e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended July 29, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-27999
Finisar Corporation
(Exact name of Registrant as specified in its charter)
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Delaware
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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.) |
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 o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
At November 30, 2007, there were 308,634,829 shares of the registrants common stock, $.001
par value, issued and outstanding.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended July 29, 2007
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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July 29, |
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April 30, |
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2007 |
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2007 |
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(in thousands, except per share data) |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
52,090 |
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$ |
56,106 |
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Short-term investments |
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59,910 |
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56,511 |
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Restricted investments, short-term |
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625 |
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625 |
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Accounts receivable, net of allowance for doubtful accounts of $1,282 and $1,607 at
July 29, 2007 and April 30, 2007 |
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58,434 |
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55,969 |
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Accounts receivable, other |
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4,724 |
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7,752 |
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Inventories |
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77,351 |
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77,670 |
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Prepaid expenses |
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4,352 |
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4,553 |
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Total current assets |
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257,486 |
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259,186 |
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Long-term investments |
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17,285 |
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19,855 |
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Property, plant and improvements, net |
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84,325 |
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84,071 |
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Purchased technology, net |
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16,622 |
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18,351 |
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Other purchased intangible assets, net |
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5,157 |
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5,647 |
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Goodwill, net |
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128,949 |
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128,949 |
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Minority investments |
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11,250 |
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11,250 |
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Other assets |
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19,832 |
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19,363 |
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Total assets |
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$ |
540,906 |
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$ |
546,672 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
32,825 |
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$ |
40,187 |
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Accrued compensation |
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12,977 |
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10,550 |
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Other accrued liabilities |
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15,287 |
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12,590 |
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Deferred revenue |
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5,864 |
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5,473 |
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Current portion of other long-term liabilities |
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2,299 |
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2,255 |
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Convertible notes |
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66,950 |
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66,950 |
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Non-cancelable purchase obligations |
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2,676 |
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2,798 |
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Total current liabilities |
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138,878 |
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140,803 |
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Long-term liabilities: |
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Convertible notes, net of beneficial conversion feature of $5,988 and $7,184 at
July 29, 2007 and April 30, 2007 |
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194,262 |
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193,066 |
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Other long-term liabilities |
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20,346 |
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21,042 |
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Deferred income taxes |
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6,634 |
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6,090 |
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Total long-term liabilities |
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221,242 |
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220,198 |
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Commitments and contingent liabilities |
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Stockholders equity: |
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Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and
outstanding at July 29, 2007 and April 30, 2007 |
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Common stock, $0.001 par value, 750,000,000 shares authorized, 308,634,829 shares
issued and outstanding at July 29, 2007 and 308,632,366 shares issued and
outstanding at April 30, 2007 |
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309 |
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309 |
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Additional paid-in capital |
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1,532,068 |
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1,529,322 |
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Accumulated other comprehensive income |
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10,852 |
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11,162 |
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Accumulated deficit |
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(1,362,443 |
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(1,355,122 |
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Total stockholders equity |
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180,786 |
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185,671 |
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Total liabilities and stockholders equity |
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$ |
540,906 |
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$ |
546,672 |
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See accompanying notes
3
FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended |
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July 29, |
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July 30, |
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2007 |
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2006 |
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(Unaudited, in thousands, |
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except share and per share data) |
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Revenues: |
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Optical subsystems and components |
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$ |
96,360 |
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$ |
96,043 |
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Network test and monitoring systems |
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9,375 |
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10,200 |
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Total revenues |
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105,735 |
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106,243 |
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Cost of revenues |
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71,703 |
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70,721 |
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Amortization of acquired developed technology |
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1,729 |
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1,519 |
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Gross profit |
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32,303 |
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34,003 |
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Operating expenses: |
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Research and development |
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17,502 |
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14,395 |
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Sales and marketing |
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10,056 |
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8,834 |
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General and administrative |
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7,991 |
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7,514 |
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Amortization of purchased intangibles |
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490 |
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299 |
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Total operating expenses |
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36,039 |
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31,042 |
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Income (loss) from operations |
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(3,736 |
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2,961 |
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Interest income |
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1,415 |
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1,255 |
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Interest expense |
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(4,246 |
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(3,921 |
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Other expense |
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(133 |
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(370 |
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Loss before income taxes and cumulative effect of change in accounting principle |
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(6,700 |
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(75 |
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Provision for income taxes |
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621 |
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631 |
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Loss before cumulative effect of change in accounting principle |
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(7,321 |
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(706 |
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Cumulative effect of change in accounting principle |
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(1,213 |
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Net income (loss) |
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$ |
(7,321 |
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$ |
507 |
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Net income (loss) per share basic: |
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Before effect of adoption of change in accounting principle |
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$ |
(0.02 |
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$ |
0.00 |
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Cumulative effect of change in accounting principle |
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$ |
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$ |
0.00 |
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Net income (loss) |
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$ |
(0.02 |
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$ |
0.00 |
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Net income (loss) per share diluted: |
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Before effect of adoption of change in accounting principle |
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$ |
(0.02 |
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$ |
0.00 |
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Cumulative effect of change in accounting principle |
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$ |
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$ |
0.00 |
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Net income (loss) |
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$ |
(0.02 |
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$ |
0.00 |
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Shares used in computing net loss per share basic |
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308,634 |
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306,499 |
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Shares used in computing net loss per share diluted |
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308,634 |
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323,845 |
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See accompanying notes.
4
FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended |
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July 29, |
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July 30, |
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2007 |
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2006 |
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(Unaudited, in thousands) |
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Operating activities |
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Net income (loss) |
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$ |
(7,321 |
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$ |
507 |
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Adjustments
to reconcile net (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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6,815 |
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6,708 |
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Stock-based compensation expense |
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2,759 |
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3,447 |
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Amortization of beneficial conversion feature of convertible notes |
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1,196 |
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1,148 |
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Amortization of purchased intangibles |
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490 |
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299 |
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Amortization of acquired developed technology |
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1,729 |
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1,519 |
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Amortization of discount on restricted securities |
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(11 |
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(32 |
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Gain on sale or retirement of equipment |
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52 |
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39 |
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Share of losses of equity investee |
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237 |
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(Gain) loss on sale of equity investment |
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(117 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(2,465 |
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(8,184 |
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Inventories |
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(101 |
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694 |
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Other assets |
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1,913 |
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(1,171 |
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Deferred income taxes |
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544 |
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544 |
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Accounts payable |
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(7,362 |
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1,310 |
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Accrued compensation |
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2,427 |
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798 |
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Other accrued liabilities |
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2,594 |
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276 |
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Deferred revenue |
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391 |
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345 |
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Net cash provided by operating activities |
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3,533 |
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8,484 |
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Investing activities |
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Purchases of property, equipment and improvements |
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(6,010 |
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(6,117 |
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Proceeds from sale of property and equipment |
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39 |
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35 |
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Sale (purchase) of short-term and long-term investments |
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(1,352 |
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(3,386 |
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Proceeds from sale of equity investment |
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323 |
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Net cash used in investing activities |
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(7,000 |
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(9,468 |
) |
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Financing activities |
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Repayments of liability related to sale-leaseback of building |
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(86 |
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(70 |
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Repayments of borrowings |
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(463 |
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(527 |
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Proceeds from exercise of stock options and employee stock purchase plan |
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1,692 |
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Net cash provided by (used in) financing activities |
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(549 |
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1,095 |
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Net increase (decrease) in cash and cash equivalents |
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(4,016 |
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111 |
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Cash and cash equivalents at beginning of period |
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56,106 |
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63,361 |
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Cash and cash equivalents at end of period |
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$ |
52,090 |
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$ |
63,472 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
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$ |
109 |
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$ |
177 |
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Cash paid for taxes |
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$ |
149 |
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$ |
48 |
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See accompanying notes.
5
FINISAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
Finisar Corporation is a leading provider of optical subsystems and components that connect
local area networks, or LANs, storage area networks, or SANs, and metropolitan area networks, or
MANs. Our optical subsystems consist primarily of transceivers which provide the fundamental
optical-electrical interface for connecting the equipment used in building these networks. These
products rely on the use of digital semiconductor lasers in conjunction with integrated circuit
design and novel packaging technology to provide a cost-effective means for transmitting and
receiving digital signals over fiber optic cable using a wide range of network protocols,
transmission speeds and physical configurations over distances of 70 meters to 200 kilometers. Our
line of optical components consists primarily of packaged lasers and photodetectors used in
transceivers, primarily for LAN and SAN applications. Our manufacturing operations are vertically
integrated and include internal manufacturing, assembly and test capability. We sell our optical
subsystem and component products to manufacturers of storage and networking equipment such as
Brocade, Cisco Systems, EMC, Emulex, Hewlett-Packard Company, Huawei and Qlogic.
We also provide network performance test and monitoring systems to original equipment
manufacturers for testing and validating equipment designs and, to a lesser degree, to operators of
networking and storage data centers for testing, monitoring and troubleshooting the performance of
their installed systems. We sell these products primarily to leading storage equipment
manufacturers such as Brocade, EMC, Emulex, Hewlett-Packard Company, IBM and Qlogic.
Finisar Corporation was incorporated in California in April 1987 and reincorporated in
Delaware in November 1999. Finisars principal executive offices are located at 1389 Moffett Park
Drive, Sunnyvale, California 94089, and its telephone number at that location is (408) 548-1000.
2. Summary of Significant Accounting Policies
Interim Financial Information and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of July 29, 2007 and
July 30, 2006, and for the three month periods ended July 29, 2007 and July 30, 2006, have been
prepared in accordance with U.S generally accepted accounting principles for interim financial
statements and pursuant to the rules and regulations of the Securities and Exchange Commission, and
include the accounts of Finisar Corporation and its wholly-owned subsidiaries (collectively,
Finisar or the Company). Inter-company accounts and transactions have been eliminated in
consolidation. Certain information and footnote disclosures normally included in annual financial
statements prepared in accordance with U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of management, the
unaudited condensed consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the Companys financial position
at July 29, 2007 and July 30, 2006 and its operating results and cash flows for the three month
periods ended July 29, 2007 and July 30, 2006. These unaudited condensed consolidated financial
statements should be read in conjunction with the Companys audited financial statements and notes
for the fiscal year ended April 30, 2007.
Fiscal Periods
The Company maintains its financial records on the basis of a fiscal year ending on April 30,
with fiscal quarters ending on the Sunday closest to the end of the period (thirteen-week periods).
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from these
estimates.
Stock-Based
Compensation Expense
The Company accounts for stock-based compensation in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123R) which requires the
measurement and recognition of compensation expense for all stock-based payment awards made to
employees and directors including employee stock options and employee stock purchases
6
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 statement of operations.
Stock-based compensation expense recognized in the Companys condensed consolidated statement
of operations for the three months ended July 29, 2007 and July 30, 2006 included compensation
expense for stock-based payment awards granted prior to, but not yet vested as of the adoption of
SFAS 123R, based on the grant date fair value estimated in accordance with the provisions of SFAS
123 and compensation expense for the stock-based payment awards granted subsequent to April 30,
2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
Compensation expense for expected-to-vest stock-based awards that were granted on or prior to
April 30, 2006 was valued under the multiple-option approach and will continue to be amortized
using the accelerated attribution method. Subsequent to April 30, 2006, compensation expense for
expected-to-vest stock-based awards is valued under the single-option approach and amortized on a
straight-line basis, net of estimated forfeitures.
Revenue Recognition
The Companys revenue transactions consist 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
Statement of Financial Accounting Standards (SFAS) No. 131 Disclosures about Segments of an
Enterprise and Related Information establishes standards for the way that public business
enterprises report information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it operates in two segments
consisting of optical subsystems and components and network test and monitoring systems.
Concentrations of Credit Risk
Financial instruments which potentially subject Finisar to concentrations of credit risk
include cash, cash equivalents, available-for-sale and restricted investments and accounts
receivable. Finisar places its cash, cash equivalents, available-for-sale and restricted
7
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,
Finisar does not require collateral or other security to support customer receivables. Finisar
performs periodic credit evaluations of its customers and maintains an allowance for potential
credit losses based on historical experience and other information available to management. Losses
to date have not been material. The Companys five largest customers represented 43.5% and 33.3% of
total accounts receivable at July 29, 2007 and April 30, 2007, respectively.
Current Vulnerabilities Due to Certain Concentrations
Finisar sells products primarily to customers located in North America. During the three
months ended July 29, 2007 and July 30, 2006, sales to the top five optical subsystems and
components customers represented 45.2% and 43.8% 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 July 29, 2007, are the net
assets of the Companys manufacturing operations, substantially all of which are located in
Malaysia and which total approximately $60.6 million.
Foreign Currency Translation
The functional currency of the Companys foreign subsidiaries is the local currency. Assets
and liabilities denominated in foreign currencies are translated using the exchange rate on the
balance sheet dates. Revenues and expenses are translated using average exchange rates prevailing
during the year. Any translation adjustments resulting from this process are shown separately as a
component of accumulated other comprehensive income. Foreign currency transaction gains and losses
are included in the determination of net loss.
Research and Development
Research and development expenditures are charged to operations as incurred.
Advertising Costs
Advertising costs are expensed as incurred. Advertising is used infrequently in marketing the
Companys products. Advertising costs were $13,000 and $8,500 in the three months ended July 29,
2007 and July 30, 2006, respectively.
Shipping and Handling Costs
The Company records costs related to shipping and handling in cost of sales for all periods
presented.
Cash and Cash Equivalents
Finisars cash equivalents consist of money market funds and highly liquid short-term
investments with qualified financial institutions. Finisar considers all highly liquid investments
with an original maturity from the date of purchase of three months or less to be cash equivalents.
Investments
Available-for-Sale
Available-for-sale investments consist of interest bearing securities with maturities of
greater than three months from the date of purchase and equity securities. Pursuant to SFAS No. 115
Accounting for Certain Investments in Debt and Equity Securities, the Company has classified its
investments as available-for-sale. Available-for-sale securities are stated at market value, which
approximates fair value, and unrealized holding gains and losses, net of the related tax effect,
are excluded from earnings and are reported as a separate component of accumulated other
comprehensive income until realized. A decline in the market value of the security below cost that
is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost
basis for the security.
Restricted Investments
Restricted investments consist of interest bearing securities with maturities of greater than
three months from the date of purchase and investments held in escrow under the terms of the
Companys convertible subordinated notes. In accordance with SFAS 115, the Company has classified
its restricted investments as held-to-maturity. Held-to-maturity securities are stated at amortized
cost.
8
Other
The Company uses the cost method of accounting for investments in companies that do not have a
readily determinable fair value in which it holds an interest of less than 20% and over which it
does not have the ability to exercise significant influence. For entities in which the Company
holds an interest of greater than 20% or in which the Company does have the ability to exercise
significant influence, the Company uses the equity method. In determining if and when a decline in
the market value of these investments below their carrying value is other-than-temporary, the
Company evaluates the market conditions, offering prices, trends of earnings and cash flows, price
multiples, prospects for liquidity and other key measures of performance. The Companys policy is
to recognize an impairment in the value of its minority equity investments when clear evidence of
an impairment exists, such as (a) the completion of a new equity financing that may indicate a new
value for the investment, (b) the failure to complete a new equity financing arrangement after
seeking to raise additional funds or (c) the commencement of proceedings under which the assets of
the business may be placed in receivership or liquidated to satisfy the claims of debt and equity
stakeholders. The Companys minority investments in private companies are generally made in
exchange for preferred stock with a liquidation preference that is intended to help protect the
underlying value of its investment.
Fair Value of Financial Instruments
The carrying amounts of certain of the Companys financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued
liabilities, approximate fair value because of their short maturities. As of July 29, 2007 and
April 30, 2007, the fair value of the Companys convertible subordinated debt was approximately
$276.7 million and $285.2 million, respectively.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or
market.
The Company permanently writes down the cost of inventory that the Company specifically
identifies and considers obsolete or excessive to fulfill future sales estimates. The Company
defines obsolete inventory as inventory that will no longer be used in the manufacturing process.
Excess inventory is generally defined as inventory in excess of projected usage and is determined
using managements best estimate of future demand, based upon information then available to the
Company. The Company also considers: (1) parts and subassemblies that can be used in alternative
finished products, (2) parts and subassemblies that are likely to be engineered out of the
Companys products, and (3) known design changes which would reduce the Companys ability to use
the inventory as planned.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Property and equipment are depreciated on a straight-line basis over the estimated useful lives of
the assets, generally three years to seven years except for buildings, which are depreciated over
40 years. Land is carried at acquisition cost and not depreciated. Leased land costs are
depreciated over the life of the lease.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets result from acquisitions accounted for under the purchase
method. Amortization of intangibles has been provided on a straight-line basis over periods ranging
from one to nine years. The amortization of goodwill ceased with the adoption of SFAS No. 142
beginning in the first quarter of fiscal 2003.
Accounting for the Impairment of Long-Lived Assets
The Company periodically evaluates whether changes have occurred to long-lived assets that
would require revision of the remaining estimated useful life of the assets or render them not
recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted value of
expected future operating cash flows to determine whether the long-lived assets are impaired. If
the aggregate undiscounted cash flows are less than the carrying amount of the assets, the
resulting impairment charge to be recorded is calculated based on the excess of the carrying value
of the assets over the fair value of such assets, with the fair value determined based on an
estimate of discounted future cash flows.
9
Computation of Net Loss Per Share
Basic and diluted net loss per share is presented in accordance with SFAS No. 128 Earnings Per
Share for all periods presented. Basic net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period. Diluted net loss
per share has been computed using the weighted-average number of shares of common stock and
dilutive potential common shares from options and warrants (under the treasury stock method) and
convertible notes (on an as-if-converted basis) outstanding during the period.
The following table presents the calculation of basic and diluted net loss per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 29, |
|
|
July 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands, except per share amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,321 |
) |
|
$ |
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share: |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding total |
|
|
308,634 |
|
|
|
306,499 |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
308,634 |
|
|
|
306,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding subject to repurchase |
|
|
|
|
|
|
4 |
|
Weighted-average shares outstanding employee stock options |
|
|
|
|
|
|
17,026 |
|
Weighted-average shares outstanding outstanding warrants |
|
|
|
|
|
|
316 |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding diluted |
|
|
308,634 |
|
|
|
323,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.02 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(0.02 |
) |
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
35,117 |
|
|
|
58,647 |
|
Conversion of convertible notes |
|
|
4,661 |
|
|
|
|
|
Warrants assumed in acquisition |
|
|
465 |
|
|
|
40 |
|
|
|
|
|
|
|
|
Potentially dilutive securities |
|
|
57,260 |
|
|
|
58,687 |
|
|
|
|
|
|
|
|
Comprehensive Income
SFAS No. 130 Reporting Comprehensive Income establishes rules for reporting and display of
comprehensive income and its components. SFAS No. 130 requires unrealized gains or losses on the
Companys available-for-sale securities and foreign currency translation adjustments to be included
in comprehensive income.
10
The components of comprehensive loss for the three months ended were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 29, |
|
|
July 30, |
|
|
|
2007 |
|
|
2006 |
|
Net income (loss) |
|
$ |
(7,321 |
) |
|
$ |
507 |
|
Foreign currency translation adjustment |
|
|
18 |
|
|
|
(585 |
) |
Change in unrealized gain (loss) on securities, net of
reclassification adjustments for realized loss |
|
|
(328 |
) |
|
|
11,985 |
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(7,631 |
) |
|
$ |
11,907 |
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (loss), net of taxes, were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 29, 2007 |
|
|
April 30, 2007 |
|
Net unrealized gains on available-for-sale securities |
|
$ |
4,741 |
|
|
$ |
5,069 |
|
Cumulative translation adjustment |
|
|
6,111 |
|
|
|
6,093 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
10,852 |
|
|
$ |
11,162 |
|
|
|
|
|
|
|
|
Income Taxes
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes An
interpretation of FASB Statement No. 109, (FIN 48) on May 1, 2007. FIN 48 is an interpretation of
FASB Statement 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition in accounting for income taxes. FIN
48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position that an entity takes or expects to take in a tax
return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. Under FIN 48, an entity may
only recognize or continue to recognize tax positions that meet a more likely than not threshold.
In accordance with our accounting policy, we recognize accrued interest and penalties related to
unrecognized tax benefits as a component of tax expense. This policy did not change as a result of
our adoption on FIN 48.
3. Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 29, 2007 |
|
|
April 30, 2007 |
|
Raw materials |
|
$ |
20,115 |
|
|
$ |
21,597 |
|
Work-in-process |
|
|
28,292 |
|
|
|
27,336 |
|
Finished goods |
|
|
28,944 |
|
|
|
28,737 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
77,351 |
|
|
$ |
77,670 |
|
|
|
|
|
|
|
|
During the three months ended July 29, 2007 and July 30 2006, the Company recorded charges of
$3.8 million and $3.4 million, respectively, for excess and obsolete inventory, and sold inventory
that was written-off in previous periods with an approximate cost of $1.7 million and $1.1 million,
respectively. As a result, cost of revenue associated with the sale of this inventory was zero.
11
5. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 29, 2007 |
|
April 30, 2007 |
|
|
|
Land |
|
$ |
9,747 |
|
|
$ |
9,747 |
|
Buildings |
|
|
11,365 |
|
|
|
11,365 |
|
Computer equipment |
|
|
38,148 |
|
|
|
37,475 |
|
Office equipment, furniture and fixtures |
|
|
3,241 |
|
|
|
3,196 |
|
Machinery and equipment |
|
|
140,028 |
|
|
|
135,238 |
|
Leasehold improvements |
|
|
13,207 |
|
|
|
12,795 |
|
Contruction-in-process |
|
|
572 |
|
|
|
444 |
|
|
|
|
Total |
|
|
216,308 |
|
|
|
210,260 |
|
Accumulated depreciation and amortization |
|
|
(131,983 |
) |
|
|
(126,189 |
) |
|
|
|
Property, equipment and improvements (net) |
|
$ |
84,325 |
|
|
$ |
84,071 |
|
|
|
|
6. Income Taxes
The Company recorded a provision for income taxes of $621,000 and $631,000, respectively, for
the three months ended July 29, 2007 and 2006. The provision for income tax expense for the three
months ended July 29, 2007 and 2006 includes non-cash charges of $544,000 for deferred
tax liabilities that were recorded for tax amortization of goodwill for which no financial
statement amortization has occurred under generally accepted accounting principles, as promulgated
by SFAS 142.
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 July 29, 2007 have been fully offset by a valuation allowance.
A portion of the valuation allowance for deferred tax
assets at July 29, 2007 relates to tax net operating loss carry forwards and other tax attributes
of acquired companies the tax benefit of which, when realized, will first reduce goodwill, then
other non-current intangible assets arising from the acquired companies, and thereafter, income tax
expense.
Effective May 1, 2007, we adopted FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. FIN 48 prescribes a
recognition threshold that a tax position is required to meet before being recognized in the
financial statements and provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and transition rules.
The adoption of FIN 48 did not result in an adjustment to beginning retained earnings and did not
have any impact on our results of operations. As of the date of adoption, the Company had $9.6
million of unrecognized tax benefits. Excluding the effects of recorded valuation allowances for
deferred tax assets, $7.2 million of the unrecognized tax benefits would favorably impact the
effective tax rate in future periods if recognized and $1.5 million of unrecognized tax benefits
would reduce goodwill if recognized.
As of date of adoption the Company has not recorded any income tax liabilities for unrecognized tax
positions as no cash payments are anticipated. There have been no significant changes during the
quarter ended July 29, 2007.
The Company records interest and penalties related to unrecognized tax benefits in income tax
expense. As of date of adoption there were no accrued interest or penalties related to uncertain
tax positions.
As a result of our global operations, the Company or its subsidiaries file income tax returns in
various jurisdictions including U.S. federal, U.S. state, and certain foreign jurisdictions. The
Companys U.S. federal and state income tax returns are generally not subject to examination by the
tax authorities for tax years before 2003. For all federal and state net operating loss and credit
carryovers, the statute of limitations does not begin until the carryover items are utilized. The
taxing authorities can examine the validity of the carryover items and if necessary, adjustments
may be made to the carryover items. The Companys Malaysia, Singapore, and China income tax
returns are generally not subject to examination by the tax authorities for tax years before 2003,
2001, and 2003, respectively. For state purposes, we are currently under examination, however, we
do not expect any significant change to our unrecognized state tax benefits within the next year.
There are no unrecognized tax benefits at July 29, 2007 related to tax positions, interest, and
penalty for which it is reasonably possible that the statute of limitations will expire within the
next twelve months.
12
6. Purchased Intangible Assets
The following table reflects intangible assets subject to amortization as of July 29, 2007 and
April 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2007 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
111,846 |
|
|
|
($95,224 |
) |
|
$ |
16,622 |
|
Trade name |
|
|
3,697 |
|
|
|
(3,216 |
) |
|
|
481 |
|
Customer relationships |
|
|
6,964 |
|
|
|
(2,288 |
) |
|
|
4,676 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
122,507 |
|
|
|
($100,728 |
) |
|
$ |
21,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2007 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
111,846 |
|
|
|
($93,495 |
) |
|
$ |
18,351 |
|
Trade name |
|
|
3,697 |
|
|
|
(3,171 |
) |
|
|
526 |
|
Customer relationships |
|
|
6,964 |
|
|
|
(1,843 |
) |
|
|
5,121 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
122,507 |
|
|
|
($98,509 |
) |
|
$ |
23,998 |
|
|
|
|
|
|
|
|
|
|
|
Estimated remaining amortization expense for each of the next five fiscal years ending April
30, is as follows (in thousands):
|
|
|
|
|
Year |
|
Amount |
|
2008 |
|
$ |
6,030 |
|
2009 |
|
|
5,481 |
|
2010 |
|
|
3,811 |
|
2011 |
|
|
3,336 |
|
2012 and beyond |
|
|
3,121 |
|
|
|
|
|
|
|
$ |
21,779 |
|
|
|
|
|
13
7. Investments
Available-for-Sale Securities
The following is a summary of the Companys available-for-sale investments as of July 29, 2007
and April 30, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
Investment Type |
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
|
As of July 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
63,941 |
|
|
$ |
7 |
|
|
$ |
(63 |
) |
|
$ |
63,885 |
|
Government agency |
|
|
12,203 |
|
|
|
19 |
|
|
|
(10 |
) |
|
|
12,212 |
|
Mortgage-backed |
|
|
3,402 |
|
|
|
|
|
|
|
(20 |
) |
|
|
3,382 |
|
Municipal |
|
|
300 |
|
|
|
|
|
|
|
(2 |
) |
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
79,846 |
|
|
$ |
26 |
|
|
$ |
(95 |
) |
|
$ |
79,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
3,400 |
|
|
$ |
4,811 |
|
|
$ |
|
|
|
$ |
8,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
83,246 |
|
|
$ |
4,837 |
|
|
$ |
(95 |
) |
|
$ |
87,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
10,793 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10,793 |
|
Short-term investments |
|
|
59,960 |
|
|
|
6 |
|
|
|
(56 |
) |
|
|
59,910 |
|
Long-term investments |
|
|
12,493 |
|
|
|
4,831 |
|
|
|
(39 |
) |
|
|
17,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
83,246 |
|
|
$ |
4,837 |
|
|
$ |
(95 |
) |
|
$ |
87,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
62,643 |
|
|
$ |
9 |
|
|
$ |
(94 |
) |
|
$ |
62,558 |
|
Government agency |
|
|
12,200 |
|
|
|
26 |
|
|
|
(18 |
) |
|
|
12,208 |
|
Mortgage-backed |
|
|
3,626 |
|
|
|
1 |
|
|
|
(21 |
) |
|
|
3,606 |
|
Municipal |
|
|
300 |
|
|
|
|
|
|
|
(3 |
) |
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
78,769 |
|
|
$ |
36 |
|
|
$ |
(136 |
) |
|
$ |
78,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
3,607 |
|
|
$ |
5,169 |
|
|
$ |
|
|
|
$ |
8,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
82,376 |
|
|
$ |
5,205 |
|
|
$ |
(136 |
) |
|
$ |
87,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
11,079 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,079 |
|
Short-term investments |
|
|
56,603 |
|
|
|
3 |
|
|
|
(95 |
) |
|
|
56,511 |
|
Long-term investments |
|
|
14,694 |
|
|
|
5,202 |
|
|
|
(41 |
) |
|
|
19,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,376 |
|
|
$ |
5,205 |
|
|
$ |
(136 |
) |
|
$ |
87,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross realized losses for the three months ended July 29, 2007 and July 30, 2006 were
immaterial. Realized gains and losses were calculated based on the specific identification method.
14
Restricted Securities
The Company has purchased and pledged to a collateral agent, as security for the exclusive
benefit of the holders of the Companys 2 1/2% convertible subordinated notes, U.S. government
securities, which will be sufficient upon receipt of scheduled principal and interest payments
thereon, to provide for the payment in full of the first eight scheduled interest payments due on
such outstanding convertible subordinated notes. These restricted securities are classified as held
to maturity and are recorded on the Companys consolidated balance sheet at amortized cost. The
following table summarizes the Companys restricted securities as of July 29, 2007 and April 30,
2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Market |
|
|
|
Cost |
|
|
Gain/(Loss) |
|
|
Value |
|
As of July 29,2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Government agency |
|
$ |
625 |
|
|
$ |
|
|
|
$ |
625 |
|
|
|
|
|
|
|
|
|
|
|
Classified as: |
|
|
|
|
|
|
|
|
|
|
|
|
Short term less than 1 year |
|
|
625 |
|
|
|
|
|
|
|
625 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
625 |
|
|
$ |
|
|
|
$ |
625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Government agency |
|
$ |
625 |
|
|
$ |
|
|
|
$ |
625 |
|
|
|
|
|
|
|
|
|
|
|
Classified as: |
|
|
|
|
|
|
|
|
|
|
|
|
Short term less than 1 year |
|
|
625 |
|
|
|
|
|
|
|
625 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
625 |
|
|
$ |
|
|
|
$ |
625 |
|
|
|
|
|
|
|
|
|
|
|
8. Minority Investments
Minority investments is comprised of several investments in other companies accounted for
under the cost method.
Cost Method Investments
Included in minority investments at July 29, 2007 and April 30, 2007 are cost method
investments of $11.3 million for each period.
9. 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. Eligible employees may
purchase a limited number of shares of common stock at a discount of 15% to the market value at
certain plan-defined dates. During the three months ended July 29, 2007, the Company did not issue
any shares under this plan. During the three months ended July 30, 2006, the Company issued
860,025 shares under this plan. At July 29, 2007, 11,060,097 shares were available for issuance
under the Purchase Plan.
The Purchase Plan permits eligible employees to purchase Finisar common stock through payroll
deductions, which may not exceed 20% of the employees total compensation. Stock may be purchased
under the plan at a price equal to 85% of the fair market value of Finisar common stock on either
the first or the last day of the offering period, whichever is lower.
Employee Stock Option Plans
During fiscal 1989, Finisar adopted the 1989 Stock Option Plan (the 1989 Plan). The 1989
Plan expired in April 1999 and no further option grants have been made under the 1989 Plan since
that time. Options granted under the 1989 Plan had an exercise price of not less than 85% of the
fair value of a share of common stock on the date of grant (110% of the fair value in certain
instances) as determined by the board of directors. Options generally vested over five years and
had a maximum term of 10 years.
Finisars 1999 Stock Option Plan was adopted by the board of directors and approved by the
stockholders in September 1999. An amendment and restatement of the 1999 Stock Option Plan,
including renaming it the 2005 Stock Incentive Plan (the 2005 Plan), was approved by the board of
directors in September 2005 and by the stockholders in October 2005. A total of 21,000,000 shares
of
15
common stock were initially reserved for issuance under the 2005 Plan. The share reserve
automatically increases on May 1 of each calendar year by a number of shares equal to 5% of the
number of shares of Finisars common stock issued and outstanding as of the immediately preceding
April 30, subject to certain restrictions on the aggregate maximum number of shares that may be
issued pursuant to incentive stock options. The types of stock-based awards available under the
2005 Plan includes stock options, stock appreciation rights, restricted stock units and other
stock-based awards which vest upon the attainment of designated performance goals or the
satisfaction of specified service requirements or, in the case of certain restricted stock units or
other stock-based awards, become payable upon the expiration of a designated time period following
such vesting events. To date, only stock options have been granted under the 2005 Plan. Options
generally vest over five years and have a maximum term of
10 years. As of July 29, 2007, there were
no shares subject to repurchase and at July 30, 2006, 3,700 shares were subject to repurchase.
A summary of activity under the Companys employee stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Available |
|
|
|
|
for Grant |
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
Remaining |
|
Aggregate |
Options for Common Stock |
|
Number of Shares |
|
Number of Shares |
|
Exercise Price |
|
Contractual Term |
|
Intrinsic Value (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years) |
|
($000s) |
Balance at April 30, 2007 |
|
|
28,815,162 |
|
|
|
46,119,115 |
|
|
$ |
2.58 |
|
|
|
|
|
|
|
|
|
Increase in authorized shares |
|
|
15,431,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(2,387,500 |
) |
|
|
2,387,500 |
|
|
$ |
3.91 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
Options canceled |
|
|
1,604,323 |
|
|
|
(1,604,323 |
) |
|
$ |
2.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 29, 2007 |
|
|
43,463,603 |
|
|
|
46,902,292 |
|
|
$ |
2.65 |
|
|
|
6.74 |
|
|
$ |
70,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the
difference between the
exercise price and the value
of Finisar common stock at
July 27, 2007. |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic
value, based on the Companys closing stock price of $3.70 as of July 27, 2007, which would have
been received by the option holders had all option holders exercised their options as of that date.
The weighted-average remaining contractual life of options exercisable is 5.7 years. The total
number of in-the-money options exercisable as of July 29, 2007 was 21.5 million.
Valuation and Expense Information under SFAS 123(R)
The following table summarizes stock-based compensation expense related to employee stock
options and employee stock purchases under SFAS 123(R) for the three months ended July 29, 2007 and
July 30, 2006 which was reflected in our operating results as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 29, |
|
|
July 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited, in thousands) |
|
Cost of revenues |
|
$ |
722 |
|
|
$ |
1,136 |
|
Research and development |
|
|
955 |
|
|
|
1,176 |
|
Sales and marketing |
|
|
451 |
|
|
|
529 |
|
General and administrative |
|
|
631 |
|
|
|
607 |
|
|
|
|
|
|
|
|
Total |
|
$ |
2,759 |
|
|
$ |
3,448 |
|
|
|
|
|
|
|
|
The total stock-based compensation capitalized as part of inventory as of July 29, 2007 was
$397,000.
As of July 29, 2007, total compensation cost related to unvested stock options not yet
recognized was $19.1 million which is expected to be recognized over the next 29 months on a
weighted-average basis.
16
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model and the straight-line attribution approach with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Option Plans |
|
Employee Stock Purchase Plan |
|
|
July 29, |
|
July 30, |
|
July 29, |
|
July 30, |
|
|
2007 |
|
2006 |
|
2007 (1) |
|
2006 |
Weighted average fair
value per share |
|
$ |
2.86 |
|
|
$ |
3.47 |
|
|
|
n/a |
|
|
$ |
0.90 |
|
Expected term (in years) |
|
|
5.44 |
|
|
|
5.15 |
|
|
|
n/a |
|
|
|
0.50 |
|
Volatility |
|
|
88 |
% |
|
|
104 |
% |
|
|
n/a |
|
|
|
67 |
% |
Risk-free interest rate |
|
|
4.60 |
% |
|
|
5.07 |
% |
|
|
n/a |
|
|
|
4.40 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
n/a |
|
|
|
0.00 |
% |
|
|
|
(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, our recorded and pro forma stock-based compensation expense could have
been materially different from that depicted above. In addition, we are required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to vest. If our
actual forfeiture rate is materially different from our estimate, the stock-based compensation
expense could be materially different.
10. Segments and Geographic Information
The Company designs, develops, manufactures and markets optical subsystems, components and
test and monitoring systems for high-speed data communications. The Company views its business as
having two principal operating segments, consisting of optical subsystems and components and
network test and monitoring systems.
Optical subsystems consist primarily of transceivers sold to manufacturers of storage and
networking equipment for storage area networks (SANs) and local area networks (LANs) and
metropolitan access network (MAN) applications. Optical subsystems also include multiplexers,
de-multiplexers and optical add/drop modules for use in MAN applications. Optical components
consist primarily of packaged lasers and photo-detectors which are incorporated in transceivers,
primarily for LAN and SAN applications. Network test and monitoring systems include products
designed to test the reliability and performance of equipment for a variety of protocols including
Fibre Channel, Gigabit Ethernet, 10 Gigabit Ethernet, iSCSI, SAS and SATA. These test and
monitoring systems are sold to both manufacturers and end-users of the equipment.
Both of the Companys operating segments and its corporate sales function report to the
President and Chief Executive Officer. Where appropriate, the Company charges specific costs to
these segments where they can be identified and allocates certain manufacturing costs, research and
development, sales and marketing and general and administrative costs to these operating segments,
primarily on the basis of manpower levels 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.
17
Information about reportable segment revenues and income/(losses) are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
July 29, 2007 |
|
July 30, 2006 |
Revenues: |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
96,360 |
|
|
$ |
96,043 |
|
Network test and monitoring systems |
|
|
9,375 |
|
|
|
10,200 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
105,735 |
|
|
$ |
106,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense: |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
6,538 |
|
|
$ |
6,424 |
|
Network test and monitoring systems |
|
|
277 |
|
|
|
284 |
|
|
|
|
|
|
|
|
Total depreciation and amortization expense |
|
$ |
6,815 |
|
|
$ |
6,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
(441 |
) |
|
|
4,970 |
|
Network test and monitoring systems |
|
|
(1,076 |
) |
|
|
(191 |
) |
|
|
|
|
|
|
|
Total operating income (loss) |
|
|
(1,517 |
) |
|
|
4,779 |
|
|
|
|
|
|
|
|
|
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
Amortization of acquired developed technology |
|
|
(1,729 |
) |
|
|
(1,519 |
) |
Amortization of purchased intangibles |
|
|
(490 |
) |
|
|
(299 |
) |
Interest income (expense), net |
|
|
(2,831 |
) |
|
|
(2,666 |
) |
Other non-operating income (expense), net |
|
|
(133 |
) |
|
|
(370 |
) |
|
|
|
|
|
|
|
Total unallocated amounts |
|
|
(5,183 |
) |
|
|
(4,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect |
|
$ |
(6,700 |
) |
|
$ |
(75 |
) |
|
|
|
|
|
|
|
The following is a summary of total assets by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 29, |
|
|
April 30, |
|
|
|
2007 |
|
|
2007 |
|
Optical subsystems and components |
|
$ |
385,531 |
|
|
$ |
392,260 |
|
Network test and monitoring systems |
|
|
82,108 |
|
|
|
76,885 |
|
Other assets |
|
|
73,267 |
|
|
|
77,527 |
|
|
|
|
|
|
|
|
|
|
$ |
540,906 |
|
|
$ |
546,672 |
|
|
|
|
|
|
|
|
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 |
|
|
|
July 29, 2007 |
|
|
July 30, 2007 |
|
Revenues from sales to unaffiliated
customers: |
|
|
|
|
|
|
|
|
United States |
|
$ |
34,176 |
|
|
$ |
40,425 |
|
Rest of the world |
|
|
71,559 |
|
|
|
65,818 |
|
|
|
|
|
|
|
|
|
|
$ |
105,735 |
|
|
$ |
106,243 |
|
|
|
|
|
|
|
|
18
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):
|
|
|
|
|
|
|
|
|
|
|
July 29, |
|
|
April 30, |
|
|
|
2007 |
|
|
2007 |
|
Long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
234,943 |
|
|
$ |
237,691 |
|
Malaysia |
|
|
27,884 |
|
|
|
26,589 |
|
Rest of the world |
|
|
3,308 |
|
|
|
3,351 |
|
|
|
|
|
|
|
|
|
|
$ |
266,135 |
|
|
$ |
267,631 |
|
|
|
|
|
|
|
|
The following is a summary of capital expenditures by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 29, 2007 |
|
|
July 30, 2007 |
|
Optical subsystems and components |
|
$ |
5,900 |
|
|
$ |
6,058 |
|
Network test and monitoring systems |
|
|
110 |
|
|
|
59 |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
6,010 |
|
|
$ |
6,117 |
|
|
|
|
|
|
|
|
11. Warranty
The Company generally offers a one-year limited warranty for all of its products. The specific
terms and conditions of these warranties vary depending upon the product sold and the end customer.
The Company estimates the costs that may be incurred under its basic limited warranty and records a
liability in the amount of such costs based on revenue recognized. Factors that affect the
Companys warranty liability include the number of units sold, historical and anticipated rates of
warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded
warranty liabilities and adjusts the amounts as necessary.
Changes in the Companys warranty liability during the following period were as follows (in
thousands):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 29, 2007 |
|
Beginning balance at April 30, 2007 |
|
$ |
1,818 |
|
Additions during the period based upon product sold |
|
|
484 |
|
Settlements |
|
|
388 |
|
Changes in liability for pre-existing warranties, including expirations |
|
|
(853 |
) |
|
|
|
|
Ending balance at July 29, 2007 |
|
$ |
1,837 |
|
|
|
|
|
12. Sales of Accounts Receivable
The Company has an agreement with Silicon Valley Bank to sell certain trade receivables. In
these non-recourse sales, the Company removes the sold receivables from its books and records no
liability related to the sale, as the Company has assessed that the sales should be accounted for
as true sales in accordance with SFAS No. 140 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. During the three months ended July 29, 2007 and July 30,
2006, the Company sold approximately $5.3 million and $4.2 million, respectively, of its trade
receivables to Silicon Valley Bank under the terms of this agreement.
13. Restructuring
As of July 29, 2007, $845,000 of committed facility payments remain accrued and are expected
to be fully utilized by the end of fiscal 2011. This amount relates to restructuring activities
associated with the Companys Sunnyvale and Scotts Valley facilities that took place in fiscal
2006.
19
14. Pending Litigation
Matters Related to Historical Stock Option Grant Practices
On November 30, 2006, the Company announced that it had undertaken a voluntary review of its
historical stock option grant practices subsequent to its initial public offering in November 1999.
The review was initiated by senior management, and preliminary results of the review were
discussed with the Audit Committee of the Companys Board of Directors. Based on the preliminary
results of the review, senior management concluded, and the Audit Committee agreed, that it was
likely that the measurement dates for certain stock option grants differed from the recorded grant
dates for such awards and that the Company would likely need to restate its historical financial
statements to record non-cash charges for compensation expense relating to some past stock option
grants. The Audit Committee thereafter conducted a further investigation and engaged independent
legal counsel and financial advisors to assist in that investigation. The Audit Committee
concluded that measurement dates for certain option grants differ from the recorded grant dates for
such awards. The Companys management, in conjunction with the Audit Committee, conducted a
further review to finalize revised measurement dates and determine the appropriate accounting
adjustments to its historical financial statements, which are reflected in this report. The
announcement of the investigation, and related delays in filing this quarterly report on Form 10-Q
for the quarter ended July 29, 2007, the Companys quarterly reports on Form 10-Q for the quarters
ended October 29, 2006 and January 28, 2007, and its annual report on Form 10-K for the fiscal year
ended April 30, 2007, have resulted in the initiation of regulatory proceedings as well as civil
litigation and claims. Financial information included in the Companys reports on Form
10-K, Form 10-Q and Form 8-K filed by Finisar prior to November 28, 2006 and the related reports of
its independent registered public accounting firm, included in the Forms 10-K, and all earnings and
press releases and similar communications issued by the Company prior to November 28, 2006 should
not be relied upon and are superseded in their entirety by the annual report of Form 10-K for the
fiscal year ended April 30, 2007, the other reports on Form 10-Q, including this report, and Form
8-K filed by the Company with the Securities and Exchange Commission on or after November 28, 2006.
Nasdaq Determination of Non-compliance
On December 13, 2006, the Company received a Staff Determination notice from the Nasdaq Stock
Market stating that the Company was not in compliance with Marketplace Rule 4310(c)(14) because it
did not timely file the October 10-Q and, therefore, that its common stock was subject to delisting
from the Nasdaq Global Select Market. The Company received similar Staff Determination Notices
with respect to its failure to timely file the January 10-Q, the July 10-Q and the 2007 10-K. In
response to the original Staff Determination Notice, the Company requested a hearing before a
Nasdaq Listing Qualifications Panel (the Panel) to review the Staff Determination and to request
additional time to comply with the filing requirements pending completion of the Audit Committees
investigation. The hearing was held on February 15, 2007. The Company thereafter supplemented its
previous submission to Nasdaq to include the subsequent periodic reports in its request for
additional time to make required filings. On April 4, 2007, the Panel granted the Company
additional time to comply with the filing requirements until June 11, 2007 for the October 10-Q and
until July 3, 2007 for the January 10-Q. The Company appealed the Panels decision to the Nasdaq
Listing and Hearing Review Counsel (the Listing Council), seeking additional time to make the
filings. On May 18, 2007, the Listing Council agreed to review the Panels April 4, 2007 decision
and stayed that decision pending review of the Companys appeal. On October 5, 2007, the Listing
Council granted the Company an exception until December 4, 2007 to file its delinquent periodic
reports and restatement. On November 26, 2007, the Company filed
an appeal with the Nasdaq Board of Directors seeking a review of the
Listing Councils decision and a stay of the decision, including
the Listing Councils December 4, 2007 deadline. On
November 30, 2007, the Nasdaq Board of Directors agreed to
review the Listing Councils decision and stayed the decision
pending further consideration by the Board. The Company believes that the filing of this report, and the simultaneous
filing of its other delinquent reports on Form 10-Q and Form 10-K, will satisfy the conditions of
the Listing Councils decision and that its common stock will continue to be listed on the Nasdaq
Global Select Market.
Securities and Exchange Commission Inquiry
In November 2006, the Company informed the staff of the Securities and Exchange Commission
(the SEC) of the voluntary investigation that had been undertaken by the Audit Committee of the
Board of Directors. The Company was subsequently notified by the SEC that the SEC was conducting
an informal inquiry regarding the Companys historical stock option grant practices. The Company
is cooperating with the SECs review.
Stock Option Derivative Litigation
Following the announcement by the Company on November 30, 2006 that the Audit Committee of the
Board of Directors had voluntarily commenced an investigation of the Companys historical stock
option grant practices, the Company was named as a nominal defendant in several shareholder
derivative cases. These cases have been consolidated into two proceedings pending in federal and
state courts in California. The federal court cases have been consolidated in the United States
District Court for the Northern District of California. The state court cases have been
consolidated in the Superior Court for the State of California for the County of Santa Clara.
Plaintiffs in all cases have alleged that certain current or former officers and directors of the
Company caused it to grant stock options at less than fair market value, contrary to the Companys
public statements (including its financial statements), and that, as a result, those officers and
directors are liable to the Company. No specific amount of damages has been alleged, and by
20
the
nature of the lawsuits no damages will be alleged, against the Company. On May 22, 2007, the state
court granted the Companys motion to stay the state court action pending resolution of the
consolidated federal court action. On June 12, 2007, the plaintiffs in the federal court case
filed an amended complaint to reflect the results of the stock option investigation announced by
the Audit Committee in June 2007. On August 28, 2007, the Company and the individual defendants
filed motions to dismiss the complaint. A hearing on the motions has been set for January 11,
2008.
Trust Indenture Litigation
On January 4, 2007, the Company received three substantially identical purported notices of
default from U.S. Bank Trust National Association, as trustee (the Trustee) for the Companys
2 1/2% Convertible Senior Subordinated Notes due 2010, its 2 1/2% Convertible Subordinated Notes
due 2010 and its 5 1/4% Convertible Subordinated Notes due 2008 (collectively, the Notes). The
notices asserted that the Companys failure to timely file the October 10-Q with the SEC and to
provide a copy to the Trustee constituted a default under each of the three indentures between the
Company and the Trustee governing the respective series of Notes (the Indentures). The notices
each indicated that, if the Company did not cure the purported default within 60 days, an Event of
Default would occur under the respective Indenture. As previously reported, the Company had
delayed filing the October 10-Q pending the completion of the review of its historical stock option
grant practices conducted by the Audit Committee of its Board of Directors.
The Company believes that it is not in default under the terms of the Indentures. The Company
contends that the plain language of each Indenture requires only that the Company file with the
Trustee reports that have actually been filed with the SEC, and that, since the October 10-Q had
not yet been filed with the SEC, the Company was under no obligation to file it with the Trustee.
In anticipation of the expiration of the 60-day cure period under the notices on March 5,
2007, and the potential assertion by the Trustee or the noteholders that an Event of Default had
occurred and a potential attempt to accelerate payment on one or more series of the Notes, on March
2, 2007, the Company filed a lawsuit in the Superior Court for the State of California for the
County of Santa Clara against U.S. Bank Trust National Association, solely in its capacity as
Trustee under the Indentures, seeking a judicial declaration that the Company is not in default
under the three Indentures, based on the Companys position as described above. The Trustee filed
an answer to the complaint generally denying all allegations and also filed a notice of removal of
the state case to the United States District Court for the Northern District of California. On
October 12, 2007, the action was remanded back to the state court in which it was commenced because
the Trustees notice of removal was not timely.
As expected, on March 16, 2007, the Company received three additional notices from the Trustee
asserting that Events of Default under the Indentures had occurred and were continuing based on
the Companys failure to cure the alleged default within the 60-day cure period.
On April 24, 2007, the Company received three substantially identical purported notices of
default from the Trustee for each of the Indentures, asserting that the Companys failure to timely
file the January 10-Q with the SEC and to provide a copy to the Trustee constituted a default under
each of the Indentures. The notices each indicated that, if the Company did not cure the purported
default within 60 days, an Event of Default would occur under the respective Indenture. The
Company believes that it is not in default under the terms of the Indentures for the reasons
described above.
On June 21, 2007, the Company filed a second declaratory relief action against the Trustee in
the Superior Court of California for the County of Santa Clara. The second action is essentially
identical to the first action filed on March 2, 2007 except that it covers the notices asserting
Events of Default received in April 2007 and any other notices of default that the Trustee may
deliver in the future with respect to the Companys delay in filing, and providing copies to the
Trustee, of periodic reports with the SEC. The Trustee filed an answer to the complaint generally
denying all allegations and filed a notice of removal to the United States District Court for the
Northern District of California. The Company has filed a motion to remand to state court, which
was heard and taken under submission on November 2, 2007.
On July 9, 2007, the Company received three substantially identical purported notices of
default from the Trustee for each of the Indentures, asserting that the Companys failure to timely
file this Form 10-K report with the SEC and to provide a copy to the Trustee constituted a default
under each of the Indentures. As before, the notices each indicated that, if the Company did not
cure the purported default within 60 days, an Event of Default would occur under the respective
Indenture. The Company believes that it is not in default under the terms of the Indentures for
the reasons described above.
To date, neither the Trustee nor the holders of at least 25% in aggregate principal amount of
one or more series of the Notes have declared all unpaid principal, and any accrued interest, on
the Notes to be due and payable, although the Trustee stated in the notices that it reserved the
right to exercise all available remedies. As of October 31,
2007, there was $250.3 million in
aggregate principal amount of Notes outstanding and an aggregate of approximately $558,000 in
accrued interest.
21
Patent Litigation
DirecTV Litigation
On April 4, 2005, the Company filed an action for patent infringement in the United States
District Court for the Eastern District of Texas against the DirecTV Group, Inc., DirecTV Holdings,
LLC, DirecTV Enterprises, LLC, DirecTV Operations, LLC, DirecTV, Inc., and Hughes Network Systems,
Inc. (collectively, DirecTV). The lawsuit involves the Companys U.S. Patent No. 5,404,505 (the
505 patent), which relates to technology used in information transmission systems to provide
access to a large database of information. On June 23, 2006, following a jury trial, the jury
returned a verdict that the Companys patent had been willfully infringed and awarded the Company
damages of $78,920,250. In a post-trial hearing held on July 6, 2006, the Court determined that,
due to DirecTVs willful infringement, those damages would be enhanced by an additional $25
million. Further, the Court awarded the Company pre-judgment interest on the jurys verdict in the
amount of 6% compounded annually from April 4, 1999, amounting to approximately $13.4 million.
Finally, the Court awarded the Company costs of $147,282 associated with the litigation. The Court
declined to award the Company its attorneys fees. The Court denied the Companys motion for
injunctive relief, but ordered DirecTV to pay a compulsory ongoing license fee to the Company at
the rate of $1.60 per set-top box activated by or on behalf of DirecTV for the period beginning
June 16, 2006 through the duration of the patent, which expires in April 2012. The Court entered
final judgment in favor of the Company and against DirecTV on July 7, 2006. On September 1, 2006,
the Court denied DirecTVs post-trial motions seeking to have the jury verdict set aside or
reversed and requesting a new trial on a number of grounds. In another written post-trial motion,
DirecTV asked the Court to allow DirecTV to place any amounts owed the Company under the compulsory
license into an escrow account pending the outcome of any appeal and for those amounts to be
refundable in the event that DirecTV prevails on appeal. The Court granted DirecTVs motion and
payments under the compulsory license are being made into an escrow account pending the outcome of
the appeal. As of October 12, 2007, DirecTV has deposited approximately $28 million into escrow.
These escrowed funds represent DirecTVs compulsory royalty payments for the period from June 17,
2006 through September 30, 2007.
DirecTV has appealed to the United States Court of Appeals for the Federal Circuit. In its
appeal, DirecTV raised issues related to claim construction, infringement, invalidity, willful
infringement and enhanced damages. The Company cross-appealed raising issues related to the denial
of the Companys motion for permanent injunction, the trial courts refusal to enhance future
damages for willfulness and the trial courts determination that some of the asserted patent claims
are invalid. The appeals have been consolidated. The parties were ordered to participate in the
appellate courts mandatory mediation program, which occurred on February 13, 2007 without
resolution. The parties have filed their respective briefs with the appellate court. A neutral
third party, New York Intellectual Property Law Association (NYIPLA) filed an amicus brief urging
the appellate court to vacate the portion of trial courts judgment denying the Companys motion
for a permanent injunction and ordering DirecTV to pay royalties pursuant to a compulsory license.
Over DirecTVs objection, the appellate court accepted NYIPLAs amicus brief. On November 19,
2007, the Court of Appeals denied NYIPLAs motion to file a
reply brief. Oral arguments have been set for January 7, 2008. Subsequent to the
oral arguments, it is anticipated that a decision from the appellate court will issue between March
2008 and November 2008.
Comcast Litigation
On July 7, 2006, Comcast Cable Communications Corporation, LLC (Comcast) filed a complaint
against the Company in the United States District Court, Northern District of California, San
Francisco Division. Comcast seeks a declaratory judgment that the Companys 505 patent is not
infringed and is invalid. The 505 patent is the same patent alleged by the Company in its lawsuit
against DirecTV. The Companys motion to dismiss the declaratory judgment action was denied on
November 9, 2006. As a result, on November 22, 2006, the Company filed an answer and counterclaim
alleging that Comcast infringes the 505 patent and seeking damages to be proven at trial. The
court held a claim construction hearing and, on April 6, 2007, issued its claim construction
ruling.
Discovery is now underway. The parties have been ordered to a mediation and settlement
conference on December 13, 2007. A
jury trial has been scheduled for March 3, 2008.
EchoStar Litigation
On July 10, 2006, EchoStar Satellite LLC, EchoStar Technologies Corporation and NagraStar LLC
(collectively EchoStar) filed an action against the Company in the United States District Court
for the District of Delaware seeking a declaration that EchoStar does not infringe, and has not
infringed, any valid claim of the Companys 505 patent. The 505 patent is the same patent that
is in dispute in the DirecTV 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. No scheduling order has been entered in the case, and discovery has not yet begun.
22
XM/Sirius Litigation
On April 27, 2007, the Company filed an action for patent infringement in the United States
District Court for the Eastern District of Texas, Lufkin Division, against XM Satellite Radio
Holdings, Inc., XM Satellite Radio, Inc., and XM Radio, Inc. (collectively, XM), and Sirius
Satellite Radio, Inc. and Satellite CD Radio, Inc. (collectively, Sirius). Judge Clark, the same
judge who presided over the DirecTV trial, has been assigned to the case. The lawsuit alleges that
XM and Sirius have infringed and continue to infringe the Companys 505 patent and seeks an
injunction to prevent further infringement, actual damages to be proven at trial, enhanced damages
for willful infringement and attorneys fees. The defendants filed an answer denying infringement
of the 505 patent and asserting invalidity and other defenses. The defendants also moved to stay
the case pending the outcome of the DirectTV appeal and the re-examination of the 505 patent
described below. Judge Clark The defendants motion for a stay
was denied.
Discovery is now underway. The claim construction hearing has been set for February 6, 2008, and
the trial has been set for September 15, 2008.
Requests for Re-Examination of the 505 Patent
Three requests for re-examination of the Companys 505 patent have been filed with the United
States Patent and Trademark Office (PTO). The 505 patent is the patent that is in dispute in
the DirecTV, EchoStar, Comcast and XM/Sirius lawsuits. On December 11, 2006, the PTO entered an
order granting the first request and, on March 21, 2007, the PTO entered an order granting the
second request. The third request, filed on August 1, 2007, was partially granted on September 28,
2007. The Company expects that the PTO will take steps to consolidate these requests into one
request for re-examination. Alternately, the PTO may consolidate the first two requests and keep
the third separate because it is directed to different claims than the first two requests. 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 DirecTV, EchoStar, Comcast and XM/Sirius lawsuits. Resolution of one or more re-examination
requests of the 505 Patent is likely to take more than 15 months.
Securities Class Action
A securities class action lawsuit was filed on November 30, 2001 in the United States District
Court for the Southern District of New York, purportedly on behalf of all persons who purchased the
Companys common stock from November 17, 1999 through December 6, 2000. The complaint named as
defendants Finisar, Jerry S. Rawls, the Companys President and Chief Executive Officer, Frank H.
Levinson, the Companys former Chairman of the Board and Chief Technical Officer, Stephen K.
Workman, the Companys Senior Vice President and Chief Financial Officer, and an investment banking
firm that served as an underwriter for the Companys initial public offering in November 1999 and a
secondary offering in April 2000. The complaint, as subsequently amended, alleges violations of
Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(b) of the Securities
Exchange Act of 1934, on the grounds that the prospectuses incorporated in the registration
statements for the offerings failed to disclose, among other things, that (i) the underwriter had
solicited and received excessive and undisclosed commissions from certain investors in exchange for
which the underwriter allocated to those investors material portions of the shares of the Companys
stock sold in the offerings and (ii) the underwriter had entered into agreements with customers
whereby the underwriter agreed to allocate shares of the Companys stock sold in the offerings to
those customers in exchange for which the customers agreed to purchase additional shares of the
Companys stock in the aftermarket at pre-determined prices. No specific damages are claimed.
Similar allegations have been made in lawsuits relating to more than 300 other initial public
offerings conducted in 1999 and 2000, which were consolidated for pretrial purposes. In October
2002, all claims against the individual defendants were dismissed without prejudice. On February
19, 2003, the Court denied defendants motion to dismiss the complaint. In July 2004, the Company
and the individual defendants accepted a settlement proposal made to all of the issuer defendants.
Under the terms of the settlement, the plaintiffs would dismiss and release all claims against
participating defendants in exchange for a contingent payment guaranty by the insurance companies
collectively responsible for insuring the issuers in all related cases, and the assignment or
surrender to the plaintiffs of certain claims the issuer defendants may have against the
underwriters. Under the guaranty, the insurers would be required to pay the amount, if any, by
which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the
underwriter defendants in all the cases. If the plaintiffs
fail to recover $1 billion and payment is required under the guaranty, the Company would be
responsible to pay its pro rata portion of the shortfall, up to the amount of the self-insured
retention under the Companys insurance policy, which may be up to $2 million. The timing and
amount of payments that the Company could be required to make under the proposed settlement would
depend on several factors, principally the timing and amount of any payment that the insurers may
be required to make pursuant to the $1 billion guaranty. The Court gave preliminary approval to
the settlement in February 2005 and held a hearing in April 2006 to consider final approval of the
settlement. Before the Court issued a final decision on the settlement, on December 5,
2006, the United States Court of Appeals for the Second Circuit vacated the class certification of
plaintiffs claims against the underwriters in six cases designated as focus or test cases.
Thereafter, on December 14, 2006, the Court ordered a stay of all proceedings in all of the
lawsuits pending the outcome of the plaintiffs petition to the Second Circuit Court of Appeals for
a rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second
Circuit Court of Appeals denied the plaintiffs petition for a rehearing, but clarified that the
plaintiffs may seek to certify a more limited class. Subsequently, and consistent with these
developments, the Court entered an order, at the request of the plaintiffs and issuers, to deny
approval of the settlement, and the plaintiffs filed an amended complaint
23
in an attempt to comply
with the decision of the Second Circuit Court of Appeals. If an amended or modified settlement is
not reached, and thereafter approved by the Court, the Company intends to defend the lawsuit
vigorously. Because of the inherent uncertainty of litigation, however, the Company cannot predict
its outcome. If, as a result of this dispute, the Company is required to pay significant monetary
damages, its business would be substantially harmed.
The Company cannot predict the outcome of the legal proceedings discussed above. No amount of loss,
if any, is considered probable or measurable and no loss contingency has been recorded at the
balance sheet date.
15. Guarantees and Indemnifications
In November 2002, the FASB issued Interpretation No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).
FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the
fair value of the obligations it assumes under that guarantee. As permitted under Delaware law and
in accordance with the Companys Bylaws, the Company indemnifies its officers and directors for
certain events or occurrences, subject to certain limits, while the officer or director is or was
serving at the Companys request in such capacity. The term of the indemnification period is for
the officers or directors lifetime. The Company may terminate the indemnification agreements with
its officers and directors upon 90 days written notice, but termination will not affect claims for
indemnification relating to events occurring prior to the effective date of termination. The
maximum amount of potential future indemnification is unlimited; however, the Company has a
director and officer insurance policy that may enable it to recover a portion of any future amounts
paid.
The Company enters into indemnification obligations under its agreements with other companies
in its ordinary course of business, including agreements with customers, business partners, and
insurers. Under these provisions the Company generally indemnifies and holds harmless the
indemnified party for losses suffered or incurred by the indemnified party as a result of the
Companys activities or the use of the Companys products. These indemnification provisions
generally survive termination of the underlying agreement. In some cases, the maximum potential
amount of future payments the Company could be required to make under these indemnification
provisions is unlimited.
The Company believes the fair value of these indemnification agreements is minimal.
Accordingly, the Company has not recorded any liabilities for these agreements as of July 29, 2007.
To date, the Company has not incurred material costs to defend lawsuits or settle claims related to
these indemnification agreements.
16. Subsequent Events
Future Impact of Certain Stock Option Restatement Items
Because virtually all holders of options issued by the Company were neither involved in nor
aware of its accounting treatment of stock options, the Company has taken and intends to take
actions to deal with certain adverse tax consequences that may be incurred by the holders of
certain incorrectly priced options. The primary adverse tax consequence is that incorrectly priced
stock options vesting after December 31, 2004 may subject the option holder to a penalty tax under
Internal Revenue Code Section 409A (and, as applicable, similar penalty taxes under California and
other state tax laws). The Company presently estimates that it will incur a liability to option
holders of approximately $7.0 million, of which approximately $5.7 million will be recognized as
additional stock compensation expense in future periods.
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ substantially from those anticipated in these
forward-looking statements as a result of many factors, including those set forth in Part II, Item
1A. Risk Factors below. The following discussion should be read together with our consolidated
financial statements and related notes thereto included elsewhere in this report.
Business Overview
Finisar Corporation is a leading provider of optical subsystems and components that connect
local area networks, or LANs, storage area networks, or SANs, and metropolitan area networks, or
MANs. Our optical subsystems consist primarily of transceivers which provide the fundamental
optical-electrical interface for connecting the equipment used in building these networks. These
products rely on the use of digital semiconductor lasers in conjunction with integrated circuit
design and novel packaging technology to provide a cost-effective means for transmitting and
receiving digital signals over fiber optic cable using a wide range of network protocols,
transmission speeds and physical configurations over distances of 70 meters to 200 kilometers. Our
line of optical components consists primarily of packaged lasers and photodetectors used in
transceivers, primarily for LAN and SAN applications. Our manufacturing operations are vertically
integrated and include internal manufacturing, assembly and test capability. We sell our optical
subsystem and component products to manufacturers of storage and networking equipment such as
Brocade, Cisco Systems, EMC, Emulex, Hewlett-Packard Company, Huawei and Qlogic.
We also provide network performance test and monitoring systems to original equipment
manufacturers for testing and validating equipment designs and, to a lesser degree, to operators of
networking and storage data centers for testing, monitoring and troubleshooting the performance of
their installed systems. We sell these products primarily to leading storage equipment
manufacturers such as Brocade, EMC, Emulex, Hewlett-Packard Company, IBM and Qlogic.
Critical Accounting Policies
The preparation of our financial statements and related disclosures require that we make
estimates, assumptions and judgments that can have a significant impact on our net revenue and
operating results, as well as on the value of certain assets, contingent assets and liabilities on
our balance sheet. We believe that the estimates, assumptions and judgments involved in the
accounting policies described below have the greatest potential impact on our financial statements
and, therefore, consider these to be our critical accounting policies. See Note 1 to our
consolidated financial statements included elsewhere in this report for more information about
these critical accounting policies, as well as a description of other significant accounting
policies.
Income
Taxes
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes An
interpretation of FASB Statement No. 109, (FIN 48) on May 1, 2007. FIN 48 is an interpretation of
FASB Statement 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition in accounting for income taxes. FIN
48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position that an entity takes or expects to take in a tax
return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures, and transition. Under FIN 48, an entity may
only recognize or continue to recognize tax positions that meet a
more likely than not threshold.
In accordance with our accounting policy, we recognize accrued interest and penalties related
to unrecognized tax benefits as a component of tax expense. This policy did not change as a result
of our adoption on FIN 48.
25
Results of Operations
The following table sets forth certain statement of operations data as a percentage of
revenues for the periods indicated:
|
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|
|
|
|
|
|
|
|
Three Months Ended |
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|
|
July 29, |
|
|
July 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
Revenues: |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
|
91.1 |
% |
|
|
90.4 |
% |
Network test and monitoring systems |
|
|
8.9 |
|
|
|
9.6 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenues |
|
|
67.8 |
|
|
|
66.6 |
|
Amortization of acquired developed technology |
|
|
1.6 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
30.6 |
|
|
|
32.0 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
16.6 |
|
|
|
13.5 |
|
Sales and marketing |
|
|
9.5 |
|
|
|
8.3 |
|
General and administrative |
|
|
7.6 |
|
|
|
7.1 |
|
Amortization of purchased intangibles |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
34.1 |
|
|
|
29.2 |
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(3.5 |
) |
|
|
2.8 |
|
Interest income |
|
|
1.3 |
|
|
|
1.2 |
|
Interest expense |
|
|
(4.0 |
) |
|
|
(3.7 |
) |
Other income (expense), net |
|
|
(0.1 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
Income (loss) before income taxes and cumulative effect of change in accounting principle |
|
|
(6.3 |
) |
|
|
0.0 |
|
Provision for income taxes |
|
|
0.6 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
Net income (loss) before cumulative effect of adopting change in accounting principle |
|
|
(6.9 |
) |
|
|
(0.6 |
) |
Cumulative
effect of adopting change in accounting principle, net of tax |
|
|
0.0 |
|
|
|
(1.1 |
) |
Net income (loss) |
|
|
(6.9 |
)% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
Revenues. Revenues decreased $508,000, or 0.5%, to $105.7 million in the quarter ended July
29, 2007 compared to $106.2 million in the quarter ended July 30, 2006. Sales of optical subsystems
and components and network test and monitoring systems represented 91.1% and 8.9%, respectively, of
total revenues in the quarter ended July 29, 2007, compared to 90.4% and 9.6%, respectively, in the
quarter ended July 30, 2006.
Optical subsystems and components revenues increased $317,000 or 0.3%, to $96.4 million in the
quarter ended July 29, 2007 compared to $96.0 million in the quarter ended July 30, 2006. While
total optical subsystem revenue was relatively flat between the years, we experienced large
fluctuations in our broad product categories. Sales of products for short distance LAN/SAN
applications decreased $13.2 million, or 21.1%, to $49.4 million in the quarter ended July 29, 2007
compared to $62.6 million in the quarter ended July 30, 2006. The decline in product sales for
LAN/SAN applications was primarily the result of a broad slowdown in unit sales to our SAN
customers combined with competitive pricing pressure. Sales of products for longer distance MAN
applications increased $13.5 million, or 40.4%, to $47.0 million in the quarter ended July 29, 2007
compared to $33.5 million in the quarter ended July 30, 2006. The increase in sales for MAN
products was primarily the result of increased sales of our XFP product for 10Gbps applications.
Network test and monitoring systems revenues decreased $825,000, or 8.1%, to $9.4 million in
the quarter ended July 29, 2007 compared to $10.2 million in the quarter ended July 30, 2006.
Amortization of Acquired Developed Technology. Amortization of acquired developed technology,
a component of cost of revenues, increased $210,000, or 13.8%, in the quarter ended July 29, 2007
to $1.7 million compared to $1.5 million in the quarter ended July 30, 2006. The increase was the
result of amortizing purchased technology acquired with the acquisitions of AZNA LLC and Kodeos
Communications in the fourth quarter of fiscal 2007.
Gross Profit. Gross profit decreased $1.7 million, or 5.0%, to $32.3 million in the quarter
ended July 29, 2007 compared to $34.0 million in the quarter ended July 30, 2006. Gross profit as a
percentage of total revenue was 30.6% in the quarter ended July 29, 2007 compared to 32.0% in the
quarter ended July 30, 2006. We recorded charges of $3.8 million for obsolete and excess inventory
in the quarter ended July 29, 2007 and $3.4 million in the quarter ended July 30, 2006. We sold
inventory that was written-off in previous periods resulting in a benefit of $1.7 million in the
quarter ended July 29, 2007 and $1.1 million in the quarter ended July 30, 2006. As
26
a result, we
recognized a net charge of $2.1 million in the quarter ended July 29, 2007 compared to $2.3 million
in the quarter ended July 30, 2006. Manufacturing overhead costs included stock-based compensation
expenses of $722,000 in the quarter ended July 29, 2007 compared to $1.1 million in the quarter
ended July 30, 2006. Excluding the amortization of acquired developed technology, the net impact of
excess and obsolete inventory charges and stock-based compensation expenses, gross profit would
have been $36.9 million, or 34.9% of revenue, in the quarter ended July 29, 2007 compared to $39.0
million, or 36.7% of revenue in the quarter ended July 30, 2006. The decrease in the adjusted gross
profit margin was primarily due to the combined effect of flat revenue, flat manufacturing overhead
expenses, and lower average sales prices on maturing products, partially offset by lower material
costs.
Research and Development Expenses. Research and development expenses increased $3.1 million,
or 21.6%, to $17.5 million in the quarter ended July 29, 2007 compared to $14.4 million in the
quarter ended July 30, 2006. The increase was primarily due to personnel related charges of $1.7
million and development materials and outside services of $872,000. Approximately $1.1 million of
the increase in research and development expenses was due to our acquisitions of AZNA LLC and
Kodeos Communications in the prior quarter with the remaining increase resulting primarily from new
10GB and 40GB product development. Research and development expenses include stock-based
compensation charges of $955,000 in the quarter ended July 29, 2007 and $1.2 million in the quarter
ended July 30, 2006. Research and development expenses as a percent of revenues increased to 16.6%
in the quarter ended July 29, 2007 compared to 13.5% in the quarter ended July 30, 2006.
Sales and Marketing Expenses. Sales and marketing expenses increased $1.2 million, or 13.8%,
to $10.1 million in the quarter ended July 29, 2007 compared to $8.8 million in the quarter ended
July 30, 2006. The increase was primarily due to increased personnel related costs, including
travel, of $766,000, to develop and support anticipated future sales growth. Commission expense
increased $188,000 due to product mix, as certain 10GB products have higher commission rates. Cost
of evaluation units increased $187,000 in our Network Test and Monitoring business unit in an
effort to stimulate enterprise sales in this segment. Sales and marketing expenses include
stock-based compensation charges of $451,000 in the quarter ended July 29, 2007 and $529,000 in the
quarter ended July 30, 2006. Sales and marketing expenses as a percent of revenues increased to
9.5% in the quarter ended July 29, 2007 compared to 7.1% in the quarter ended July 30, 2006.
General and Administrative Expenses. General and administrative expenses increased $477,000,
or 6.3%, to $8.0 million in the quarter ended July 29, 2007 compared to $7.5 million in the quarter
ended July 30, 2006. The increase was primarily due to an increase in personnel related costs, of
which, approximately $120,000 was related to the acquisition of AZNA and Kodeos. Additionally, in
the quarter ended July 29, 2007, we incurred fees associated with our stock option investigation of
$1.2 million which were offset by a decrease in legal fees associated with patent infringement
litigation. General and administrative expenses include stock-based compensation charges of
$631,000 in the quarter ended July 29, 2007 and $607,000 in the quarter ended July 30, 2006.
General and administrative expenses as a percent of revenues increased to 7.6% in the quarter ended
July 29, 2007 compared to 7.1% in the quarter ended July 30, 2006.
Amortization of Purchased Intangibles. Amortization of purchased intangibles increased
$191,000, or 63.9%, to $490,000 in the quarter ended July 29, 2007 compared to $299,000 in the
quarter ended July 30, 2006. The increase was due to the acquisition of AZNA and Kodeos in the
fourth quarter of fiscal 2007.
Interest Income. Interest income increased $160,000, or 12.7%, to $1.4 million in the quarter
ended July 29, 2007 compared to $1.2 million in the quarter ended July 30, 2006. The increase was
due to increased investment balances and interest rates.
Interest Expense. Interest expense increased $325,000, or 8.3%, to $4.2 million in the
quarter ended July 29, 2007 compared to $3.9 million in the quarter ended July 30, 2006. Of total
interest expense included in the quarter ended July 29, 2007, approximately $2.6 million related to
our convertible subordinated notes due in 2008 and 2010 and $1.2 million represented a non-cash
charge to amortize the beneficial conversion feature of the 2008 notes. The increase in interest
expense, between quarters, was primarily due to the interest recorded in the quarter ended July 29,
2007 related to convertible notes in the amount of $17.0 million, bearing interest at 5% per annum,
that were issued upon the acquisition of AZNA in the fourth quarter of fiscal 2007.
Other Income (Expense), Net. Other expense was $133,000 in the quarter ended July 29, 2007
compared to $370,000 in the quarter ended July 30, 2006. Other expense primarily consists of
amortization of subordinated loan costs offset by the gain on the sale of an equity investment in
the quarter ended July 29, 2007. Other expense primarily consists of our proportional share of
losses associated with a minority investment and amortization of subordinated loan costs, partially
offset by a foreign exchange gain in the quarter ended July 30, 2006.
Provision for Income Taxes. We recorded income tax provisions of $621,000 and $631,000,
respectively, for the quarters ended July 29, 2007 and July 30, 2006. The income tax provision for
these periods is primarily the result of establishing a deferred tax liability to reflect tax
amortization of goodwill for which no book amortization has occurred. Due to the uncertainty
regarding the timing and extent of our future profitability, we have recorded a valuation allowance
to offset potential income tax benefits associated
27
with our operating losses. As a result, we did
not record any income tax benefit in the quarters ended July 2007 or 2006. There can be no
assurance that deferred tax assets subject to the valuation allowance will ever be realized.
We adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48), in the first quarter
of 2007. See Income Taxes in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q
for further discussion.
Liquidity and Capital Resources
At July 29, 2007, cash, cash equivalents and short-term and long-term available-for-sale
investments were $129.3 million compared to $132.5 million at April 30, 2006. Of this amount at
July 29, 2007, long-term available-for-sale investments totaled $17.3 million of which $9.1 million
was related to debt securities which were readily saleable and $8.2 million related to the
conversion of an equity method investment to available-for-sale although there are market
restrictions on our ability to sell the security underlying this investment. Restricted
securities, used to secure future interest payments on our convertible debt were $625,000 at July
29, 2007 and April 30, 2006. At July 29, 2007, total short and long term debt was $268.3 million,
compared to $267.6 million at April 30, 2006.
Net cash provided by operating activities totaled $3.5 million in the quarter ended July 29,
2007, compared to $8.5 million in the quarter ended July 30, 2006. 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 $5.6
million offset by $2.1 million in additional working capital most of which was related to an
increase in accounts receivable and a decrease in accounts payable. The cash provided by operating
activities for the quarter ended July 30, 2006 was primarily a result of operating losses adjusted
for depreciation, amortization and non-cash related items in the income statement totaling $13.9
million offset by $5.4 million related to lower working capital requirements primarily resulting
from an increase in accounts receivable.
Net cash used in investing activities totaled $7.0 million in the quarter ended July 29, 2007
compared to $9.5 million in the quarter ended July 30, 2006. Cash invested in the quarters ended
July 2007 and 2006 was primarily related equipment purchases to support production expansion and
the purchase of short-term investments.
Net cash used by financing activities totaled $549,000 in the quarter ended July 29, 2007
compared to net cash provided by financing activities of $1.1 million in the quarter ended July 30,
2006. Cash used by financing activities for the quarter ended July 29, 2007 was due to repayments
of borrowings. Cash provided by financing activities in quarter ended July 30, 2006 was primarily
due to proceeds from the exercise of stock options and sales of stock under the employee stock
purchase plan of $1.7 million partially offset by repayments on borrowings of $597,000.
We believe that our existing balances of cash, cash equivalents and short-term investments,
together with the cash expected to be generated from our future operations, will be sufficient to
meet our cash needs for working capital and capital expenditures for at least the next 12 months.
We may however require additional financing to fund our operations in the future. A significant
contraction in the capital markets, particularly in the technology sector, may make it difficult
for us to raise additional capital if and when it is required, especially if we experience
disappointing operating results. If adequate capital is not available to us as required, or is not
available on favorable terms, our business, financial condition and results of operations will be
adversely affected.
Contractual Obligations and Commercial Commitments
At July 29, 2007, we had contractual obligations of $345.1 million as shown in the following
table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
5 Years |
|
|
Short-term debt |
|
$ |
1,925 |
|
|
$ |
1,925 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term debt |
|
|
5,146 |
|
|
|
|
|
|
|
4,206 |
|
|
|
940 |
|
|
|
|
|
Convertible debt |
|
|
267,200 |
|
|
|
66,950 |
|
|
|
100,250 |
|
|
|
100,000 |
|
|
|
|
|
Interest on debt |
|
|
18,586 |
|
|
|
9,318 |
|
|
|
8,004 |
|
|
|
1,264 |
|
|
|
|
|
Lease commitment under
sale-leaseback agreement |
|
|
44,703 |
|
|
|
3,114 |
|
|
|
6,439 |
|
|
|
6,732 |
|
|
|
28,418 |
|
Operating leases |
|
|
4,912 |
|
|
|
2,213 |
|
|
|
2,500 |
|
|
|
199 |
|
|
|
|
|
Purchase obligations |
|
|
2,676 |
|
|
|
2,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations |
|
$ |
345,148 |
|
|
$ |
86,196 |
|
|
$ |
121,399 |
|
|
$ |
109,135 |
|
|
$ |
28,418 |
|
|
|
|
|
|
|
Short-term debt of $1.9 million represents the current portion of a note payable to a
financial institution.
Long-term debt consists of the long-term portion of a note payable to a financial institution
in the principal amount of $5.1 million.
28
Convertible debt consists of a series of convertible subordinated notes in the aggregate
principal amount of $100.3 million due October 15, 2008, and two series of convertible subordinated
notes in the aggregate principal amount of $150.0 million due October 15, 2010. The notes are
convertible by the holders of the notes at any time prior to maturity into shares of Finisar common
stock at specified conversion prices. The notes are redeemable by us, in whole or in part. Annual
interest payments on the convertible subordinated notes are approximately $9.0 million annually.
Interest on debt consists of the scheduled interest payments on our short-term, long-term, and
convertible debt.
The lease commitment under sale-leaseback agreement includes the principal amount of $11.9
million related to the sale-leaseback of our corporate office building, which we entered into in
the fourth quarter of fiscal 2005.
Operating lease obligations consist primarily of base rents for facilities we occupy at
various locations.
Purchase obligations consist of standby repurchase obligations and are related to materials
purchased and held by subcontractors on our behalf to fulfill the subcontractors purchase order
obligations at their facilities. Our repurchase obligations of $2.7 million have been expensed and
recorded on the balance sheet as non-cancelable purchase obligations as of July 29, 2007.
On November 1, 2007, the Company entered into an amended letter of credit reimbursement
agreement with Silicon Valley Bank that will be available to the Company through October 26, 2008.
The terms of the new amended agreement are substantially unchanged from the previous agreement,
although, the bank has waived the SEC filing requirement covenant until the Company is current with
its filing requirements. Under the terms of the amended agreement, Silicon Valley Bank is
providing a $15 million letter of credit facility covering existing letters of credit issued by
Silicon Valley Bank and any other letters of credit that may be required by us. Outstanding
letters of credit secured by this agreement at July 29, 2007 totaled $11.3 million.
Off-Balance-Sheet Arrangements
At July 29, 2007 and April 30, 2007, we did not have any off-balance sheet arrangements or
relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which are typically established for
the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk for changes in interest rates relates primarily to our investment
portfolio. The primary objective of our investment activities is to preserve principal while
maximizing yields without significantly increasing risk. We place our investments with high credit
issuers in short-term securities with maturities ranging from overnight up to 36 months or have
characteristics of such short-term investments. The average maturity of the portfolio will not
exceed 18 months. The portfolio includes only marketable securities with active secondary or resale
markets to ensure portfolio liquidity. We have no investments denominated in foreign country
currencies and therefore our investments are not subject to foreign exchange risk.
We invest in equity instruments of privately held companies for business and strategic
purposes. These investments are included in other long-term assets and are accounted for under the
cost method when our ownership interest is less than 20% and we do not have the ability to exercise
significant influence. For entities in which we hold greater than a 20% ownership interest, or
where we have the ability to exercise significant influence, we use the equity method. For these non-quoted
investments, our policy is to regularly review the assumptions underlying the operating performance
and cash flow forecasts in assessing the carrying values. We identify and record impairment losses
when events and circumstances indicate that such assets are impaired. If our investment in a
privately-held company becomes marketable equity securities upon the companys completion of an
initial public offering or its acquisition by another company, our investment would be subject to
significant fluctuations in fair market value due to the volatility of the stock market. There has
been no material change in our interest rate exposure since
April 30, 2007.
Item 4. Controls and Procedures.
Evaluation of Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the first quarter
of fiscal 2007 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
Matters Related to Historical Stock Option Grant Practices
On November 30, 2006, we announced that we had undertaken a voluntary review of our historical
stock option grant practices subsequent to our initial public offering in November 1999. The
review was initiated by senior management, and preliminary results of the review were discussed
with the Audit Committee of our Board of Directors. Based on the preliminary results of the
review, senior management concluded, and the Audit Committee agreed, that it was likely that the
measurement dates for certain stock option grants differed from the recorded grant dates for such
awards and that we would likely need to restate our historical financial statements to record
non-cash charges for compensation expense relating to some past stock option grants. The Audit
Committee thereafter conducted a further investigation and
engaged independent legal counsel and financial advisors to assist in that investigation. The
Audit Committee concluded that measurement dates for certain option grants differ from the recorded
grant dates for such awards. Our management, in conjunction with the Audit Committee, conducted a
further review to finalize revised measurement dates and determine the appropriate accounting
adjustments to our historical financial statements, which are reflected in this report. The
announcement of the investigation, and related delays in filing this quarterly report on Form 10-Q
for the quarter ended January 28, 2007 (the January 10-Q), our quarterly report on Form 10-Q for
the quarters ended October 29, 2006 (the October 10-Q) and July 29, 2007 (the July 10-Q) and
our annual report on Form 10-K for the fiscal year ended April 30, 2007 (the 2007 10-K), have
resulted in the initiation of regulatory proceedings as well as civil litigation and claims.
Nasdaq Determination of Non-compliance
On December 13, 2006, we received a Staff Determination notice from the Nasdaq Stock Market
stating that the Company was not in compliance with Marketplace Rule 4310(c)(14) because we did not
timely file the October 10-Q and, therefore, that our
30
common stock was subject to delisting from
the Nasdaq Global Select Market. We received similar Staff Determination Notices with respect to
our failure to timely file the January 10-Q, the July 10-Q and the 2007 10-K. In response to the
original Staff Determination Notice, we requested a hearing before a Nasdaq Listing Qualifications
Panel (the Panel) to review the Staff Determination and to request additional time to comply
with the filing requirements pending completion of the Audit Committees investigation. The
hearing was held on February 15, 2007. The Company thereafter supplemented its previous submission
to Nasdaq to include the subsequent periodic reports in its request for additional time to make
required filings. On April 4, 2007, the Panel granted us additional time to comply with the filing
requirements until June 11, 2007 for the October 10-Q and until July 3, 2007 for the January 10-Q.
We appealed the Panels decision to the Nasdaq Listing and Hearing Review Counsel (the Listing
Council), seeking additional time to make the filings. On May 18, 2007, the Listing Council
agreed to review the Panels April 4, 2007 decision and stayed that decision pending review of our
appeal. On October 5, 2007, the Listing Council granted us an exception until December 4, 2007 to
file our delinquent periodic reports and restatement. On
November 26, 2007, we filed an appeal with the Nasdaq Board of
Directors seeking a review of the Listing Councils decision and
a stay of the decision, including the Listing Councils
December 4, 2007 deadline. On November 30, 2007, the Nasdaq
Board of Directors agreed to review the
Listing Councils decision and stayed the decision pending further
consideration. We believe that the filing of this report,
and the simultaneous filing of the other delinquent reports on Form 10-K and Form 10-Q, will
satisfy the conditions of the Listing Councils decision and that our common stock will continue to
be listed on the Nasdaq Global Select Market.
Securities and Exchange Commission Inquiry
In November 2006, we informed the staff of the SEC of the voluntary investigation that had
been undertaken by the Audit Committee of our Board of Directors. We were subsequently notified by
the SEC that the SEC was conducting an informal inquiry regarding our historical stock option grant
practices. We are cooperating with the SECs review.
Stock Option Derivative Litigation
Following our announcement on November 30, 2006 that the Audit Committee of the Board of
Directors had voluntarily commenced an investigation of our historical stock option grant
practices, we were named as a nominal defendant in several shareholder derivative cases. These
cases have been consolidated into two proceedings pending in federal and state courts in
California. The federal court cases have been consolidated in the United States District Court for
the Northern District of California. The state court cases have been consolidated in the Superior
Court for the State of California for the County of Santa Clara. Plaintiffs in all cases have
alleged that certain of our current or former officers and directors caused us 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 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 our motion
to stay the state court action pending resolution of the consolidated federal court action. On
June 12, 2007, the plaintiffs in the federal court case filed an amended complaint to reflect the
results of the stock option investigation
announced by the Audit Committee in June 2007. On August 28, 2007, we and the individual
defendants filed motions to dismiss the complaint. A hearing on the motions has been set for
January 11, 2008.
Trust Indenture Litigation
On January 4, 2007, we received three substantially identical purported notices of default
from U.S. Bank Trust National Association, as trustee (the Trustee) for our 2 1/2% Convertible
Senior Subordinated Notes due 2010, our 2 1/2% Convertible Subordinated Notes due 2010 and our 5
1/4% Convertible Subordinated Notes due 2008 (collectively, the Notes). The notices asserted
that our failure to timely file the October 10-Q with the SEC and to provide a copy to the Trustee
constituted a default under each of the three indentures between us and the Trustee governing the
respective series of Notes (the Indentures). The notices each indicated that, if we did not cure
the purported default within 60 days, an Event of Default would occur under the respective
Indenture. As previously reported, we had delayed filing the October 10-Q pending the completion
of the review of our historical stock option grant practices conducted by the Audit Committee of
its Board of Directors.
We do not believe that we are in default under the terms of the Indentures. We contend that
the plain language of each Indenture requires only that we file with the Trustee reports that have
actually been filed with the SEC, and that, since the October 10-Q had not yet been filed with the
SEC, we were under no obligation to file it with the Trustee.
In anticipation of the expiration of the 60 day cure period under the notices on March 5,
2007, and the potential assertion by the Trustee or the noteholders that an Event of Default had
occurred and a potential attempt to accelerate payment on one or more series of the Notes, on March
2, 2007, we filed a lawsuit in the Superior Court for the State of California for the County of
Santa Clara against U.S. Bank Trust National Association, solely in its capacity as Trustee under
the Indentures, seeking a judicial declaration that we are not in default under the three
Indentures, based on our position as described above. The Trustee filed an answer to the complaint
generally denying all allegations and also filed a notice of removal of the state case to the
United States District Court for the Northern District of California. On October 12, 2007, the
action was remanded back to state court in which it was commenced because the Trustees notice of
removal was not timely.
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As expected, on March 16, 2007, we received three additional notices from the Trustee
asserting that Events of Default under the Indentures had occurred and were continuing based on
our failure to cure the alleged default within the 60 day cure period.
On April 24, 2007, we received three substantially identical purported notices of default from
the Trustee for each of the Indentures, asserting that our failure to timely file the January 10-Q
with the SEC and to provide a copy to the Trustee constituted a default under each of the
Indentures. The notices each indicated that, if we did not cure the purported default within 60
days, an Event of Default would occur under the respective Indenture. We do not believe that we
are in default under the terms of the Indentures for the reasons described above.
On June 21, 2007, we filed a second declaratory relief action against the Trustee in the
Superior Court of California for the County of Santa Clara. The second action is essentially
identical to the first action filed on March 2, 2007 except that it covers the notices asserting
Events of Default received in April 2007 and any other notices of default that the Trustee may
deliver in the future with respect to our delay in filing, and providing copies to the Trustee, of
periodic reports with the SEC. The Trustee filed an answer to the complaint generally denying all
allegations and filed a notice of removal to the United States District Court for the Northern
District of California. We have filed a motion to remand to state court, which was heard and taken
under submission on November 2, 2007.
On July 9, 2007, we received three substantially identical purported notices of default from
the Trustee for each of the Indentures, asserting that our failure to timely file this Form 10 K
report with the SEC and to provide a copy to the Trustee constituted a default under each of the
Indentures. As before, the
notices each indicated that, if we did not cure the purported default within 60 days, an
Event of Default would occur under the respective Indenture. We do not believe that we are in
default under the terms of the Indentures for the reasons described above.
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 its notices that it reserved the
right to exercise all available remedies. As of October 31,
2007, there was $250.3 million in
aggregate principal amount of Notes outstanding and an aggregate of approximately $558,000 in
accrued interest.
Patent Litigation
DirecTV Litigation
On April 4, 2005, we filed an action for patent infringement in the United States District
Court for the Eastern District of Texas against the DirecTV Group, Inc., DirecTV Holdings, LLC,
DirecTV Enterprises, LLC, DirecTV Operations, LLC, DirecTV, Inc., and Hughes Network Systems, Inc.
(collectively, DirecTV). The lawsuit involves our U.S. Patent No. 5,404,505 (the 505 patent),
which relates to technology used in information transmission systems to provide access to a large
database of information. On June 23, 2006, following a jury trial, the jury returned a verdict
that our patent had been willfully infringed and awarded us damages of $78,920,250. In a
post-trial hearing held on July 6, 2006, the Court determined that, due to DirecTVs willful
infringement, those damages would be enhanced by an additional $25 million. Further, the Court
awarded us pre-judgment interest on the jurys verdict in the amount of 6% compounded annually from
April 4, 1999, amounting to approximately $13.4 million. Finally, the Court awarded us costs of
$147,282 associated with the litigation. The Court declined to award us attorneys fees. The
Court denied our motion for injunctive relief, but ordered DirecTV to pay us a compulsory ongoing
license fee at the rate of $1.60 per set-top box activated by or on behalf of DirecTV for the
period beginning June 16, 2006 through the duration of the patent, which expires in April 2012.
The Court entered final judgment in our favor and against DirecTV on July 7, 2006. On September 1,
2006, the Court denied DirecTVs post-trial motions seeking to have the jury verdict set aside or
reversed and requesting a new trial on a number of grounds. In another written post-trial motion,
DirecTV asked the Court to allow DirecTV to place any amounts owed to us under the compulsory
license into an escrow account pending the outcome of any appeal and for those amounts to be
refundable in the event that DirecTV prevails on appeal. The Court granted DirecTVs motion, and
payments under the compulsory license are being made into an escrow account pending the outcome of
the appeal. As of October 12, 2007, DirecTV has deposited approximately $28 million into escrow.
These escrowed funds represent DirecTVs compulsory royalty payments for the period from June 17,
2006 through September 30, 2007.
DirecTV has appealed to the United States Court of Appeals for the Federal Circuit. In its
appeal, DirecTV raised issues related to claim construction, infringement, invalidity, willful
infringement and enhanced damages. We cross-appealed raising issues related to the denial of our
motion for permanent injunction, the trial courts refusal to enhance future damages for
willfulness and the trial courts determination that some of the asserted patent claims are
invalid. The appeals have been consolidated. The parties were ordered to participate in the
appellate courts mandatory mediation program, which occurred on February 13, 2007 without
resolution. The parties have filed their respective briefs with the appellate court. A neutral
third party, New York Intellectual Property Law Association (NYIPLA) filed an amicus brief urging
the appellate court to vacate the portion of trial courts judgment denying our motion for a
permanent injunction and ordering DirecTV to pay royalties pursuant to a compulsory license. Over
DirecTVs objection, the appellate court accepted NYIPLAs amicus brief.
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On November 19, 2007, the
Court of Appeals denied NYIPLAs motion to file a reply brief. Oral arguments have been set for January 7, 2008. Subsequent to the oral
arguments, it is anticipated that a decision from the appellate court will issue between March 2008
and November 2008.
Comcast Litigation
On July 7, 2006, Comcast Cable Communications Corporation, LLC (Comcast) filed a complaint
against us in the United States District Court, Northern District of California, San Francisco
Division. Comcast seeks a declaratory judgment that our 505 patent is not infringed and is
invalid. The 505 patent is the same patent alleged by us in our lawsuit against DirecTV. Our
motion to dismiss the declaratory judgment action was denied on November 9, 2006. As a result, on
November 22, 2006, we filed an answer and counterclaim alleging that Comcast infringes the 505
patent and seeking damages to be proven at trial. The court held a claim construction hearing and,
on April 6, 2007, issued its claim construction ruling.
Discovery is now underway. The parties have been ordered to a
mediation and settlement conference on December 13, 2007. A jury trial
has been scheduled for March 3, 2008.
EchoStar Litigation
On July 10, 2006, EchoStar Satellite LLC, EchoStar Technologies Corporation and NagraStar LLC
(collectively, EchoStar) filed an action against us in the United States District Court for the
District of Delaware seeking a declaration that EchoStar does not infringe, and has not infringed,
any valid claim of our 505 patent. The 505 patent is the same patent that is in dispute in the
DirecTV and Comcast lawsuits. On October 24, 2006, we filed a motion to dismiss the action for
lack of a justiciable controversy. The Court denied our motion on September 25, 2007. We filed
our answer and counterclaim on October 10, 2007. No scheduling order has been entered in the case,
and discovery has not yet begun.
XM/Sirius Litigation
On April 27, 2007, we filed an action for patent infringement in the United States District
Court for the Eastern District of Texas, Lufkin Division, against XM Satellite Radio Holdings,
Inc., XM Satellite Radio, Inc., and XM Radio, Inc. (collectively, XM), and Sirius Satellite
Radio, Inc. and Satellite CD Radio, Inc. (collectively, Sirius). Judge Clark, the same judge who
presided over the DirecTV trial, has been assigned to the case. The lawsuit alleges that XM and
Sirius have infringed and continue to infringe our 505 patent and seeks an injunction to prevent
further infringement, actual damages to be proven at trial, enhanced damages for willful
infringement and attorneys fees. The defendants filed an answer denying infringement of the 505
patent and asserting invalidity and other defenses. The defendants also moved to stay the case
pending the outcome of the Direct TV appeal and the re-examination of the 505 patent described
below. The defendants motion for a stay was denied. Discovery
is now underway. The claim construction hearing has been set
for February 6, 2008, and the trial has been set for September 15, 2008.
Requests for Re-Examination of the 505 Patent
Three requests for re-examination of our 505 patent have been filed with the United States
Patent and Trademark Office (PTO). The 505 patent is the patent that is in dispute in the
DirecTV, EchoStar, Comcast and XM/Sirius lawsuits. On December 11, 2006, the PTO entered an order
granting the first request and, on March 21, 2007, the PTO entered an order granting the second
request. The third request, filed on August 1, 2007, was partially granted on September 28, 2007.
We expect that the PTO will take steps to consolidate these requests into one request for
re-examination. Alternately, the PTO may consolidate the first two requests and keep the third
separate because it is directed to different claims than the first two requests. 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 our position in the
DirecTV, EchoStar, Comcast, XM/Sirius lawsuits. Resolution of one or more re-examination requests
of the 505 Patent is likely to take more than 15 months.
Securities Class Action
A securities class action lawsuit was filed on November 30, 2001 in the United States District
Court for the Southern District of New York, purportedly on behalf of all persons who purchased our
common stock from November 17, 1999 through December 6, 2000. The complaint named as defendants
Finisar, Jerry S. Rawls, our President and Chief Executive Officer, Frank H. Levinson, our former
Chairman of the Board
and Chief Technical Officer, Stephen K. Workman, our Senior Vice President and Chief Financial
Officer, and an investment banking firm that served as an underwriter for our initial public
offering in November 1999 and a secondary offering in April 2000. The complaint, as subsequently
amended, alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b)
and 20(b) of the Securities Exchange Act of 1934, on the grounds that the prospectuses incorporated
in the registration statements for the offerings failed to disclose, among other things, that (i)
the underwriter had solicited and received excessive and undisclosed commissions from certain
investors in exchange for which the underwriter allocated to those investors
33
material portions of
the shares of our stock sold in the offerings and (ii) the underwriter had entered into agreements
with customers whereby the underwriter agreed to allocate shares of our stock sold in the offerings
to those customers in exchange for which the customers agreed to purchase additional shares of our
stock in the aftermarket at pre-determined prices. No specific damages are claimed. Similar
allegations have been made in lawsuits relating to more than 300 other initial public offerings
conducted in 1999 and 2000, which were consolidated for pretrial purposes. In October 2002, all
claims against the individual defendants were dismissed without prejudice. On February 19, 2003,
the Court denied defendants motion to dismiss the complaint. In July 2004, we and the individual
defendants accepted a settlement proposal made to all of the issuer defendants. Under the terms of
the settlement, the plaintiffs would dismiss and release all claims against participating
defendants in exchange for a contingent payment guaranty by the insurance companies collectively
responsible for insuring the issuers in all related cases, and the assignment or surrender to the
plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the
guaranty, the insurers would be required to pay the amount, if any, by which $1 billion exceeds the
aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all the
cases. If the plaintiffs fail to recover $1 billion and payment is required under the guaranty, we
would be responsible to pay its pro rata portion of the shortfall, up to the amount of the
self-insured retention under our insurance policy, which may be up to $2 million. The timing and
amount of payments that we could be required to make under the proposed settlement would depend on
several factors, principally the timing and amount of any payment that the insurers may be required
to make pursuant to the $1 billion guaranty. The Court gave preliminary approval to the settlement
in February 2005 and held a hearing in April 2006 to consider final approval of the settlement.
Before the Court issued a final decision on the settlement, on December 5, 2006, the United States
Court of Appeals for the Second Circuit vacated the class certification of plaintiffs claims
against the underwriters in six cases designated as focus or test cases. Thereafter, on December
14, 2006, the Court ordered a stay of all proceedings in all of the lawsuits pending the outcome of
the plaintiffs petition to the Second Circuit Court of Appeals for a rehearing en banc and
resolution of the class certification issue. On April 6, 2007, the Second Circuit Court of Appeals
denied the plaintiffs petition for a rehearing, but clarified that the plaintiffs may seek to
certify a more limited class. Subsequently, and consistent with these developments, the Court
entered an order, at the request of the plaintiffs and issuers, to deny approval of the settlement,
and the plaintiffs filed an amended complaint in an attempt to comply with the decision of the
Second Circuit Court of Appeals. The plaintiffs and issuers have stated that they are prepared to
discuss how the settlement might be amended or renegotiated to comply with the Second Circuit
decision. If an amended or modified settlement is not reached, and thereafter approved by the
Court, we intend to defend the lawsuit vigorously. Because of the inherent uncertainty of
litigation, however, we cannot predict its outcome. If, as a result of this dispute, we are
required to pay significant monetary damages, our business would be substantially harmed.
Item 1A. Risk Factors
OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS, INCLUDING THOSE DESCRIBED BELOW. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING PRICE OF
OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS
REPORT, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.
THE RISK FACTORS DESCRIBED BELOW DO NOT CONTAIN ANY MATERIAL CHANGES
FROM THOSE DISCLOSED IN ITEM 1A OF OUR ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2007.
34
We have incurred significant net losses, our future revenues are inherently unpredictable, our
operating results are likely to fluctuate from period to period, and if we fail to meet the
expectations of securities analysts or investors, our stock price could decline significantly
We incurred net losses of $45.4 million, $33.0 million and $117.7 million in our fiscal years
ended April 30, 2007, 2006 (as restated) and 2005 (as restated), respectively. Our operating
results for future periods are subject to numerous uncertainties, and we cannot assure you that we
will be able to achieve or sustain profitability on a consistent basis.
Our quarterly and annual operating results have fluctuated substantially in the past and are
likely to fluctuate significantly in the future due to a variety of factors, some of which are
outside of our control. 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.
Some of the factors that could cause our quarterly or annual operating results to fluctuate include
market acceptance of our products, market demand for the products manufactured by our customers,
the introduction of new products and manufacturing processes, manufacturing yields, competitive
pressures and customer retention.
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.
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 outstanding 21/2% convertible
senior subordinated notes due 2010 totaling $100 million, our 21/2% convertible subordinated notes
due 2010 totaling $50 million, and our 51/4% convertible subordinated notes due 2008 totaling $100
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. We may not be able to cover our
anticipated debt service obligations from our cash flow. This may materially hinder our ability to
make payments on the notes. 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 when due.
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 are in default under the indentures governing the respective series
of notes as a result of our failure to timely file periodic reports with the Securities and
Exchange Commission (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 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 have not yet been filed with the SEC, we are 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. Should we 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 October
31, 2007, there was $250.3 million in aggregate principal amount of Notes outstanding and an
aggregate of approximately $558,000 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, unless our payment obligations under our
35
outstanding convertible subordinated notes is accelerated. 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.
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.
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. 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 enough lasers or other key 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 several key components used in the manufacture of our products from
single or limited sources, and we rely on a single independent contract manufacturer 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
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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 two product families, and our revenues will
decline if the market does not continue to accept either of these product families
We currently derive substantially all of our revenue from sales of our optical subsystems and
components and network test and monitoring systems. We expect that revenue from these products will
continue to account for substantially all 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 either our optical subsystems and components or our network test and monitoring
systems, our revenues will decline significantly. Factors that may affect the market acceptance of
our products include the continued growth of the markets for LANs, SANs and MANs and, in
particular, Gigabit Ethernet and Fibre Channel-based technologies, as well as the performance,
price and total cost of ownership of our products and the availability, functionality and price of
competing products and technologies.
Many of these factors are beyond our control. In addition, in order to achieve widespread
market acceptance, we must differentiate ourselves from our competition through product offerings
and brand name recognition. We cannot assure you that we will be successful in making this
differentiation or achieving widespread acceptance of our products. Failure of our existing or
future products to maintain and achieve widespread levels of market acceptance will significantly
impair our revenue growth.
We depend on large purchases from a few significant customers, and any loss, cancellation,
reduction or delay in purchases by these customers could harm our business
A small number of customers have consistently accounted for a significant portion of our
revenues. For example, sales to our top five customers represented 40% of our revenues in fiscal
2007. 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.
The markets in which we sell our optical subsystems and components products are dominated by a
relatively small number of systems manufacturers, thereby limiting the number of our potential
customers. 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 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.
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Our market is 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, changes in customer requirements and evolving industry standards with
respect to the protocols used in data communications networks. We expect that new technologies will
emerge as competition and the need for higher and more cost-effective bandwidth increases. 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, we expect the SAN market to begin migrating from 4 Gbps to 8 Gbps
product solutions in fiscal 2008 and that our ability to achieve sustained revenue growth in the
markets for LAN, MAN and telecom applications will depend to a large extent on our ability to
successfully develop and introduce new 10 Gbps transceiver and transponder solutions during this
same period. 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. 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 test and monitoring systems for use
in LANs, SANs and MANs 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. 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, JDS Uniphase, Intel, Opnext, Optium, Sumitomo and a number of smaller vendors.
For network test and monitoring systems, we compete primarily with Agilent Technologies and LeCroy.
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 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
38
response to product introductions by competitors or us, or by other factors, including price
pressures from significant customers. Therefore, in order to achieve and sustain profitable
operations, we must continue to develop and introduce on a timely basis new products that
incorporate features that can be sold at higher average selling prices. Failure to do so could
cause our revenues and gross margins to decline, which would result in additional operating losses
and significantly harm our business.
We may be unable to reduce the cost of our products sufficiently to enable us to compete with
others. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures
and could adversely affect our margins. In order to remain competitive, we must continually reduce
the cost of manufacturing our products through design and engineering changes. We may not be
successful in redesigning our products or delivering our products to market in a timely manner. We
cannot assure you that any redesign will result in sufficient cost reductions to allow us to reduce
the price of our products to remain competitive or improve our gross margins.
Shifts in our product mix may result in declines in gross margins
Our gross profit margins vary among our product families, and are generally higher on our
network test and monitoring 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. Our gross margins are generally
lower for newly introduced products and improve as unit volumes increase. 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
them in their equipment. 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, we operate smaller facilities
in China and Singapore and rely on two 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. |
39
Any of these factors could significantly impair our ability to source our contract
manufacturing requirements internationally.
Our future operating results may be subject to volatility as a result of exposure to foreign
exchange risks.
We are exposed to foreign exchange risks. Foreign currency fluctuations may affect both our
revenues and our costs and expenses and significantly affect our operating results. Prices for our
products are currently denominated in U.S. dollars for sales to our customers throughout the world.
If there is a significant devaluation of the currency in a specific country relative to the dollar,
the prices of our products will increase relative to that countrys currency, our products may be
less competitive in that country and our revenues may be adversely affected.
Although we price our products in U.S. dollars, portions of both our cost of revenues and
operating expenses are incurred in foreign currencies, principally the Malaysian ringit and the
Chinese yuan. 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 and Singapore 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
Since October 2000, we have completed the acquisition of ten privately-held companies and
certain businesses and assets from six other companies. 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.
Several of our past acquisitions have been material, and acquisitions that we may complete in
the future may be material. In 12 of our 16 acquisitions, we issued common stock or notes
convertible into common stock as all or a portion of the consideration. The issuance of stock in
any future transactions 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. |
40
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.
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 2007, we recorded minority equity investments in early-stage technology
companies, totaling $52.4 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 $11.3 million in such investments remaining on our balance sheet as of April 30,
2007 in future periods.
We face risks of regulatory actions and inquiries into our historical stock option grant practices
and related accounting, which could require significant management time and attention, and that
could have a material adverse effect on our business, results of operations and financial condition
As a result of our investigation into our historical stock option grant practices and the
restatement of our prior financial statements, we may be subject to greater risks associated with
litigation, regulatory proceedings and government inquiries and enforcement actions, as described
in Item 3. Legal Proceedings. We have voluntarily informed the SEC of the results of this
investigation, and have been cooperating with, and continue to cooperate with, inquiries from the
SEC. We are unable to predict what consequences, if any, that any inquiry by any regulatory agency
may have on us. Any civil or criminal action commenced against us by a regulatory agency could
result in administrative orders against us, the imposition of significant penalties and/or fines
against us, and/or the imposition of civil or criminal sanctions against certain of our officers,
directors and/or employees. Any regulatory action could result in the filing of additional
restatements of our prior financial statements or require that we take other actions, and could
divert managements attention from other business concerns and harm our business.
We have been named as a party to derivative action lawsuits, and we may be named in additional
litigation, all of which will require significant management time and attention and result in
significant legal expenses and may result in an unfavorable outcome which could have a material
adverse effect on our business, financial condition, results of operations and cash flows.
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 federal court cases have been consolidated
in the United States District Court for the Northern District of California. The state court cases
have been consolidated in the Superior Court for the State of California for the County of Santa
Clara. Plaintiffs in all cases have alleged that certain current or former officers and directors
of the Company caused it to grant stock options at less than fair market value, contrary to our
public statements (including statements in our 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 our motion to stay the state court action pending resolution of the
consolidated federal court action. On June 12, 2007, the plaintiffs in the federal court case
filed an amended complaint to reflect the results of the stock option investigation announced by
the Audit Committee in June 2007. On August 28, 2007, we and the individual defendants filed
motions to dismiss the complaint. A hearing on the motions has been set for December 7, 2007. 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.
41
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 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, and the plaintiffs
and issuers have stated that they are prepared to discuss how the settlement might be amended or
renegotiated to comply with the Second Circuit decision. There is no assurance that the settlement
will be amended or renegotiated to comply with the Second Circuits ruling, 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.
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. 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. Any infringement of our
proprietary rights could result in significant litigation costs, and any failure to adequately
protect our proprietary rights could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and decreased revenues. Despite our
efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret
laws afford only limited protection. In addition, the laws of some foreign countries do not protect
our proprietary rights to the same extent as do the laws of the United States. Attempts may be made
to copy or reverse engineer aspects of our products or to obtain and use information that we regard
as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or
deter others from developing similar technology. Furthermore, policing the unauthorized use of our
products is difficult and expensive. We are currently engaged in pending litigation to enforce
certain of our patents, and additional litigation may be necessary in the future to enforce our
intellectual 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
42
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. 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. Royalty or licensing agreements, if required, may not be available
on terms acceptable to us, if at all. 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.
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
We currently have outstanding 21/2% convertible senior subordinated notes due
2010 in the
principal amount of $100 million, 51/4% convertible subordinated notes due 2008 in the principal
amount of $100.3 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 upon our stock
price reaching $4.92 for a period of time, in which case the notes are convertible at a conversion
rate of 304.9055 shares of common stock per $1,000 principal amount of notes, with the underlying
principal payable in cash. An aggregate of approximately 42,000,000 shares of common stock would be
issued upon the conversion all outstanding convertible subordinated notes at these exchange rates,
which would significantly 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.
43
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.
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.
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Item 6. Exhibits
The following exhibits are filed herewith:
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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 |
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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:
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/s/ JERRY S. RAWLS
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Jerry S. Rawls |
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Chairman of the Board, President and Chief Executive Officer |
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By:
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/s/ STEPHEN K. WORKMAN
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Stephen K. Workman |
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Senior Vice President, Finance, Chief Financial Officer and Secretary |
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Dated: December 4, 2007
47
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
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
48