shares subject to repurchase.
18
A summary of activity under the Companys employee stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
Options Outstanding |
|
|
Available |
|
|
|
|
|
Weighted- |
|
Weighted-Average |
|
|
|
|
for Grant |
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
Number of |
|
Number of |
|
Exercise |
|
Contractual |
|
Intrinsic |
Options for Common Stock |
|
Shares |
|
Shares |
|
Price |
|
Term |
|
Value(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years) |
|
($000s) |
Balance at April 30, 2008 |
|
|
37,022,529 |
|
|
|
53,158,061 |
|
|
$ |
2.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares |
|
|
15,441,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(1,066,449 |
) |
|
|
1,066,449 |
|
|
$ |
1.84 |
|
|
|
|
|
|
|
|
|
RSUs granted |
|
|
(60,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(620,805 |
) |
|
$ |
1.19 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
5,447,525 |
|
|
|
(5,447,525 |
) |
|
$ |
2.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 3, 2008 |
|
|
56,785,566 |
|
|
|
48,156,180 |
|
|
$ |
2.65 |
|
|
|
6.39 |
|
|
$ |
1,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the difference between the exercise price and the value of Finisar common stock at
August 3, 2008. |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic
value, based on the Companys closing stock price of $1.34 as of August 1, 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 5.2 years. The total
number of shares of common stock subject to in-the-money options exercisable as of August 3, 2008
was approximately 5.1 million.
Valuation and Expense Information Under SFAS 123R
The following table summarizes stock-based compensation expense related to employee stock
options and employee stock purchases under SFAS 123R for the three months ended August 3, 2008 and
July 29, 2007 which was reflected in the Companys operating results (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
August 3, |
|
|
July 29, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(unaudited, in thousands) |
|
Cost of revenues |
|
$ |
856 |
|
|
$ |
722 |
|
Research and development |
|
|
1,108 |
|
|
|
955 |
|
Sales and marketing |
|
|
517 |
|
|
|
451 |
|
General and administrative |
|
|
576 |
|
|
|
631 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,057 |
|
|
$ |
2,759 |
|
|
|
|
|
|
|
|
The total stock-based compensation capitalized as part of inventory as of August 3, 2008 was
$524,000.
As of August 3, 2008, total compensation cost related to unvested stock options not yet
recognized was approximately $16.8 million which is expected to be recognized over the next 34
months on a weighted-average basis.
19
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
single option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Option Plans |
|
Employee Stock Purchase Plan |
|
|
August 3, |
|
July 29, |
|
August 3, |
|
July 29, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 (1) |
Weighted average fair value per share |
|
$ |
0.99 |
|
|
$ |
2.86 |
|
|
$ |
0.51 |
|
|
|
n/a |
|
Expected term (in years) |
|
|
5.14 |
|
|
|
5.44 |
|
|
|
0.74 |
|
|
|
n/a |
|
Volatility |
|
|
72 |
% |
|
|
88 |
% |
|
|
58 |
% |
|
|
n/a |
|
Risk-free interest rate |
|
|
3.23 |
% |
|
|
4.60 |
% |
|
|
3.29 |
% |
|
|
n/a |
|
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
n/a |
|
|
|
|
(1) |
|
During the quarter ended July 29, 2007, the Companys Purchase Plan was not in effect. |
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 16. Pending
LitigationMatters Related to Historical Stock Option Practices. 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 SFAS 123R.
As a result of the extension, the fair value related to these stock options had 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
remaining accrued balance for these stock options as of April 30, 2008 was approximately $341,000.
During the first quarter of fiscal 2009, the Company recognized a benefit of approximately
$332,000 as a result of a decrease in the fair value of these options on June 30, 2008. The
remaining accrued balance of $9,000 related to these stock options was reclassified to equity as of
August 3, 2008. These transactions represented the final settlement of these options.
12. Segments and Geographic Information
The Company designs, develops, manufactures and markets optical subsystems, components and
network performance test 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 performance test 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 performance test 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 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 or a percentage of sales. The Company does not allocate
income taxes, non-operating income, acquisition related costs, stock compensation, interest income
and interest expense to its operating segments. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies. There are no
intersegment sales.
20
Information about reportable segment revenues and income/(losses) are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
August 3, 2008 |
|
July 29, 2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
115,774 |
|
|
$ |
96,360 |
|
Network performance test systems |
|
|
12,938 |
|
|
|
9,375 |
|
|
|
|
Total revenues |
|
$ |
128,712 |
|
|
$ |
105,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense: |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
6,874 |
|
|
$ |
6,538 |
|
Network performance test systems |
|
|
268 |
|
|
|
277 |
|
|
|
|
Total depreciation and amortization expense |
|
$ |
7,142 |
|
|
$ |
6,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
9,488 |
|
|
$ |
(441 |
) |
Network performance test systems |
|
|
471 |
|
|
|
(1,076 |
) |
|
|
|
Total operating income (loss) |
|
|
9,959 |
|
|
|
(1,517 |
) |
|
|
|
|
|
|
|
|
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
Amortization of acquired developed technology |
|
|
(1,246 |
) |
|
|
(1,729 |
) |
Amortization of other intangibles |
|
|
(268 |
) |
|
|
(490 |
) |
Interest income (expense), net |
|
|
(3,040 |
) |
|
|
(2,831 |
) |
Other non-operating income (expense), net |
|
|
57 |
|
|
|
(133 |
) |
|
|
|
Total unallocated amounts |
|
|
(4,497 |
) |
|
|
(5,183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
5,462 |
|
|
$ |
(6,700 |
) |
|
|
|
The following is a summary of total assets by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 3, |
|
|
April 30, |
|
|
|
2008 |
|
|
2008 |
|
Optical subsystems and components |
|
$ |
403,212 |
|
|
$ |
386,936 |
|
Network performance test systems |
|
|
32,080 |
|
|
|
39,326 |
|
Other assets |
|
|
67,158 |
|
|
|
67,225 |
|
|
|
|
|
|
|
|
|
|
$ |
502,450 |
|
|
$ |
493,487 |
|
|
|
|
|
|
|
|
Cash, short-term, restricted and minority investments are the primary components of other
assets in the above table.
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 |
|
|
|
August 3, |
|
|
July 29, |
|
|
|
2008 |
|
|
2007 |
|
Revenues from sales to unaffiliated customers: |
|
|
|
|
|
|
|
|
United States |
|
$ |
36,740 |
|
|
$ |
34,176 |
|
Rest of the world |
|
|
91,972 |
|
|
|
71,559 |
|
|
|
|
|
|
|
|
|
|
$ |
128,712 |
|
|
$ |
105,735 |
|
|
|
|
|
|
|
|
21
Revenues generated in the United States are all from sales to customers located in the United
States.
The following is a summary of long-lived assets within geographic areas based on the location
of the assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
August 3, |
|
April 30, |
|
|
2008 |
|
2008 |
Long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
173,662 |
|
|
$ |
185,638 |
|
Malaysia |
|
|
31,459 |
|
|
|
32,553 |
|
Rest of the world |
|
|
6,219 |
|
|
|
5,422 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
211,340 |
|
|
$ |
223,613 |
|
|
|
|
|
|
|
|
|
|
The following is a summary of capital expenditures by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
August 3, |
|
|
July 29 |
|
|
|
2008 |
|
|
2007 |
|
Optical subsystems and components |
|
$ |
5,527 |
|
|
$ |
5,900 |
|
Network performance test systems |
|
|
116 |
|
|
|
110 |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
5,643 |
|
|
$ |
6,010 |
|
|
|
|
|
|
|
|
13. Warranty
The Company generally offers a one-year limited warranty for its products. The specific terms
and conditions of these warranties vary depending upon the product sold. The Company estimates the
costs that may be incurred under its basic limited warranty and records a liability in the amount
of such costs based on revenue recognized. Factors that affect the Companys warranty liability
include the historical and anticipated rates of warranty claims. The Company periodically assesses
the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Companys warranty liability during the following period were as follows (in
thousands):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
August 3, 2008 |
|
Beginning balance at April 30, 2008 |
|
$ |
2,132 |
|
Additions during the period based on product sold |
|
|
817 |
|
Settlements |
|
|
(424 |
) |
Changes in liability for pre-existing warranties, including expirations |
|
|
58 |
|
|
|
|
|
Ending balance at August 3, 2008 |
|
$ |
2,583 |
|
|
|
|
|
14. Non-recourse Accounts Receivable Purchase Agreement
On March 14, 2008, the Company entered into an amended non-recourse accounts receivable
purchase agreement with Silicon Valley Bank that will be available to the Company through March 13,
2009. Under the terms of the agreement, the Company may sell to Silicon Valley Bank up to
$10 million of qualifying receivables whereby all right, title and interest in the Companys
invoices are purchased by Silicon Valley Bank. In these non-recourse sales, the Company removes
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 . The
discount interest for the facility is based on the number of days in the discount period multiplied
by Silicon Valley Banks prime rate plus 0.25% and a non-refundable administrative fee of 0.25% of
the face amount of each invoice. During the three months ended August 3, 2008 and July 29, 2007,
the Company sold approximately $5.2 million and $5.3 million, respectively, of its trade
receivables.
22
15. Restructuring and Product Line Sale
During the first quarter of fiscal 2009, the Company completed the sale of a product line
related to its network performance test systems segment to a third party for an 11% equity interest
in the acquiring company in the form of preferred stock and a note convertible into preferred
stock. For accounting purposes, no value has been placed on the equity interest due to the
uncertainty in the recoverability of this investment and note. The sale included the transfer of
certain assets, liabilities and the retention of certain obligations related to the sale of the
product line resulting in a net loss of approximately $919,000 which was included in operating
expenses.
As of August 3, 2008, $1.2 million of committed facility payments remain accrued and are
expected to be fully utilized by the end of fiscal 2011. This amount relates to payment
obligations under restructuring activities associated with the Companys Scotts Valley facility
that took place in fiscal 2006 and the sale of a product line during the first quarter of fiscal
2009.
16. Pending Litigation
Matters Related to Historical Stock Option Grant Practices
On November 30, 2006, the Company announced that it had undertaken a voluntary review
of its historical stock option grant practices subsequent to its initial public offering in
November 1999. The review was initiated by senior management, and preliminary results of the review
were discussed with the Audit Committee of the Companys board of directors. Based on the
preliminary results of the review, senior management concluded, and the Audit Committee agreed,
that it was likely that the measurement dates for certain stock option grants differed from the
recorded grant dates for such awards and that the Company would likely need to restate its
historical financial statements to record non-cash charges for compensation expense relating to
some past stock option grants. The Audit Committee thereafter conducted a further investigation and
engaged independent legal counsel and financial advisors to assist in that investigation. The Audit
Committee concluded that measurement dates for certain option grants differ from the recorded grant
dates for such awards. The Companys management, in conjunction with the Audit Committee, conducted
a further review to finalize revised measurement dates and determine the appropriate accounting
adjustments to its historical financial statements. The announcement of the investigation, and
related delays in filing the Companys quarterly reports on Form 10-Q for the quarters ended
October 29, 2006 (the October 10-Q), January 28, 2007 (the January 10-Q), and July 29, 2007
(the July 10-Q), and the Companys 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.
Securities and Exchange Commission Inquiry
In November 2006, the Company informed the staff of 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 the Companys historical stock option grant practices. The Company cooperated with the
SECs review. In a letter dated July 20, 2008, the SEC advised the Company that its investigation
had been terminated and that no enforcement action had been recommended.
Stock Option Derivative Litigation
Following the Companys announcement on November 30, 2006 that the Audit Committee of
the board of directors had voluntarily commenced an investigation of the Companys historical stock
option grant practices, the Company was named as a nominal defendant in several shareholder
derivative cases. These cases have been consolidated into two proceedings pending in federal and
state courts in California. The federal court cases have been consolidated in the United States
District Court for the Northern District of California. The state court cases have been
consolidated in the Superior Court of California for the County of Santa Clara. The plaintiffs in
all cases have alleged that certain of the Companys current or former officers and directors
caused the Company to grant stock options at less than fair market value, contrary to the Companys
public statements (including its financial statements), and that, as a result, those officers and
directors are liable to the Company. No specific amount of damages has been alleged, and by the
nature of the lawsuits, no damages will be alleged against the Company. On May 22, 2007, the state
court granted the Companys motion to stay the state court action pending resolution of the
consolidated federal court action. On June 12, 2007, the plaintiffs in the federal court case filed
an amended complaint to reflect the results of the stock option investigation announced by the
Audit Committee in June 2007. On August 28, 2007, the Company and the individual defendants filed
motions to dismiss the complaint. On January 11, 2008, the Court granted the motions to dismiss,
with leave to amend. On May 12, 2008, the plaintiffs filed an amended complaint. The Company and
the individual defendants filed motions to dismiss the amended complaint on July 1, 2008. A hearing
on the motions is set for September 26, 2008.
23
Trust Indenture Litigation
On January 4, 2007, the Company received three substantially identical purported
notices of default from U.S. Bank Trust National Association, as trustee (the Trustee) for the
Companys 2 1 / 2 % Convertible Senior Subordinated Notes due 2010, the Companys 2
1 / 2 % Convertible Subordinated Notes due 2010 and the Companys 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 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 the Companys
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 the Company
has 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 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 it 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
approximately $318,000 in fees and expenses as demanded by the Trustee, under protest and subject
to reservation of rights to seek recovery of all amounts paid.
On June 27, 2008, the Trustee filed an answer to the Companys complaint in the second
declaratory relief action and also filed a counterclaim seeking unspecified damages allegedly
suffered by the holders of the Notes, as well as additional attorneys fees of approximately
$270,000. On April 24, 2008, the Trustee filed a motion for summary judgment. The Company filed a
cross-motion for summary judgment on June 6, 2008. On August 25, 2008, the Court denied the
Trustees motion in its entirety and granted the Companys motion, in part, ruling that the Company
had not defaulted under the Indentures and that the Company was responsible to pay reasonable fees
incurred by the Trustee. The Court did not make a determination as to the amount of the fees owed.
24
Patent Litigation
DirecTV Litigation
On April 4, 2005, the Company filed an action for patent infringement in the
United States District Court for the Eastern District of Texas against the DirecTV Group, Inc.,
DirecTV Holdings, LLC, DirecTV Enterprises, LLC, DirecTV Operations, LLC, DirecTV, Inc., and Hughes
Network Systems, Inc. (collectively, DirecTV). The lawsuit involves the Companys U.S. Patent
No. 5,404,505, or the 505 patent, which relates to technology used in information transmission
systems to provide access to a large database of information. On June 23, 2006, following a jury
trial, the jury returned a verdict that the Companys patent had been willfully infringed and
awarded the Company damages of $78,920,250. In a post-trial hearing held on July 6, 2006, the Court
determined that, due to DirecTVs willful infringement, those damages would be enhanced by an
additional $25 million. Further, the Court awarded the Company pre-judgment interest on the jurys
verdict 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 to 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 were to prevail on appeal. The Court
granted DirecTVs motion and payments under the compulsory license were thereafter made into an
escrow account pending the outcome of the appeal. As of March 31, 2008, DirecTV had deposited
approximately $37 million into escrow.
DirecTV appealed to the United States Court of Appeals for the Federal Circuit. In its
appeal, DirecTV raised issues related to claim construction, infringement, invalidity, willful
infringement and enhanced damages. The Company cross-appealed raising issues related to the denial
of the Companys motion for a permanent injunction, the trial courts refusal to enhance future
damages for willfulness and the trial courts determination that some of the asserted patent claims
are invalid. The appeals were consolidated.
On April 18, 2008, the appeals court issued its decision affirming in part, reversing
in part, and remanding the case for further proceedings before the trial court in Texas.
Specifically, the appeals court ruled that the lower courts interpretation of some of the patent
claim terms was too broad and issued its own, narrower interpretation of those terms. The appeals
court also determined that one of the seven patent claims (Claim 16) found infringed by the jury
was invalid, that DirecTVs infringement of the 505 patent was not willful, and that the trial
court did not err in its determination that various claims of the 505 patent were invalid for
indefiniteness. As a result, the judgment, including the compulsory license, was vacated and the
case was remanded to the trial court to reconsider infringement and validity of the six remaining
patent claims and releasing to DirecTV the escrow funds it had deposited.
On May 2, 2008, the Company filed a petition for rehearing requesting the appeals
court to reconsider its decision invalidating Claim 16, to reconsider its decision affirming the
trial courts determination of indefiniteness, and to clarify its instructions concerning the scope
of further proceeding before the trial court. On May 29, 2008, the appeals court denied the
Companys petition.
On June 5, 2008, the appeals court restored jurisdiction of the case with the trial
court in Texas. Thereafter, the trial court issued an order releasing to DirecTV the funds that it
had deposited into escrow. A status conference is scheduled for September 26, 2008, at which time
the Company anticipates that the court will set a schedule for further proceedings.
On July 11, 2008, the United States District Court for the Northern District of
California issued an order in the Comcast lawsuit described below in which it held that one of the
claims of the 505 patent, Claim 25, is invalid. The order in the Comcast lawsuit also, in effect,
ruled invalid a related claim, Claim 24, which is one of the six remaining claims of the
505 patent that were returned to the trial court for retrial in the DirectTV lawsuit. The Company
is in the process of appealing the Comcast ruling.
Comcast Litigation
On July 7, 2006, Comcast Cable Communications Corporation, LLC (Comcast), filed a
complaint against the Company in the United States District Court for the Northern District of
California, San Francisco Division. Comcast sought 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. 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 were not
implicated by the pending DirecTV 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. Determination of the validity
25
and infringement issues was 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.
At a status conference held on April 24, 2008, the Court accepted the Companys
proposal to narrow the issues for trial and proceed only with the Companys principal claim
(Claim 25), subject to the Company providing a covenant not to sue Comcast on the other previously
asserted claims. On May 22, 2008, Comcast filed its renewed motion for summary judgment of
invalidity and non-infringement. On July 11, 2008, the Court issued an order granting Comcasts
motion for summary judgment on the basis of invalidity and also entered a final judgment in favor
of Comcast. On July 25, 2008 the Company filed its notice of appeal to the Federal Circuit. The
Company is in the process of preparing its appeal brief which is due October 7, 2008. Oral argument
at the Federal Circuit is expected early in 2009.
On July 25, 2008, Comcast filed motions seeking to recover $139,000 in attorneys fees accrued
after the Federal Circuit decision in the DirecTV case and costs of $224,000 incured by it from
inception of the case. The Company has filed objections to Comcasts motions, opposing the
proposed award of attorneys fees and seeking to reduce the alleged costs by $173,000.
EchoStar Litigation
On July 10, 2006, EchoStar Satellite LLC, EchoStar Technologies Corporation and
NagraStar LLC (collectively, EchoStar), filed an action against the Company in the United States
District Court for the District of Delaware seeking a declaration that EchoStar does not infringe,
and has not infringed, any valid claim of the Companys 505 patent. The 505 patent is the same
patent that is in dispute in the DirecTV 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 issuance of the Federal Circuits mandate in the DirecTV case.
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 DirecTV appeal and the
re-examination of the 505 patent described below. Judge Clark denied defendants motion for a
stay. The claim construction hearing was held on February 5, 2008, and the trial was set for
September 15, 2008. Judge Clark delayed entering a claims construction order, in anticipation of an
opinion from the Federal Circuit in the DirecTV appeal. The Federal Circuit entered its decision in
the DirecTV appeal on April 18, 2008. At around the same time, the United States Patent and
Trademark Office (the PTO), issued its initial office action in the re-examination proceeding of
the 505 patent rejecting a number of claims in light of prior art. Subsequently, the Company moved
without opposition to stay the case pending further action in the DirecTV case on remand and
re-examination. The Court granted the motion and stayed the case until further order.
Requests for Re-Examination of the 505 Patent
Three requests for re-examination of the Companys 505 patent have been filed with
the 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. On February 18, 2008, the PTO issued the first substantive office action
rejecting 17 of the 48 claims of the reexamined patent. The Company filed a response to the office
action on May 5, 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 the Companys initial public offering in
26
November 1999 and a secondary offering in April 2000. The complaint, as subsequently amended,
alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(b)
of the Securities Exchange Act of 1934, on the grounds that the prospectuses incorporated in the
registration statements for the offerings failed to disclose, among other things, that (i) the
underwriter had solicited and received excessive and undisclosed commissions from certain investors
in exchange for which the underwriter allocated to those investors material portions of the shares
of the Companys stock sold in the offerings and (ii) the underwriter had entered into agreements
with customers whereby the underwriter agreed to allocate shares of the Companys stock sold in the
offerings to those customers in exchange for which the customers agreed to purchase additional
shares of the Companys stock in the aftermarket at pre-determined prices. No specific damages are
claimed. Similar allegations have been made in lawsuits relating to more than 300 other initial
public offerings conducted in 1999 and 2000, which were consolidated for pretrial purposes. In
October 2002, all claims against the individual defendants were dismissed without prejudice. On
February 19, 2003, the Court denied defendants motion to dismiss the complaint. In July 2004, the
Company and the individual defendants accepted a settlement proposal made to all of the issuer
defendants. Under the terms of the settlement, the plaintiffs would dismiss and release all claims
against participating defendants in exchange for a contingent payment guaranty by the insurance
companies collectively responsible for insuring the issuers in all related cases, and the
assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against
the underwriters. Under the guaranty, the insurers would be required to pay the amount, if any, by
which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the
underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment
is required under the guaranty, the Company would be responsible to pay its pro rata portion of the
shortfall, up to the amount of the self-insured retention under 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. After several
months of considering the impact of the Court of Appeals ruling, the parties have now officially
withdrawn the prior settlement. Since then, the plaintiffs filed amended complaints in certain
focus or test cases in an attempt to comply with the decision of the Second Circuit Court of
Appeals. On March 26, 2008, the Court denied in part and granted in part the motions to dismiss
these amended complaints on substantially the same grounds as set forth in its prior opinion.
Because of the inherent uncertainty of litigation, 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 holder of the Companys common
stock against two investment banking firms that served as underwriters for the initial public
offering of the Companys common stock in November 1999. None of the Companys officers, directors
or employees were named as defendants in the complaint. On February 28, 2008, the plaintiff filed
an amended complaint. The complaint, as amended, alleges that: (i) the defendants, other
underwriters of the offering, and unspecified officers, directors and the Companys principal
shareholders constituted a group that owned in excess of 10% of the Companys outstanding common
stock between November 11, 1999 and November 20, 2000; (ii) the defendants were therefore subject
to the short swing prohibitions of Section 16(b) of the Securities Exchange Act of 1934; and
(iii) the defendants engaged in purchases and sales, or sales and purchases, of the Companys
common stock within periods of less than six months in violation of the provisions of
Section 16(b). The complaint seeks disgorgement of all profits allegedly received by the
defendants, with interest and attorneys fees, for transactions in violation of Section 16(b). The
Company, as the statutory beneficiary of any potential Section 16(b) recovery, is named as a
nominal defendant in the complaint. This case is one of 55 lawsuits containing similar allegations
relating to initial public offerings of technology company issuers. On July 25, 2008, the
defendants filed a motion to dismiss the amended complaint. Briefing on the motion to dismiss is to
be completed by October 23, 2008. A ruling on the motion is expected by November 24, 2008.
17. 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.
27
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.
During the first quarter of fiscal 2009, the Companys Malaysian subsidiary entered into loan
agreements with a Malaysian bank (see Note 3. Installment Loan) for which the Company has provided
corporate guarantees. The Company guaranteed loan payments of up to $23.1 million in the event of
non-payment by its Malaysian subsidiary. These guarantees are effective during the term of these
loans.
The Company believes the fair value of these indemnification agreements and loan guarantees is
minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of
August 3, 2008. To date, the Company has not incurred material costs to defend lawsuits or settle
claims related to these indemnification agreements and payments under the loans are expected to be
paid when due.
18. Subsequent Events
Completion of Combination with Optium Corporation
On May 15, 2008, the Company entered into a merger agreement with Optium Corporation
(Optium), a leading designer and manufacturer of high performance optical subsystems for use in
telecommunications and cable TV network systems. The Companys management and board of directors
believed that the combination of the two companies will create the worlds largest supplier of
optical components, modules and subsystems for the communications industry and will leverage the
Companys leadership position in the storage and data networking sectors of the industry and
Optiums leadership position in the telecommunications and CATV sectors to create a more
competitive industry participant. On August 29, 2008, the Company consummated the combination with
Optium through the merger of Optium with a wholly-owned subsidiary of the Company following
approval by the stockholders of both companies.
Under the terms of the merger agreement, Optium stockholders received 6.262 shares of the
Companys common stock for each share of Optium common stock they owned. Optium options and
warrants represent a corresponding right to acquire a number of shares of the Companys common
stock based on the exchange ratio. The Company issued 160,808,659 shares of its common stock for
all of the outstanding shares of Optium Corporation on August 29, 2008. The Companys shareholders
now own approximately 65% of the combined company, and Optium shareholders now own approximately
35%. The combination is intended to qualify as a tax-free reorganization for federal income tax
purposes. The Company will account for this acquisition under the purchase method and the results
of operations of Optium (beginning with the closing date of the acquisition) and the estimated fair
value of assets acquired will be included in the optical subsystems and components segment of the
Companys consolidated financial statements beginning in the second quarter of fiscal 2009.
Jerry S. Rawls, Chairman, President and Chief Executive Officer of the Company, remains as the
executive Chairman of the Companys board of directors. Eitan Gertel, Chairman, President and Chief
Executive Officer of Optium, became Chief Executive Officer of the Company. Under the merger
agreement, the Company agreed to increase the size of its board of directors by two members, to a
total of nine members, and to appoint three current members of the Optium board of directors to
serve on the its board. To create the third vacancy on the Companys board, director Frank H.
Levinson resigned effective immediately prior to the merger. Mr. Gertel has joined the Companys
board of directors, along with former Optium directors Morgan Jones and Christopher Crespi.
28
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 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 and passive optical components used in building MANs. Our
manufacturing operations are vertically integrated and include integrated circuit design and
internal assembly and test capabilities for our optical subsystems products, as well as key
components used in those subsystems. 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, IBM and Qlogic.
We also provide network performance test systems primarily to leading storage equipment
manufacturers such as Brocade, EMC, Emulex, Hewlett-Packard Company and Qlogic for testing and
validating equipment designs.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make judgments, estimates and assumptions in the preparation of
our consolidated financial statements and accompanying notes. Actual results could differ from
those estimates. We believe there have been no significant changes in our critical accounting
policies as discussed in our Annual Report on Form 10-K for the year ended April 30, 2008 other
than the adoption of SFAS No. 157 (see Note 1 to Condensed Consolidated Financial Statements).
29
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 |
|
|
August 3, |
|
July 29, |
|
|
2008 |
|
2007 |
|
|
(Unaudited) |
Revenues |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
|
89.9 |
% |
|
|
91.1 |
% |
Network performance test systems |
|
|
10.1 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenues |
|
|
60.6 |
|
|
|
67.8 |
|
Amortization of acquired developed technology |
|
|
1.0 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
38.4 |
|
|
|
30.6 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
16.1 |
|
|
|
16.6 |
|
Sales and marketing |
|
|
7.9 |
|
|
|
9.5 |
|
General and administrative |
|
|
7.6 |
|
|
|
7.6 |
|
Amortization of purchased intangibles |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
31.8 |
|
|
|
34.1 |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
6.6 |
|
|
|
(3.5 |
) |
Interest income |
|
|
0.8 |
|
|
|
1.3 |
|
Interest expense |
|
|
(3.1 |
) |
|
|
(4.0 |
) |
Other income (expense), net |
|
|
0.0 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
4.3 |
|
|
|
(6.3 |
) |
Provision for income taxes |
|
|
0.6 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
|
3.7 |
% |
|
|
(6.9 |
)% |
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased $23.0 million, or 21.7%, to $128.7 million in the quarter ended
August 3, 2008 compared to $105.7 million in the quarter ended July 29, 2007. Sales of optical
subsystems and components and network performance test systems represented 89.9 % and 10.1 %,
respectively, of total revenues in the quarter ended August 3, 2008, compared to 91.1% and 8.9%,
respectively, in the quarter ended July 29, 2007.
Optical subsystems and components revenues increased $19.4 million, or 20.1%, to $115.8
million in the quarter ended August 3, 2008 compared to $96.4 million in the quarter ended July 29,
2007. While total optical subsystem revenues increased, we also experienced large fluctuations
within individual product categories. Sales of new products for 10/40 Gbps applications for both
LAN/SAN and longer distance MAN applications increased $14 million in the quarter ended August 3,
2008 while sales of products for shorter distance LAN/SAN applications less than 10 Gbps increased
$4.5 million.
Network performance test systems revenues increased $3.6 million, or 37.2%, to $12.9 million
in the quarter ended August 3, 2008 compared to $9.4 million in the quarter ended July 29, 2007.
The increase was primarily due to the recent introduction of several new products for testing 8
Gbps Fibre Channel, 3/6 Gbps SAS/SATA, and 10 Gbps Fibre Channel over Ethernet products being
developed and used at OEM system manufacturers.
Amortization of Acquired Developed Technology. Amortization of acquired developed technology,
a component of cost of revenues, decreased $483,000, or 27.9%, in the quarter ended August 3, 2008
to $1.2 million compared to $1.7 million in the quarter ended July 29, 2007. The decrease was
primarily due to the full amortization during fiscal 2008 of certain assets associated with the
Honeywell, Infineon, and InterSan acquisitions.
Gross Profit. Gross profit increased $17.1 million, or 53.0%, to $49.4 million in the quarter
ended August 3, 2008 compared to $32.3 million in the quarter ended July 29, 2007. Gross profit as
a percentage of total revenue was 38.4 % in the quarter ended August 3, 2008 compared to 30.6% in
the quarter ended July 29, 2007. We recorded charges of $2.6 million for obsolete and excess
inventory in the quarter ended August 3, 2008 compared to $3.8 million in the quarter ended July
29, 2007. We sold inventory that was written-off in previous periods resulting in a benefit of $1.8
million in the quarter ended August 3, 2008 and $1.7 million in the quarter ended July 29, 2007. As
a result, we recognized a net charge of $800,000 in the quarter ended August 3, 2008 compared to
$2.1 million in the quarter ended July 29, 2007. Manufacturing overhead includes stock-based
compensation charges of $856,000 in the quarter ended August 3, 2008 and $722,000 in the quarter
ended July 29, 2007. Excluding amortization of acquired developed technology, the net impact of
excess and obsolete inventory charges and stock-based compensation charges, gross profit would have
been $ 51.2 million, or 39.8% of revenue, in the quarter ended August 3, 2008 compared to $36.9
million, or 34.9% of revenue in the quarter ended July 29, 2007. The increase in adjusted gross
profit margin was primarily due to a more favorable product mix resulting from increased sales of
higher margin network performance test systems and optical subsystems for 10/40 Gbps applications,
as well as cost efficiencies associated with higher shipment volumes.
30
Research and Development Expenses. Research and development expenses increased $3.3 million,
or 18.7%, to $20.8 million in the quarter ended August 3, 2008 compared to $17.5 million in the
quarter ended July 29, 2007. The increase was primarily due to an increase in employee related
expenses of $1.5 million and increases in the costs of development materials and outside services
totaling $960,000. Included in research and development expenses were stock-based compensation
charges of $1.1 million in the quarter ended August 3, 2008 and $955,000 in the quarter ended July
29, 2007. Research and development expenses as a percent of revenues decreased to 16.1 % in the
quarter ended August 3, 2008 compared to 16.6% in the quarter ended July 29, 2007.
Sales and Marketing Expenses. Sales and marketing expenses increased $93,000, or 0.9 %, to
$10.1 million in the quarter ended August 3, 2008 compared to $10.1 million in the quarter ended
July 29, 2007. The increase in sales and marketing expenses was primarily due to personnel related
costs added in the last half of the 2008 fiscal year in anticipation of revenue growth. Included
in sales and marketing expenses were stock-based compensation charges of $517,000 in the quarter
ended August 3, 2008 and $451,000 in the quarter ended July 29, 2007. Sales and marketing expenses
as a percent of revenues decreased to 7.9% in the quarter ended August 3, 2008 compared to 9.5% in
the quarter ended July 29, 2007.
General and Administrative Expenses. General and administrative expenses increased $1.8
million, or 22.5 %, to $9.8 million in the quarter ended August 3, 2008 compared to $8.0 million in
the quarter ended July 29, 2007. The increase was primarily due to legal costs of ongoing
litigation of approximately $524,000, general corporate legal cost of $307,000, and non-cash
charges of $919,000 related to the sale of a product line. Included in general and administrative
expenses were stock-based compensation charges of $576,000 in the quarter ended August 3, 2008 and
$631,000 in the quarter ended July 29, 2007. General and administrative expenses as a percent of
revenues stayed the same as 7.6% in the quarter ended August 3, 2008 as in the quarter ended July
29, 2007.
Amortization of Purchased Intangibles. Amortization of purchased intangibles decreased
$222,000, or 45.3 %, to $268,000 in the quarter ended August 3, 2008 compared to $490,000 in the
quarter ended July 29, 2007. The decrease was primarily due to the full amortization of certain
assets associated with the AZNA and Kodeos acquisitions.
Interest Income. Interest income decreased $447,000, or 31.6 %, to $968,000 in the quarter
ended August 3, 2008 compared to $1.4 million in the quarter ended July 29, 2007. The decrease in
the quarter ended August 3, 2008 was due primarily to a decrease in interest rates.
Interest Expense. Interest expense decreased $238,000, or 5.6%, to $4.0 million in the
quarter ended August 3, 2008 compared to $4.2 million in the quarter ended July 29, 2007. The
decrease was primarily related to repayments on the outstanding convertible subordinated notes. Of
the total interest expense for the quarters ended August 3, 2008 and July 29, 2007, approximately
$2.2 million and $2.6 million, respectively, was related to our convertible subordinated notes due
in 2008 and 2010 and $1.1 million and $1.2 million, respectively, represented a non-cash charge to
amortize the beneficial conversion feature of the notes due in 2008.
Other Income (Expense), Net. Other income was $57,000 in the quarter ended August 3, 2008
compared to $133,000 in the quarter ended July 29, 2007. Other income consisted primarily of a
$1.1 million gain recorded upon the expiration of an option we had granted to a third party to
purchase equity securities in an investee company. This income was largely offset by the
other-than-temporary impairment recognized on the value of those equity securities as well as by a
net loss of $343,000 on the sale of our corporate headquarters which was recognized in the quarter
ended August 3, 2008. Other expense primarily consists of subordinated loan costs offset in fiscal
2008 period by the gain on the sale of an equity investment.
Provision for Income Taxes. We recorded income tax provisions of $746,000 and $621,000,
respectively, for the quarters ended August 3, 2008 and July 29, 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 month periods
ended August 3, 2008 and July 29, 2007. There can be no assurance that our deferred tax assets
subject to the valuation allowance will ever be realized.
Liquidity and Capital Resources
At August 3, 2008, cash, cash equivalents and short-term and long-term available-for-sale
investments were $125.9 million compared to $119.3 million at April 30, 2008. Of this amount,
long-term available-for-sale investments totaled $7.5 million, which consisted of readily saleable
debt securities. At August 3, 2008, total short- and long-term debt was $266.3 million, compared to
$257.6 million at April 30, 2008.
Net cash provided by operating activities totaled $4.7 million in the quarter ended August 3,
2008, compared to $4.5 million in the quarter ended July 29, 2007. Cash provided by operating
activities in the quarter ended August 3, 2008 primarily consisted of
31
operating income adjusted for depreciation, amortization and non-cash related items in the
income statement totaling $18.5 million and offset by $13.8 million in additional working capital
which was primarily related to increases in inventory, accounts receivable, and other assets and a
decrease in accrued compensation, offset by increase in accounts payable and deferred revenue. Cash
provided by operating activities for the quarter ended July 29, 2007 was primarily a result of
operating losses adjusted for depreciation, amortization and non-cash related items in the income
statement totaling $5.5 million offset by $1.0 million in additional working capital most of which
was related to an increase in accounts receivable and a decrease in accounts payable.
Net cash provided by investing activities totaled $1.8 million in the quarter ended August 3,
2008 compared to net cash used in investing activities of $8.0 million in the quarter ended July
29, 2007. Net cash provided by investing activities in the quarter ended August 3, 2008 was
primarily related to the net maturities of available-for-sale investments offset by purchases of
equipment to support production expansion. Cash invested in the quarter ended July 29, 2007 was
primarily related equipment purchases to support production expansion and the purchase of
short-term investments.
Net cash provided by financing activities totaled $10.5 million in the quarter ended August 3,
2008 compared to net cash used in financing activities of $549,000 in the quarter ended July 29,
2007. Cash provided by financing activities for the quarter ended August 3, 2008 primarily
reflected proceeds of $20 million from bank borrowings and proceeds from the exercise of stock
options and purchases under our stock purchase plan totaling $3.1 million, partially offset by
repayments on borrowings of $12.5 million. Cash used in financing activities for the quarter ended
July 29, 2007 was due to repayments of borrowings.
Our outstanding 5 1/4% convertible subordinated notes, in the principal amount of $92 million
are payable on October 15, 2008. 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 repay these notes and 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 August 3, 2008, we had contractual obligations of $330.4 million as shown in the following
table (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
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|
|
|
|
|
|
Less than |
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|
|
|
|
|
|
|
|
|
After |
|
Contractual Obligations |
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Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
5 Years |
|
|
|
Short-term debt |
|
$ |
5,286 |
|
|
$ |
5,286 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term debt |
|
|
19,855 |
|
|
|
|
|
|
|
11,105 |
|
|
|
8,000 |
|
|
|
750 |
|
Convertible debt |
|
|
242,026 |
|
|
|
92,026 |
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
Interest on debt |
|
|
14,068 |
|
|
|
7,215 |
|
|
|
6,232 |
|
|
|
599 |
|
|
|
22 |
|
Operating leases |
|
|
47,179 |
|
|
|
5,805 |
|
|
|
9,203 |
|
|
|
7,232 |
|
|
|
24,939 |
|
Purchase obligations |
|
|
1,995 |
|
|
|
1,995 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
330,409 |
|
|
$ |
112,327 |
|
|
$ |
176,540 |
|
|
$ |
15,831 |
|
|
$ |
25,711 |
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|
Short-term debt of $5.3 million represents the current portion of a note payable to a
financial institution and a loan from a Malaysian bank.
Long-term debt consists of the long-term portion of a note payable to a financial institution
and a loan from a Malaysian bank in the principal amount of $19.9 million.
Convertible debt consists of two series of convertible subordinated notes in the aggregate
principal amount of $92.0 million due October 15, 2008 and $50.0 million due October 15, 2010 and a
series of convertible senior subordinated notes in the aggregate principal amount of $100.0 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 $ 8.5 million.
Interest on debt consists of the scheduled interest payments on our short-term, long-term, and
convertible debt.
Operating lease obligations consist primarily of base rents for facilities we occupy at
various locations.
32
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 $2.0 million have been expensed and
recorded on the balance sheet as non-cancelable purchase obligations as of August 3, 2008.
On March 14, 2008, we entered into an amended letter of credit reimbursement agreement with
Silicon Valley Bank that will be available through March 13, 2009. Under the terms of the amended
agreement, Silicon Valley Bank is providing a $10.5 million letter of credit facility covering
existing letters of credit issued by Silicon Valley Bank and any other letters of credit that we
may require. Outstanding letters of credit secured by this agreement at August 3, 2008 totaled
$9.4 million.
On March 14, 2008, we also entered into a revolving line of credit agreement with Silicon
Valley Bank. Under the terms of the agreement, the bank is providing a $50 million revolving line
of credit that will be available to us through March 13, 2009. Borrowings under this line are
collateralized by substantially all of our assets except our intellectual property rights and bear
interest, at our option, at either the banks prime rate or the LIBOR rate plus 2.5%. The agreement
is subject to certain financial covenants that may restrict our ability to borrow under this line
of credit. At August 3, 2008, there was no balance outstanding under this line of credit.
Off-Balance-Sheet Arrangements
At August 3, 2008 and April 30, 2008, 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.
33
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, 2008.
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 first quarter
of fiscal 2009 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 16. Pending Litigation for
a description of pending legal proceedings, including material developments in certain of those
proceedings during the quarter ended August 3, 2008.
Item 1A. Risk Factors
On August 29, 2008, we consummated a combination with Optium Corporation through the merger of
Optium with a wholly-owned subsidiary of Finisar. The completion of the merger gave rise to a
number of special risks and uncertainties that are described below under the heading We are
subject to a number of special risks as a result of our recently completed combination with
Optium. In addition to these specific merger-related risks, the combination of Optiums business
and operations with Finisars resulted in a number of 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, 2008, and the addition of several new risk factors. Accordingly, the following
discussion updates and replaces the disclosure contained in the Annual Report on Form 10-K.
We are subject to a number of special risks as a result of our recently completed combination with
Optium.
On May 15, 2008, we entered into an agreement with Optium Corporation, providing for the
merger of Optium and a subsidiary of Finisar, with Optium surviving as a subsidiary of Finisar.
The merger was consummated on August 29, 2008, and, pursuant to the merger, we issued approximately
161 million shares of Finisar common stock to the former stockholders of Optium.
34
Our future results of operation will be substantially influenced by the operations of the
former Optium business, and, as a result of the merger, we will be subject to a number of special
risks and uncertainties, including the following:
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Failure to achieve the strategic objectives of the merger could have a material
adverse effect on our revenues, operating results and expense levels. We expect the
merger to be dilutive to our earnings per share during the 12 months following the
closing and accretive thereafter. In the event that estimated pre-tax cost
synergies are not realized, the merger may be substantially dilutive to our earnings
per share thereafter as well. In addition, we cannot assure you that our growth
rate will equal the historical growth rate experienced by either Finisar or Optium
prior to the merger. |
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|
We will face significant challenges in integrating the organizations and
operations of Finisar and Optium in a timely and efficient manner. The integration
of the two companies will be complex and time consuming and will require significant
attention from management and other personnel, which may distract their attention
from the day-to-day business of the combined company. The diversion of managements
attention and any difficulties associated with integrating Optium into Finisar could
have a material adverse effect on our operating results and our stock price, and
could result in a delay or even the inability to achieve the anticipated benefits of
the merger. Failure to successfully integrate the operations of the two companies
could have a material adverse effect on our business and operating results. |
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To be successful, we must retain and motivate executives and other key employees,
including those in managerial, technical, marketing and information technology
support positions. Our employees may experience uncertainty about their future role
both before and after strategies with regard to the combined company are announced
or executed. This potential uncertainty may adversely affect our ability to attract
and retain key personnel. We must continue to motivate our employees and keep them
focused on our strategies and goals, which may be particularly difficult due to the
potential distractions of the merger or the loss of key employees due to such
uncertainties. |
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As a result of the merger, Finisar has become a substantially larger
organization. We may face challenges inherent in efficiently managing our enlarged
workforce of approximately 5,000 employees located in a total of 14 facilities
around the world, including the need to implement appropriate systems, policies,
benefits and compliance programs. The inability to successfully manage these
geographically more diverse locations and substantially larger combined workforce
could have a material adverse effect on our operating results and, as a result, on
the market price of our common stock. |
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We may incur charges to operations, in amounts that are not currently reasonably
estimable, in the quarter in which the merger was completed or in subsequent
quarters, to reflect costs associated with the valuation of the merger and the
integration of the two companies. Unanticipated costs associated with the merger,
if significant, could adversely affect our future liquidity and operating results. |
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As of May 3, 2008, Optium had U.S. net operating loss, or NOL, carryforwards of
approximately $20.0 million for federal and $7.3 million for state tax purposes
expiring through its fiscal year ending July 2025. These NOL carryforwards
represent an asset to the extent they can be utilized to reduce future cash income
tax payments. The merger likely resulted in an ownership change under Section 382
of the Internal Revenue Code, limiting the use of the Optium NOL carryforwards to
offset future taxable income of the combined company. A limitation on the use of
the Optium NOL carryforwards may increase the combined companys costs and expenses
if the Optium NOLs are not available to reduce the combined companys future income
tax liabilities. The utilization of Optiums NOL carryforwards depends on the
timing and amount of taxable income earned in the future, which we are unable to
predict. In addition, the combined companys effective tax rates may be affected by
the timing of income recognition and limitations, if any, resulting from ownership
changes. |
Our quarterly revenues and operating results fluctuate due to a variety of factors, which may
result in volatility or a decline in the price of our stock.
The quarterly operating results of both Finisar and Optium have varied significantly due to a
number of factors, including:
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fluctuation in demand for their products; |
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the timing of new product introductions or enhancements by both companies and
their competitors; |
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the level of market acceptance of new and enhanced versions of their products; |
35
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the timing or cancellation of large customer orders; |
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the length and variability of the sales cycle for their products; |
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pricing policy changes by both companies and their competitors and suppliers; |
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the availability of development funding and the timing of development revenue; |
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changes in the mix of products sold; |
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increased competition in product lines, and competitive pricing pressures; and |
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the evolving and unpredictable nature of the markets for products incorporating
their optical components and subsystems. |
We expect that the operating results of the combined company will continue to fluctuate in the
future as a result of these factors and a variety of other factors, including:
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fluctuations in manufacturing yields; |
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the emergence of new industry standards; |
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failure to anticipate changing customer product requirements; |
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the loss or gain of important customers; |
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product obsolescence; and |
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the amount of research and development expenses associated with new product
introductions. |
Our operating results could also be harmed by:
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economic conditions generally or in various geographic areas where we or our
customers do business; |
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acts of terrorism and international conflicts or crises; |
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other conditions affecting the timing of customer orders; or |
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a downturn in the markets for our customers products, particularly the data
storage and networking and telecommunications components markets. |
We may experience a delay in generating or recognizing revenues for a number of reasons.
Orders at the beginning of each quarter typically represent a small percentage of expected revenues
for that quarter and are generally cancelable at any time. Accordingly, we depend on obtaining
orders during each quarter for shipment in that quarter to achieve our revenue objectives. Failure
to ship these products by the end of a quarter may adversely affect our operating results.
Furthermore, our customer agreements typically provide that the customer may delay scheduled
delivery dates and cancel orders within specified timeframes without significant penalty. Because
we base our operating expenses on anticipated revenue trends and a high percentage of our expenses
are fixed in the short term, any delay in generating or recognizing forecasted revenues could
significantly harm our business. It is likely that in some future quarters our operating results
will again decrease from the previous quarter or fall below the expectations of securities analysts
and investors. In this event, it is likely that the trading price of our common stock would
significantly decline.
As a result of these factors, our operating results may vary significantly from quarter to
quarter. Accordingly, we believe that period-to-period comparisons of our results of operations
are not meaningful and should not be relied upon as indications of future performance. Any
shortfall in revenues or net income from levels expected by the investment community could cause a
decline in the trading price of our stock.
36
We may have insufficient cash flow to meet our debt service obligations, including payments due on
our subordinated convertible notes.
We will be required to generate cash sufficient to conduct our business operations and pay our
indebtedness and other liabilities, including all amounts due on our 51/4% convertible
subordinated notes due October 15, 2008 totaling $92 million, our outstanding 21/2%
convertible senior subordinated notes due October 15, 2010 totaling $100 million, and our
21/2% convertible subordinated notes due October 15, 2010 totaling $50 million. In
addition, the $100 million in principal amount of our 21/2% convertible senior
subordinated notes that mature in October 2010 include a net share settlement feature under which
we are required to pay the principal portion of the notes in cash upon conversion. Our existing
balances of cash, cash equivalents and short-term investments are sufficient to repay the notes
that mature in October 2008. However, we may not be able to cover our future debt service
obligations from our cash flow. This may materially hinder our ability to make payments on the
notes due in 2010. Our ability to meet our future debt service obligations will depend upon our
future performance, which will be subject to financial, business and other factors affecting our
operations, many of which are beyond our control. Accordingly, we cannot assure you that we will be
able to make required principal and interest payments on the notes due in 2010.
If we are unsuccessful in pending litigation, our payment obligations under our outstanding
convertible subordinated notes could be accelerated.
The trustee for all of our outstanding convertible subordinated notes has notified us that, in
the opinion of the trustee, we were in default under the indentures governing the respective series
of notes as a result of our failure to timely file periodic reports with the SEC. Although neither
the trustee nor the holders of any of the notes have declared the unpaid principal, and accrued
interest, on any of the notes to be due and payable, the trustee has stated in its notices that it
reserves the right to exercise all available remedies, which, if we are in fact in default, would
include acceleration of the notes. We do not believe that we were in default under the terms of
the indentures on the basis that the plain language of each indenture requires only that we file
with the trustee reports that have actually been filed with the SEC and that, since the reports in
question had not yet been filed with the SEC at the time of the trustees notices, we were under no
obligation to file them with the trustee. In anticipation of the assertion by the trustee or the
noteholders that Events of Default had occurred, and a potential attempt to accelerate payment on
one or more series of the notes, we instituted litigation seeking a judicial declaration that we
are not in default under the indentures. We have since filed all of our previously-delayed
periodic reports with the SEC and the trustee. The trial court has granted summary judgment in our
favor, ruling that we are not in default under the indentures; however, it is possible that the
trustee may appeal the trial courts ruling. Should we ultimately be unsuccessful in this
litigation, the trustee or the noteholders could attempt to accelerate payment on one or more
series of the notes. As of August 3, 2008, there was $242.0 million in aggregate principal amount
of notes outstanding and an aggregate of approximately $3.3 million in accrued interest.
We may not be able to obtain additional capital in the future, and failure to do so may harm our
business.
We believe that our existing balances of cash, cash equivalents and short-term investments
will be sufficient to meet our cash needs for working capital and capital expenditures for at least
the next 12 months. We may, however, require additional financing to fund our operations in the
future or to repay the principal of our outstanding convertible subordinated notes. Due to the
unpredictable nature of the capital markets, particularly in the technology sector, we cannot
assure you that we will be able to raise additional capital if and when it is required, especially
if we experience disappointing operating results. If adequate capital is not available to us as
required, or is not available on favorable terms, we could be required to significantly reduce or
restructure our business operations. If we do raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of our stockholders could be
significantly diluted, and these newly-issued securities may have rights, preferences or privileges
senior to those of existing stockholders.
Failure to accurately forecast our revenues could result in additional charges for obsolete or
excess inventories or non-cancelable purchase commitments.
We base many of our operating decisions, and enter into purchase commitments, on the basis of
anticipated revenue trends which are highly unpredictable. Some of our purchase commitments are not
cancelable, and in some cases we are required to recognize a charge representing the amount of
material or capital equipment purchased or ordered which exceeds our actual requirements. In the
past, we have sometimes experienced significant growth followed by a significant decrease in
customer demand such as occurred in fiscal 2001, when revenues increased by 181% followed by a
decrease of 22% in fiscal 2002. Based on projected revenue trends during these periods, we acquired
inventories and entered into purchase commitments in order to meet anticipated increases in demand
for our products which did not materialize. As a result, we recorded significant charges for
obsolete and excess inventories and non-cancelable purchase commitments which contributed to
substantial operating losses in fiscal 2002. Should revenue in future periods again fall
substantially below our expectations, or should we fail again to accurately forecast changes in
demand mix, we could be required to record additional charges for obsolete or excess inventories or
non-cancelable purchase commitments.
37
If we encounter sustained yield problems or other delays in the production or delivery of our
internally-manufactured components or in the final assembly and test of our transceiver products,
we may lose sales and damage our customer relationships.
Our manufacturing operations are highly vertically integrated. In order to reduce our
manufacturing costs, we have acquired a number of companies, and business units of other companies,
that manufacture optical components incorporated in our optical subsystem products and have
developed our own facilities for the final assembly and testing of our products. For example, we
design and manufacture many critical components including all of the short wavelength VCSEL lasers
incorporated in transceivers used for LAN/SAN applications at our wafer fabrication facility in
Allen, Texas and manufacture a portion of our internal requirements for longer wavelength lasers at
our wafer fabrication facility located in Fremont, California. We assemble and test most of our
transceiver products at our facility in Ipoh, Malaysia. As a result of this vertical integration,
we have become increasingly dependent on our internal production capabilities. The manufacture of
critical components, including the fabrication of wafers, and the assembly and testing of our
products, involve highly complex processes. For example, minute levels of contaminants in the
manufacturing environment, difficulties in the fabrication process or other factors can cause a
substantial portion of the components on a wafer to be nonfunctional. These problems may be
difficult to detect at an early stage of the manufacturing process and often are time-consuming and
expensive to correct. From time to time, we have experienced problems achieving acceptable yields
at our wafer fabrication facilities, resulting in delays in the availability of components.
Moreover, an increase in the rejection rate of products during the quality control process before,
during or after manufacture, results in lower yields and margins. In addition, changes in
manufacturing processes required as a result of changes in product specifications, changing
customer needs and the introduction of new product lines have historically caused significantly
reduced our manufacturing yields, resulting in low or negative margins on those products. Poor
manufacturing yields over a prolonged period of time could adversely affect our ability to deliver
our subsystem products to our customers and could also affect our sale of components to customers
in the merchant market. Our inability to supply components to meet our internal needs could harm
our relationships with customers and have an adverse effect on our business.
We may lose sales if our suppliers or independent contractors fail to meet our needs.
We currently purchase a number of key components used in the manufacture of our products from
single or limited sources, and we rely on several independent contract manufacturers to supply us
with certain key subassemblies, including printed circuit boards. We depend on these sources to
meet our production needs. Moreover, we depend on the quality of the components and subassemblies
that they supply to us, over which we have limited control. We have encountered shortages and
delays in obtaining components in the past and expect to encounter additional shortages and delays
in the future. If we cannot supply products due to a lack of components, or are unable to redesign
products with other components in a timely manner, our business will be significantly harmed. We
generally have no long-term contracts with any of our component suppliers or contract
manufacturers. As a result, a supplier or contract manufacturer can discontinue supplying
components or subassemblies to us without penalty. If a supplier were to discontinue supplying a
key component, our business may be harmed by the resulting product manufacturing and delivery
delays. We are also subject to potential delays in the development by our suppliers of key
components which may affect our ability to introduce new products. Similarly, disruptions in the
services provided by our contract manufacturers or the transition to other suppliers of these
services could lead to supply chain problems or delays in the delivery of our products. These
problems or delays could damage our relationships with our customers and adversely affect our
business.
We use rolling forecasts based on anticipated product orders to determine our component and
subassembly requirements. Lead times for materials and components that we order vary significantly
and depend on factors such as specific supplier requirements, contract terms and current market
demand for particular components. If we overestimate our component requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component requirements, we may
have inadequate inventory, which could interrupt our manufacturing and delay delivery of our
products to our customers. Any of these occurrences would significantly harm our business.
We are dependent on widespread market acceptance of our optical subsystems and components, and our
revenues will decline if the markets for these products do not expand as expected.
We currently derive a substantial majority of our revenue from sales of our optical subsystems
and components. We expect that revenue from these products will continue to account for a
substantial majority of our revenue for the foreseeable future. Accordingly, widespread acceptance
of these products is critical to our future success. If the market does not continue to accept our
optical subsystems and components, our revenues will decline significantly. Our future success
ultimately depends on the continued growth of the communications industry and, in particular, the
continued expansion of global information networks, particularly those directly or indirectly
dependent upon a fiber optics infrastructure. As part of that growth, we are relying on increasing
demand for voice, video and other data delivered over high-bandwidth network systems as well as
commitments by network systems vendors to invest in the expansion of the global information
network. As network usage and bandwidth demand increase, so does the need for advanced optical
networks to provide the required bandwidth. Without network and bandwidth growth, the need for
optical
subsystems and components, and hence our future growth as a manufacturer of these products,
and systems that test these products, will be jeopardized, and our business would be significantly
harmed.
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Many of these factors are beyond our control. In addition, in order to achieve widespread
market acceptance, we must differentiate ourselves from our competition through product offerings
and brand name recognition. We cannot assure you that we will be successful in making this
differentiation or achieving widespread acceptance of our products. Failure of our existing or
future products to maintain and achieve widespread levels of market acceptance will significantly
impair our revenue growth.
We depend on large purchases from a few significant customers, and any loss, cancellation,
reduction or delay in purchases by these customers could harm our business.
A small number of customers have consistently accounted for a significant portion of the
revenues of both Finisar and Optium. For example, sales to Finisars top five customers
represented 42% of Finisars revenues in fiscal 2008, and for the nine months ended July 28, 2007,
Optium generated 67% of its revenues from its four largest end customers. Our success will depend
on our continued ability to develop and manage relationships with significant customers. Although
we are attempting to expand our customer base, we expect that significant customer concentration
will continue for the foreseeable future. We may not be able to offset any decline in revenues
from our existing major customers with revenues from new customers and our quarterly results may be
volatile because we are dependent on large orders from these customers that may be reduced
or delayed.
The markets in which we have historically sold our optical subsystems and components products
are dominated by a relatively small number of systems manufacturers, thereby limiting the number of
our potential customers. Similarly, Optium has depended primarily on a limited number of major
carrier customers for the sale of its products in the telecommunications market. Recent
consolidation of Optiums customer base and the risk of further consolidation may have a material
adverse impact on our business. Our dependence on large orders from a relatively small number of
customers makes our relationship with each customer critically important to our business. We cannot
assure you that we will be able to retain our largest customers, that we will be able to attract
additional customers or that our customers will be successful in selling their products that
incorporate our products. We have in the past experienced delays and reductions in orders from some
of our major customers. In addition, our customers have in the past sought price concessions from
us, and we expect that they will continue to do so in the future. Cost reduction measures that we
have implemented over the past several years, and additional action we may take to reduce costs,
may adversely affect our ability to introduce new and improved products which may, in turn,
adversely affect our relationships with some of our key customers. Further, some of our customers
may in the future shift their purchases of products from us to our competitors or to joint ventures
between these customers and our competitors. The loss of one or more of our largest customers, any
reduction or delay in sales to these customers, our inability to successfully develop relationships
with additional customers or future price concessions that we may make could significantly harm our
business.
Because we do not have long-term contracts with our customers, our customers may cease purchasing
our products at any time if we fail to meet our customers needs.
Typically, we do not have long-term contracts with our customers. As a result, our agreements
with our customers do not provide any assurance of future sales. Accordingly:
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our customers can stop purchasing our products at any time without penalty; |
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our customers are free to purchase products from our competitors; and |
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our customers are not required to make minimum purchases. |
Sales are typically made pursuant to inventory hub arrangements under which customers may draw
down inventory to satisfy their demand as needed or pursuant to individual purchase orders, often
with extremely short lead times. If we are unable to fulfill these orders in a timely manner, it is
likely that we will lose sales and customers. If our major customers stop purchasing our products
for any reason, our business and results of operations would be harmed.
The markets for our products are subject to rapid technological change, and to compete effectively
we must continually introduce new products that achieve market acceptance.
The markets for our products are characterized by rapid technological change, frequent new
product introductions, substantial capital investment, changes in customer requirements and
evolving industry standards with respect to the protocols used in data communications,
telecommunications and cable TV networks. Our future performance will depend on the successful
development, introduction and market acceptance of new and enhanced products that address these
changes as well as current and potential customer requirements. For example, the market for
optical subsystems is currently characterized by a trend toward the adoption of pluggable modules
and subsystems that do not require customized interconnections and by the development of more
complex and
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integrated optical subsystems. We expect that new technologies will emerge as competition and
the need for higher and more cost-effective bandwidth increases. The introduction of new and
enhanced products may cause our customers to defer or cancel orders for existing products. In
addition, a slowdown in demand for existing products ahead of a new product introduction could
result in a write-down in the value of inventory on hand related to existing products. We have in
the past experienced a slowdown in demand for existing products and delays in new product
development and such delays may occur in the future. To the extent customers defer or cancel orders
for existing products due to a slowdown in demand or in the expectation of a new product release or
if there is any delay in development or introduction of our new products or enhancements of our
products, our operating results would suffer. We also may not be able to develop the underlying
core technologies necessary to create new products and enhancements, or to license these
technologies from third parties. Product development delays may result from numerous factors,
including:
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changing product specifications and customer requirements; |
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unanticipated engineering complexities; |
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expense reduction measures we have implemented, and others we may implement, to
conserve our cash and attempt to achieve and sustain profitability; |
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difficulties in hiring and retaining necessary technical personnel; |
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difficulties in reallocating engineering resources and overcoming resource
limitations; and |
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changing market or competitive product requirements. |
The development of new, technologically advanced products is a complex and uncertain process
requiring high levels of innovation and highly skilled engineering and development personnel, as
well as the accurate anticipation of technological and market trends. The introduction of new
products also requires significant investment to ramp up production capacity, for which benefit
will not be realized if customer demand does not develop as expected. Ramping of production
capacity also entails risks of delays which can limit our ability to realize the full benefit of
the new product introduction. We cannot assure you that we will be able to identify, develop,
manufacture, market or support new or enhanced products successfully, if at all, or on a timely
basis. Further, we cannot assure you that our new products will gain market acceptance or that we
will be able to respond effectively to product announcements by competitors, technological changes
or emerging industry standards. Any failure to respond to technological change would significantly
harm our business.
Continued competition in our markets may lead to a reduction in our prices, revenues and market
share.
The end markets for optical products have experienced significant industry consolidation
during the past few years while the industry that supplies these customers has not. As a result,
the markets for optical subsystems and components and network performance test systems are highly
competitive. Our current competitors include a number of domestic and international companies, many
of which have substantially greater financial, technical, marketing and distribution resources and
brand name recognition than we have. We may not be able to compete successfully against either
current or future competitors. Companies competing with us may introduce products that are
competitively priced, have increased performance or functionality, or incorporate technological
advances and may be able to react quicker to changing customer requirements and expectations.
There is also the risk that network systems vendors may re-enter the subsystem market and begin to
manufacture the optical subsystems incorporated in their network systems. Increased competition
could result in significant price erosion, reduced revenue, lower margins or loss of market share,
any of which would significantly harm our business. For optical subsystems, we compete primarily
with Avago Technologies, Capella Intelligent Subsystems, CoAdna Photonics, Emcore, Fujitsu Computer
Systems, JDS Uniphase, Opnext, Oplink, StrataLight Communications, Sumitomo, and a number of
smaller vendors. For network performance test systems, we compete primarily with Agilent
Technologies and LeCroy. BKtel, Emcore, Olson Technology and Yagi Antenna are our main competitors
with respect to our cable TV products. Our competitors continue to introduce improved products and
we will have to do the same to remain competitive.
Decreases in average selling prices of our products may reduce our gross margins.
The market for optical subsystems is characterized by declining average selling prices
resulting from factors such as increased competition, overcapacity, the introduction of new
products and increased unit volumes as manufacturers continue to deploy network and storage
systems. We have in the past experienced, and in the future may experience, substantial
period-to-period fluctuations in operating results due to declining average selling prices. We
anticipate that average selling prices will decrease in the future in response to product
introductions by competitors or us, or by other factors, including pricing pressures from
significant customers. Therefore, in order to achieve and sustain profitable operations, we must
continue to develop and introduce on a timely basis new products that incorporate features that can
be sold at higher average selling prices. Failure to do so could cause our revenues and gross
margins to decline, which would result in additional operating losses and significantly harm our
business.
We may be unable to reduce the cost of our products sufficiently to enable us to compete with
others. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures
and could adversely affect our margins. In order to remain competitive, we must continually reduce
the cost of manufacturing our products through design and engineering changes. We may not
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be successful in redesigning our products or delivering our products to market in a timely
manner. We cannot assure you that any redesign will result in sufficient cost reductions to allow
us to reduce the price of our products to remain competitive or improve our gross margins.
Shifts in our product mix may result in declines in gross margins.
Our gross profit margins vary among our product families, and are generally higher on our
network performance test systems than on our optical subsystems and components. Our optical
products sold for longer distance MAN and telecom applications typically have higher gross margins
than our products for shorter distance LAN or SAN applications. Gross margins on individual
products fluctuate over the products life cycle. Our overall gross margins have fluctuated from
period to period as a result of shifts in product mix, the introduction of new products, decreases
in average selling prices for older products and our ability to reduce product costs, and these
fluctuations are expected to continue in the future.
Our customers often evaluate our products for long and variable periods, which causes the timing
of our revenues and results of operations to be unpredictable.
The period of time between our initial contact with a customer and the receipt of an actual
purchase order may span a year or more. During this time, customers may perform, or require us to
perform, extensive and lengthy evaluation and testing of our products before purchasing and using
the products in their equipment. These products often take substantial time to develop because of
their complexity and because customer specifications sometimes change during the development cycle.
Our customers do not typically share information on the duration or magnitude of these
qualification procedures. The length of these qualification processes also may vary substantially
by product and customer, and, thus, cause our results of operations to be unpredictable. While our
potential customers are qualifying our products and before they place an order with us, we may
incur substantial research and development and sales and marketing expenses and expend significant
management effort. Even after incurring such costs we ultimately may not sell any products to such
potential customers. In addition, these qualification processes often make it difficult to obtain
new customers, as customers are reluctant to expend the resources necessary to qualify a new
supplier if they have one or more existing qualified sources. Once our products have been
qualified, the agreements that we enter into with our customers typically contain no minimum
purchase commitments. Failure of our customers to incorporate our products into their systems would
significantly harm our business.
We depend on facilities located outside of the United States to manufacture a substantial portion
of our products, which subjects us to additional risks.
In addition to our principal manufacturing facility in Malaysia, Finisar operates smaller
facilities in China and Singapore. As a result of the Optium merger, we now operate additional
facilities in Australia and Israel. We also rely on several contract manufacturers located in Asia
for our supply of key subassemblies. Each of these facilities and manufacturers subjects us to
additional risks associated with international manufacturing, including:
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unexpected changes in regulatory requirements; |
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legal uncertainties regarding liability, tariffs and other trade barriers; |
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inadequate protection of intellectual property in some countries; |
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greater incidence of shipping delays; |
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greater difficulty in overseeing manufacturing operations; |
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greater difficulty in hiring talent needed to oversee manufacturing operations; |
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potential political and economic instability; and |
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the outbreak of infectious diseases such as severe acute respiratory syndrome, or
SARS, which could result in travel restrictions or the closure of our facilities or
the facilities of our customers and suppliers. |
Any of these factors could significantly impair our ability to source our contract
manufacturing requirements internationally.
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Our future operating results may be subject to volatility as a result of exposure to foreign
exchange risks.
We are exposed to foreign exchange risks. Foreign currency fluctuations may affect both our
revenues and our costs and expenses and significantly affect our operating results. Prices for our
products are currently denominated in U.S. dollars for sales to our customers throughout the world.
If there is a significant devaluation of the currency in a specific country relative to the dollar,
the prices of our products will increase relative to that countrys currency, our products may be
less competitive in that country and our revenues may be adversely affected.
Although we price our products in U.S. dollars, portions of both our cost of revenues and
operating expenses are incurred in foreign currencies, principally the Malaysian ringit, the
Chinese yuan, the Australian dollar and the Israeli shekel. As a result, we bear the risk that the
rate of inflation in one or more countries will exceed the rate of the devaluation of that
countrys currency in relation to the U.S. dollar, which would increase our costs as expressed in
U.S. dollars. To date, we have not engaged in currency hedging transactions to decrease the risk of
financial exposure from fluctuations in foreign exchange rates.
Our business and future operating results are subject to a wide range of uncertainties arising out
of the continuing threat of terrorist attacks and ongoing military actions in the Middle East.
Like other U.S. companies, our business and operating results are subject to uncertainties
arising out of the continuing threat of terrorist attacks on the United States and ongoing military
actions in the Middle East, including the economic consequences of the war in Iraq or additional
terrorist activities and associated political instability, and the impact of heightened security
concerns on domestic and international travel and commerce. In particular, due to these
uncertainties we are subject to:
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increased risks related to the operations of our manufacturing facilities in
Malaysia; |
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greater risks of disruption in the operations of our China, Singapore, and
Israeli facilities and our Asian contract manufacturers and more frequent instances
of shipping delays; and |
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the risk that future tightening of immigration controls may adversely affect the
residence status of non-U.S. engineers and other key technical employees in our U.S.
facilities or our ability to hire new non-U.S. employees in such facilities. |
Past and future acquisitions could be difficult to integrate, disrupt our business, dilute
stockholder value and harm our operating results.
In addition to our recent combination with Optium, we have completed the acquisition of ten
privately-held companies and certain businesses and assets from six other companies since October
2000. We continue to review opportunities to acquire other businesses, product lines or
technologies that would complement our current products, expand the breadth of our markets or
enhance our technical capabilities, or that may otherwise offer growth opportunities, and we from
time to time make proposals and offers, and take other steps, to acquire businesses, products and
technologies.
The Optium merger and several of our other past acquisitions have been material, and
acquisitions that we may complete in the future may be material. In 13 of our 17 acquisitions, we
issued common stock or notes convertible into common stock as all or a portion of the
consideration. The issuance of common stock or other equity securities by us in any future
transaction would dilute our stockholders percentage ownership.
Other risks associated with acquiring the operations of other companies include:
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problems assimilating the purchased operations, technologies or products; |
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unanticipated costs associated with the acquisition; |
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diversion of managements attention from our core business; |
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adverse effects on existing business relationships with suppliers and customers; |
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risks associated with entering markets in which we have no or limited prior
experience; and |
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potential loss of key employees of purchased organizations. |
Not all of our past acquisitions have been successful. During fiscal 2003, we sold some of the
assets acquired in two prior acquisitions, discontinued a product line and closed one of our
acquired facilities. As a result of these activities, we incurred significant restructuring charges
and charges for the write-down of assets associated with those acquisitions. We cannot assure you
that we will be successful in overcoming problems encountered in connection with future
acquisitions, and our inability to do so could significantly harm our business. In addition, to the
extent that the economic benefits associated with any of our acquisitions diminish in the future,
we may be required to record additional write downs of goodwill, intangible assets or other assets
associated with such acquisitions, which would adversely affect our operating results.
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We have made and may continue to make strategic investments which may not be successful, may
result in the loss of all or part of our invested capital and may adversely affect our operating
results.
Through fiscal 2008, we made minority equity investments in early-stage technology companies,
totaling approximately $55 million. Our investments in these early stage companies were primarily
motivated by our desire to gain early access to new technology. We intend to review additional
opportunities to make strategic equity investments in pre-public companies where we believe such
investments will provide us with opportunities to gain access to important technologies or
otherwise enhance important commercial relationships. We have little or no influence over the
early-stage companies in which we have made or may make these strategic, minority equity
investments. Each of these investments in pre-public companies involves a high degree of risk. We
may not be successful in achieving the financial, technological or commercial advantage upon which
any given investment is premised, and failure by the early-stage company to achieve its own
business objectives or to raise capital needed on acceptable economic terms could result in a loss
of all or part of our invested capital. In fiscal 2003, we wrote off $12.0 million in two
investments which became impaired. In fiscal 2004, we wrote off $1.6 million in two additional
investments, and in fiscal 2005, we wrote off $10.0 million in another investment. During fiscal
2006, we reclassified $4.2 million of an investment associated with the Infineon acquisition to
goodwill as the investment was deemed to have no value. We may be required to write off all or a
portion of the $14.3 million in such investments remaining on our balance sheet as of August 3,
2008 in future periods.
We will lose sales if we are unable to obtain government authorization to export certain of our
products, and we would be subject to legal and regulatory consequences if we do not comply with
applicable export control laws and regulations.
Exports of certain of our products are subject to export controls imposed by the
U.S. Government and administered by the U.S. Departments of State and Commerce. In certain
instances, these regulations may require pre-shipment authorization from the administering
department. For products subject to the Export Administration Regulations, or EAR, administered by
the Department of Commerces Bureau of Industry and Security, the requirement for a license is
dependent on the type and end use of the product, the final destination, the identity of the end
user and whether a license exception might apply. Virtually all exports of products subject to the
International Traffic in Arms Regulations, or ITAR, administered by the Department of States
Directorate of Defense Trade Controls, require a license. Certain of our fiber optics products are
subject to EAR and certain of our RF over fiber products, as well as certain products developed
with government funding, are currently subject to ITAR.
Given the current global political climate, obtaining export licenses can be difficult and
time-consuming. Failure to obtain export licenses for these shipments could significantly reduce
our revenue and materially adversely affect our business, financial condition and results of
operations. Compliance with U.S. Government regulations may also subject us to additional fees and
costs. The absence of comparable restrictions on competitors in other countries may adversely
affect our competitive position.
During mid-2007, Optium became aware that certain of its analog RF over fiber products may,
depending on end use and customization, be subject to ITAR. Accordingly, Optium filed a detailed
voluntary disclosure with the United States Department of State, describing the details of possible
inadvertent ITAR violations with respect to the export of a limited number of certain prototype
products, and related technical data and defense services. Optium may have also made unauthorized
transfers of ITAR-restricted technical data and defense services to foreign persons in the
workplace. Optium has provided additional information upon request to the Department of State with
respect to this matter. The Department of State encourages voluntary disclosures and generally
affords parties mitigating credit under such circumstances. We nevertheless could be subject to
continued investigation and potential regulatory consequences related to these possible violations
ranging from a no-action letter, government oversight of facilities and export transactions,
monetary penalties, and in extreme cases, debarment from government contracting, denial of export
privileges and criminal sanctions.
We are subject to other pending legal proceedings.
A securities class action lawsuit was filed on November 30, 2001 in the United States District
Court for the Southern District of New York, purportedly on behalf of all persons who purchased our
common stock from November 17, 1999 through December 6, 2000. The complaint named as defendants
Finisar, certain of our current and former officers, and an investment banking firm that served as
an underwriter for our initial public offering in November 1999 and a secondary offering in April
2000. The complaint, as subsequently amended, alleges violations of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(b) of the Securities Exchange Act of 1934. No
specific damages are claimed. Similar allegations have been made in lawsuits relating to more than
300 other initial public offerings conducted in 1999 and 2000, which were consolidated for pretrial
purposes. In October 2002, all claims against the individual defendants were dismissed without
prejudice. On February 19, 2003, the Court denied defendants motion to dismiss the complaint. In
July 2004, we and the individual defendants accepted a settlement proposal made to all of the
issuer defendants. Under the terms of the settlement, the plaintiffs would dismiss and release all
claims against participating defendants in exchange for a contingent payment guaranty by the
insurance companies collectively responsible for insuring the issuers in all related cases, and the
assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against
the underwriters. Under the guaranty, the insurers would be required to pay the amount, if any, by
which $1 billion exceeds the aggregate
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amount ultimately collected by the plaintiffs from the underwriter defendants in all the
cases. If the plaintiffs fail to recover $1 billion and payment is required under the guaranty, we
would be responsible to pay our pro rata portion of the shortfall, up to the amount of the
self-insured retention under our insurance policy, which may be up to $2 million. The timing and
amount of payments that we could be required to make under the proposed settlement would depend on
several factors, principally the timing and amount of any payment that the insurers may be required
to make pursuant to the $1 billion guaranty. While the court was considering final approval of the
settlement, the Second Circuit Court of Appeals vacated the class certification of plaintiffs
claims against the underwriters in six cases designated as focus or test cases. All proceedings in
all of the lawsuits have been stayed. After several months of considering the impact of the Court
of Appeals ruling, the parties have officially withdrawn the settlement. There is no assurance that
the settlement will be amended or renegotiated and then approved. If the settlement is not amended
or renegotiated and subsequently approved by the Court, we intend to defend the lawsuit vigorously.
Because of the inherent uncertainty of litigation, however, we cannot predict its outcome. If, as a
result of this dispute, we are required to pay significant monetary damages, our business would be
substantially harmed.
We have been named as a nominal defendant in several purported shareholder derivative lawsuits
concerning the granting of stock options. These cases have been consolidated into two proceedings
pending in federal and state courts in California. The plaintiffs in all of these cases have
alleged that certain current or former officers and directors of Finisar caused it to grant stock
options at less than fair market value, contrary to our public statements (including statements in
our financial statements), and that, as a result, those officers and directors are liable to
Finisar. No specific amount of damages has been alleged and, by the nature of the lawsuits no
damages will be alleged, against Finisar. On May 22, 2007, the state court granted our motion to
stay the state court action pending resolution of the consolidated federal court action. On
August 28, 2007, we and the individual defendants filed motions to dismiss the complaint which were
granted on January 11, 2008. On May 12, 2008, the plaintiffs filed a further amended complaint in
the federal court action. On July 1, 2008, we and the individual defendants filed motions to
dismiss the amended complaint. We cannot predict whether these actions are likely to result in any
material recovery by, or expense to, us. We expect to continue to incur legal fees in responding to
these lawsuits, including expenses for the reimbursement of legal fees of present and former
officers and directors under indemnification obligations. The expense of defending such litigation
may be significant. The amount of time to resolve these and any additional lawsuits is
unpredictable and these actions may divert managements attention from the day-to-day operations of
our business, which could adversely affect our business, results of operations and cash flows.
Because of competition for technical personnel, we may not be able to recruit or retain necessary
personnel.
We believe our future success will depend in large part upon our ability to attract and retain
highly skilled managerial, technical, sales and marketing, finance and manufacturing personnel. In
particular, we may need to increase the number of technical staff members with experience in
high-speed networking applications as we further develop our product lines. Competition for these
highly skilled employees in our industry is intense. In making employment decisions, particularly
in the high-technology industries, job candidates often consider the value of the equity they are
to receive in connection with their employment. Therefore, significant volatility in the price of
our common stock may adversely affect our ability to attract or retain technical personnel.
Furthermore, changes to accounting principles generally accepted in the United States relating to
the expensing of stock options may limit our ability to grant the sizes or types of stock awards
that job candidates may require to accept employment with us. Our failure to attract and retain
these qualified employees could significantly harm our business. The loss of the services of any of
our qualified employees, the inability to attract or retain qualified personnel in the future or
delays in hiring required personnel could hinder the development and introduction of and negatively
impact our ability to sell our products. In addition, employees may leave our company and
subsequently compete against us. Moreover, companies in our industry whose employees accept
positions with competitors frequently claim that their competitors have engaged in unfair hiring
practices. We have been subject to claims of this type and may be subject to such claims in the
future as we seek to hire qualified personnel. Some of these claims may result in material
litigation. We could incur substantial costs in defending ourselves against these claims,
regardless of their merits.
Our failure to protect our intellectual property may significantly harm our business.
Our success and ability to compete is dependent in part on our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality
agreements to establish and protect our proprietary rights. We license certain of our proprietary
technology, including our digital diagnostics technology, to customers who include current and
potential competitors, and we rely largely on provisions of our licensing agreements to protect our
intellectual property rights in this technology. Although a number of patents have been issued to
us, we have obtained a number of other patents as a result of our acquisitions, and we have filed
applications for additional patents, we cannot assure you that any patents will issue as a result
of pending patent applications or that our issued patents will be upheld. Additionally,
significant technology used in the product lines obtained as a result of the Optium merger is not
the subject of any patent protection, and we may be unable to obtain patent protection on such
technology in the future. Any infringement of our proprietary rights could result in significant
litigation costs, and any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in loss of a competitive advantage and
decreased revenues. Despite our efforts to protect our proprietary rights, existing patent,
copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of
some foreign countries do not protect our
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proprietary rights to the same extent as do the laws of the United States. Attempts may be
made to copy or reverse engineer aspects of our products or to obtain and use information that we
regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our
technology or deter others from developing similar technology. Furthermore, policing the
unauthorized use of our products is difficult and expensive. We are currently engaged in pending
litigation to enforce certain of our patents, and additional litigation may be necessary in the
future to enforce our intellectual property rights or to determine the validity and scope of the
proprietary rights of others. In connection with the pending litigation, substantial management
time has been, and will continue to be, expended. In addition, we have incurred, and we expect to
continue to incur, substantial legal expenses in connection with these pending lawsuits. These
costs and this diversion of resources could significantly harm our business.
Claims that we infringe third-party intellectual property rights could result in significant
expenses or restrictions on our ability to sell our products.
The networking industry is characterized by the existence of a large number of patents and
frequent litigation based on allegations of patent infringement. We have been involved in the past
as a defendant in patent infringement lawsuits, and are currently defending a patent infringement
lawsuit filed against Optium by JDS Uniphase Corporation and EMCORE Corporation. From time to
time, other parties may assert patent, copyright, trademark and other intellectual property rights
to technologies and in various jurisdictions that are important to our business. Any claims
asserting that our products infringe or may infringe proprietary rights of third parties, if
determined adversely to us, could significantly harm our business. Any claims, with or without
merit, could be time-consuming, result in costly litigation, divert the efforts of our technical
and management personnel, cause product shipment delays or require us to enter into royalty or
licensing agreements, any of which could significantly harm our business. In addition, our
agreements with our customers typically require us to indemnify our customers from any expense or
liability resulting from claimed infringement of third party intellectual property rights. In the
event a claim against us was successful and we could not obtain a license to the relevant
technology on acceptable terms or license a substitute technology or redesign our products to avoid
infringement, our business would be significantly harmed.
Numerous patents in our industry are held by others, including academic institutions and
competitors. Optical subsystem suppliers may seek to gain a competitive advantage or other third
parties may seek an economic return on their intellectual property portfolios by making
infringement claims against us. In the future, we may need to obtain license rights to patents or
other intellectual property held by others to the extent necessary for our business. Unless we are
able to obtain those licenses on commercially reasonable terms, patents or other intellectual
property held by others could inhibit our development of new products. Licenses granting us the
right to use third party technology may not be available on commercially reasonable terms, if at
all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties
or both. These payments or other terms could have a significant adverse impact on our operating
results.
Our products may contain defects that may cause us to incur significant costs, divert our
attention from product development efforts and result in a loss of customers.
Our products are complex and defects may be found from time to time. Networking products
frequently contain undetected software or hardware defects when first introduced or as new versions
are released. In addition, our products are often embedded in or deployed in conjunction with our
customers products which incorporate a variety of components produced by third parties. As a
result, when problems occur, it may be difficult to identify the source of the problem. These
problems may cause us to incur significant damages or warranty and repair costs, divert the
attention of our engineering personnel from our product development efforts and cause significant
customer relation problems or loss of customers, all of which would harm our business.
Our business and future operating results may be adversely affected by events outside our control.
Our business and operating results are vulnerable to events outside of our control, such as
earthquakes, fire, power loss, telecommunications failures and uncertainties arising out of
terrorist attacks in the United States and overseas. Our corporate headquarters and a portion of
our manufacturing operations are located in California. California in particular has been
vulnerable to natural disasters, such as earthquakes, fires and floods, and other risks which at
times have disrupted the local economy and posed physical risks to our property. We are also
dependent on communications links with our overseas manufacturing locations and would be
significantly harmed if these links were interrupted for any significant length of time. We
presently do not have adequate redundant, multiple site capacity if any of these events were to
occur, nor can we be certain that the insurance we maintain against these events would be adequate.
The conversion of our outstanding convertible subordinated notes would result in substantial
dilution to our current stockholders.
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We currently have outstanding 51/4% convertible subordinated notes due 2008 in the
principal amount of $92 million, 21/2% convertible senior subordinated notes due 2010 in
the principal amount of $100 million, and 21/2% convertible subordinated notes due
2010 in the principal amount of $50 million. The 51/4% notes are convertible, at
the option of the holder, at any time on or prior to maturity into shares of our common stock at a
conversion price of $5.52 per share. The $50 million in principal amount of our 21/2%
notes are convertible, at the option of the holder, at any time on or prior to maturity into shares
of our common stock at a conversion price of $3.705 per share. The $100 million in principal amount
of our 21/2% senior notes are convertible at a conversion price of $3.28, with the
underlying principal payable in cash, upon the trading price of our common stock reaching $4.92 for
a period of time. It is presently our intent to pay off the remaining balance of our 5.25%
convertible notes in October 2008 with cash. .However, an aggregate of approximately 23,660,000
shares of common stock would be issued upon the conversion of all other outstanding convertible
subordinated notes at these exchange rates, which would dilute the voting power and ownership
percentage of our existing stockholders. We have previously entered into privately negotiated
transactions with certain holders of our convertible subordinated notes for the repurchase of notes
in exchange for a greater number of shares of our common stock than would have been issued had the
principal amount of the notes been converted at the original conversion rate specified in the
notes, thus resulting in more dilution. Although we do not currently have any plans to enter into
similar transactions in the future, if we were to do so there would be additional dilution to the
voting power and percentage ownership of our existing stockholders.
Delaware law, our charter documents and our stockholder rights plan contain provisions that could
discourage or prevent a potential takeover, even if such a transaction would be beneficial to our
stockholders.
Some provisions of our certificate of incorporation and bylaws, as well as provisions of
Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These include provisions:
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authorizing the board of directors to issue additional preferred stock; |
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prohibiting cumulative voting in the election of directors; |
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limiting the persons who may call special meetings of stockholders; |
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prohibiting stockholder actions by written consent; |
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creating a classified board of directors pursuant to which our directors are
elected for staggered three-year terms; |
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permitting the board of directors to increase the size of the board and to fill
vacancies; |
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requiring a super-majority vote of our stockholders to amend our bylaws and
certain provisions of our certificate of incorporation; and |
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establishing advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted on by stockholders at
stockholder meetings. |
We are subject to the provisions of Section 203 of the Delaware General Corporation Law which
limit the right of a corporation to engage in a business combination with a holder of 15% or more
of the corporations outstanding voting securities, or certain affiliated persons.
In addition, in September 2002, our board of directors adopted a stockholder rights plan under
which our stockholders received one share purchase right for each share of our common stock held by
them. Subject to certain exceptions, the rights become exercisable when a person or group (other
than certain exempt persons) acquires, or announces its intention to commence a tender or exchange
offer upon completion of which such person or group would acquire, 20% or more of our common stock
without prior board approval. Should such an event occur, then, unless the rights are redeemed or
have expired, our stockholders, other than the acquirer, will be entitled to purchase shares of our
common stock at a 50% discount from its then-Current Market Price (as defined) or, in the case of
certain business combinations, purchase the common stock of the acquirer at a 50% discount.
Although we believe that these charter and bylaw provisions, provisions of Delaware law and
our stockholder rights plan provide an opportunity for the board to assure that our stockholders
realize full value for their investment, they could have the effect of delaying or preventing a
change of control, even under circumstances that some stockholders may consider beneficial.
We do not currently intend to pay dividends on Finisar common stock and, consequently, a
stockholders ability to achieve a return on such stockholders investment will depend on
appreciation in the price of the common stock.
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We have never declared or paid any cash dividends on Finisar common stock and we do not
currently intend to do so for the foreseeable future. We currently intend to invest our future
earnings, if any, to fund our growth. Therefore, a stockholder is not likely to receive any
dividends on such stockholders common stock for the foreseeable future.
Our stock price has been and is likely to continue to be volatile.
The trading price of our common stock has been and is likely to continue to be subject to
large fluctuations. Our stock price may increase or decrease in response to a number of events and
factors, including:
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trends in our industry and the markets in which we operate; |
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changes in the market price of the products we sell; |
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changes in financial estimates and recommendations by securities analysts; |
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acquisitions and financings; |
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quarterly variations in our operating results; |
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the operating and stock price performance of other companies that investors in
our common stock may deem comparable; and |
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purchases or sales of blocks of our common stock. |
Part of this volatility is attributable to the current state of the stock market, in which
wide price swings are common. This volatility may adversely affect the prices of our common stock
regardless of our operating performance. If any of the foregoing occurs, our stock price could
fall and we may be exposed to class action lawsuits that, even if unsuccessful, could be costly to
defend and a distraction to management.
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Item 6. Exhibits
The following exhibits are filed herewith:
31.1 |
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
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31.2 |
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Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
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32.1 |
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Certification of Chief Executive Officer Pursuant to 18 U.S.C.Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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FINISAR CORPORATION
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By: |
/s/ JERRY S. RAWLS
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Jerry S. Rawls |
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Chairman of the Board |
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By: |
/s/ STEPHEN K. WORKMAN
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Stephen K. Workman |
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Senior Vice President, Finance and Chief Financial Officer |
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Dated: September 12, 2008
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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31.1
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
50