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 31, 2006
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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(State or other jurisdiction of
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94-3038428 |
incorporation or organization)
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(I.R.S. Employer |
1389 Moffett Park Drive
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Identification No.) |
Sunnyvale, California
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94089 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code:
408-548-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, 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 August 31, 2006, there were 307,739,363 shares of the registrants common stock, $.001 par
value, issued and outstanding.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended July 31, 2006
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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July 31, 2006 |
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April 30, 2006 |
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(In thousands, except share and per share amounts) |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
63,472 |
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$ |
63,361 |
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Short-term available-for-sale investments |
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40,394 |
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33,507 |
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Restricted investments, short-term |
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3,725 |
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3,705 |
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Accounts receivable, net of allowance for doubtful accounts of $2,023
and $2,198 at July 31, 2006 and April 30, 2006 |
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65,572 |
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57,388 |
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Accounts receivable, other |
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9,773 |
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8,963 |
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Inventories |
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52,440 |
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52,974 |
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Prepaid expenses |
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3,492 |
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4,112 |
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Total current assets |
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238,868 |
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224,010 |
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Long-term available-for-sale investments |
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34,024 |
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21,918 |
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Property, plant and improvements, net |
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82,202 |
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82,225 |
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Restricted investments, long-term |
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1,827 |
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1,815 |
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Purchased technology, net |
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13,460 |
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14,972 |
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Other purchased intangible assets, net |
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3,878 |
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4,184 |
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Goodwill |
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122,960 |
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124,532 |
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Minority investments |
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11,250 |
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15,093 |
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Other assets |
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17,392 |
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17,125 |
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Total assets |
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$ |
525,861 |
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$ |
505,874 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
35,531 |
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$ |
34,221 |
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Accrued compensation |
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10,011 |
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9,376 |
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Other accrued liabilities |
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13,483 |
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13,129 |
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Deferred revenue |
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5,415 |
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5,070 |
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Current portion of other long-term liabilities |
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2,284 |
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2,333 |
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Non-cancelable purchase obligations |
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1,693 |
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1,209 |
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Total current liabilities |
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68,417 |
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65,338 |
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Long-term liabilities: |
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Convertible notes, net of beneficial conversion feature of $10,827 and
$11,975 at July 31, 2006 and April 30, 2006 |
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239,423 |
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238,275 |
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Other long-term liabilities |
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20,612 |
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21,253 |
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Deferred income taxes |
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4,518 |
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4,053 |
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Total long-term liabilities |
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264,553 |
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263,581 |
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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 31, 2006 and April 30, 2006 |
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Common stock, $0.001 par value, 750,000,000 shares authorized, 307,111,128
shares issued and outstanding at July 31, 2006 and 305,512,111
shares issued and outstanding at April 30, 2006 |
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307 |
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306 |
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Additional paid-in capital |
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1,376,535 |
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1,371,180 |
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Accumulated other comprehensive income |
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13,098 |
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1,698 |
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Accumulated deficit |
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(1,197,049 |
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(1,196,229 |
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Total stockholders equity |
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192,891 |
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176,955 |
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Total liabilities and stockholders equity |
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$ |
525,861 |
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$ |
505,874 |
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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 31, |
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2006 |
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2005 |
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(Unaudited, in thousands, |
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except per share data) |
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Revenues: |
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Optical subsystems and components |
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$ |
96,043 |
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$ |
72,370 |
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Network test and monitoring systems |
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10,200 |
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9,362 |
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Total revenues |
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106,243 |
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81,732 |
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Cost of revenues |
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69,950 |
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60,791 |
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Amortization of acquired developed technology |
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1,519 |
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5,654 |
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Gross profit |
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34,774 |
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15,287 |
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Operating expenses: |
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Research and development |
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14,059 |
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13,021 |
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Sales and marketing |
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8,669 |
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8,371 |
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General and administrative |
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7,376 |
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8,009 |
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Amortization of purchased intangibles |
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299 |
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476 |
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Total operating expenses |
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30,403 |
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29,877 |
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Income (loss) from operations |
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4,371 |
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(14,590 |
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Interest income |
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1,255 |
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783 |
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Interest expense |
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(3,921 |
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(4,087 |
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Other income (expense), net |
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(370 |
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(600 |
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Income (loss) before income taxes |
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1,335 |
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(18,494 |
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Provision for income taxes |
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2,155 |
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594 |
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Net loss |
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$ |
(820 |
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$ |
(19,088 |
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Net loss per share basic and diluted |
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$ |
(0.00 |
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$ |
(0.07 |
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Shares used in computing net loss per share basic and diluted |
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306,499 |
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272,228 |
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See accompanying notes. The Company adopted SFAS 123(R) as of May 1, 2006 and operating
results for the three months ended July 31, 2006 included stock-based compensation expense under
SFAS 123(R) of $2.2 million, net of tax, related to employee stock options and employee stock
purchases. There was no stock-based compensation expense related to employee stock options and
employee stock purchases recorded in the three months ended July 31, 2005.
See Note 9 to the condensed consolidated financial statements for more information.
4
FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended |
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July 31, |
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2006 |
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2005 |
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(Unaudited, in thousands) |
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Operating activities |
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Net loss |
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$ |
(820 |
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$ |
(19,088 |
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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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6,708 |
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7,471 |
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Stock-based compensation expense related to employee stock options and employee stock purchases |
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2,202 |
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Amortization of beneficial conversion feature of convertible notes |
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1,148 |
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1,081 |
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Amortization of purchased technology and other purchased intangibles |
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299 |
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476 |
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Amortization of acquired developed technology |
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1,519 |
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5,654 |
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Amortization of discount on restricted securities |
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(32 |
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(47 |
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Gain on sale or retirement of equipment |
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39 |
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24 |
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Share of losses of equity investee |
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237 |
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522 |
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Excess tax benefits from stock-based compensation |
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(44 |
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Deferred income taxes |
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1,572 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(8,184 |
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(683 |
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Inventories |
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694 |
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(871 |
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Other assets |
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(1,171 |
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1,468 |
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Deferred income taxes |
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470 |
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586 |
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Accounts payable |
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1,310 |
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2,129 |
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Accrued compensation |
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635 |
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2,096 |
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Other accrued liabilities |
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300 |
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2,583 |
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Deferred revenue |
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345 |
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617 |
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Net cash provided by operating activities |
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7,227 |
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4,018 |
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Investing activities |
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Purchases of property, equipment and improvements |
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(6,117 |
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(3,968 |
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Proceeds from sale of property and equipment |
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35 |
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Sale (purchase) of short-term and long-term investments |
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(3,386 |
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226 |
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Acquisition of subsidiaries, net of cash assumed |
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(394 |
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Net cash used in investing activities |
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(9,468 |
) |
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(4,136 |
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Financing activities |
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Repayments of liability related to sale-leaseback of building |
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(70 |
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(57 |
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Repayments of borrowings |
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(527 |
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(118 |
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Proceeds from exercise of stock options and employee stock purchase plan |
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2,905 |
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42 |
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Excess tax benefits from stock-based compensation |
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44 |
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Net cash provided by (used in) financing activities |
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2,352 |
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(133 |
) |
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Net increase (decrease) in cash and cash equivalents |
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111 |
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(251 |
) |
Cash and cash equivalents at beginning of period |
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63,361 |
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29,431 |
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Cash and cash equivalents at end of period |
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$ |
63,472 |
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$ |
29,180 |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
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$ |
177 |
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$ |
21 |
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Cash paid for taxes |
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$ |
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$ |
(10 |
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Supplemental schedule of non-cash investing and financing activities |
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Issuance of common stock upon conversion of promissory notes |
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$ |
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$ |
20,239 |
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Issuance of common stock in connection with acquisitions |
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$ |
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$ |
8,815 |
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See accompanying notes.
5
FINISAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business
Finisar is a leading provider of optical subsystems and components and network test and
monitoring systems. These products enable high-speed data communications over local area networks,
or LANs, storage area networks, or SANs, and metropolitan area networks, or MANs. Optical
subsystems consist primarily of transceivers which provide the fundamental optical-electrical
interface for connecting the various elements of these networks together. 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 using a wide range of network protocols, transmission speeds, physical mediums and
configurations over distances of 200 meters to 120 kilometers. Optical subsystems are sold to
leading manufacturers of storage and networking equipment for SAN, LAN and MAN applications such as
Brocade, Cisco Systems, EMC, Emulex, Hewlett-Packard Company, Huawei, McData and Qlogic. Sales of
optical components consist primarily of packaged lasers and photodetectors used in transceivers,
primarily for LAN and SAN applications.
Network test and monitoring systems are sold to original equipment manufacturers for testing
and validating their equipment designs and, to a lesser degree, to operators of networking and
storage data centers for monitoring and troubleshooting the performance of their installed systems.
These products are sold primarily to leading storage equipment manufacturers such as Brocade, EMC,
Emulex, Hewlett-Packard Company, IBM, McData and Qlogic.
2. Summary of Significant Accounting Policies
Interim Financial Information and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of July 31, 2006,
and for the three month periods ended July 31, 2006 and 2005, 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 31, 2006 and its operating results
and cash flows for the three month periods ended July 31, 2006 and 2005. 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, 2006.
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).
For ease of comparison, all references to period end dates have been presented as though the period
ended on the last day of the calendar month. The first quarter of fiscal 2007 ended on July 30,
2006. The first quarter of fiscal 2006 ended on July 31, 2005.
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
On May 1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123(revised 2004), Share-Based Payment (SFAS 123(R)), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to employees and
directors including employee stock options and employee stock purchases related to the Employee
Stock Purchase Plan (employee stock purchases) based on estimated fair values. SFAS 123(R)
supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) for periods
6
beginning in fiscal 2007. In
March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R).
The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of May 1, 2006, the first day of the
Companys fiscal year 2007. The Companys condensed consolidated financial statements as of and for
the three months ended July 31, 2006 reflect the impact of SFAS 123(R). In accordance with the
modified prospective transition method, the Companys condensed consolidated financial statements
for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).
Stock-based compensation expense recognized under SFAS 123(R) for the three months ended July 31,
2006 was $2.2 million which consisted of stock-based compensation expense related to employee stock
options and employee stock purchases. There was no stock-based compensation expense related to
employee stock options and employee stock purchases recognized during the three months ended July
31, 2005. See Note 9 for additional information.
SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the
date of grant using an option-pricing model. 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 condensed consolidated statement of operations. Prior to the adoption of SFAS 123(R), the
Company accounted for stock-based awards to employees and directors using the intrinsic value
method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no
stock-based compensation expense had been recognized in the Companys condensed consolidated
statement of operations, other than as related to acquisitions and certain stock option grants
issued to employees prior to the Companys initial public offering, because the exercise price of
the Companys stock options granted to employees and directors equaled the fair market value of the
underlying stock at the date of grant.
Stock-based compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest during the period.
Stock-based compensation expense recognized in the Companys condensed consolidated statement of
operations for the three months ended July 31, 2006 included compensation expense for share-based
payment awards granted prior to, but not yet vested as of April 30, 2006 based on the grant date
fair value estimated in accordance with the provisions of SFAS 123 and compensation expense for the
share-based payment awards granted subsequent to April 30, 2006 based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). Compensation expense for all
share-based payment awards granted prior to the adoption of SFAS 123(R) was recognized using the
Black-Scholes option-pricing model with a multiple-option approach. Compensation expense for all
share-based payment awards granted subsequent to adoption of SFAS 123(R) is recognized using the
Black-Scholes option-pricing model with a straight-line single-option approach. As stock-based
compensation expense recognized in the condensed consolidated statement of operations for the first
quarter of fiscal 2007 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In
the Companys pro forma information required under SFAS 123 for the periods prior to fiscal 2007,
the Company accounted for forfeitures as they occurred.
The Companys determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Companys stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables include, but are
not limited to, the Companys expected stock price volatility over the term of the awards, and the
actual and projected employee stock option exercise behaviors. Option-pricing models were
developed for use in estimating the value of traded options that have no vesting or hedging
restrictions and are fully transferable. Because the Companys employee stock options have certain
characteristics that are significantly different from traded options, and because changes in the
subjective assumptions can materially affect the estimated value, in managements opinion, the
existing valuation models may not provide an accurate measure of the fair value of the Companys
employee stock options. Although the fair value of employee stock options is determined in
accordance with SFAS 123(R) and SAB 107 using an options-pricing model, that value may not be
indicative of the fair value observed in a willing buyer/willing seller market transaction.
On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position No. FAS 123(R)-3 Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards. The Company has elected to adopt the alternative transition method provided in the
FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS
123(R). The alternative transition method includes simplified methods to establish the beginning
balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee
stock-based compensation, and to determine the subsequent impact on the APIC pool and condensed
consolidated statements of cash flows of the tax effects of employee stock-based compensation
awards that are outstanding upon adoption of SFAS 123(R).
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
7
(EITF) Issue 00-21 Revenue
Arrangements with Multiple Deliverables. Specifically, the Company recognizes revenue when
persuasive evidence of an arrangement exists, title and risk of loss have passed to the customer,
generally upon shipment, the price is fixed or determinable, and collectability is reasonably
assured. For those arrangements with multiple elements, or in related arrangements with the same
customer, the arrangement is divided into separate units of accounting if certain criteria are met,
including whether the delivered item has stand-alone value to the customer and whether there is
objective and reliable evidence of the fair value of the undelivered items. The consideration
received is allocated among the separate units of accounting based on their respective fair values,
and the applicable revenue recognition criteria are applied to each of the separate units. In cases
where there is objective and reliable evidence of the fair value of the undelivered item in an
arrangement but no such evidence for the delivered item, the residual method is used to allocate
the arrangement consideration. For units of accounting which include more than one deliverable, the
Company generally recognizes all revenue and cost of revenue for the unit of accounting during the
period in which the last undelivered item is delivered.
At the time revenue is recognized, the Company establishes an accrual for estimated warranty
expenses associated with sales, recorded as a component of cost of revenues. The Companys
customers and distributors generally do not have return rights. However, the Company has
established an allowance for estimated customer returns, based on historical experience, which is
netted against revenue.
Sales to certain distributors are made under agreements providing distributor price
adjustments and rights of return under certain circumstances. Revenue and costs relating to
distributor sales are deferred until products are sold by the distributors to end customers.
Revenue recognition depends on notification from the distributor that product has been sold to the
end customer. Also reported by the distributor are product resale price, quantity and end customer
shipment information, as well as inventory on hand. Deferred revenue on shipments to distributors
reflects the effects of distributor price adjustments and, the amount of gross margin expected to
be realized when distributors sell-through products purchased from the Company. Accounts receivable
from distributors are recognized and inventory is relieved when title to inventories transfers,
typically upon shipment from the Company at which point the Company has a legally enforceable right
to collection under normal payment terms.
Segment Reporting
Statement of Financial Accounting Standards (SFAS) No. 131 Disclosures about Segments of an
Enterprise and Related Information establishes standards for the way that public business
enterprises report information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has determined that it operates in two segments
consisting of optical subsystems and components and network test and monitoring systems.
Concentrations of Credit Risk
Financial instruments which potentially subject Finisar to concentrations of credit risk
include cash, cash equivalents, available-for-sale and restricted investments and accounts
receivable. Finisar places its cash, cash equivalents, available-for-sale and restricted
investments with high-credit quality financial institutions. Such investments are generally in
excess of FDIC insurance limits. 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 44.4% and 34.7% of
total accounts receivable at July 31, 2006 and April 30, 2006, respectively.
Current Vulnerabilities Due to Certain Concentrations
Finisar sells products primarily to customers located in North America. During the three
months ended July 31, 2006 and 2005, sales to the top five optical subsystems and components
customers represented 43.8% and 48.2% of total revenues, respectively. One customer represented
more than 10% of total revenues during each of these periods.
Included in the Companys condensed consolidated balance sheet at July 31, 2006, are the net
assets of the Companys manufacturing operations, substantially all of which are located in
Malaysia and which total approximately $48.6 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
8
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 $8,500 and $128,000 in the three months ended July 31,
2006 and 2005, 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.
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
9
July 31, 2006 and
April 30, 2006, the fair value of the Companys convertible subordinated debt was approximately
$257.8 million and $323.0 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 unlikely 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.
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):
10
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands, except per share amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(820 |
) |
|
$ |
(19,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net loss per share: |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding total |
|
|
306,499 |
|
|
|
272,228 |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
306,499 |
|
|
|
272,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.00 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents related to potentially dilutive securities
excluded from computation above because they are anti-dilutive: |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
17,659 |
|
|
|
1,545 |
|
Conversion of convertible subordinated notes |
|
|
58,647 |
|
|
|
58,647 |
|
Conversion of convertible notes |
|
|
|
|
|
|
16,284 |
|
Warrants |
|
|
470 |
|
|
|
942 |
|
|
|
|
|
|
|
|
Potentially dilutive securities |
|
|
76,776 |
|
|
|
77,418 |
|
|
|
|
|
|
|
|
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.
The components of comprehensive loss for the three months ended July 31, 2006 and 2005 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Net loss |
|
$ |
(820 |
) |
|
$ |
(19,088 |
) |
Foreign currency translation adjustment |
|
|
(585 |
) |
|
|
22 |
|
Change in unrealized gain (loss) on securities, net of
reclassification adjustments for realized loss |
|
|
11,985 |
|
|
|
(123 |
) |
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
10,580 |
|
|
$ |
(19,189 |
) |
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (loss), net of taxes, were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, 2006 |
|
|
April 30, 2006 |
|
Net unrealized gains/(losses) on available-for-sale securities |
|
$ |
11,409 |
|
|
$ |
(576 |
) |
Cumulative translation adjustment |
|
|
1,689 |
|
|
|
2,274 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
13,098 |
|
|
$ |
1,698 |
|
|
|
|
|
|
|
|
3. Inventories
Inventories consist of the following (in thousands):
11
|
|
|
|
|
|
|
|
|
|
|
July 31, 2006 |
|
|
April 30, 2006 |
|
Raw materials |
|
$ |
16,443 |
|
|
$ |
19,133 |
|
Work-in-process |
|
|
23,369 |
|
|
|
21,479 |
|
Finished goods |
|
|
12,628 |
|
|
|
12,362 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
52,440 |
|
|
$ |
52,974 |
|
|
|
|
|
|
|
|
During the three months ended July 31, 2006 and 2005, the Company recorded charges of $3.4
million and $1.1 million, respectively, for excess and obsolete inventory, and sold inventory that
was written-off in previous periods with an approximate cost of $1.1 million and $1.4 million,
respectively. As a result, cost of revenue associated with the sale of this inventory was zero.
4. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, 2006 |
| |
April 30, 2006 | |
|
|
|
Land |
|
$ |
9,747 |
|
|
$ |
9,747 |
|
Buildings |
|
|
10,846 |
|
|
|
10,929 |
|
Computer equipment |
|
|
34,858 |
|
|
|
34,149 |
|
Office equipment, furniture and fixtures |
|
|
3,160 |
|
|
|
3,182 |
|
Machinery and equipment |
|
|
122,091 |
|
|
|
118,327 |
|
Leasehold improvements |
|
|
12,777 |
|
|
|
7,445 |
|
Contruction-in-process |
|
|
1,082 |
|
|
|
5,888 |
|
|
|
|
Total |
|
|
194,561 |
|
|
|
189,667 |
|
Accumulated depreciation and amortization |
|
|
(112,359 |
) |
|
|
(107,442 |
) |
|
|
|
Property, equipment and improvements (net) |
|
$ |
82,202 |
|
|
$ |
82,225 |
|
|
|
|
5. Income Taxes
The Company recorded a provision for income taxes of $2.2 million and $594,000, respectively,
for the three months ended July 31, 2006 and 2005. The provision for income tax expense for the
three months ended July 31, 2006 includes a non-cash charge for tax expense of approximately $1.6
million associated with the utilization of pre-acquisition tax net operating losses of an acquired
company, the tax benefits of which must be recorded as a reduction of goodwill pursuant to the
accounting rules under SFAS 109 for business combinations. The provision for income tax expense for
the three months ended July 31, 2006 and 2005 also includes non-cash charges for deferred tax
liabilities that were recorded for tax amortization of goodwill for which no financial statement
amortization has occurred under generally accepted accounting principles, as promulgated by SFAS
142, and current tax expense for minimum state taxes and foreign income taxes arising in certain
foreign jurisdictions in which the Company conducts business.
The Company records a valuation allowance against its deferred tax assets for each period in
which management concludes that it is more likely than not that the deferred tax assets will not be
realized. Realization of the Companys net deferred tax assets is dependent upon future taxable
income the amount and timing of which are uncertain. Accordingly, the Companys net deferred tax
assets as of July 31, 2006 have been fully offset by a valuation allowance.
A portion of the valuation allowance for deferred tax assets at July 31, 2006 relates to the
tax benefits of stock option deductions the tax benefit of which will be credited to paid-in
capital if and when realized. In addition, a portion of the valuation allowance for deferred tax
assets at July 31, 2006 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. Thus in the current quarter, the tax benefits resulting from the elimination of the
valuation against deferred tax assets associated net operating loss carry forwards of acquired
companies did not result in a reduction in income tax expense. Furthermore, the Company records a
non-cash charge for deferred income tax expense in each quarter that such tax benefits are actually
realized for income tax purposes in the Companys tax returns.
Based on the amount deferred tax assets related to tax net operating loss carry forwards of
acquired companies, the Company presently estimates that any tax benefit resulting from the
elimination of the related valuation allowance will continue to reduce goodwill and other
non-current intangible assets throughout fiscal 2007 and at least a portion of fiscal 2008.
12
Utilization of the Companys net operating loss and tax credit carryforwards may be subject to
a substantial annual limitation due to the ownership change limitations set forth by Internal
Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in
the expiration of the net operating loss and tax credit carryforwards before utilization.
6. Purchased Intangible Assets Including Goodwill
The following table reflects changes in the carrying amount of goodwill by reporting unit (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical Subsystems |
|
|
Network Test and |
|
|
Consolidated |
|
|
|
and Components |
|
|
Monitoring Systems |
|
|
Total |
|
Balance at April 30, 2006 |
|
$ |
84,426 |
|
|
$ |
40,106 |
|
|
$ |
124,532 |
|
Reduction related to tax related net operating loss usage |
|
|
(1,572 |
) |
|
|
|
|
|
|
(1,572 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
$ |
82,854 |
|
|
$ |
40,106 |
|
|
$ |
122,960 |
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of fiscal 2007, the Company recorded a reduction of goodwill
associated with the utilization of the net operating losses for tax purposes of an acquired
subsidiary. See Note 5 to the condensed consolidated financial statements for more information.
The following table reflects intangible assets subject to amortization as of July 31, 2006 and
April 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2006 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
102,466 |
|
|
|
($89,006 |
) |
|
$ |
13,460 |
|
Trade name |
|
|
3,625 |
|
|
|
(3,083 |
) |
|
|
542 |
|
Customer relationships |
|
|
5,243 |
|
|
|
(1,907 |
) |
|
|
3,336 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,334 |
|
|
|
($93,996 |
) |
|
$ |
17,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2006 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Purchased technology |
|
$ |
102,466 |
|
|
|
($87,494 |
) |
|
$ |
14,972 |
|
Trade name |
|
|
3,625 |
|
|
|
(3,056 |
) |
|
|
569 |
|
Customer relationships |
|
|
5,243 |
|
|
|
(1,628 |
) |
|
|
3,615 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,334 |
|
|
|
($92,178 |
) |
|
$ |
19,156 |
|
|
|
|
|
|
|
|
|
|
|
Estimated remaining amortization expense for each of the next five fiscal years ending April
30, is as follows (dollars in thousands):
|
|
|
|
|
Year |
|
Amount |
|
2007 |
|
$ |
5,287 |
|
2008 |
|
|
5,851 |
|
2009 |
|
|
3,264 |
|
2010 |
|
|
1,594 |
|
2011 and beyond |
|
|
1,342 |
|
|
|
|
|
|
|
$ |
17,338 |
|
|
|
|
|
13
7. Investments
Available-for-Sale Securities
The following is a summary of the Companys available-for-sale investments as of July 31, 2006
and April 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Market |
|
Investment Type |
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
As of July 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
46,737 |
|
|
$ |
5 |
|
|
$ |
(313 |
) |
|
$ |
46,429 |
|
Government agency |
|
|
23,025 |
|
|
|
2 |
|
|
|
(129 |
) |
|
|
22,898 |
|
Mortgage-backed |
|
|
4,880 |
|
|
|
|
|
|
|
(53 |
) |
|
|
4,827 |
|
Other securities |
|
|
1,594 |
|
|
|
|
|
|
|
(7 |
) |
|
|
1,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,236 |
|
|
|
7 |
|
|
|
(502 |
) |
|
|
75,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
3,607 |
|
|
$ |
11,920 |
|
|
$ |
|
|
|
$ |
15,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
79,843 |
|
|
$ |
11,927 |
|
|
$ |
(502 |
) |
|
$ |
91,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
16,850 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,850 |
|
Short-term investments |
|
|
40,641 |
|
|
|
2 |
|
|
|
(249 |
) |
|
|
40,394 |
|
Long-term investments |
|
|
22,352 |
|
|
|
11,925 |
|
|
|
(253 |
) |
|
|
34,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
79,843 |
|
|
$ |
11,927 |
|
|
$ |
(502 |
) |
|
$ |
91,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
$ |
51,925 |
|
|
$ |
1 |
|
|
$ |
(357 |
) |
|
$ |
51,569 |
|
Government agency |
|
|
16,826 |
|
|
|
|
|
|
|
(160 |
) |
|
|
16,666 |
|
Mortgage-backed |
|
|
5,125 |
|
|
|
1 |
|
|
|
(54 |
) |
|
|
5,072 |
|
Municipal |
|
|
300 |
|
|
|
|
|
|
|
(7 |
) |
|
|
293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,176 |
|
|
$ |
2 |
|
|
$ |
(578 |
) |
|
$ |
73,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
18,176 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
18,175 |
|
Short-term investments |
|
|
33,745 |
|
|
|
1 |
|
|
|
(239 |
) |
|
|
33,507 |
|
Long-term investments |
|
|
22,255 |
|
|
|
1 |
|
|
|
(338 |
) |
|
|
21,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,176 |
|
|
$ |
2 |
|
|
$ |
(578 |
) |
|
$ |
73,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross realized losses for the three months ended July 31, 2006 and 2005 were immaterial.
Realized gains and losses were calculated based on the specific identification method.
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 31, 2006 and April 30,
2006 (in thousands):
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Market |
|
|
|
Cost |
|
|
Gain/(Loss) |
|
|
Value |
|
As of July 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Government agency |
|
$ |
5,552 |
|
|
$ |
(77 |
) |
|
$ |
5,475 |
|
|
|
|
|
|
|
|
|
|
|
Classified as: |
|
|
|
|
|
|
|
|
|
|
|
|
Short term less than 1 year |
|
|
3,725 |
|
|
|
(29 |
) |
|
|
3,696 |
|
Long term - 1 to 3 years |
|
|
1,827 |
|
|
|
(48 |
) |
|
|
1,779 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,552 |
|
|
$ |
(77 |
) |
|
$ |
5,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Government agency |
|
$ |
5,520 |
|
|
$ |
(105 |
) |
|
$ |
5,415 |
|
|
|
|
|
|
|
|
|
|
|
Classified as: |
|
|
|
|
|
|
|
|
|
|
|
|
Short term less than 1 year |
|
|
3,705 |
|
|
|
(51 |
) |
|
|
3,654 |
|
Long term - 1 to 3 years |
|
|
1,815 |
|
|
|
(54 |
) |
|
|
1,761 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,520 |
|
|
$ |
(105 |
) |
|
$ |
5,415 |
|
|
|
|
|
|
|
|
|
|
|
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 31, 2006 and April 30, 2006 are cost method
investments of $11.3 million for each period.
Equity Method Investment
Included in minority investments at July 31, 2006 and April 30, 2006 are $0 and $3.8 million,
respectively, representing the carrying value of the Companys minority investment in one private
company accounted for under the equity method. During the three months ended July 31, 2006 and
2005, the Company recorded expenses of $237,000 and $522,000, respectively, representing the
Companys share of the loss of the investee, which was classified as other expense.
Conversion of Equity Method Investment to Available-for-Sale Securities
During the first quarter of fiscal 2007, the Companys ownership percentage in its equity
method investee decreased below 20%. Additionally, the investee became a publicly traded company.
The Company classified this investment as available-for-sale securities in accordance with SFAS 115
and recorded an unrealized gain of $11.9 million in accumulated other comprehensive income at July
31, 2006. As of July 31, 2006, the fair market value of this investment included in long-term
available-for-sale investments was $15.5 million.
9. Employee Benefit Plans
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, which includes its sub-plan, the
International Employee Stock Purchase Plan (together the Purchase Plan), under which 15,750,000
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 31, 2006 and 2005, the Company
issued 860,025 and no shares, respectively. At July 31, 2006,
10,060,097 shares were available for
issuance under the Purchase Plan.
The employee stock 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.
15
Employee Stock Option Plans
During fiscal 1989, Finisar adopted the 1989 Stock Option Plan (the 1989 Plan). The 1989
Plan expired in April 1999 and no further option grants have been made under the 1989 Plan since
that time. Options granted under the 1989 Plan had an exercise price of not less than 85% of the
fair value of a share of common stock on the date of grant (110% of the fair value in certain
instances) as determined by the board of directors. Options generally vested over five years and
had a maximum term of 10 years.
Finisars 1999 Stock Option Plan was adopted by the board of directors and approved by the
stockholders in September 1999. An amendment and restatement of the 1999 Stock Option Plan,
including renaming it the 2005 Stock Incentive Plan (the 2005 Plan), was approved by the board of
directors in September 2005 and by the stockholders in October 2005. A total of 21,000,000 shares
of common stock were initially reserved for issuance under the 2005 Plan. The share reserve
automatically increases on May 1 of each calendar year by a number of shares equal to 5% of the
number of shares of Finisars common stock issued and outstanding as of the immediately preceding
April 30, subject to certain restrictions on the aggregate maximum number of shares that may be
issued pursuant to incentive stock options. The types of stock-based awards available under the
2005 Plan includes stock options, stock appreciation rights, restricted stock units and other
stock-based awards which vest upon the attainment of designated performance goals or the
satisfaction of specified service requirements or, in the case of certain restricted stock units or
other stock-based awards, become payable upon the expiration of a designated time period following
such vesting events. To date, only stock options have been granted under the 2005 Plan. Options
generally vest over five years and have a maximum term of 10 years. All options granted under the
2005 Plan are immediately exercisable. As of July 31, 2006 and 2005, 3,700 shares were subject to
repurchase for each period.
A summary of activity under the Companys employee stock option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Available |
|
|
|
|
for Grant |
|
Options Outstanding |
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
Aggregate |
Options for Common Stock |
|
Number of Shares |
|
Number of Shares |
|
Exercise Price |
|
Intrinsic Value (1) |
Balance at April 30, 2006 |
|
|
20,067,862 |
|
|
|
41,849,962 |
|
|
$ |
2.34 |
|
|
|
|
|
Increase in authorized shares |
|
|
15,275,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(2,058,500 |
) |
|
|
2,058,500 |
|
|
$ |
4.39 |
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(738,764 |
) |
|
$ |
1.66 |
|
|
$ |
2,146,273 |
|
Options canceled |
|
|
435,827 |
|
|
|
(435,827 |
) |
|
$ |
4.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2006 |
|
|
33,720,794 |
|
|
|
42,733,871 |
|
|
$ |
2.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the difference between the exercise price and the value of Finisar common stock at the time of exercise. |
The following table summarizes significant ranges of outstanding and exercisable options
as of July 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Range of |
|
Number |
|
|
Remaining |
|
|
Exercise |
|
|
Aggregate |
|
|
Number |
|
|
Exercise |
|
|
Aggregate |
|
Exercise Prices |
|
Outstanding |
|
|
Contractual Life |
|
|
Price |
|
|
Intrinsic Value |
|
|
Exercisable |
|
|
Price |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
(In years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05 - $1.13 |
|
|
3,305,716 |
|
|
|
7.73 |
|
|
$ |
0.95 |
|
|
$ |
6,068,964 |
|
|
|
1,087,816 |
|
|
$ |
0.84 |
|
|
$ |
2,121,676 |
|
$1.15 - $1.15 |
|
|
4,688,042 |
|
|
|
8.05 |
|
|
|
1.15 |
|
|
|
7,688,389 |
|
|
|
1,114,994 |
|
|
|
1.15 |
|
|
|
1,828,590 |
|
$1.18 - $1.47 |
|
|
4,408,741 |
|
|
|
8.21 |
|
|
|
1.34 |
|
|
|
6,409,428 |
|
|
|
1,132,390 |
|
|
|
1.37 |
|
|
|
1,602,898 |
|
$1.48 - $1.73 |
|
|
4,565,599 |
|
|
|
5.96 |
|
|
|
1.58 |
|
|
|
5,509,765 |
|
|
|
4,228,199 |
|
|
|
1.58 |
|
|
|
5,125,000 |
|
$1.76 - $1.76 |
|
|
4,986,670 |
|
|
|
9.32 |
|
|
|
1.76 |
|
|
|
5,136,270 |
|
|
|
754,030 |
|
|
|
1.76 |
|
|
|
776,651 |
|
$1.77 - $1.79 |
|
|
4,802,848 |
|
|
|
7.4 |
|
|
|
1.79 |
|
|
|
4,806,690 |
|
|
|
1,957,576 |
|
|
|
1.79 |
|
|
|
1,957,576 |
|
$1.80 - $1.80 |
|
|
4,692,942 |
|
|
|
7.02 |
|
|
|
1.80 |
|
|
|
4,646,013 |
|
|
|
4,375,883 |
|
|
|
1.80 |
|
|
|
4,332,124 |
|
$1.835 - $2.91 |
|
|
4,330,320 |
|
|
|
7.83 |
|
|
|
2.23 |
|
|
|
2,442,734 |
|
|
|
1,523,320 |
|
|
|
2.16 |
|
|
|
952,684 |
|
$2.92 - $5.31 |
|
|
5,533,945 |
|
|
|
7.45 |
|
|
|
3.99 |
|
|
|
|
|
|
|
2,525,617 |
|
|
|
3.72 |
|
|
|
|
|
$5.32 - $22.50 |
|
|
1,419,048 |
|
|
|
4.26 |
|
|
|
17.34 |
|
|
|
|
|
|
|
1,415,448 |
|
|
|
17.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,733,871 |
|
|
|
7.55 |
|
|
$ |
2.43 |
|
|
$ |
42,708,252 |
|
|
|
20,115,273 |
|
|
$ |
3.00 |
|
|
$ |
18,697,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax
intrinsic value, based on the Companys closing stock price of $2.79 as of July 28, 2006, which
would have been received by the option holders had all option holders exercised their
16
options as of
that date. The weighted-average remaining contractual life of options exercisable is 6.51 years.
The total number of in-the-money options exercisable as of July 31, 2006 was 16.2 million.
Valuation and Expense Information under SFAS 123(R)
On May 1, 2006, the Company adopted SFAS 123(R), which requires the measurement and
recognition of compensation expense for all share-based payment awards made to the Companys
employees and directors including employee stock options and employee stock purchases under its
1999 Employee Stock Purchase Plan based on estimated fair values. 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 31, 2006 which was reflected in our operating
results as follows (in thousands):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, 2006 |
|
Cost of revenues |
|
$ |
457 |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in cost of revenues |
|
|
457 |
|
|
|
|
|
|
Research and development |
|
|
889 |
|
Sales and marketing |
|
|
371 |
|
General and administrative |
|
|
485 |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in operating expenses |
|
|
1,745 |
|
|
|
|
|
|
Stock-based compensation expense related to employee stock options
and employee stock purchases |
|
|
2,202 |
|
Tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense related to employee stock options
and employee stock purchases, net of tax |
|
$ |
2,202 |
|
|
|
|
|
As a result of adopting SFAS 123(R), the Companys income before income taxes and net loss for
the three months ended July 31, 2006, was $2.2 million
lower than if the Company had continued to
account for stock-based compensation under APB 25. Basic and diluted earnings per share for the
three months ended July 31, 2006 would have been unchanged had the Company continued to account for
share-based compensation under APB 25.
The total stock-based compensation capitalized as part of inventory as of July 31, 2006 was
$204,000.
The table below reflects net loss and diluted net loss per share for the three months ended
July 31, 2006 compared with pro forma information for the three months ended July 31, 2005 as
follows (in thousands, except per share amounts):
17
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
July 31, |
|
|
|
2006 |
|
|
2005 |
|
Net loss as reported (1) |
|
|
N/A |
|
|
$ |
(19,088 |
) |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense related to employee stock options
and employee stock purchases |
|
|
2,202 |
|
|
|
3,084 |
|
Tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense related to employee stock options
and employee stock purchases, net of tax (2) |
|
|
2,202 |
|
|
|
3,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, including the effect of stock-based compensation expense (3) |
|
|
(820 |
) |
|
|
(22,172 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share as reported for the prior period (1) |
|
|
N/A |
|
|
$ |
(0.07 |
) |
Basic and diluted net income (loss) per share, including the effect of stock-based
compensation expense (3) |
|
$ |
(0.00 |
) |
|
$ |
(0.08 |
) |
|
|
|
(1) |
|
Net loss and net loss per share prior to fiscal 2007 did not include stock-based
compensation expense for employee stock options and employee stock purchases under SFAS 123
because the Company did not adopt the recognition provisions of SFAS 123. |
|
(2) |
|
Stock-based compensation expense prior to fiscal 2007 is calculated based on the pro
forma application of SFAS 123. |
|
(3) |
|
Net loss and net loss per share prior to fiscal 2007 represents pro forma information
based on SFAS 123. |
As of July 31, 2006, total compensation cost related to unvested stock options not yet
recognized was $10.6 million which is expected to be recognized over the next 21 months on a
weighted-average basis.
Upon adoption of SFAS 123(R), the Company began estimating the value of employee stock options
on the date of grant using the Black-Scholes option-pricing model with a straight-line attribution
method to recognize share-based compensation expense. Compensation expense for all share-based
payment awards granted prior to the adoption of SFAS 123(R) was recognized using the Black-Scholes
option-pricing model with a multiple-option approach for the purpose of the pro forma financial
information in accordance with SFAS 123.
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 31, |
|
July 31, |
|
July 31, |
|
July 31, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Weighted average fair value of grants |
|
$ |
3.47 |
|
|
$ |
0.84 |
|
|
$ |
0.90 |
|
|
$ |
0.36 |
|
Expected term (in years) |
|
|
5.15 |
|
|
|
3.60 |
|
|
|
0.50 |
|
|
|
0.46 |
|
Volatility |
|
|
104 |
% |
|
|
110 |
% |
|
|
67 |
% |
|
|
99 |
% |
Risk-free interest rate |
|
|
5.07 |
% |
|
|
4.12 |
% |
|
|
4.40 |
% |
|
|
2.85 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
The expected term represents the period that the Companys stock-based awards are expected to
be outstanding and was determined based on the Companys historical experience with similar awards,
giving consideration to the contractual terms of the stock-based awards, vesting schedules and
expectations of future employee behavior as influenced by changes to the terms of its stock-based
awards.
The fair value of stock based payments made during the three months ended July 31, 2006 and
2005, were valued using the Black-Scholes option-pricing model with a volatility factor based on
the Companys historical stock prices.
The Company bases the risk-free interest rate used in the Black-Scholes option-pricing model
on constant maturity bonds from the Federal Reserve in which the maturity is set equal to the
expected term.
18
The Black-Scholes option-pricing model calls for a single expected dividend yield as an input.
The Company has not issued any dividends.
As stock-based compensation expense recognized in the condensed consolidated statement of
operations for the first quarter of fiscal 2007 is based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Forfeitures were estimated based on historical experience. In the Companys pro
forma information required under SFAS 123 for the periods prior to fiscal 2007, the Company
accounted for forfeitures as they occurred.
Pro Forma information Under SFAS 123 for Periods Prior to Fiscal 2007
Pro forma information regarding option grants made to the Companys employees and directors
and employee stock purchases related to the Purchase Plan is as follows (in thousands, except
per-share amounts):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, 2005 |
|
Net loss as reported |
|
$ |
(19,088 |
) |
Total stock-based employee compensation expense determined
under fair value based method for all awards |
|
|
(3,084 |
) |
|
|
|
|
Net loss pro forma |
|
$ |
(22,172 |
) |
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share as reported |
|
$ |
(0.07 |
) |
|
|
|
|
|
Basic and diluted net loss per share pro forma |
|
$ |
(0.08 |
) |
The weighted-average estimated value of employee stock options granted during the three months
ended July 31, 2005 was $0.84 using the Black-Scholes model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, 2005 |
|
Expected term (in years) |
|
|
3.60 |
|
Volatility |
|
|
110 |
% |
Risk-free interest rate |
|
|
4.12 |
% |
Dividend yield |
|
|
0.00 |
% |
Accuracy of Fair Value Estimates
The Company uses third-party analyses to assist in developing the assumptions used in the
Black-Scholes model. The Company is responsible for determining the assumptions used in estimating
the fair value of its share-based payment awards.
The Companys determination of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by the Companys stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables include, but are not
limited to, the Companys expected stock price volatility over the term of the awards, and actual
and projected employee stock option exercise behaviors. Option-pricing models were developed for
use in estimating the value of traded options that have no vesting or hedging restrictions and are
fully transferable. Because the Companys employee stock options have certain characteristics that
are significantly different from traded options, and because changes in the subjective assumptions
can materially affect the estimated value, in managements opinion, the existing valuation models
may not provide an accurate measure of the fair value of the Companys employee stock options.
Although the fair value of employee stock options is determined in accordance with SFAS 123(R) and
SAB 107 using an option-pricing model, that value may not be indicative of the fair value observed
in a willing buyer/willing seller market transaction.
19
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.
20
Information about reportable segment revenues and income/(losses) are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
July 31, |
|
|
2006 |
|
2005 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
96,043 |
|
|
$ |
72,370 |
|
Network test and monitoring systems |
|
|
10,200 |
|
|
|
9,362 |
|
|
|
|
Total revenues |
|
$ |
106,243 |
|
|
$ |
81,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense: |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
6,424 |
|
|
$ |
7,081 |
|
Network test and monitoring systems |
|
|
284 |
|
|
|
390 |
|
|
|
|
Total depreciation and amortization expense |
|
$ |
6,708 |
|
|
$ |
7,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
$ |
6,197 |
|
|
$ |
(5,366 |
) |
Network test and monitoring systems |
|
|
(8 |
) |
|
|
(3,094 |
) |
|
|
|
Total operating income (loss) |
|
|
6,189 |
|
|
|
(8,460 |
) |
|
|
|
|
|
|
|
|
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
Amortization of acquired developed technology |
|
|
(1,519 |
) |
|
|
(5,654 |
) |
Amortization of purchased intangibles |
|
|
(299 |
) |
|
|
(476 |
) |
Interest income (expense), net |
|
|
(2,666 |
) |
|
|
(3,304 |
) |
Other non-operating income (expense), net |
|
|
(370 |
) |
|
|
(600 |
) |
|
|
|
Total unallocated amounts |
|
|
(4,854 |
) |
|
|
(10,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
1,335 |
|
|
$ |
(18,494 |
) |
|
|
|
The following is a summary of total assets by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
April 30, |
|
|
|
2006 |
|
|
2006 |
|
Optical subsystems and components |
|
$ |
360,289 |
|
|
$ |
349,235 |
|
Network test and monitoring systems |
|
|
69,887 |
|
|
|
72,422 |
|
Other assets |
|
|
95,685 |
|
|
|
84,217 |
|
|
|
|
|
|
|
|
|
|
$ |
525,861 |
|
|
$ |
505,874 |
|
|
|
|
|
|
|
|
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 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenues from sales to unaffiliated
customers: |
|
|
|
|
|
|
|
|
United States |
|
$ |
40,425 |
|
|
$ |
46,675 |
|
Rest of the world |
|
|
65,818 |
|
|
|
35,057 |
|
|
|
|
|
|
|
|
|
|
$ |
106,243 |
|
|
$ |
81,732 |
|
|
|
|
|
|
|
|
Revenues generated in the United States are all from sales to customers located in the United
States.
21
The following is a summary of long-lived assets within geographic areas based on the location
of the assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
April 30, |
|
|
|
2006 |
|
|
2006 |
|
Long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
224,164 |
|
|
$ |
233,498 |
|
Malaysia |
|
|
24,028 |
|
|
|
21,649 |
|
Rest of the world |
|
|
2,950 |
|
|
|
2,984 |
|
|
|
|
|
|
|
|
|
|
$ |
251,142 |
|
|
$ |
258,131 |
|
|
|
|
|
|
|
|
The following is a summary of capital expenditures by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2006 |
|
|
2005 |
|
Optical subsystems and components |
|
$ |
6,058 |
|
|
$ |
3,936 |
|
Network test and monitoring systems |
|
|
59 |
|
|
|
32 |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
6,117 |
|
|
$ |
3,968 |
|
|
|
|
|
|
|
|
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 31, 2006 |
|
Beginning balance at April 30, 2006 |
|
$ |
1,767 |
|
Additions during the period based upon product sold |
|
|
617 |
|
Settlements |
|
|
(117 |
) |
Changes in liability for pre-existing warranties, including expirations |
|
|
(442 |
) |
|
|
|
|
Ending balance at July 31, 2006 |
|
$ |
1,825 |
|
|
|
|
|
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 31, 2006 and 2005,
the Company sold approximately $4.2 million and $6.0 million, respectively, of its trade
receivables to Silicon Valley Bank under the terms of this agreement.
13. Restructuring
As of July 31, 2006, $1.2 million of committed facility payments remain accrued and are
expected to be fully utilized by the end of fiscal 2011. This amount relates to restructuring
activities associated with the Companys Sunnyvale and Scotts Valley facilities that took place in
fiscal 2006.
22
14. Pending Litigation
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, its President and Chief Executive Officer, Frank H. Levinson,
its former Chairman of the Board and Chief Technical Officer, Stephen K. Workman, its Senior Vice
President and Chief Financial Officer, and an investment banking firm that served as an underwriter
for its initial public offering in November 1999 and a secondary offering in April 2000. The
complaint, as subsequently amended, alleges violations of Sections 11 and 15 of the Securities Act
of 1933 and Sections 10(b) and 20(b) of the Securities Exchange Act of 1934, on the grounds that
the prospectuses incorporated in the registration statements for the offerings failed to disclose,
among other things, that (i) the underwriter had solicited and received excessive and undisclosed
commissions from certain investors in exchange for which the underwriter allocated to those
investors material portions of the shares of its stock sold in the offerings and (ii) the
underwriter had entered into agreements with customers whereby the underwriter agreed to allocate
shares of its stock sold in the offerings to those customers in exchange for which the customers
agreed to purchase additional shares of its stock in the aftermarket at pre-determined prices. No
specific damages are claimed. Similar allegations have been made in lawsuits relating to more than
300 other initial public offerings conducted in 1999 and 2000, which were consolidated for pretrial
purposes. In October 2002, all claims against the individual defendants were dismissed without
prejudice. On February 19, 2003, the Court denied defendants motion to dismiss the complaint. In
July 2004, the Company and the individual defendants accepted a settlement proposal made to all of
the issuer defendants. Under the terms of the settlement, the plaintiffs will 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 will be required to pay the amount, if any, by
which $1 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the
underwriter defendants in all the cases. If the plaintiffs fail to recover $1 billion and payment
is required under the guaranty, the Company would be responsible to pay its pro rata portion of the
shortfall, up to the amount of the self-insured retention under its insurance policy, which may be
up to $2 million. The timing and amount of payments that the Company could be required to make
under the proposed settlement will 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
settlement is subject to approval of the Court. The Court held hearings on April 13, 2005 and
September 6, 2005 to determine the final form, substance and program of class notice and the
scheduling of a fairness hearing to consider final approval of the settlement. Subsequently, the
Court held a hearing on April 24, 2006 to consider final approval of the settlement and has yet to
issue a decision. If the settlement is not 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.
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, 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 has been willfully infringed and awarded the Company damages of
$78,920,250.25. 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 monthly figures beginning April 4, 1999, amounting to approximately
$13.4 million. Finally, the Court awarded the Company costs of $147,282.36 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 for the period beginning June 16, 2006 through the duration of the patent, which expires in April 2012. In court testimony,
DirecTVs damages expert estimated that in 2006 DirecTV would bring into service 15 million new set
top boxes. As a result, assuming this estimate does not change going forward, and that all other
conditions remain the same, for example, DirecTVs business conditions and the technology used in
its transmission of content, DirecTV would owe the Company approximately $6 million for the first
quarterly period of the compulsory license, such first payment being due under the Courts decree
on October 7, 2006. During the July 6, 2006 hearing, the Court denied all pending motions not
previously ruled on, including DirecTVs oral motions requesting the Court to set aside or reverse
the jury verdict. The Court entered final judgment in favor of the Company and against DirecTV on
July 7, 2006. DirecTV filed written post-trial motions, seeking essentially the same relief it
sought through its oral motions and requesting a new trial on a number of grounds. The Court
denied each of those motions in an order dated September 1, 2006. In still another written
post-trial motion, DirecTV asked the Court to allow DirecTV to place any amounts owed Finisar under
the compulsory license into an escrow account pending the outcome of any appeal, requesting that
those amounts be refundable in the event that DirecTV prevails on appeal. Finisar opposed that
motion, and a decision by the Court on that issue is pending. DirecTV has indicated in post-trial
press releases that it intends to appeal. Based upon the entrance date of the Courts September 1,
2006 order, DirecTVs notice of appeal, if any, will be due on or before October 5, 2006. The
Company is currently reviewing its options with respect to any cross appeal which is likewise due
either on or before October 5, 2006 or fourteen (14) days from when DirecTV files its notice of
appeal, whichever is later.
On September 6, 2005, the Company filed an action in the United States District Court for the
District of Delaware against Agilent Technologies, Inc. (Agilent). The lawsuit alleged that
Agilent willfully infringed the Companys U.S. Patents No. 5,019,769 and No. 6,941,077, relating to
its digital diagnostics technology, by developing, manufacturing, using, importing, selling and/or
offering to sell optoelectronic transceivers that embody one or more of the claims of the patents.
The complaint sought damages for lost profits of at least $1.1 billion based on Agilents sales of
infringing products. The Company also sought to treble those damages based on the willful nature of
Agilents infringement and to obtain an injunction against future infringement. On October 24,
2005, the Company filed an amended complaint adding allegations of infringement of its U.S. Patents
No. 6,952,531 and No. 6,957,021, two patents that also relate to its digital diagnostic technology.
On December 7, 2005, Agilent answered the complaint denying infringement and asserting patent
invalidity. The Court had set a trial date of September 4, 2007. On July 11, 2006 the Company
signed a settlement agreement with Agilent and Verigy Pte. Ltd. (a Singaporean corporation created
from Agilents semiconductor test business after the suit began), which included a cross-covenant
not to sue the other parties for infringement of fiber optic patents in their respective
portfolios. Under terms of the settlement, the parties agreed to dismiss the suit and countersuit.
On July 18, 2006 the court signed the order of dismissal.
On February 22, 2006, Avago Technologies General IP Pte. Ltd. and Avago Technologies Fiber IP
Pte. Ltd., both Singaporean corporations, filed suit against the Company in the United States
District Court for the District of Delaware, alleging that the Companys short-wavelength
optoelectronic transceivers infringe U.S. Patents Nos. 5,359,447 and 5,761,229. The Avago entities
were created as a result of the acquisition of Agilents Semiconductor Products Group (which
included Agilents optoelectronic transceiver business) by Kohlberg Kravis Roberts & Co., Silver
Lake Partners, and others. The complaint sought damages for willful infringement, injunctive
relief, prejudgment interest, and attorneys fees. Without ever having served the complaint on the
Company, the Avago entities dismissed their suit without prejudice on March 2, 2006. The Company
believes that the allegations by the Avago entities were without merit. On July 11, 2006, the
Company signed a cross-license agreement with the Avago entities covering the parties respective
fiber optic patent portfolios. The agreement resolves, among other things, any previous issues with
respect to U.S. Patent Nos. 5,359,447 and 5,761,229.
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 U.S. Patent No.
5,404,505 (the 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 Company believes the suit to be without
merit and is currently reviewing its options in response to the complaint. Pursuant to stipulated
extensions agreed by the parties and approved by the Court, the Company may respond or otherwise
move to dismiss the complaint on or before September 15, 2006.
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 Company believes that the suit to be
without merit and is currently reviewing its options in response to the complaint. Pursuant to
stipulated extensions agreed by the parties and approved by the Court, the Company may respond or
otherwise move to dismiss the complaint on or before October 23, 2006.
23
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 31, 2006.
To date, the Company has not incurred material costs to defend lawsuits or settle claims related to
these indemnification agreements.
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.
Overview
Revenues increased for the twelfth consecutive quarter to $106.2 million in the three months
ended July 31, 2006. This represented an increase of $24.5 million, or 30.0%, from $81.7 million
in the three months ended July 31, 2005. The increase was primarily attributable to an increase in
sales of optical subsystem products, primarily for LAN/SAN applications and, to a lesser degree,
for MAN-Ethernet applications that are compliant with the SONET/SDH protocol. Historically, we
have generated most of our revenues from products used for LAN/SAN and MAN-Ethernet applications
capable of operating at 1 and 2 gigabits per second, or Gbps. We began selling products capable of
operating at 4 Gbps for SAN applications during fiscal 2006. Sales of these products comprised 88%
of total optical subsystem and component revenues in the most recent quarter. While we believe
that these markets will continue to grow, we are targeting the emerging 10 to 40 Gbps market for
LAN and MAN applications for its future growth potential and have invested a considerable portion
of our research and development resources in designing new products for these markets. Sales of
these products totaled less than $6.0 million in the three months ended July 31, 2006, or 6% of
total revenues for optical subsystems and components.
Revenues from the sale of network test and monitoring systems have been in the range of $9 to
$11 million per quarter for the last eight quarters. This segment of our business has been heavily
reliant on the sale of products to original equipment manufacturers who use these systems to design
products for SANs using the Fibre Channel protocol. This industry is in the process of
establishing specifications for new products that will operate at 8 Gbps by the end of calendar 2006. New test and monitoring systems capable of operating at these new speeds will
likely be introduced in the early part of calendar 2007. We believe that the demand for existing
products that operate at 4 Gbps may soften in the near term as customers anticipate the
introduction of these new 8 Gbps products. In the meantime, we are currently pursuing other market
opportunities that rely on the use of high-speed serial data transmission using other protocols
such as SAS/SATA and CE ATA to expand our network test and monitoring system business.
We recorded a net loss of $820,000 in the three months ended July 31, 2006, compared to a net
loss of $19.1 million in the three months ended July 31, 2005. The improvement is the result of
the increase in revenues and associated gross profit thereon. Operating expenses were up $526,000
from the comparable period in fiscal 2006 due to a charge of $2.2 million in the current quarter
associated with stock-based compensation expense as a result of the adoption of FAS 123(R).
Profitability in the current quarter was also impacted by a tax provision totaling $2.2 million
against pretax income of $1.3 million. Approximately $1.6 million of this largely non-cash
provision relates to the requirement to use a net operating loss carryforward to reduce goodwill on
our balance sheet rather as a credit to the provision for income taxes on our statement of
operations. An additional tax charge totaling approximately $500,000 is related to deferred tax
liabilities that were recorded for tax amortization of goodwill for which no financial statement
amortization has occurred.
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 2 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.
Stock-Based Compensation Expense
Effective May 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, using
the modified prospective transition method, and therefore have not restated prior period results.
Under this method we recognize compensation expense for all share-based payments granted after May
1, 2006 and prior to but not yet vested as of May 1, 2006, in accordance with SFAS 123R. Under the
fair value recognition provisions of SFAS 123R, we recognize stock-based compensation net of an
estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on
a straight-line basis over the requisite service period of the award.
Prior to our adoption of SFAS 123R,
we accounted for share-based payments under APB 25 and no stock-based compensation expense had been
recognized in the Companys consolidated statement of operations, other than as related to
acquisitions and certain
25
stock option grants issued to employees prior to the Companys initial public offering,
because the exercise price of the Companys stock options granted to employees and directors
equaled the fair market value of the underlying stock at the date of grant.
Determining the appropriate fair value model and calculating the fair value of share-based
payment awards require the input of highly subjective assumptions, including the expected life of
the share-based payment awards and stock price volatility. In determining stock price volatility,
we considered the volume of market activity of freely traded options, and determined there was
insufficient market activity to provide a meaningful measure of implied volatility. Therefore,
expected volatility for the quarter ended July 31, 2006 was based on the historical volatility of
our stock price. The assumptions used in calculating the fair value of share-based payment awards
represent managements best estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if factors change and we use different
assumptions, our stock-based compensation expense could be materially different in the future. 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 significantly different from what we have
recorded in the current period. See Note 2 to the condensed consolidated financial statements for a
further discussion on stock-based compensation.
Results of Operations
The following table sets forth certain statement of operations data as a percentage of
revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
July 31, |
|
|
2006 |
|
2005 |
|
|
(Unaudited) |
Revenues: |
|
|
|
|
|
|
|
|
Optical subsystems and components |
|
|
90.4 |
% |
|
|
88.5 |
% |
Network test and monitoring systems |
|
|
9.6 |
|
|
|
11.5 |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenues |
|
|
65.8 |
|
|
|
74.4 |
|
Amortization of acquired developed technology |
|
|
1.4 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
32.7 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
13.2 |
|
|
|
15.9 |
|
Sales and marketing |
|
|
8.2 |
|
|
|
10.2 |
|
General and administrative |
|
|
6.9 |
|
|
|
9.8 |
|
Amortization of purchased intangibles |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
28.6 |
|
|
|
36.6 |
|
Income (loss) from operations |
|
|
4.1 |
|
|
|
(17.9 |
) |
Interest income |
|
|
1.2 |
|
|
|
1.0 |
|
Interest expense |
|
|
(3.7 |
) |
|
|
(5.0 |
) |
Other income (expense), net |
|
|
(0.3 |
) |
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1.3 |
|
|
|
(22.6 |
) |
Provision for income taxes |
|
|
2.1 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(0.8 |
)% |
|
|
(23.4 |
)% |
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased $24.5 million, or 30.0%, to $106.2 million in the quarter ended
July 31, 2006 compared to $81.7 million in the quarter ended July 31, 2005. Sales of optical
subsystems and components and network test and monitoring systems represented 90.4% and 9.6%,
respectively, of total revenues in the quarter ended July 31, 2006, compared to 88.5% and 11.5%,
respectively, in the quarter ended July 31, 2005.
Optical subsystems and components revenues increased $23.7 million, or 32.7%, to $96.0 million
in the quarter ended July 31, 2006 compared to $72.4 million in the quarter ended July 31, 2005.
The increase was primarily the result of a $17.0 million, or 37.2%, increase in sales of products
for short distance LAN/SAN applications and a $6.7 million, or 25.1%, increase in sales of products
for longer distance MAN applications. The increase in revenues for LAN/SAN applications reflects
the growth in these markets while the
26
increase in revenues for MAN applications reflects our
increased market penetration, particularly for products that operate under the SONET/SDH protocol.
Network test and monitoring systems revenues increased $838,000, or 9.0%, to $10.2 million in
the quarter ended July 31, 2006 compared to $9.4 million in the quarter ended July 31, 2005. The
increase in revenue was primarily due to new sales of our SAN Commander Fibre Channel Test System.
Amortization of Acquired Developed Technology. Amortization of acquired developed technology,
a component of cost of revenues, decreased $4.1 million, or 73.1%, in the quarter ended July 31,
2006 to $1.5 million compared to $5.7 million in the quarter ended July 31, 2005. The decrease
reflects an impairment charge recorded in the second quarter of fiscal 2006 as well as the roll-off
of certain fully amortized assets.
Gross Profit. Gross profit increased $19.5 million, or 127.5%, to $34.8 million in the
quarter ended July 31, 2006 compared to $15.3 million in the quarter ended July 31, 2005. Gross
profit as a percentage of total revenue was 32.7% in the quarter ended July 31, 2006 compared to
18.7% in the quarter ended July 31, 2005. We recorded charges of $3.4 million for obsolete and
excess inventory in the quarter ended July 31, 2006 and $1.1 million in the quarter ended July 31,
2005. We sold inventory that was written-off in previous periods resulting in a benefit of $1.1
million in the quarter ended July 31, 2006 and $1.4 million in the quarter ended July 31, 2005. As
a result, we recognized a net charge of $2.3 million in the quarter ended July 31, 2006 compared to
a net benefit of $300,000 in the quarter ended July 31, 2005. Excluding the amortization of
acquired developed technology and the net impact of excess and obsolete inventory charges, gross
profit would have been $38.6 million, or 36.3% of revenue, in the quarter ended July 31, 2006
compared to $20.6 million, or 25.3% of revenue in the quarter ended July 31, 2005. The increase in
the adjusted gross profit margin was primarily due to the 30.0% increase in revenue driven by
increases in unit volume and a decrease in manufacturing overhead spending of 1.9% combined with
decreases in material costs. Manufacturing overhead costs in the quarter ended July 31, 2006
included stock-based compensation expenses of $457,000. Manufacturing overhead costs in the quarter
ended July 31, 2005 include severance charges of $1.3 million.
Research and Development Expenses. Research and development expenses increased $1.1 million,
or 8.0%, to $14.1 million in the quarter ended July 31, 2006 compared to $13.0 million in the
quarter ended July 31, 2005. The increase was primarily due to a stock-based compensation charge of
$889,000 in 2006. Research and development expenses as a percent of revenues decreased to 13.2% in
the quarter ended July 31, 2006 compared to 15.9% in the quarter ended July 31, 2005 as a result of
increased revenues.
Sales and Marketing Expenses. Sales and marketing expenses increased $298,000, or 3.6%, to
$8.7 million in the quarter ended July, 31 2006 compared to $8.4 million in the quarter ended July
31, 2005. The increase was primarily due to increased commissions and a stock-based compensation
charge of $371,000, partially offset by decreased spending for marketing and advertising services.
Sales and marketing expenses as a percent of revenues decreased to 8.2% in the quarter ended July
31, 2006 compared to 10.2% in the quarter ended July 31, 2005.
General and Administrative Expenses. General and administrative expenses decreased $633,000,
or 7.9%, to $7.4 million in the quarter ended July 31, 2006 compared to $8.0 million in the quarter
ended July 31, 2005. The decrease was primarily due to a decrease in service fees associated with
the evaluation and testing of internal control systems required under Section 404 of the
Sarbanes-Oxley Act during our second year of compliance with the Act. The decrease was partially
offset by a charge in 2006 for stock-based compensation of $485,000 and increased legal fees
associated with patent infringement litigation. General and administrative expenses as a percent of
revenues decreased to 6.9% in the quarter ended July 31, 2006 compared to 9.8% in the quarter ended
July 31, 2005.
Amortization of Purchased Intangibles. Amortization of purchased intangibles decreased
$177,000, or 37.2%, to $299,000 in the quarter ended July 31, 2006 compared to $476,000 in the
quarter ended July 31, 2005. The decrease was due to the full amortization of assets acquired in
the acquisitions of Shomiti Systems, Inc. and Medusa Technologies, Inc. in 2001.
Interest Income. Interest income increased $472,000, or 60.3%, to $1.3 million in the quarter
ended July 31, 2006 compared to $783,000 in the quarter ended July 31, 2005. The increase was due
to increased investment balances and interest rates.
Interest Expense. Interest expense decreased $166,000, or 4.1%, to $3.9 million in the
quarter ended July 31, 2006 compared to $4.1 million in the quarter ended July 31, 2005. Of total
interest expense included in each of the two quarters, $2.3 million related to our convertible
subordinated notes due in 2008 and 2010 and $1.1 million represented a non-cash charge to amortize
the beneficial conversion feature of the 2008 notes. Approximately $135,000 is interest on our
installment loan from a bank and $279,000 in the interest charge on our sale-leaseback commitment
on our Sunnyvale facility.
Other Income (Expense), Net. Other expense was $370,000 in the quarter ended July 31, 2006
compared to $600,000 in the quarter ended July 31, 2005. Other expense primarily consists of our
proportional share of losses associated with a minority investment and
27
amortization of subordinated
loan costs in both quarters, partially offset by a $216,000 foreign exchange gain in the quarter
ended July 31, 2006.
Provision for Income Taxes. We recorded income tax provisions of $2.2 million and $594,000,
respectively, for the quarters ended July 31, 2006 and 2005. The provision for income tax expense
for the quarter ended July 31, 2006 includes a non-cash charge for tax expense of $1.6 million
associated with the utilization of pre-acquisition tax net operating losses of an acquired company,
the tax benefits of which must be recorded as a reduction of goodwill pursuant to the accounting
rules under SFAS 109 for business combinations. The provision for income tax expense for the
quarters ended July 31, 2006 and 2005 also includes non-cash charges of $470,000 and $584,000
respectively, for deferred tax liabilities that were recorded for tax amortization for which no
financial statement amortization has occurred under generally accepted accounting principles, as
promulgated by SFAS 142, and current tax expense in the current quarter of $113,000 for federal
taxes, minimum state taxes and foreign income taxes arising in certain jurisdictions in which we
conduct business.
Liquidity and Capital Resources
At July 31, 2006, cash, cash equivalents and short-term and long-term available-for-sale
investments were $137.9 million compared to $118.8 million at April 30, 2006. Of this amount,
long-term available-for-sale investments totaled $34.0 million of which $18.5 million was related
to debt securities which were readily saleable and another $15.5 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 $5.6 million at July 31, 2006 compared to
$5.5 million at April 30, 2006. At July 31, 2006, total short and long term debt was $248.5
million, compared to $247.8 million at April 30, 2006.
Net cash provided by operating activities totaled $7.2 million in the three months ended July
31, 2006, compared to $4.0 million in the three months ended July 31, 2005. Cash provided by
operating activities for the three months ended July 31, 2006 was primarily a result of operating
losses adjusted for depreciation, amortization and non-cash related items in the income statement
totaling $12.8 million offset by $5.6 million in additional working capital most of which was
related to an increase in accounts receivable. The cash provided by operating activities for the
three months ended July 31, 2005 was primarily a result of operating losses adjusted for
depreciation, amortization and non-cash related items in the income statement resulting in a use of
cash totaling $3.9 million which was more than offset by $7.9 million related to lower working
capital requirements primarily resulting from an increase in accounts payable, accrued compensation
and other accrued liabilities.
Net cash used in investing activities totaled $9.5 million in the three months ended July 31,
2006 compared to $4.1 million in the three months ended July 31, 2005. Cash invested in the three
months ended July 31, 2006 was primarily related equipment purchases to support production
expansion in Texas and Malaysia and the purchase of short-term investments. Cash invested during
the three months ended July 31, 2005 was primarily related to equipment purchases to support
production expansion in Texas and Malaysia.
Net cash provided by financing activities totaled $2.4 million in the three months ended July
31, 2006 compared to net cash used in financing activities of $133,000 in the three months ended
July 31, 2005. Cash provided by financing activities in three months ended July 31, 2006 was
primarily due to proceeds from the exercise of stock options and sales of stock under the employee
stock purchase plan of $2.9 million partially offset by repayments on borrowings. Cash used in
financing activities in the three months ended July 31, 2005 consisted primarily of repayments on
borrowings.
We believe that our existing balances of cash, cash equivalents and short-term investments,
together with the cash expected to be generated from our future operations, will be sufficient to
meet our cash needs for working capital and capital expenditures for at least the next 12 months.
We may however require additional financing to fund our operations in the future. A significant
contraction in the capital markets, particularly in the technology sector, may make it difficult
for us to raise additional capital if and when it is required, especially if we experience
disappointing operating results. If adequate capital is not available to us as required, or is not
available on favorable terms, our business, financial condition and results of operations will be
adversely affected.
Contractual Obligations and Commercial Commitments
At July 31, 2006, we had contractual obligations of $346.3 million as shown in the following
table (in thousands):
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
5 Years |
|
|
Short-term debt |
|
$ |
1,972 |
|
|
$ |
1,972 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term debt |
|
|
7,071 |
|
|
|
|
|
|
|
3,966 |
|
|
|
3,105 |
|
|
|
|
|
Convertible debt |
|
|
250,250 |
|
|
|
|
|
|
|
100,250 |
|
|
|
150,000 |
|
|
|
|
|
Interest on debt |
|
|
31,259 |
|
|
|
9,487 |
|
|
|
16,008 |
|
|
|
5,764 |
|
|
|
|
|
Lease commitment under
sale-leaseback agreement |
|
|
47,749 |
|
|
|
3,045 |
|
|
|
6,298 |
|
|
|
6,584 |
|
|
|
31,822 |
|
Operating leases |
|
|
5,124 |
|
|
|
1,922 |
|
|
|
2,146 |
|
|
|
1,056 |
|
|
|
|
|
Purchase obligations |
|
|
1,693 |
|
|
|
1,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitments |
|
|
1,231 |
|
|
|
1,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Total contractual obligations |
|
$ |
346,349 |
|
|
$ |
19,350 |
|
|
$ |
128,668 |
|
|
$ |
166,509 |
|
|
$ |
31,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt consists of $157,000 of current debt obligations assumed as part of the
acquisition of InterSAN, Inc., and $1.8 million representing 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 $7.1 million.
Convertible debt consists of two series of convertible subordinated notes in the aggregate
principal amount of $100.3 million due October 15, 2008, and $150.0 million due October 15, 2010.
The two series of 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 two series of notes are
redeemable by us, in whole or in part, after October 15, 2004 and October 15, 2007, respectively.
Holders of the notes due in 2010 have the right to require us to repurchase some or all of their
notes on October 15, 2007. We may choose to pay the repurchase price in cash, shares of Finisar
common stock, or a combination thereof. 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 $12.2
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 $1.7 million have been expensed and
recorded on the balance sheet as non-cancelable purchase obligations as of July 31, 2006.
Purchase commitments relate to a supply agreement entered into with Honeywell International
Inc. in April 2006. This agreement requires us to purchase $2.6 million of products from Honeywell
between April 2006 and December 2008.
On October 20, 2005, we entered into an amended letter of credit reimbursement agreement with
Silicon Valley Bank that will be available to us through October 26, 2006. Under the terms of the
amended agreement, Silicon Valley Bank is providing a $20 million letter of credit facility to
house 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 31, 2006
totaled $13.3 million.
Off-Balance-Sheet Arrangements
At July 31, 2006 and April 30, 2006, 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. We recorded
losses of $237,000 and $522,000 in the three months ended July 31, 2006 and July 31, 2005,
respectively, for investments accounted for under 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, 2006.
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
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 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 will 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 will 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 will 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
settlement is subject to approval of the Court. The Court held hearings on April 13, 2005 and
September 6, 2005 to determine the final form, substance and program of class notice and the
scheduling of a fairness hearing to consider final approval of the settlement. Subsequently, the
Court held a hearing on April 24, 2006 to consider final approval of the settlement and has yet to
issue a decision. If the settlement is not 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.
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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, 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 has been willfully infringed and awarded us damages of
$78,920,250.25. 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 monthly figures beginning April 4, 1999, amounting to approximately $13.4
million. Finally, the Court awarded us costs of $147,282.36 associated with the litigation. The
Court declined to award us our attorneys fees. The Court denied our motion for injunctive relief,
but ordered DirecTV to pay a compulsory ongoing license fee to us at the rate of $1.60 per set-top
box for the period beginning June 16, 2006 through the duration of the patent, which expires in
April 2012. In court testimony, DirecTVs damages expert estimated that in 2006 DirecTV would bring
into service 15 million new set top boxes. As a result, assuming this estimate does not change
going forward, and that all other conditions remain the same, for example, DirecTVs business
conditions and the technology used in its transmission of content, DirecTV would owe us
approximately $6 million for the first quarterly period of the compulsory license, such first
payment being due under the Courts decree on October 7, 2006. During the July 6, 2006 hearing,
the Court denied all pending motions not previously ruled on, including DirecTVs oral motions
requesting the Court to set aside or reverse the jury verdict. The Court entered final judgment in
favor of us and against DirecTV on July 7, 2006. DirecTV filed written post-trial motions, seeking
essentially the same relief it sought through its oral motions and requesting a new trial on a
number of grounds. The Court denied each of those motions in an order dated September 1, 2006. In
still another written post-trial motion, DirecTV asked the Court to allow DirecTV to place any
amounts owed us under the compulsory license into an escrow account pending the outcome of any
appeal, requesting that those amounts be refundable in the event that DirecTV prevails on appeal.
We opposed that motion, and a decision by the Court on that issue is pending. DirecTV has
indicated in post-trial press releases that it intends to appeal. Based upon the entrance date of
the Courts September 1, 2006 order, DirecTVs notice of appeal, if any, will be due on or before
October 5, 2006. We are currently reviewing our options with respect to any cross appeal which is
likewise due either on or before October 5, 2006 or fourteen (14) days from when DirecTV files its
notice of appeal, whichever is later.
On September 6, 2005, we filed an action in the United States District Court for the District
of Delaware against Agilent Technologies, Inc. (Agilent). The lawsuit alleged that Agilent
willfully infringed our U.S. Patents No. 5,019,769 and No. 6,941,077, relating to our digital
diagnostics technology, by developing, manufacturing, using, importing, selling and/or offering to
sell optoelectronic transceivers that embody one or more of the claims of the patents. The
complaint sought damages for lost profits of at least $1.1 billion based on Agilents sales of
infringing products. We also sought to treble those damages based on the willful nature of
Agilents infringement and to obtain an injunction against future infringement. On October 24,
2005, we filed an amended complaint adding allegations of infringement of our U.S. Patents No.
6,952,531 and No. 6,957,021, two patents that also relate to our digital diagnostic technology. On
December 7, 2005, Agilent answered the complaint denying infringement and asserting patent
invalidity. The Court had set a trial date of September 4, 2007. On July 11, 2006 we signed a
settlement agreement with Agilent and Verigy Pte. Ltd. (a Singaporean corporation created from
Agilents semiconductor test business after the suit began), which included a cross-covenant not to
sue the other parties for infringement of fiber optic patents in their respective portfolios. Under
terms of the settlement, the parties agreed to dismiss the suit and countersuit. On July 18, 2006
the court signed the order of dismissal.
On February 22, 2006, Avago Technologies General IP Pte. Ltd. and Avago Technologies Fiber IP
Pte. Ltd., both Singaporean corporations, filed suit against us in the United States District Court
for the District of Delaware, alleging that our short-wavelength optoelectronic transceivers
infringe U.S. Patents Nos. 5,359,447 and 5,761,229. The Avago entities were created as a result of
the acquisition of Agilents Semiconductor Products Group (which included Agilents optoelectronic
transceiver business) by Kohlberg Kravis Roberts & Co., Silver Lake Partners, and others. The
complaint sought damages for willful infringement, injunctive relief, prejudgment interest, and
attorneys fees. Without ever having served the complaint on us, the Avago entities dismissed their
suit without prejudice on March 2, 2006. We believe that the allegations by the Avago entities were
without merit. On July 11, 2006, we signed a cross-license agreement with the Avago entities
covering the parties respective fiber optic patent portfolios. The agreement resolves, among other
things, any previous issues with respect to U.S. Patent Nos. 5,359,447 and 5,761,229.
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 U.S. Patent No. 5,404,505 (the 505 patent) is not infringed
and is invalid. The 505 patent is the same patent alleged by us in our lawsuit against DirecTV.
We believe the suit to be without merit and are currently reviewing our options in response to the
complaint. Pursuant to stipulated extensions agreed by the parties and approved by the Court, we
may respond or otherwise move to dismiss the complaint on or before September 15, 2006.
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. We believe the suit to be without merit and are currently
reviewing our options in response to the complaint. Pursuant to stipulated extensions agreed by the
parties and approved by the Court, we may respond or otherwise move to dismiss the complaint on or
before October 23, 2006.
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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 ON APRIL 30, 2006.
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 $24.9 million, $114.1 million and $113.8 million in our fiscal
years ended April 30, 2006, 2005 and 2004, respectively, and a net loss of $820,000 in the fiscal
quarter ended July 31, 2006. Although we recorded net income of $10.0 million in the second half of
fiscal 2006, 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%
and 51/4% convertible subordinated notes due 2010 and
2008, respectively. The aggregate outstanding principal amount of these notes was $250.3 million at
July 31, 2006. Holders of the notes due in 2010 have the right to require us to repurchase some or
all of their notes on October 15, 2007. We may choose to pay the repurchase price in cash, shares
of our common stock or a combination thereof. 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.
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We may not be able to obtain additional capital in the future, and failure to do so may harm
our business
We believe that our existing balances of cash, cash equivalents and short-term
investments will be sufficient to meet our cash needs for working capital and capital expenditures
for at least the next 12 months. We may, however, require additional financing to fund our
operations in the future or to repay the principal of our outstanding 21/2%
and 51/4% convertible subordinated notes due 2010 and 2008, respectively. 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, we may lose sales and damage our customer relationships
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. For example, we now manufacture all of the short wavelength VCSEL lasers
incorporated in transceivers used for LAN/SAN applications at our wafer fabrication facility in
Richardson, Texas. We also manufacture a portion of our internal requirements for long wavelength
lasers at our wafer fabrication facility located in Fremont, California for which second sources exist. As a result of this increased vertical integration, we have become
increasingly dependent on our internally-produced components. The manufacture of these components,
including the fabrication of wafers, involves highly complex processes. 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. We have recently experienced problems achieving acceptable
yields at our wafer fabrication facilities, resulting in delays in the delivery of components to
our subsystem assembly facilities. 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.
We are currently in the process of qualifying a new reactor used to manufacture VCSEL lasers
at our facility in Allen, Texas while continuing to operate our existing reactor at our Richardson,
Texas facility. Once this new reactor is qualified for production, we intend to build a buffer of
inventory before relocating the existing reactor to the new facility so that we can eventually have
two reactors available to produce these critical components. While we have recently qualified the
new reactor to produce certain components used for consumer electronics applications and believe it
will be qualified to produce VCSEL lasers used in transceivers for LAN/SAN applications by the end
of the calendar year, we could experience delays in qualifying this reactor. Our lease of the
Richardson facility expires in November 2006, and we are currently seeking to extend the term;
however, a significant delay in the qualification of the new reactor in Allen combined with the
inability to continue to operate in the Richardson facility would adversely affect our ability to
supply product to our customers.
Our inability to supply enough lasers to meet our internal needs as well as the merchant
market could harm our relationships with customers and have an adverse effect on our business.
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 eight 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
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technologies. Several of our past acquisitions have been material, and acquisitions that we
may complete in the future may be material. In 10 of our 14 acquisitions, we issued stock as all or
a portion of the consideration. The issuance of stock in these and any future transactions has or
would dilute 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. |
Several of our past acquisitions have not 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 future problems encountered in connection with our past or
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 may lose sales if our suppliers fail to meet our needs
We currently purchase several key components used in the manufacture of our products from
single or limited sources. We depend on these current and future sources to meet our production
needs. Moreover, we depend on the quality of the products supplied to us over which we have limited
control. We have encountered shortages and delays in obtaining components in the past and expect to
encounter 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 for any of our
components. As a result, a supplier can discontinue supplying components to us without penalty. If
a supplier discontinued supplying a 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.
We use rolling forecasts based on anticipated product orders to determine our component
requirements. Lead times for materials and components that we order vary significantly and depend
on factors such as specific supplier requirements, contract terms and current market demand for
particular components. If we overestimate our component requirements, we may have excess inventory,
which would increase our costs. If we underestimate our component requirements, we may have
inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to
our customers. Any of these occurrences would significantly harm our business.
We are dependent on widespread market acceptance of 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.
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We depend on large purchases from a few significant customers, and any loss, cancellation,
reduction or delay in purchases by these customers could harm our business
A small number of customers have consistently accounted for a significant portion of our
revenues. For example, sales to our top five customers represented 43.8% of our revenues in the
first quarter of 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.
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. 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
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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
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. Other
companies, including some of our customers, may enter the market for optical subsystems and network
test and monitoring systems. 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 JDS Uniphase, Avago Technologies (formerly part
of Agilent Technologies), Intel, Mitsubishi, Sumitomo and a number of smaller vendors. For network
test and monitoring systems, we compete primarily with LeCroy Corporation and Agilent Technologies.
Our competitors continue to introduce improved products with lower prices, and we will have to do
the same to remain competitive. In addition, some of our current and potential customers may
attempt to integrate their operations by producing their own optical components and subsystems and
network test and monitoring systems or acquiring one of our competitors, thereby eliminating the
need to purchase our products. Furthermore, larger companies in other related industries, such as
the telecommunications industry, may develop or acquire technologies and apply their significant
resources, including their distribution channels and brand name recognition, to capture significant
market share in the industry segments in which we participate.
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 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.
36
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 also rely on two contract manufacturers located outside of
the United States. Each of these facilities and manufacturers subjects us to additional risks
associated with international manufacturing, including:
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unexpected changes in regulatory requirements; |
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legal uncertainties regarding liability, tariffs and other trade barriers; |
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inadequate protection of intellectual property in some countries; |
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greater incidence of shipping delays; |
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greater difficulty in overseeing manufacturing operations; |
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greater difficulty in hiring talent needed to oversee manufacturing operations; |
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potential political and economic instability; and |
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the outbreak of infectious diseases such as severe acute respiratory syndrome, or
SARS, which could result in travel restrictions or the closure of our facilities or the
facilities of our customers and suppliers. |
Any of these factors could significantly impair our ability to source our contract
manufacturing requirements internationally.
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. On July 21, 2005, the Peoples Bank of
China announced that the yuan will no longer be pegged to the U.S. dollar but will be allowed to
float in a band (and, to a limited extent, increase in value) against a basket of foreign
currencies. This development increases the risk that Chinese-sourced materials and labor could
become more expensive for us. To date, we have not engaged in currency hedging transactions to
decrease the risk of financial exposure from fluctuations in foreign exchange rates.
37
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 action 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 action 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 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. |
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 the first quarter of 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 the first quarter of 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 July 31, 2006 in future periods.
We are subject to 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, 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. 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 will 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 will 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 will
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 held hearings on April 13, 2005
and September 6, 2005 to determine the form, substance and program of class notice and the
scheduling of a fairness hearing for final approval of the settlement. Subsequently, the Court held
a hearing on April 24, 2006 to consider final approval of the settlement and has yet to issue a
decision. If the settlement is not 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.
38
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 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 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 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
39
on acceptable terms or license a substitute technology or redesign our products to avoid
infringement, our business would be significantly harmed.
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 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 $150.0 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 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. An aggregate of 58,647,060
shares of common stock would be issued upon the conversion of all outstanding convertible
subordinated notes at these exchange rates, which would significantly dilute the voting power and
ownership percentage of our existing stockholders. Holders of the notes due in 2010 have the right
to require us to repurchase some or all of their notes on October 15, 2007. We may choose to pay
the repurchase price in cash, shares of our common stock or a combination thereof. Our right to
repurchase the notes, in whole or in part, with shares of our common stock is subject to the
registration of the shares of our common stock to be issued upon repurchase under the Securities
Act, if required, and registration with or approval of any state or federal governmental authority
if such registration or approval is required before such shares may be issued. We have previously
entered into privately negotiated transactions with certain holders of our convertible subordinated
notes for the repurchase of notes in exchange for a greater number of shares of our common stock
than would have been issued had the principal amount of the notes been converted at the original
conversion rate specified in the notes, thus resulting in more dilution. Although we do not
currently have any plans to enter into similar transactions in the future, if we were to do so
there would be additional dilution to the voting power and percentage ownership of our existing
stockholders.
Delaware law, our charter documents and our stockholder rights plan contain provisions that
could discourage or prevent a potential takeover, even if such a transaction would be beneficial to
our stockholders
Some provisions of our certificate of incorporation and bylaws, as well as provisions of
Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These include provisions:
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authorizing the board of directors to issue additional preferred stock; |
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prohibiting cumulative voting in the election of directors; |
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limiting the persons who may call special meetings of stockholders; |
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prohibiting stockholder actions by written consent; |
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creating a classified board of directors pursuant to which our directors are elected for staggered three-year terms; |
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permitting the board of directors to increase the size of the board and to fill vacancies; |
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requiring a super-majority vote of our stockholders to amend our bylaws and certain
provisions of our certificate of incorporation; and |
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establishing advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be |
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acted on by stockholders at stockholder meetings. |
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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:
31.1 |
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
31.2 |
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Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
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 |
32.2 |
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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FINISAR CORPORATION
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By: |
/s/ JERRY S. RAWLS
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Jerry S. Rawls |
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Chairman of the Board, President and Chief Executive Officer |
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By: |
/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: September 8, 2006
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EXHIBIT INDEX
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Exhibit |
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Description |
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 |