e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
April 30, 2009
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
000-27999
(Commission File No.)
Finisar Corporation
(Exact name of Registrant as
specified in its charter)
|
|
|
Delaware
(State or other jurisdiction
of
incorporation or organization)
|
|
94-3038428
(I.R.S. Employer
Identification No.)
|
1389 Moffett Park Drive
Sunnyvale, California
(Address of principal
executive offices)
|
|
94089
(Zip Code)
|
Registrants telephone number, including area code:
408-548-1000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common stock, $.001 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 229.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller reporting company o
|
|
|
|
|
(Do not check if a smaller reporting company)
|
|
|
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
As of November 3, 2008, the aggregate market value of the
voting and non-voting common equity held by non-affiliates of
the registrant was approximately $288,548,495, based on the
closing sales price of the registrants common stock as
reported on the NASDAQ Stock Market on October 31, 2008 of
$0.61 per share. Shares of common stock held by officers,
directors and holders of more than ten percent of the
outstanding common stock have been excluded from this
calculation because such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of June 10, 2009, there were 478,127,179 shares of
the registrants common stock, $.001 par value, issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for
its 2009 annual meeting of stockholders are incorporated by
reference in Part III hereof.
INDEX TO
ANNUAL REPORT ON
FORM 10-K
FOR THE
FISCAL YEAR ENDED APRIL 30, 2009
i
FORWARD
LOOKING STATEMENTS
This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
We use words like anticipates, believes,
plans, expects, future,
intends and similar expressions to identify these
forward-looking statements. We have based these forward-looking
statements on our current expectations and projections about
future events; however, our business and operations are subject
to a variety of risks and uncertainties, and, consequently,
actual results may materially differ from those projected by any
forward-looking statements. As a result, you should not place
undue reliance on these forward-looking statements since they
may not occur.
Certain factors that could cause actual results to differ from
those projected are discussed in Item 1A. Risk
Factors. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of
new information or future events.
1
PART I
Overview
We are a leading provider of optical subsystems and components
that connect short-distance local area networks, or LANs, and
storage area networks, or SANs, and longer distance metropolitan
area networks, or MANs and wide area networks, or WANs. Our
optical subsystems consist primarily of transmitters, receivers,
transceivers and transponders which provide the fundamental
optical-electrical interface for connecting the equipment used
in building these networks. These products rely on the use of
semiconductor lasers and photodetectors in conjunction with
integrated circuit design and novel packaging technology to
provide a cost-effective means for transmitting and receiving
digital signals over fiber optic cable at speeds ranging from
less than 1 gigabits per second, or Gbps, Gbps to
40 Gbps, using a wide range of network protocols and
physical configurations over distances of 70 meters to 200
kilometers. We supply optical transceivers and transponders that
allow point-to-point communications on a fiber using a single
specified wavelength or, bundled with multiplexing technologies,
can be used to supply multi-gigabit bandwidth over several
wavelengths on the same fiber. We also provide products for
dynamically switching network traffic from one optical
wavelength to another across multiple wavelengths known as
reconfigurable optical add/drop multiplexers, or ROADMs. Our
line of optical components consists primarily of packaged lasers
and photodetectors used in transceivers for LAN and SAN
applications and passive optical components used in building
MANs. Our manufacturing operations are vertically integrated,
and we utilize internal sources for many of the key components
used in making our products including lasers, photodetectors and
integrated circuits, or ICs, designed by our internal IC
engineering teams. We also have internal assembly and test
capabilities that make use of internally designed equipment for
the automated testing of our optical subsystems and components.
We sell our optical products to manufacturers of storage
systems, networking equipment and telecommunication equipment or
their contract manufacturers, such as Alcatel-Lucent, Brocade,
Cisco Systems, EMC, Emulex, Ericsson, Hewlett-Packard Company,
Huawei, IBM, Juniper, Qlogic, Siemens and Tellabs. These
customers, in turn, sell their systems to businesses and to
wireline and wireless telecommunications service providers and
cable TV operators, collectively referred to as carriers.
We also provide network performance test systems primarily to
leading SAN equipment manufacturers such as Brocade, EMC,
Emulex, Hewlett-Packard Company and Qlogic for testing and
validating system designs.
We were incorporated in California in April 1987 and
reincorporated in Delaware in November 1999. Our principal
executive offices are located at 1389 Moffett Park Drive,
Sunnyvale, California 94089, and our telephone number at that
location is
(408) 548-1000.
Recent
Developments
Combination
with Optium Corporation
On August 29, 2008, we completed a business combination
with Optium Corporation, a leading designer and manufacturer of
high performance optical subsystems for use in
telecommunications and cable cable television, or CATV, network
systems, through the merger of Optium with a wholly-owned
subsidiary of Finisar. We believe that the combination of the
two companies created the worlds largest supplier of
optical components, modules and subsystems for the
communications industry and will leverage Finisars
leadership position in the storage and data networking sectors
of the industry and Optiums leadership position in the
telecommunications and CATV, sectors to create a more
competitive industry participant. In addition, as a result of
the combination, we expect to realize cost synergies related to
operating expenses and manufacturing costs resulting from
(1) the transfer of production to lower cost locations,
(2) improved purchasing power associated with being a
larger company and (3) cost synergies associated with the
integration of components into product designs previously
purchased in the open market by Optium. At the closing of the
merger, we issued 160,808,659 shares of Finisar common
stock, valued at approximately $242.8 million, in exchange
for all of the outstanding common stock of Optium.
We have accounted for the combination using the purchase method
of accounting and as a result have included the operating
results of Optium in our consolidated financial results since
the August 29, 2008 consummation date.
2
The Optium results are included in our optical subsystems and
components segment. Reference is made to Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations for additional information
regarding the impact of the combination with Optium on our
results of operations.
Pending
Sale of Network Performance Test System Business
Historically, we have offered our line of network performance
test systems through our Network Tools Division. On July 8,
2009, we entered into an agreement to sell substantially all of
the assets of the Network Tools Division (excluding accounts
receivable and payable) to JDS Uniphase Corporation
(JDSU) for $40.6 million in cash. JDSU will
assume certain liabilities associated with the network
performance test equipment business, and we will provide
manufacturing support services to JDSU during a transition
period. The sale is expected to be completed on or about
July 15, 2009.
Exchange
Offers
On July 9, 2009, the Company announced that it had
commenced separate concurrent Modified Dutch Auction
tender offers (each an Exchange Offer and together,
the Exchange Offers) to exchange shares of its
common stock and cash for an aggregate of up to $95 million
principal amount of the following series of its outstanding
convertible notes (the Notes):
|
|
|
|
|
2.50% Convertible Subordinated Notes due 2010 (the
Subordinated Notes); and
|
|
|
|
2.50% Convertible Senior Subordinated Notes due 2010 (the
Senior Subordinated Notes)
|
The Company is conducting the Exchange Offers in order to reduce
the aggregate principal amount of its outstanding indebtedness.
As of July 9, 2009, approximately $50 million
aggregate principal amount of the Subordinated Notes and
approximately $92 million aggregate principal amount of the
Senior Subordinated Notes were outstanding.
The Company is offering to exchange up to an aggregate of
$37.5 million principal amount, or 75%, of the outstanding
Subordinated Notes. The Company will also exchange up to an
aggregate of $57.5 million principal amount, or 62.5%, of
the outstanding Senior Subordinated Notes, with such Exchange
Offer being conditioned on a minimum of $42 million
principal amount of Senior Subordinated Notes being validly
tendered and not withdrawn.
For each $1,000 principal amount of Notes, tendering holders
will receive consideration with a value not greater than $750
nor less than $700 (the Exchange Consideration),
with such value determined by a Modified Dutch
Auction procedure, plus accrued and unpaid interest to,
but excluding, the settlement date, payable in cash. A separate
Modified Dutch Auction procedure will be conducted
for each of the Exchange Offers. A Modified Dutch
Auction tender offer allows holders of the Notes to
indicate the principal amount of Notes that such holders desire
to tender and the consideration within the specified range at
which they wish to tender such Notes for each Exchange Offer.
The mix of Exchange Consideration will consist of (i) $525
in cash, and (ii) a number of shares of common stock with a
value equal to the Exchange Consideration minus $525 (the
Equity Consideration). The number of shares of
common stock representing the Equity Consideration to be
received by holders as part of the Exchange Consideration will
be determined on the basis of the trading price of the common
stock during a 5-trading day VWAP period (the
5-day
VWAP) starting on July 13 and ending on July 17,
2009, as further described in a Schedule TO (including the
Offer to Exchange and related Letter of Transmittal attached as
exhibits thereto) filed by Finisar with the Securities and
Exchange Commission (the SEC) on July 9, 2009.
The portion of the Exchange Consideration consisting of cash
will be paid using a portion of the approximately
$40.6 million in aggregate proceeds to be received from the
sale of the Companys Network Tools Division, expected to
be consummated on or about July 15, 2009, and with
available cash and borrowings.
The Exchange Offers are scheduled to expire at 5:00 p.m.,
New York City time, on Thursday, August 6, 2009, unless
they are extended. Tendered Notes may be withdrawn at any time
on or prior to the expiration of the Exchange Offers.
Further information regarding the terms and conditions of the
Exchange Offers is set forth in the Offer to Exchange, the
Letter of Transmittal and related materials filed with the SEC.
3
Amended
Credit Facilities
We are a party to credit agreements with Silicon Valley Bank
(the SVB Agreements) which provide, subject to
certain restrictions and limitations, credit facilities up to
$65 million, including $45 million under a secured revolving
line of credit, $16 million under an accounts receivable
purchase line of credit and $4 million under a credit line for
standby letters of credit. Currently, we have no borrowings
outstanding under any of these facilities, although borrowings
available under the secured revolving line of credit are
currently limited to $25 million based on financial covenants
contained in the SVB Agreements. On July 8, 2009, the
Company received a written commitment from Silicon Valley Bank
to modify the Companys existing credit facilities under
the SVB Agreements in order to facilitate the Exchange Offers.
Principal modifications include:
|
|
|
|
|
A reduction in the total size of the Companys secured
revolving line of credit from $45 million to
$25 million; and
|
|
|
|
Revised covenants that permit the use of borrowings under the
secured revolving line of credit for a portion of the Exchange
Consideration in connection with the Exchange Offers and the use
of up to an aggregate of $50 million of cash from all
sources for that purpose.
|
Industry
Background and Markets
Optical
Subsystems and Components
Industry
Background
Computer networks are frequently described in terms of the
distance they span and by the hardware and software protocols
used to transport and store data. The physical medium through
which signals are best transmitted over these networks depends
on the amount of data or bandwidth to be transmitted, expressed
as gigabits per second, or Gbps, and the distance involved.
Voice-grade copper wire can only support connections of about
1.2 miles without the use of repeaters to amplify the
signal, whereas optical systems can carry signals in excess of
60 miles without further processing. Early computer
networks had relatively limited performance requirements, short
connection distances and low transmission speeds and, therefore,
relied almost exclusively on copper wire as the medium of
choice. At speeds of more than 1 Gbps, the ability of copper
wire to transmit more than 300 meters is limited due to the loss
of signal over distance as well as interference from external
signal generating equipment. The proliferation of electronic
commerce, communications and broadband entertainment has
resulted in the digitization and accumulation of enormous
amounts of data. Thus, while copper continues to be the primary
medium used for delivering signals to the desktop, even at 1
Gbps, the need to quickly transmit, store and retrieve large
blocks of data across networks in a cost-effective manner has
increasingly required enterprises and service providers to use
fiber optic technology to transmit data at higher speeds over
greater distances and to expand the capacity, or bandwidth, of
their networks.
A LAN typically consists of a group of computers and other
devices that share the resources of one or more processors or
servers within a small geographic area and are connected through
the use of hubs (used for broadcasting data within a LAN),
switches (used for sending data to a specific destination in a
LAN) and routers (used as gateways to route data packets between
two or more LANs or other large networks). In order to switch or
route optical signals to their ultimate destination, they must
first be converted to electrical signals which can be processed
by the switch, router or other networking equipment and then
retransmitted as optical signals to the next switching point or
ending destination. As a result, data networking equipment
typically contains multiple connection points, or ports, in
which various types of transceivers or transponders are used to
transmit and receive signals to and from other networking
equipment over various distances using a variety of networking
protocols.
LANs typically use the Ethernet protocol to transport data
packets across the network at distances of up to 500 meters
at speeds of 1 to 10 Gbps. Because most residential and business
subscriber traffic begins and ends over Ethernet, it has become
the de facto standard user interface for connecting to the
public network. And, while Ethernet was originally developed as
a data-oriented protocol, it has evolved to support a wide range
of services including digital voice and video as well as data.
In response to continually increasing bandwidth and performance
requirements, the Gigabit Ethernet standard, which allows LANs
to operate at 1 Gbps, was introduced in 1998.
A 10 Gbps version of Ethernet, or 10GigE, was
introduced in 2002. We expect that pre-standard products capable
of
4
transmitting at 40 to 100 Gbps for Ethernet applications will
reach the market in late 2009, including 40 Gbps products used
for server connectivity and 100 Gbps products for core switching
applications. Standards-compliant versions of these products are
expected to become available following the expected June 2010
ratification of the 802.3ba standard.
A SAN is a high-speed subnetwork embedded within a LAN where
critical data stored on devices such as disk arrays, optical
disks and tape backup devices is made available to all servers
on the LAN thereby freeing the network servers to deliver
business applications, increasing network capacity and improving
response time. SANs were originally developed using the Fibre
Channel protocol designed for storing and retrieving large
blocks of data. A SAN based on the Fibre Channel protocol
typically incorporates the use of file servers containing
host-bus adapters, or HBAs, for accessing multiple storage
devices through one or more switches, thereby creating multiple
paths to that storage. The Fibre Channel interconnect protocol,
operating at 1 Gbps, was introduced in 1995 to address the
speed, distance and connectivity limitations of copper-based
storage solutions using the Small Computer Interface, or SCSI,
interface protocol while maintaining backward compatibility with
the installed base of SCSI-based storage systems. Products for
the Fibre Channel protocol capable of transmitting at data rates
of 2, 4 and 8 Gbps are now being delivered and products capable
of 16 Gbps are currently in development.
A number of new storage technologies have been introduced to
lower the cost and complexity of deploying Fibre Channel-based
storage networks. Since its introduction in 2003, small and
medium size storage networks have been developed based on the
Internet Small Computer System Interface protocol, or iSCSI.
Other solutions designed to reduce the cost of storage networks
allow for the direct attachment of storage systems to the
network without requiring a host, also known as Network Attached
Storage, or NAS. In 2007, the Fibre Channel over Ethernet
standard, or FCoE, was introduced which enables Fibre Channel
data packets to be encapsulated within Enhanced Ethernet frames.
This standard utilizes the additional bandwidth created at
transmission speeds of 10 Gbps and higher to combine
different types of data traffic for storage (Fibre Channel), LAN
traffic (TCP/IP) and various server clustering protocols
(Infiniband) that previously required their own separate
infrastructure within a data center. As a result, FCoE will
enable the creation of a single converged network within a data
center, rather than two or three networks as previously
required. Since a single server will be able to use a single
network interface card to accommodate the various types of
traffic in FCoE-based networks, the number of cables and
connections in such a network can be reduced with fewer, but
higher-speed connections. In addition, the FCoE protocol will be
able to utilize Ethernet-based technology currently under
development for transmitting signals at speeds of 40 and
100 Gbps.
Due to the cost effectiveness of the optical technologies
involved, transceivers for both LANs and SANs have been
developed using vertical cavity surface emitting lasers, or
VCSELs, to transmit and receive signals at the
850 nanometer, or nm, wavelength over relatively short
distances through multi-mode fiber. Most LANs and SANs operating
today at 1, 2, 4 and 8 Gbps over distances of up to 70 meters,
incorporate this VCSEL technology. The same technology is now
being employed to build FCoE and iSCSI-based LANs and SANs
operating at 10 Gbps.
A new market has emerged in recent years for the use of parallel
optics technologies for high-capacity interconnects used in
telecommunications applications to connect core IP routers and
in the datacenter to interconnect SANs and servers and for
high-performance computing clusters. This technology makes use
of an array of lasers and photodetectors instead of using just
one per transceiver to boost the amount of data that can be
transmitted over a single fiber over very short distances.
Optical interconnects provide for an attractive alternative to
bulky copper cables as data rate and port densities increase
allowing for fewer connections. Like the transceivers used for
LANs and SANs, parallel optical solutions rely primarily on the
use of VCSEL technology. A variation of parallel optics
technology called active optical cable, or AOC, was introduced
by several vendors in late 2007. These products eliminate the
use of fiber connectors used in other parallel optical modules
by bonding the fibers directly to the optical subassembly.
According to industry analyst Lightcounting, demand for AOCs is
expected to equal or exceed demand for other parallel optical
solutions by 2012.
A MAN is a regional data network typically covering an area of
up to 50 kilometers in diameter that allows the sharing of
computing resources on a regional basis within a town or city.
These Metro networks are typically arranged in a ring
configuration that can ultimately transmit data around
metropolitan areas over hundreds of kilometers. MANs typically
use the SONET and SDH communications standards to encapsulate
data to be
5
transmitted over fiber optic cable due to the widespread use of
this standard in legacy telecommunication networks. However,
MANs can also be built using the Ethernet standard, also known
as Metro Ethernet, which can typically result in savings to the
network operator in terms of network infrastructure and
operating costs.
The portion of a MAN that connects a LAN or SAN to a public data
network is frequently referred to as the Last Mile or Access
portion of a network. There are several means that carriers
employ to provide integrated voice, video and data services to
customers over this portion of the network. The more popular
means include CATV and passive optical networks, or PONs. Both
PONs and CATV employ the use of fiber optic technologies in
providing these services. A PON is a point-to-multipoint, fiber
to the premises network architecture in which unpowered optical
splitters are used to enable a single optical fiber to serve
multiple premises, typically
32-128. A
PON consists of an Optical Line Terminal, or OLT, at the service
providers central office and a number of Optical Network
Units, or ONUs, near end users. A PON configuration reduces the
amount of fiber and central office equipment required compared
with point-to-point architectures. Today, there are three
standardized versions of PON based on network speeds: Broadband
PON, or BPON, operating at .6 Gbps, Ethernet PON, or EPON,
operating at 1 Gbps and Gigabit PON, or GPON, operating at 2.5
Gbps. While EPON products currently dominate the market due to
their early adoption in Japan and South Korea, according to
Lightcounting, the demand for GPON products will surpass
all other types by 2011.
CATV is a shared cable system that uses radio frequency, or RF,
signals to deliver services over a
tree-and-branch
topology in which multiple households within a neighborhood
share the same cable. While early CATV systems were all coaxial
cable, they have increasingly employed fiber optic cable to
overcome attenuation of signals over long distances and problems
related to aging components. Fiber also provides more bandwidth
for future expansion. This dual system is called a hybrid fiber
coax, or HFC. Due to the shared-nature of a CATV network
and the use of RF signal technology, these networks typically
utilize analog lasers in conjunction with optical amplifiers to
deliver these services.
Transceivers and transponders used in building MANs and WANs
typically require the use of Fabry Perot, or FP, distributed
feedback, or DFB, and externally modulated lasers operating at
wavelengths of 1310 nm or 1550 nm in order to send signals
longer distances through single mode fiber. In addition, to
accommodate the need for bandwidth, carriers employ the use of
wavelength division multiplexing, or WDM, a technique that
combines multiple wavelengths on a single optical fiber. Systems
using coarse wavelength multiplexing, or CWDM, typically use
only eight wavelengths, spaced 20 nm apart, while systems using
dense wavelength division multiplexing, or DWDM, use up to 64
wavelengths. DWDM systems enable both bandwidth optimization and
increased wavelength agility throughout the network. The groups
of wavelengths or channels in a DWDM system are usually defined
in terms of frequency of the channel and the channels are
generally spaced at either 50 or 100 gigahertz (0.4 or 0.8 nm)
intervals.
Initially, DWDM systems utilized a transceiver or transponder
for each wavelength as specified by the customer. However,
transponders that are capable of being tuned to transmit and
receive specific wavelengths by the customer are increasingly
becoming the preferred product solution for these large
bandwidth applications, while the same capability is being
developed for transceivers in a smaller footprint. These
products greatly reduce the amount of inventory of fixed
wavelength transceivers that the carrier would otherwise have to
carry. Most tunable transponders being shipped today utilize a
tunable laser although alternative technologies are being
developed such as the chirp-managed laser, or CMLTM, which
creates tunability via the use of novel filters in conjunction
with a standard DFB laser.
A wide area network, or WAN, is a geographically dispersed data
communications network that typically includes the use of a
public shared user network such as the telephone system,
although a WAN can also be built using leased lines or
satellites. Similar to MANs, a terrestrial WAN uses the
SONET/SDH communications standard to transmit information over
longer distances due to its use in legacy telecommunication
networks.
Addressable
Markets
According to industry analyst Lightcounting Inc., total sales of
transceiver and transponder products in 2008 were estimated to
be approximately $2.3 billion. This total excludes sales of
optical products designed for use in CATV networks and
ROADMs. Of this total, approximately $553 million
represented sales of transceivers used for
6
LAN and SAN applications incorporating optical technologies to
generate and receive signals up to 500 meters; approximately
$343 million represented sales of transceivers for longer
distance MANs using the Ethernet and Fibre Channel protocols;
approximately $968 million represented sales of
transceivers and transponders used in building MANs that are
compliant with the SONET/SDH protocol; approximately
$328 million was related to products used in building
fiber-to-the-home/curb networks, or FTTx; and approximately
$76 million was for optical interconnects using parallel
optics technologies.
According to Lightcounting, the market for transceivers and
transponders operating at 10 to 40 Gbps represented
approximately $1 billion, or 44%, of the total market in
2008. Of this total market, approximately $173 million was
for short distance LAN applications, $162 million was for
longer distance MANs using the Ethernet protocol, while
$669 million, or two-thirds, represented sales of
transceivers and transponders for
SONET/SDH
networks.
Not all segments of the transceiver and transponder market were
addressed by our product offerings throughout fiscal 2009.
Products that address the FTTx and parallel optics segments,
together totaling approximately $500 million per year, were
not introduced until the end of fiscal 2009. In addition,
products for 10 Gbps LAN and MAN applications were not qualified
at major customers until the same timeframe. With these new
product introductions and the Optium merger, we believe we now
address all major segments of the transceiver and transponder
market.
According to industry analyst OVUM, the market for ROADMs in
2008 was approximately $200 million but represents one of
the fastest growing product solutions as a result of the ability
of ROADMs to enable flexible bandwidth management in MANs. This
market became addressable as a result of the Optium merger.
Information pertaining to the size of the market for optical
products used in CATV networks is limited, but we believe annual
sales of these products currently total approximately
$100 million. This market also became addressable as a
result of the Optium merger.
Additional markets exist for optical products designed primarily
for longer distance WAN applications such as laser and detector
modules, dispersion compensators and channel monitors for very
long-haul transmission. Additional opportunities may exist for
the application of our underlying optical technologies to
non-communications markets. We may decide to enter one or more
of these markets in the future.
Our future revenue potential for optical products will
ultimately depend on the growth rate of our underlying markets,
the extent to which we are able to offer new products,
particularly for higher-speed applications, which will expand
our addressable market, the willingness of customers to devote
resources to qualifying these new products, our market share and
average selling prices.
Demand
for Optical Subsystems and Components Used in LANs and
SANs
The demand for optical subsystems and components used in
building LANs and SANs is driven primarily by spending within
the business enterprise to meet the demands for growth in
information which must be stored and retrieved in a timely
manner and made available to users located within a building or
campus. With the evolution of the internet, the amount of data
to be stored has increased to the point where the cost of
managing and protecting this data has become the primary cost of
a typical information technology department. According to a
report issued by the Gartner Group in 2008, the amount of
controller-based disk storage is expected to grow at nearly 60%
per year from 2008 to 2012. This growth is being driven in part
by video-centric files and data generated by the broadcast,
media, entertainment, medical and security industries as well as
by the proliferation of video-capable mobile computing devices.
While much of this data is transient in nature and does not need
to be stored, a growing portion of the total will need to be
preserved due to regulatory pressures and the desire to use and
protect personal information.
Most SANs are currently capable of transmitting at 2 and 4 Gbps
under the Fibre Channel protocol. To handle this growth in
storage requirements, systems operating at 8 Gbps are now being
deployed and systems capable of 16 Gbps are currently in
development. With the introduction of lower cost 10 Gbps
transceivers, industry analysts believe that, over time,
FCoE-based solutions may become more popular than Fibre Channel
SANs due to their lower cost and ease of installation and
administration.
7
Because SANs enable the sharing of resources thereby reducing
the required investment in storage infrastructure, the continued
growth in stored data is expected to result in the ongoing
centralization of storage and the need to deploy larger SANs.
The centralization of storage, in turn, is increasing the demand
for higher-bandwidth solutions to provide faster, more efficient
interconnection of data storage systems with servers and LANs as
well as the need to connect at higher speeds over longer
distances for disaster recovery applications.
The future demand for equipment used to build SANs and the
optical products to connect them will be influenced by a number
of factors including:
|
|
|
|
|
the need to connect increasing numbers of storage devices and
servers to a growing number of users;
|
|
|
|
the need to provide switched access to multiple storage systems
simultaneously;
|
|
|
|
the increasingly mission-critical nature of stored data and the
need for rapid access to this data;
|
|
|
|
the increase in bandwidth needed to store and retrieve larger
files containing graphics and video content;
|
|
|
|
the expense and complexity associated with managing increasingly
large amounts of data storage;
|
|
|
|
the increasing cost of downtime and the growing importance of
disaster recovery capabilities;
|
|
|
|
the limitations of copper wiring in terms of speed versus
distance;
|
|
|
|
the migration of smaller discrete SAN islands to single
integrated SANs;
|
|
|
|
an increase in demand for higher bandwidth solutions as larger
SANs serve a greater number of users across longer distances;
|
|
|
|
an increase in the number of
IP-based
SANs deployed by small and medium sized businesses due to the
lower cost and reduced complexity associated with using the
iSCSI or the emerging FCoE protocol in conjunction with
networking equipment capable of operating at 10 Gbps; and
|
|
|
|
the growing popularity of blade servers and file virtualization
which, while reducing the overall number of servers and ports
(typically copper-based connections), is expected to increase
demand for optical ports in the data center, particularly those
capable of transmitting and receiving signals at higher speeds.
|
Demand
for Optical Subsystems Used in Metropolitan Area
Networks
The demand for products used to build MANs is driven primarily
by service providers as they seek to upgrade or build new
networks to handle the growth in the bandwidth demands of
business and residential users. These users now have extensive
gigabyte per second transmission capacity in their buildings and
local networks to connect to the public network. This has
resulted in new choke points in todays network
infrastructure: in the Last Mile or local
loop for network access and in MANs themselves, where
islands of data are connected by a copper straw
reducing transmission rates to megabits per second or slower
over a combination of twisted pair copper wire, T-1 lines, frame
relay and wireless links. These choke points are being
eliminated with the deployment of equipment using Gigabit
Ethernet and 10GigE transceivers and transponders.
Demand for all of these products is tied closely to the demand
for bandwidth. The Cisco Visual Network Index is that
companys ongoing effort to forecast the growth and use of
IP networking worldwide. According to this index, the amount of
bandwidth usage devoted to transmitting IP traffic will increase
by a factor of five from 2008 to 2013, approaching 56 exabytes
per month in 2013, compared to approximately 9 exabytes per
month in 2008. The amount of bandwidth to be added during the
next several years and the networks to be built or upgraded to
accommodate this growth will be influenced by several trends
including:
|
|
|
|
|
The rollout of competitive broadband networks by the telephony
companies to offer voice, data, and video services to compete
with cable networks; and
|
|
|
|
The increased availability of video-centric services such as
video-on-demand,
video-telephony/conferencing, video-mail and high definition
television, or HDTV, where 9 Mbps of bandwidth is required as
compared to about 2 Mbps for standard definition television.
|
8
Demand
for Optical Products Used in Wireless Networks
Wireless networks typically use fiber optic transmission to
backhaul wireless traffic to the central office for switching.
According the Cisco Visual Network Index, mobile data traffic
alone is expected to roughly double each year from 2008 through
2013 largely as a result of the deployment of mobile network
devices which offer enhanced communication services, including
the ability to download video files as well as offering voice,
data and internet connectivity. To meet these bandwidth demands,
next generation wireless networks, or 3G, are being deployed
which expand the use of fiber optic technologies from
backhauling mobile traffic out of base stations to being used in
cellular towers to reduce the weight of copper-based solutions
while expanding their bandwidth capabilities.
Network
Performance Test Systems
Industry
Background
Customers who use equipment to test the performance of
packet-based networks such as Ethernet LANs and Fibre Channel
SANs include original equipment manufacturers, or OEMs, who
conduct extensive testing in the development of their products
to ensure system performance and reliability, and operators of
data centers who require their networks to be tested on an
ongoing basis to ensure maximum uptime and to optimize
performance in order to minimize the investment in expensive
upgrades. Manufacturers of equipment for both LANs and SANs
typically focus on the design and development of their own
products and turn to specialized independent suppliers for
state-of-the-art test equipment in order to accelerate the time
required to develop new products. This test equipment consists
of protocol analyzers, traffic generators, bit-error rate
testers and load testers, for Ethernet as well as a wide array
of storage-related protocols including Fibre Channel, iSCSI,
SAS/SATA, PCI-Express, and the emerging Fiber Channel Over
Ethernet protocol, or FCoE.
Business
Strategy
We have become a leading supplier of optical products to
manufacturers of LAN and SAN networking equipment due in part to
our early work in the development of the Fibre Channel standard
in the mid-1990s as well as our pioneering work in developing
transceivers using VCSEL technology. As part of our business
strategy, we continue to actively serve on various standards
committees in helping to influence the use of new cost-effective
optical technologies.
During the late 1990s through 2000, demand for storage and
networking equipment and the optical components and subsystems
that connect them was driven by new applications for the
internet economy, and the storage and networking capacity that
was built was far in excess of end user demand. With the
resulting inventory correction in 2001, we identified several
important trends that we believed would have a significant
influence on how the optical subsystems and components industry
would evolve in the future. Among these trends were:
|
|
|
|
|
industry consolidation involving the combination of key
competitors;
|
|
|
|
a reduction in the number of suppliers of optical subsystems to
large customers as these customers sought to ensure the
financial health of their supply chain;
|
|
|
|
a preference by large OEMs to use suppliers who are able to
offer a broad product line;
|
|
|
|
the need for telecom carriers to enhance their legacy networks
in order to compete more effectively with CATV networks who were
going to bundle their voice, data and video services;
|
|
|
|
the expanded use of pluggable transceivers by telecom carriers
in building out these networks over time;
|
|
|
|
ongoing pricing pressures which would require lower costs of
production; and
|
|
|
|
a tighter supply chain as a result of the increasing use of
customer and supplier inventory hubs which are intended to
minimize future inventory corrections, but which also require
suppliers to be able to respond more quickly to greater than
expected demand.
|
9
To address these trends, we made a number of important strategic
decisions in order to develop a vertically integrated business
model to achieve lower costs of production and to broaden our
product portfolio to enhance our competitive position. Among
these decisions were the following:
|
|
|
|
|
May 2001: We acquired a former disk drive
facility in Ipoh, Malaysia and developed an optical transceiver
manufacturing capability in order to provide low-cost, off-shore
production and to improve our ability to respond quickly to
increased demand from customers;
|
|
|
|
March 2003: We acquired Genoa Corporation in
Fremont, California along with its state-of-the-art wafer
fabrication facility in order to develop an internal source of
long wavelength lasers (both Fabry Perot and DFB type) and
achieve lower production costs for transceivers used in MAN
applications;
|
|
|
|
April 2004: We acquired a division of
Honeywell Inc. engaged in the manufacture of VCSELs to gain
access to an internal source of short-wavelength lasers to
achieve lower production costs for transceivers used in LAN and
SAN applications;
|
|
|
|
Fiscal
2001-2005: We
invested in critical technologies, including an internal
integrated circuit design capability, and a broader product
portfolio;
|
|
|
|
January 2005: We acquired certain assets of
the fiber optics division of Infineon Technologies AG to gain
access to new customers and broaden our product portfolio,
particularly for 10GigE applications;
|
|
|
|
November 2005: We acquired certain assets of
Big Bear Networks, Inc. related to 10GigE and 40 Gbps
applications;
|
|
|
|
Fiscal 2007: We acquired AZNA, LLC and Kodeos
Communications, Inc. to add critical technologies to cost
effectively extend the transmission distance of 10 Gbps products
and to broaden our product portfolio for 10 Gbps applications
based on the 300 pin form factor used in SONET/SDH
networks; and
|
|
|
|
Fiscal 2009: We combined with Optium, a
leading designer and manufacturer of high performance optical
subsystems for use in telecommunications and CATV network
systems to create the worlds largest supplier of optical
components, modules and subsystems for the communications
industry and leverage the Companys leadership position in
the storage and data networking sectors of the industry and
Optiums leadership position in the telecommunications and
CATV sectors to create a more competitive industry participant.
|
As a result of these actions, we have developed a vertically
integrated business model that operates best when our factory
and laser production facilities are highly utilized. In order to
maintain our position as a leading supplier of fiber optic
subsystems and components, we are continuing to pursue the
following business strategies:
Continue to Invest in or Acquire Critical
Technologies. Our years of engineering
experience, our multi-disciplinary technical expertise and our
participation in the development of industry standards have
enabled us to become a leader in the design and development of
fiber optic subsystems and components. We have developed and
acquired critical skills that we believe are essential to
maintain a technological lead in our markets including high
speed semiconductor laser design and wafer fabrication, complex
logic and mixed signal integrated circuit design, optical
subassembly design, software coding, system design, and
manufacturing test design. As a result of these technological
capabilities, we have been at the forefront of a number of
important breakthroughs in the development of innovative
products for fiber optic applications. In the process of
investing in or acquiring critical technologies, we have
obtained a number of U.S. patents with other patent
applications pending in addition to numerous foreign patents and
patent applications. We intend to maintain our technological
leadership through continual enhancement of our existing
products and the development or acquisition of new products,
especially those capable of higher speed transmission of data,
with greater capacity, over longer distances.
Expand Our Broad Product Line of Optical
Subsystems. With the additional product lines
added as a result of the Optium merger, we now offer one of the
broadest portfolios of optical subsystems which support a wide
range of speeds, fiber types, voltages, wavelengths, distances
and functionality and are available in a variety of industry
standard packaging configurations, or form factors. Our optical
subsystems are designed to
10
comply with key networking protocols such as Fibre Channel,
Gigabit Ethernet, 10GigE and SONET and to plug directly into
standard port configurations used in our customers
products. The breadth of our optical subsystems product line is
important to many of our customers who are seeking to
consolidate their supply sources for a wide range of networking
products for diverse applications, and we are focused on the
ongoing expansion of our product line to add key products to
meet our customers needs, particularly for 10 Gigabit
Ethernet and SONET applications. Where time-to-market
considerations are especially important in order to secure or
enhance our supplier relationships with key customers, we may
elect to acquire additional product lines.
Leverage Core Competencies Across Multiple, High-Growth
Markets. We believe that fiber optic technology
will remain the transmission technology of choice for multiple
data communication markets, including Gigabit and 10-Gigabit
Ethernet-based LANs and MANs, Fibre Channel-based SANs and
SONET-based MANs and WANs. These markets are characterized by
differentiated applications with unique design criteria such as
product function, performance, cost, in-system monitoring, size
limitations, physical medium and software. We intend to target
opportunities where our core competencies in high-speed data
transmission protocols can be leveraged into leadership
positions as these technologies are extended across multiple
data communications applications and into other markets and
industries such as automotive and consumer electronics products.
Strengthen and Expand Customer
Relationships. Over the past 20 years, we
have established valuable relationships and a loyal base of
customers by providing high-quality products and superior
service. Our service-oriented approach has allowed us to work
closely with leading data and storage network system
manufacturers, understand and address their current needs and
anticipate their future requirements. We intend to leverage our
relationships with our existing customers as they enter new,
high-speed data communications markets.
Continue to Strengthen Our Low-Cost Manufacturing
Capabilities. We believe that new markets can be
created by the introduction of new, low-cost, high value-added
products. Lower product costs can be achieved through the
introduction of new technologies, product design or market
presence. Access to low-cost manufacturing resources is a key
factor in the ability to offer a low-cost product solution. We
have acquired manufacturing facilities in Ipoh, Malaysia and
Shanghai, China in order to take advantage of low-cost,
off-shore labor while protecting access to our intellectual
property and know-how. In addition, access to critical
underlying technologies, such as our laser manufacturing and IC
design capabilities enables us to accelerate our product
development efforts to be able to introduce new low cost
products more quickly. We continue to seek ways to lower our
production costs through improved product design, improved
manufacturing and testing processes and increased vertical
integration.
Products
In accordance with the guidelines established by the Statement
of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information
(SFAS 131), we have determined that we
operate in two segments: optical subsystems and components; and
network test systems. We provide a broad line of complementary
products within each of these segments. Upon the completion of
the sale of the network test business, we will operate in a
single segment.
Optical
Subsystems and Components
Our optical subsystems are integrated into our customers
systems and used for both short- and intermediate-distance fiber
optic communications applications.
Our family of optical subsystem products consists of
transmitters, receivers, transceivers and transponders
principally based on the Gigabit Ethernet, Fibre Channel and
SONET protocols. A transmitter converts electrical signals into
optical signals for transmission over fiber optics. Receivers
incorporating photo detectors convert incoming optical signals
into electric signals. A transceiver combines both transmitter
and receiver functions in a single device. A transponder
includes an IC to provide the serializer-deserializer function
that otherwise resides in the customers equipment if a
transceiver is used. Our optical subsystem products perform
these functions with high
11
reliability and data integrity and support a wide range of
protocols, transmission speeds, fiber types, wavelengths,
transmission distances, physical configurations and software
enhancements.
Our high-speed fiber optic subsystems are engineered to deliver
value-added functionality and intelligence. Most of our optical
subsystem products include a microprocessor with proprietary
embedded software that allows customers to monitor transmitted
and received optical power, temperature, drive current and other
link parameters of each port on their systems in real time. In
addition, our intelligent optical subsystems are used by some
enterprise networking and storage system manufacturers to
enhance the ability of their systems to diagnose and correct
abnormalities in fiber optic networks.
For SAN applications which rely on the Fibre Channel standard,
we currently provide a wide range of optical subsystems for
transmission applications at 1 to 8 Gbps. We currently provide
optical subsystems for data networking applications for LANs and
MANs based on the Ethernet standard for transmitting signals at
1 to 10 Gbps using the SFP, SFP+, and XFP form factors and,
at the end of fiscal 2009, became qualified for shipping
products for 10 Gbps Ethernet solutions using the legacy Xenpak
and newer X2 form factors which make use of the XAUI electrical
interface. For SONET/SDH-based MANs, we supply optical
subsystems which are capable of transmitting at 2.5, 10 and 40
Gbps. We also offer products that operate at less than 1 Gbps
for these SONET/SDH networks.
We also offer a full line of optical subsystems for MANs using
WDM technologies. Our CWDM subsystems include every major
optical transport component needed to support a MAN, including
transceivers, optical add/drop multiplexers, or OADMs, for
adding and dropping wavelengths in a network without the need to
convert to an electrical signal and multiplexers/demultiplexers
for SONET, Gigabit Ethernet and Fibre Channel protocols.
CWDM-based optical subsystems allow network operators to scale
the amount of bandwidth offered on an incremental basis, thus
providing additional cost savings during the early stages of
deploying new
IP-based
systems. For DWDM systems, we offer DWDM-based transceivers in
the SFP and XFP form factor and, as a result of the Optium
merger, we now offer tunable 300 pin 10 Gbps transponders.
As a result of several acquisitions, we have gained access to
leading-edge technology for the manufacture of a number of
active and passive optical components including VCSELs, FP
lasers, DFB lasers, PIN detectors, fused fiber couplers,
isolators, filters, polarization beam combiners, interleavers
and linear semiconductor optical amplifiers. Most of these
optical components are used internally in the manufacture of our
optical subsystems. We currently sell VCSELs and limited
quantities of other components in the so-called merchant
market to other subsystems manufacturers.
Of the estimated $2.3 billion market for transceivers and
transponders in calendar 2008, our sales of transceiver and
transponder products for LAN, SAN and MAN applications totaled
approximately $458 million, excluding sales of optical
components. Of this amount, approximately $225 million was
from sales of products for short-distance LAN and SAN
applications and $233 million was from sales of products
for longer distance MAN networks for Ethernet, Fibre Channel and
SONET/SDH network protocols. Sales of transceivers and
transponders operating at 10 to 40 Gbps totaled approximately
$167 million in calendar 2008 compared to the total
estimated market size of $1 billion, as estimated by
Lightcounting.
We have only recently begun to offer products used in building
fiber-to-the-home/curb networks and for parallel optics
applications such as backplanes for switches and routers.
According to Lightcounting, the total market for these products
was over $400 million in calendar 2008. We did not offer
and were not qualified for a large number of products for 10
Gbps Ethernet applications which use the XAUI electrical
interface until the end of fiscal 2009.
As a result of our combination with Optium, we offer a
wavelength selective switch, or WSS, ROADM, a dynamic wavelength
processor in a highly configurable platform for wavelength
management in a DWDM telecommunications network. These
capabilities are made possible in part through the use of a
unique technology known as liquid crystal on silicon, or LCoS,
currently used in making television sets. The technology
provides a highly flexible WSS switch capable of operating on
both 50 and 100 GHz International Telecommunications Union
grids, the capability for in-service upgrades of functionality
and integration of additional system functionality,
12
including drop and continue, channel monitoring and channel
contouring. Revenues from the sale of this product totaled
approximately $22 million for the last the last eight
months of fiscal 2009.
Network
Performance Test Systems
Our testing and analysis solutions allow engineers, service
technicians and network managers to generate and capture data at
high speeds, filter the data, identify various types of
intermittent errors and verify protocol compliance for SANs and
LANs, including emerging technologies such as VOIP, 10GigE,
iSCSI, SAS/SATA and FCoE. Our network performance test products
are sold primarily to system manufacturers who use such
equipment in the development of new products for SANs. Because
of our early work in developing the fibre channel standard for
storage networks we have cultivated a leading share of the test
equipment market for SAN applications.
On July 8, 2009, we entered into an agreement to sell the
assets of our network performance test business to JDS Uniphase
Corporation. The sale is expected to be completed on or about
July 15, 2009.
Customers
To date, our revenues have been principally derived from sales
of optical subsystems and components to a broad base of original
equipment manufacturers. Sales to these customers accounted for
92% of our total revenues in fiscal 2009 and 91% in fiscal 2008
and 2007, with the remainder of revenues in each year
representing sales of network performance test systems. Sales of
products for LAN and SAN applications represented 40%, 50% and
60% of our total optical subsystems revenues in fiscal 2009,
2008 and 2007, respectively. Our network performance test
systems are sold primarily to original equipment manufacturers
for testing and validating equipment designs. Most of our
network performance test revenues in fiscal 2009 were derived
from sales of test equipment to manufacturers of SAN networking
equipment. Sales to our top three customers represented
approximately 33% of our total revenues in each of fiscal years
2009, 2008 and 2007. Sales to Cisco Systems accounted for 16% ,
21% and 21% of our total revenues in fiscal 2009, 2008 and 2007,
respectively. No other customer accounted for more than 10% of
our total revenues in any of these years.
Technology
The development of high quality fiber optic subsystems and
components and network performance test systems for high-speed
data communications requires multidisciplinary expertise in the
following technology areas:
High Frequency Integrated Circuit Design. Our
fiber optic subsystems development efforts are supported by an
engineering team that specialized in analog/digital integrated
circuit design. This group works in both silicon, or Si CMOS,
and silicon germanium, or SiGe BiCMOS, semiconductor
technologies where circuit element frequencies are very fast and
can be as high as 40 Gbps. We have designed proprietary
circuits including laser drivers, receiver pre-and
post-amplifiers and controller circuits for handling digital
diagnostics at 1, 2, 4, 8, 10 and 49 Gbps. These advanced
semiconductor devices provide significant cost advantages and
will be critical in the development of future products capable
of even faster data rates.
Optical Subassembly and Mechanical Design. We
established ourselves as a low-cost design leader beginning with
our initial Gbps optical subsystems in 1992. From that base we
have developed single-mode laser alignment approaches and
low-cost, all-metal packaging techniques for improved EMI
performance and environmental tolerance. We develop our own
component and packaging designs and integrate these designs with
proprietary manufacturing processes that allow our products to
be manufactured in high volume.
System Design. The design of all of our
products requires a combination of sophisticated technical
competencies optical engineering, high-speed digital
and analog design, ASIC design and software engineering. We have
built an organization of people with skills in all of these
areas. It is the integration of these technical competencies
that enables us to produce products that meet the needs of our
customers. Our combination of these technical competencies has
enabled us to design and manufacture optical subsystems with
built-in optical test multiplexing and network monitoring, as
well as test systems that integrate optical and protocol testing
with user interface software.
13
Manufacturing System Design. The design skills
gained in our test systems group are also used in the
manufacture of our optical subsystems. We utilize our high-speed
FPGA design blocks and concepts and GUI software elements to
provide specialized manufacturing test systems for our internal
use. These test systems are optimized for test capacity and
broad test coverage. We use automated, software-controlled
testing to enhance the field reliability of all Finisar
products. All of our products are subjected to temperature
testing of powered systems as well as full functional tests.
Optoelectronic Device Design and Wafer
Fabrication. The ability to manufacture our own
optical components can provide significant cost savings while
the ability to create unique component designs, enhances our
competitive position in terms of performance, time-to-market and
intellectual property. We design and manufacture a number of
active components that are used in our optical subsystems. Our
acquisition of Honeywells VCSEL Optical Products business
unit in March 2004 provided us with wafer fabrication capability
for designing and manufacturing all of the 850 nm VCSEL
components used in our short distance transceivers for LAN and
SAN applications. These applications represented 44% of our
optical subsystem revenues in fiscal 2009. The acquisition of
Genoa Corporation in April 2003 provided us with a
state-of-the-art foundry for the manufacture of PIN detectors
and 1310 nm FP and DFB lasers used in our longer distance
transceivers, although we continue to rely on third-party
suppliers for a portion of our DFB laser requirements. These
longer distance transceiver products comprised approximately 50%
of our optical subsystem revenues in fiscal 2009.
Competition
Several of our competitors in the optical subsystems and
components market have recently been acquired or announced plans
to be acquired. These announcements reflect an ongoing
realignment of industry capacity with market demand in order to
restore the financial health of the optics industry. Despite
this trend, the market for optical subsystems and components for
use in LANs, SANs and MANs as well as the market for network
performance test systems remains highly competitive. We believe
the principal competitive factors in these markets are:
|
|
|
|
|
product performance, features, functionality and reliability;
|
|
|
|
price/performance characteristics;
|
|
|
|
timeliness of new product introductions;
|
|
|
|
breadth of product line;
|
|
|
|
adoption of emerging industry standards;
|
|
|
|
service and support;
|
|
|
|
size and scope of distribution network;
|
|
|
|
brand name;
|
|
|
|
access to customers; and
|
|
|
|
size of installed customer base.
|
Competition in the market for optical subsystems and components
varies by market segment. Our principal competitors for optical
transceivers sold for applications based on the Fibre Channel
and Ethernet protocols include Avago Technologies (formerly part
of Agilent Technologies) and JDS Uniphase. Our principal
competitors for optical transceivers sold for MAN and telecom
applications based on the SONET/SDH protocols include Oclaro,
formed with the merger of Bookham and Avanex, Opnext and
Sumitomo and. We believe we compete favorably with our
competitors with respect to most of the foregoing factors based,
in part, upon our broad product line, our sizeable installed
base, our significant vertical integration and our low-cost
manufacturing facility in Ipoh, Malaysia. We believe that the
recent introduction of a number of products for 10GigE
applications has strengthened our position in the optical
subsystem market. We believe that our Xgig product line for
testing multiple network
14
protocols within the same hardware platform has strengthened our
competitive position within the network performance test systems
market.
Sales,
Marketing and Technical Support
For sales of our optical subsystems and components, we utilize a
direct sales force augmented by one world-wide distributor, ten
international distributors, three domestic distributors, 17
domestic manufacturers representatives and three
international manufacturers representatives. For sales of
our network performance test systems, we utilize a direct sales
force augmented by 10 domestic manufacturers
representatives and 21 international resellers. Our direct sales
force maintains close contact with our customers and provides
technical support to our manufacturers representatives. In
our international markets, our direct sales force works with
local resellers who assist us in providing support and
maintenance in the territories they cover.
Our marketing efforts are focused on increasing awareness of our
product offerings for optical subsystems and network performance
test systems and our brand name. Key components of our marketing
efforts include:
|
|
|
|
|
continuing our active participation in industry associations and
standards committees to promote and further enhance Gigabit
Ethernet, Fibre Channel and SAS/SATA technologies, promote
standardization in the LAN, SAN and MAN markets, and increase
our visibility as industry experts;
|
|
|
|
leveraging major trade show events and LAN, SAN, and MAN
conferences to promote our broad product lines; and
|
|
|
|
promoting our network performance test systems products in
industry publications and other electronic media.
|
In addition, our marketing group provides marketing support
services for our executive staff, our direct sales force and our
manufacturers representatives and resellers. Through our
marketing activities, we provide technical and strategic sales
support to our direct sales personnel and resellers, including
in-depth product presentations, technical manuals, sales tools,
pricing, marketing communications, marketing research, trademark
administration and other support functions.
A high level of continuing service and support is critical to
our objective of developing long-term customer relationships. We
emphasize customer service and technical support in order to
provide our customers and their end users with the knowledge and
resources necessary to successfully utilize our product line.
Our customer service organization utilizes a technical team of
field and factory applications engineers, technical marketing
personnel and, when required, product design engineers. We
provide extensive customer support throughout the qualification
and sale process. In addition, we provide many resources through
our World Wide Web site, including product documentation and
technical information. We intend to continue to provide our
customers with comprehensive product support and believe it is
critical to remaining competitive.
Backlog
A substantial portion of our revenues is derived from sales to
OEMs through hub arrangements where revenue is generated as
inventory that resides at these customers or their contract
manufacturers is drawn down. Visibility as to future customer
demand is limited in these situations. Most of our other
revenues are derived from sales pursuant to individual purchase
orders which remain subject to negotiation with respect to
delivery schedules and are generally cancelable without
significant penalties. Manufacturing capacity and availability
of key components can also impact the timing and amount of
revenue ultimately recognized under such sale arrangements.
Accordingly, we do not believe that the backlog of undelivered
product under these purchase orders are a meaningful indicator
of our future financial performance.
Manufacturing
We manufacture most of our optical subsystems at our production
facility in Ipoh, Malaysia. This facility consists of
640,000 square feet, of which 240,000 square feet is
suitable for cleanroom operations. The acquisition of this
facility has allowed us to transfer most of our manufacturing
processes from contract manufacturers to a
15
lower-cost manufacturing facility and to maintain greater
control over our intellectual property. We expect to continue to
use contract manufacturers for a portion of our manufacturing
needs. We conduct a portion of our new product introduction
operations at our Ipoh, Malaysia facility. We manufacture
certain passive optical components used in our long wavelength
products for MAN applications at our facility in Shanghai, China
which we expanded to 150,000 square feet in October 2008.
We continue to conduct a portion of our new product introduction
activities at our Sunnyvale facility where we also conduct
supply chain management for certain components, quality
assurance and documentation control operations. We conduct wafer
fabrication operations for the manufacture of VCSELs used in LAN
and SAN applications at our facility in Allen, Texas. We conduct
wafer fabrication operations for the manufacture of long
wavelength FP and DFB lasers at our facility in Fremont,
California.
As a result of the Optium merger, we now manufacture products in
a 81,000 square foot facility in Horsham, Pennsylvania, and
in a 9,990 square foot facility in Waterloo, Australia. Although
we expect to transfer the manufacturing of certain products to
Malaysia and China in fiscal 2010, we expect to retain these
primarily facilities as research and development centers.
We design and develop a number of the key components of our
products, including photodetectors, lasers, ASICs, printed
circuit boards and software. In addition, our manufacturing team
works closely with our engineers to manage the supply chain. To
assure the quality and reliability of our products, we conduct
product testing and burn-in at our facilities in conjunction
with inspection and the use of testing and statistical process
controls. In addition, most of our optical subsystems have an
intelligent interface that allows us to monitor product quality
during the manufacturing process. Our facilities in Sunnyvale,
Fremont, Allen, Shanghai and Malaysia are qualified under
ISO 9001-9002.
Although we use standard parts and components for our products
where possible, we currently purchase several key components
from single or limited sources. Our principal single source
components purchased from external suppliers include ASICs and
certain DFB lasers that we do not manufacture internally. In
addition, all of the short wavelength VCSEL lasers used in our
LAN and SAN products are currently produced at our facility in
Allen, Texas. Generally, purchase commitments with our single or
limited source suppliers are on a purchase order basis. We
generally try to maintain a buffer inventory of key components.
However, any interruption or delay in the supply of any of these
components, or the inability to procure these components from
alternate sources at acceptable prices and within a reasonable
time, would substantially harm our business. In addition,
qualifying additional suppliers can be time-consuming and
expensive and may increase the likelihood of errors.
We use a rolling
12-month
forecast of anticipated product orders to determine our material
requirements. Lead times for materials and components we order
vary significantly, and depend on factors such as the demand for
such components in relation to each suppliers
manufacturing capacity, internal manufacturing capacity,
contract terms and demand for a component at a given time.
Research
and Development
In fiscal 2009, 2008 and 2007, our research and development
expenses were $92.1 million, $76.5 million and
$64.6 million, respectively. We believe that our future
success depends on our ability to continue to enhance our
existing products and to develop new products that maintain
technological competitiveness. We focus our product development
activities on addressing the evolving needs of our customers
within the LAN, SAN and MAN markets, although we also are
seeking to leverage our core competencies by developing products
for other applications. We work closely with our original
equipment manufacturers and system integrators to monitor
changes in the marketplace. We design our products around
current industry standards and will continue to support emerging
standards that are consistent with our product strategy. Our
research and development groups are aligned with our various
product lines, and we also have specific groups devoted to ASIC
design and test, subsystem design, and test equipment hardware
and software design. Our product development operations include
the active involvement of our manufacturing engineers who
examine each product for its manufacturability, predicted
reliability, expected lifetime and manufacturing costs.
We believe that our research and development efforts are key to
our ability to maintain technical competitiveness and to deliver
innovative products that address the needs of the market.
However, there can be no assurance
16
that our product development efforts will result in commercially
successful products, or that our products will not be rendered
obsolete by changing technology or new product announcements by
other companies.
Intellectual
Property
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 and licensing arrangements, to
establish and protect our proprietary rights. We currently own
936 issued U.S. patents and 524 patent applications with
additional foreign counterparts. We have agreed to transfer 57
of these patents and 130 of these patent applications to JDSU in
connection with the pending sale of our network performance test
systems business. 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. We are currently
engaged in pending litigation to enforce certain of our patents
(see Item 3. Legal Proceedings), 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. This litigation could
result in substantial costs and diversion of resources and could
significantly harm our business.
The networking industry is characterized by the existence of a
large number of patents and frequent litigation based on
allegations of patent infringement. 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 such claims, with or
without merit, could be time-consuming, result in costly
litigation, divert the efforts of our technical and management
personnel, cause product shipment delays or require us to enter
into royalty or licensing agreements, any of which could
significantly harm our business. Royalty or licensing
agreements, if required, may not be available on terms
acceptable to us, if at all. In addition, our agreements with
our customers typically require us to indemnify our customers
from any expense or liability resulting from claimed
infringement of third party intellectual property rights. In the
event a claim against us was successful and we could not obtain
a license to the relevant technology on acceptable terms or
license a substitute technology or redesign our products to
avoid infringement, our business would be significantly harmed.
Employees
As of April 30, 2009, we employed approximately
5,004 full-time employees, 784 of whom were located in the
United States and 3,991 of whom were located at our production
facilities in Ipoh, Malaysia, Shanghai, China and our Singapore
facility where we conduct research and development activities.
We also from time to time employ part-time employees and hire
contractors. Our employees are not represented by any collective
bargaining agreement, and we have never experienced a work
stoppage. We believe that there is a positive employee relations
environment within the company.
Available
Information
Our website is located at www.finisar.com. Electronic
copies of our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available, free of charge, on our website as soon as
practicable after we electronically file such material with the
Securities and Exchange Commission. The contents of our website
are not incorporated by reference in this Annual Report on
Form 10-K.
17
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.
We may
have insufficient cash flow to meet our debt service
obligations, including payments due on our subordinated
convertible notes.
We will be required to generate cash sufficient to conduct our
business operations and pay our indebtedness and other
liabilities, including all amounts due on our outstanding
21/2%
convertible senior subordinated notes due October 15, 2010
totaling $92 million and our
21/2%
convertible subordinated notes due October 15, 2010
totaling $50 million. In addition, the $92 million in
principal amount of our
21/2%
convertible senior subordinated notes that mature in October
2010 include a net share settlement feature under which we are
required to pay the principal portion of the notes in cash upon
conversion. Our existing balances of cash, cash equivalents and
short-term investments are not sufficient to repay these notes,
and we may not be able to cover our future debt service
obligations from our operating cash flow. We have recently
implemented a series of cost control measures, but these
measures alone will not be sufficient to generate the cash
necessary to repay our outstanding notes. We have also announced
the commencement of the Exchange Offers in order to reduce the
principal amount of our outstanding indebtedness under the notes
due in 2010. There can be no assurance that the Exchange Offers
will be successfully completed. 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 our
indebtedness, including the notes due in October 2010.
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 together with the cash expected to be
generated from future operations and borrowings under our bank
credit facility will be sufficient to meet our cash needs for
working capital and capital expenditures for at least the next
12 months. We may, however, require additional financing to
fund our operations in the future or to repay the principal of
our outstanding convertible subordinated notes which mature in
October 2010. Due to the unpredictable nature of the capital
markets, particularly in the technology sector, we cannot assure
you that we will be able to raise additional capital if and when
it is required, especially if we experience disappointing
operating results. If adequate capital is not available to us as
required, or is not available on favorable terms, we could be
required to significantly reduce or restructure our business
operations. If we do raise additional funds through the issuance
of equity or convertible debt securities, the percentage
ownership of our stockholders could be significantly diluted,
and these newly-issued securities may have rights, preferences
or privileges senior to those of existing stockholders.
We
expect that our revenues and profitability will be adversely
affected following the completion of the pending sale of our
network performance test systems business.
On July 8, 2009, we entered into an agreement to sell the
assets of our Network Tools Division (excluding accounts
receivable and payable) to JDSU for $40.6 million in cash.
Following the completion of the sale, we will no longer offer
network performance test products. These products accounted for
$37.3 million, $38.6 million and $44.2 million in
revenues during fiscal 2007, 2008 and 2009, respectively. Gross
profit and operating profit margins on sales of network
performance test products have generally been higher than on our
optical subsystem and component products. Accordingly, we expect
that our revenues and profitability will be adversely affected
following the sale unless and until we are able to achieve
significant growth in our optical subsystems and components
business.
18
Our
quarterly revenues and operating results fluctuate due to a
variety of factors, which may result in volatility or a decline
in the price of our stock.
Our quarterly operating results have varied significantly due to
a number of factors, including:
|
|
|
|
|
fluctuation in demand for our products;
|
|
|
|
the timing of new product introductions or enhancements by us
and our competitors;
|
|
|
|
the level of market acceptance of new and enhanced versions of
our products;
|
|
|
|
the timing or cancellation of large customer orders;
|
|
|
|
the length and variability of the sales cycle for our products;
|
|
|
|
pricing policy changes by us and our competitors and suppliers;
|
|
|
|
the availability of development funding and the timing of
development revenue;
|
|
|
|
changes in the mix of products sold;
|
|
|
|
increased competition in product lines, and competitive pricing
pressures; and
|
|
|
|
the evolving and unpredictable nature of the markets for
products incorporating our optical components and subsystems.
|
We expect that our operating results will continue to fluctuate
in the future as a result of these factors and a variety of
other factors, including:
|
|
|
|
|
fluctuations in manufacturing yields;
|
|
|
|
the emergence of new industry standards;
|
|
|
|
failure to anticipate changing customer product requirements;
|
|
|
|
the loss or gain of important customers;
|
|
|
|
product obsolescence; and
|
|
|
|
the amount of research and development expenses associated with
new product introductions.
|
Our operating results could also be harmed by:
|
|
|
|
|
the continuation or worsening of the current global economic
slowdown or economic conditions in various geographic areas
where we or our customers do business;
|
|
|
|
acts of terrorism and international conflicts or crises;
|
|
|
|
other conditions affecting the timing of customer orders; or
|
|
|
|
a downturn in the markets for our customers products,
particularly the data storage and networking and
telecommunications components markets.
|
We may experience a delay in generating or recognizing revenues
for a number of reasons. Orders at the beginning of each quarter
typically represent a small percentage of expected revenues for
that quarter and are generally cancelable with minimal notice.
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.
19
As a result of these factors, our operating results may vary
significantly from quarter to quarter. Accordingly, we believe
that
period-to-period
comparisons of our results of operations are not meaningful and
should not be relied upon as indications of future performance.
Any shortfall in revenues or net income from levels expected by
the investment community could cause a decline in the trading
price of our stock.
We may
lose sales if our suppliers or independent contractors fail to
meet our needs or go out of business.
We currently purchase a number of key components used in the
manufacture of our products from single or limited sources, and
we rely on several independent contract manufacturers to supply
us with certain key subassemblies, including lasers, modulators,
and printed circuit boards. We depend on these sources to meet
our production needs. Moreover, we depend on the quality of the
components and subassemblies that they supply to us, over which
we have limited control. Several of our suppliers are or may
become financially unstable as the result of current global
market conditions. In addition, we have encountered shortages
and delays in obtaining components in the past and expect to
encounter additional shortages and delays in the future.
Recently, many of our suppliers have extended lead times for
many of their products as the result of significantly reducing
capacity in light of the global slowdown in demand. This
reduction in capacity has reduced the ability of many suppliers
to respond to increases in demand. If we cannot supply products
due to a lack of components, or are unable to redesign products
with other components in a timely manner, our business will be
significantly harmed. We generally have no long-term contracts
with any of our component suppliers or contract manufacturers.
As a result, a supplier or contract manufacturer can discontinue
supplying components or subassemblies to us without penalty. If
a supplier were to discontinue supplying a key component or
cease operations, our business may be harmed by the resulting
product manufacturing and delivery delays. We are also subject
to potential delays in the development by our suppliers of key
components which may affect our ability to introduce new
products. Similarly, disruptions in the services provided by our
contract manufacturers or the transition to other suppliers of
these services could lead to supply chain problems or delays in
the delivery of our products. These problems or delays could
damage our relationships with our customers and adversely affect
our business.
We use rolling forecasts based on anticipated product orders to
determine our component and subassembly requirements. Lead times
for materials and components that we order vary significantly
and depend on factors such as specific supplier requirements,
contract terms and current market demand for particular
components. If we overestimate our component requirements, we
may have excess inventory, which would increase our costs. If we
underestimate our component requirements, we may have inadequate
inventory, which could interrupt our manufacturing and delay
delivery of our products to our customers. Any of these
occurrences could significantly harm our business.
If we
are unable to realize anticipated cost savings from the transfer
of certain manufacturing operations to our overseas locations
and increased use of internally-manufactured components our
results of operations could be harmed.
As part of our cost of goods sold cost reduction initiatives
planned for the next several quarters, we expect to realize
significant cost savings through (i) the transfer of
certain product manufacturing operations to lower cost off-shore
locations and (ii) product engineering changes to enable
the broader use of internally-manufactured components. The
transfer of production to overseas locations may be more
difficult and costly than we currently anticipate, which could
result in increased transfer costs and time delays. Further,
following transfer, we may experience lower manufacturing yields
than those historically achieved in our U.S. manufacturing
locations. In addition, the engineering changes required for the
use of internally-manufactured components may be more
technically-challenging than we anticipate and customer
acceptance of such changes could be delayed. If we fail to
achieve the planned product manufacturing transfer and increase
in internally-manufactured component use within our currently
anticipated time frame, or if our manufacturing yields decrease
as a result, our actual cost savings will be less than
anticipated and our results of operations could be harmed.
20
Failure
to accurately forecast our revenues could result in additional
charges for obsolete or excess inventories or non-cancellable
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 revenues in future periods again fall substantially below
our expectations, or should we fail again to accurately forecast
changes in demand mix, we could be required to record additional
charges for obsolete or excess inventories or non-cancelable
purchase commitments.
If we
encounter sustained yield problems or other delays in the
production or delivery of our internally-manufactured components
or in the final assembly and test of our transceiver products,
we may lose sales and damage our customer
relationships.
Our manufacturing operations are highly vertically integrated.
In order to reduce our manufacturing costs, we have acquired a
number of companies, and business units of other companies, that
manufacture optical components incorporated in our optical
subsystem products and have developed our own facilities for the
final assembly and testing of our products. For example, we
design and manufacture many critical components including all of
the short wavelength VCSEL lasers incorporated in transceivers
used for LAN/SAN applications at our wafer fabrication facility
in Allen, Texas and manufacture a portion of our internal
requirements for longer wavelength lasers at our wafer
fabrication facility in Fremont, California. We assemble and
test most of our transceiver products at our facility in Ipoh,
Malaysia. As a result of this vertical integration, we have
become increasingly dependent on our internal production
capabilities. The manufacture of critical components, including
the fabrication of wafers, and the assembly and testing of our
products, involve highly complex processes. For example, minute
levels of contaminants in the manufacturing environment,
difficulties in the fabrication process or other factors can
cause a substantial portion of the components on a wafer to be
nonfunctional. These problems may be difficult to detect at an
early stage of the manufacturing process and often are
time-consuming and expensive to correct. From time to time, we
have experienced problems achieving acceptable yields at our
wafer fabrication facilities, resulting in delays in the
availability of components. Moreover, an increase in the
rejection rate of products during the quality control process
before, during or after manufacture, results in lower yields and
margins. In addition, changes in manufacturing processes
required as a result of changes in product specifications,
changing customer needs and the introduction of new product
lines have historically significantly reduced our manufacturing
yields, resulting in low or negative margins on those products.
Poor manufacturing yields over a prolonged period of time could
adversely affect our ability to deliver our subsystem products
to our customers and could also affect our sale of components to
customers in the merchant market. Our inability to supply
components to meet our internal needs could harm our
relationships with customers and have an adverse effect on our
business.
We are
dependent on widespread market acceptance of our optical
subsystems and components, and our revenues will decline if the
markets for these products do not expand as
expected.
We currently derive a substantial majority of our revenue from
sales of our optical subsystems and components. We expect that
revenue from these products will continue to account for a
substantial majority of our revenue for the foreseeable future.
Accordingly, widespread acceptance of these products is critical
to our future success. If the market does not continue to accept
our optical subsystems and components, our revenues will decline
significantly. Our future success ultimately depends on the
continued growth of the communications industry and, in
particular, the continued expansion of global information
networks, particularly those directly or indirectly dependent
upon a fiber optics infrastructure. As part of that growth, we
are relying on increasing demand for voice, video and other data
delivered over high-bandwidth network systems as well as
commitments by network systems
21
vendors to invest in the expansion of the global information
network. As network usage and bandwidth demand increase, so does
the need for advanced optical networks to provide the required
bandwidth. Without network and bandwidth growth, the need for
optical subsystems and components, and hence our future growth
as a manufacturer of these products, and systems that test these
products, will be jeopardized, and our business would be
significantly harmed.
Many of these factors are beyond our control. In addition, in
order to achieve widespread market acceptance, we must
differentiate ourselves from our competition through product
offerings and brand name recognition. We cannot assure you that
we will be successful in making this differentiation or
achieving widespread acceptance of our products. Failure of our
existing or future products to maintain and achieve widespread
levels of market acceptance will significantly impair our
revenue growth.
We
depend on large purchases from a few significant customers, and
any loss, cancellation, reduction or delay in purchases by these
customers could harm our business.
A small number of customers have consistently accounted for a
significant portion of our revenues. For example, sales to
Finisars top five customers represented 40% of its
revenues in fiscal 2009. Our success will depend on our
continued ability to develop and manage relationships with our
major customers. Although we are attempting to expand our
customer base, we expect that significant customer concentration
will continue for the foreseeable future. We may not be able to
offset any decline in revenues from our existing major customers
with revenues from new customers, and our quarterly results may
be volatile because we are dependent on large orders from these
customers that may be reduced or delayed.
The markets in which we have historically sold our optical
subsystems and components products are dominated by a relatively
small number of systems manufacturers, thereby limiting the
number of our potential customers. Recent consolidation of
portions of our customer base, including telecommunications
systems manufacturers, and potential future consolidation may
have a material adverse impact on our business. Our dependence
on large orders from a relatively small number of customers
makes our relationship with each customer critically important
to our business. We cannot assure you that we will be able to
retain our largest customers, that we will be able to attract
additional customers or that our customers will be successful in
selling their products that incorporate our products. We have in
the past experienced delays and reductions in orders from some
of our major customers. In addition, our customers have in the
past sought price concessions from us, and we expect that they
will continue to do so in the future. Cost reduction measures
that we have implemented over the past several years, and
additional action we may take to reduce costs, may adversely
affect our ability to introduce new and improved products which
may, in turn, adversely affect our relationships with some of
our key customers. Further, some of our customers may in the
future shift their purchases of products from us to our
competitors or to joint ventures between these customers and our
competitors. The loss of one or more of our largest customers,
any reduction or delay in sales to these customers, our
inability to successfully develop relationships with additional
customers or future price concessions that we may make could
significantly harm our business.
Because
we do not have long-term contracts with our customers, our
customers may cease purchasing our products at any time if we
fail to meet our customers needs.
Typically, we do not have long-term contracts with our
customers. As a result, our agreements with our customers do not
provide any assurance of future sales. Accordingly:
|
|
|
|
|
our customers can stop purchasing our products at any time
without penalty;
|
|
|
|
our customers are free to purchase products from our
competitors; and
|
|
|
|
our customers are not required to make minimum purchases.
|
Sales are typically made pursuant to inventory hub arrangements
under which customers may draw down inventory to satisfy their
demand as needed or pursuant to individual purchase orders,
often with extremely short lead times. If we are unable to
fulfill these orders in a timely manner, it is likely that we
will lose sales and customers. If our major customers stop
purchasing our products for any reason, our business and results
of operations would be harmed.
22
The
markets for our products are subject to rapid technological
change, and to compete effectively we must continually introduce
new products that achieve market acceptance.
The markets for our products are characterized by rapid
technological change, frequent new product introductions,
substantial capital investment, changes in customer requirements
and evolving industry standards with respect to the protocols
used in data communications, telecommunications and cable TV
networks. Our future performance will depend on the successful
development, introduction and market acceptance of new and
enhanced products that address these changes as well as current
and potential customer requirements. For example, the market for
optical subsystems is currently characterized by a trend toward
the adoption of pluggable modules and subsystems
that do not require customized interconnections and by the
development of more complex and integrated optical subsystems.
We expect that new technologies will emerge as competition and
the need for higher and more cost-effective bandwidth increases.
The introduction of new and enhanced products may cause our
customers to defer or cancel orders for existing products. In
addition, a slowdown in demand for existing products ahead of a
new product introduction could result in a write-down in the
value of inventory on hand related to existing products. We have
in the past experienced a slowdown in demand for existing
products and delays in new product development and such delays
may occur in the future. To the extent customers defer or cancel
orders for existing products due to a slowdown in demand or in
the expectation of a new product release or if there is any
delay in development or introduction of our new products or
enhancements of our products, our operating results would
suffer. We also may not be able to develop the underlying core
technologies necessary to create new products and enhancements,
or to license these technologies from third parties. Product
development delays may result from numerous factors, including:
|
|
|
|
|
changing product specifications and customer requirements;
|
|
|
|
unanticipated engineering complexities;
|
|
|
|
expense reduction measures we have implemented, and others we
may implement, to conserve our cash and attempt to achieve and
sustain profitability;
|
|
|
|
difficulties in hiring and retaining necessary technical
personnel;
|
|
|
|
difficulties in reallocating engineering resources and
overcoming resource limitations; and
|
|
|
|
changing market or competitive product requirements.
|
The development of new, technologically advanced products is a
complex and uncertain process requiring high levels of
innovation and highly skilled engineering and development
personnel, as well as the accurate anticipation of technological
and market trends. The introduction of new products also
requires significant investment to ramp up production capacity,
for which benefit will not be realized if customer demand does
not develop as expected. Ramping of production capacity also
entails risks of delays which can limit our ability to realize
the full benefit of the new product introduction. We cannot
assure you that we will be able to identify, develop,
manufacture, market or support new or enhanced products
successfully, if at all, or on a timely basis. Further, we
cannot assure you that our new products will gain market
acceptance or that we will be able to respond effectively to
product announcements by competitors, technological changes or
emerging industry standards. Any failure to respond to
technological change would significantly harm our business.
Continued
competition in our markets may lead to an accelerated reduction
in our prices, revenues and market share.
The end markets for optical products have experienced
significant industry consolidation during the past few years
while the industry that supplies these customers has not. As a
result, the markets for optical subsystems and components and
network test systems are highly competitive. Our current
competitors include a number of domestic and international
companies, many of which have substantially greater financial,
technical, marketing and distribution resources and brand name
recognition than we have. We may not be able to compete
successfully against either current or future competitors.
Companies competing with us may introduce products that are
competitively priced, have increased performance or
functionality, or incorporate technological advances and may be
able to react quicker to changing customer requirements and
expectations. There is also the risk that network
23
systems vendors may re-enter the subsystem market and begin to
manufacture the optical subsystems incorporated in their network
systems. Increased competition could result in significant price
erosion, reduced revenue, lower margins or loss of market share,
any of which would significantly harm our business. For optical
subsystems, we compete primarily with Avago Technologies,
Capella Intelligent Subsystems, CoAdna Photonics, Emcore,
Fujitsu Computer Systems, JDS Uniphase, Opnext, Oplink,
StrataLight Communications, Sumitomo, and a number of smaller
vendors. BKtel, Emcore, Olson Technology and Yagi Antenna are
our main competitors with respect to our cable TV products. For
network test systems, we compete primarily with Agilent
Technologies and LeCroy. Our competitors continue to introduce
improved products and we will have to do the same to remain
competitive.
Decreases
in average selling prices of our products may reduce our gross
margins.
The market for optical subsystems is characterized by declining
average selling prices resulting from factors such as increased
competition, overcapacity, the introduction of new products and
increased unit volumes as manufacturers continue to deploy
network and storage systems. We have in the past experienced,
and in the future may experience, substantial
period-to-period
fluctuations in operating results due to declining average
selling prices. We anticipate that average selling prices will
decrease in the future in response to product introductions by
competitors or us, or by other factors, including pricing
pressures from significant customers. Therefore, in order to
achieve and sustain profitable operations, we must continue to
develop and introduce on a timely basis new products that
incorporate features that can be sold at higher average selling
prices. Failure to do so could cause our revenues and gross
margins to decline, which would result in additional operating
losses and significantly harm our business.
We may be unable to reduce the cost of our products sufficiently
to enable us to compete with others. Our cost reduction efforts
may not allow us to keep pace with competitive pricing pressures
and could adversely affect our margins. In order to remain
competitive, we must continually reduce the cost of
manufacturing our products through design and engineering
changes. We may not 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 systems than on our
optical subsystems and components. Our optical products sold for
longer distance MAN and telecom applications typically have
higher gross margins than our products for shorter distance LAN
or SAN applications. Gross margins on individual products
fluctuate over the products life cycle. Our overall gross
margins have fluctuated from period to period as a result of
shifts in product mix, the introduction of new products,
decreases in average selling prices for older products and our
ability to reduce product costs, and these fluctuations are
expected to continue in the future.
Our
customers often evaluate our products for long and variable
periods, which causes the timing of our revenues and results of
operations to be unpredictable.
The period of time between our initial contact with a customer
and the receipt of an actual purchase order may span a year or
more. During this time, customers may perform, or require us to
perform, extensive and lengthy evaluation and testing of our
products before purchasing and using the products in their
equipment. These products often take substantial time to develop
because of their complexity and because customer specifications
sometimes change during the development cycle. Our customers do
not typically share information on the duration or magnitude of
these qualification procedures. The length of these
qualification processes also may vary substantially by product
and customer, and, thus, cause our results of operations to be
unpredictable. While our potential customers are qualifying our
products and before they place an order with us, we may incur
substantial research and development and sales and marketing
expenses and expend significant management effort. Even after
incurring such costs we ultimately may not sell any products to
such potential customers. In addition, these qualification
processes often make it difficult to obtain new customers, as
customers are reluctant to expend the resources necessary to
qualify a new supplier if they have one or more existing
qualified sources. Once our products have been qualified, the
agreements that we enter into with our customers typically
contain no minimum purchase
24
commitments. Failure of our customers to incorporate our
products into their systems would significantly harm our
business.
We
will lose sales if we are unable to obtain government
authorization to export certain of our products, and we would be
subject to legal and regulatory consequences if we do not comply
with applicable export control laws and
regulations.
Exports of certain of our products are subject to export
controls imposed by the U.S. Government and administered by
the United States Departments of State and Commerce. In certain
instances, these regulations may require pre-shipment
authorization from the administering department. For products
subject to the Export Administration Regulations, or EAR,
administered by the Department of Commerces Bureau of
Industry and Security, the requirement for a license is
dependent on the type and end use of the product, the final
destination, the identity of the end user and whether a license
exception might apply. Virtually all exports of products subject
to the International Traffic in Arms Regulations, or ITAR,
administered by the Department of States Directorate of
Defense Trade Controls, require a license. Certain of our fiber
optics products are subject to EAR and certain of our RF over
fiber products, as well as certain products developed with
government funding, are currently subject to ITAR. Products
developed and manufactured in our foreign locations are subject
to export controls of the applicable foreign nation.
Given the current global political climate, obtaining export
licenses can be difficult and time-consuming. Failure to obtain
export licenses for these shipments could significantly reduce
our revenue and materially adversely affect our business,
financial condition and results of operations. Compliance with
U.S. Government regulations may also subject us to
additional fees and costs. The absence of comparable
restrictions on competitors in other countries may adversely
affect our competitive position.
During mid-2007, Optium became aware that certain of its analog
RF over fiber products may, depending on end use and
customization, be subject to ITAR. Accordingly, Optium filed a
detailed voluntary disclosure with the Department of State
describing the details of possible inadvertent ITAR violations
with respect to the export of a limited number of certain
prototype products, as well as related technical data and
defense services. Optium may have also made unauthorized
transfers of ITAR-restricted technical data and defense services
to foreign persons in the workplace. Additional information has
been provided upon request to the Department of State with
respect to this matter. In late 2008, a grand jury subpoena from
the office of the U.S. Attorney for the Eastern District of
Pennsylvania was received requesting documents from 2005 through
the present referring to, relating to or involving the subject
matter of the above referenced voluntary disclosure and export
activities.
While the Department of State encourages voluntary disclosures
and generally affords parties mitigating credit under such
circumstances, we nevertheless could be subject to continued
investigation and potential regulatory consequences ranging from
a no-action letter, government oversight of facilities and
export transactions, monetary penalties, and in extreme cases,
debarment from government contracting, denial of export
privileges and criminal sanctions, any of which would adversely
affect our results of operations and cash flow. The Department
of State and U.S. Attorney inquiries may require us to
expend significant management time and incur significant legal
and other expenses. We cannot predict how long it will take or
how much more time and resources it will have to expend to
resolve these government inquiries, nor can it predict the
outcome of these inquiries.
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 Australia, China, Israel and
Singapore. We also rely on several contract manufacturers
located in Asia for our supply of key subassemblies. Each of
these facilities and manufacturers subjects us to additional
risks associated with international manufacturing, including:
|
|
|
|
|
unexpected changes in regulatory requirements;
|
|
|
|
legal uncertainties regarding liability, tariffs and other trade
barriers;
|
|
|
|
inadequate protection of intellectual property in some countries;
|
25
|
|
|
|
|
greater incidence of shipping delays;
|
|
|
|
greater difficulty in overseeing manufacturing operations;
|
|
|
|
greater difficulty in hiring talent needed to oversee
manufacturing operations;
|
|
|
|
potential political and economic instability; and
|
|
|
|
the outbreak of infectious diseases such as the H1N1 influenza
virus and/or
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 ringgit, the
Chinese yuan, the Australian dollar and the Israeli shekel. As a
result, we bear the risk that the rate of inflation in one or
more countries will exceed the rate of the devaluation of that
countrys currency in relation to the U.S. dollar,
which would increase our costs as expressed in
U.S. dollars. To date, we have not engaged in currency
hedging transactions to decrease the risk of financial exposure
from fluctuations in foreign exchange rates.
Our
business and future operating results are subject to a wide
range of uncertainties arising out of the continuing threat of
terrorist attacks and ongoing military actions in the Middle
East.
Like other U.S. companies, our business and operating
results are subject to uncertainties arising out of the
continuing threat of terrorist attacks on the United States and
ongoing military actions in the Middle East, including the
economic consequences of the war in Iraq or additional terrorist
activities and associated political instability, and the impact
of heightened security concerns on domestic and international
travel and commerce. In particular, due to these uncertainties
we are subject to:
|
|
|
|
|
increased risks related to the operations of our manufacturing
facilities in Malaysia;
|
|
|
|
greater risks of disruption in the operations of our China,
Singapore, and Israeli facilities and our Asian contract
manufacturers and more frequent instances of shipping
delays; and
|
|
|
|
the risk that future tightening of immigration controls may
adversely affect the residence status of
non-U.S. engineers
and other key technical employees in our U.S. facilities or
our ability to hire new
non-U.S. employees
in such facilities.
|
Past
and future acquisitions could be difficult to integrate, disrupt
our business, dilute stockholder value and harm our operating
results.
In addition to our recent combination with Optium, we have
completed the acquisition of ten privately-held companies and
certain businesses and assets from six other companies since
October 2000. We continue to review opportunities to acquire
other businesses, product lines or technologies that would
complement our current products, expand the breadth of our
markets or enhance our technical capabilities, or that may
otherwise offer growth opportunities, and we from time to time
make proposals and offers, and take other steps, to acquire
businesses, products and technologies.
26
The Optium merger and several of our other past acquisitions
have been material, and acquisitions that we may complete in the
future may be material. In 13 of our 17 acquisitions, we issued
common stock or notes convertible into common stock as all or a
portion of the consideration. The issuance of common stock or
other equity securities by us in any future transaction would
dilute our stockholders percentage ownership.
Other risks associated with acquiring the operations of other
companies include:
|
|
|
|
|
problems assimilating the purchased operations, technologies or
products;
|
|
|
|
unanticipated costs associated with the acquisition;
|
|
|
|
diversion of managements attention from our core business;
|
|
|
|
adverse effects on existing business relationships with
suppliers and customers;
|
|
|
|
risks associated with entering markets in which we have no or
limited prior experience; and
|
|
|
|
potential loss of key employees of purchased organizations.
|
Not all of our past acquisitions have been successful. In the
past, we have subsequently sold some of the assets acquired in
prior acquisitions, discontinued product lines and closed
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. Through
fiscal 2009, we have written off all of the goodwill associated
with past acquisitions. We cannot assure you that we will be
successful in overcoming problems encountered in connection with
more recently completed acquisitions or potential 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 completed or future
acquisitions diminish in the future, we may be required to
record additional write downs of goodwill, intangible assets or
other assets associated with such acquisitions, which would
adversely affect our operating results.
We
have made and may continue to make strategic investments which
may not be successful, may result in the loss of all or part of
our invested capital and may adversely affect our operating
results.
Through fiscal 2009, we made minority equity investments in
early-stage technology companies, totaling approximately
$56 million. Our investments in these early stage companies
were primarily motivated by our desire to gain early access to
new technology. We intend to review additional opportunities to
make strategic equity investments in pre-public companies where
we believe such investments will provide us with opportunities
to gain access to important technologies or otherwise enhance
important commercial relationships. We have little or no
influence over the early-stage companies in which we have made
or may make these strategic, minority equity investments. Each
of these investments in pre-public companies involves a high
degree of risk. We may not be successful in achieving the
financial, technological or commercial advantage upon which any
given investment is premised, and failure by the early-stage
company to achieve its own business objectives or to raise
capital needed on acceptable economic terms could result in a
loss of all or part of our invested capital. In fiscal 2003, we
wrote off $12.0 million in two investments which became
impaired. In fiscal 2004, we wrote off $1.6 million in two
additional investments, and in fiscal 2005, we wrote off
$10.0 million in another investment. During fiscal 2006, we
reclassified $4.2 million of an investment associated with
the Infineon acquisition to goodwill as the investment was
deemed to have no value. During fiscal 2009, we wrote off
$1.2 million for another investment that became impaired.
We may be required to write off all or a portion of the
$14.3 million in such investments remaining on our balance
sheet as of April 30, 2009 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, certain of our current and former officers, and an
investment banking firm that served as an underwriter for our
initial public offering in November 1999 and a secondary
offering in April 2000. The complaint, as subsequently amended,
alleges violations of Sections 11 and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(b) of the Securities
Exchange Act of 1934. No specific damages are claimed. Similar
allegations have been made in lawsuits relating to more than 300
other initial public offerings conducted in 1999 and 2000, which
were consolidated for pretrial
27
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 February 2009, the parties reached
an understanding regarding the principal elements of a
settlement, subject to formal documentation and Court approval.
Under the new proposed settlement, the underwriter defendants
would pay a total of $486 million, and the issuer
defendants and their insurers would pay a total of
$100 million to settle all of the cases. We would be
responsible for a pro rata share of the issuers
contribution to the settlement and certain costs anticipated to
total between $350,000 and $400,000. If this settlement is not
approved by the Court, we intend to defend the lawsuit
vigorously. Because of the inherent uncertainty of litigation,
we cannot predict its outcome. If, as a result of this dispute,
we are required to pay significant monetary damages, our
business would be substantially harmed.
We have been named as a nominal defendant in several purported
shareholder derivative lawsuits concerning the granting of stock
options. These cases have been consolidated into two proceedings
pending in federal and state courts in California. The
plaintiffs in all of these cases have alleged that certain
current or former officers and directors of Finisar caused it to
grant stock options at less than fair market value, contrary to
our public statements (including statements in our financial
statements), and that, as a result, those officers and directors
are liable to Finisar. No specific amount of damages has been
alleged and, by the nature of the lawsuits no damages will be
alleged, against Finisar. On May 22, 2007, the state court
granted our motion to stay the state court action pending
resolution of the consolidated federal court action. On
August 28, 2007, we and the individual defendants filed
motions to dismiss the complaint which were granted on
January 11, 2008. On May 12, 2008, the plaintiffs
filed a further amended complaint in the federal court action.
On July 1, 2008, we and the individual defendants filed
motions to dismiss the amended complaint. We cannot predict
whether these actions are likely to result in any material
recovery by, or expense to, us. We expect to continue to incur
legal fees in responding to these lawsuits, including expenses
for the reimbursement of legal fees of present and former
officers and directors under indemnification obligations. The
expense of defending such litigation may be significant. The
amount of time to resolve these and any additional lawsuits is
unpredictable and these actions may divert managements
attention from the
day-to-day
operations of our business, which could adversely affect our
business, results of operations and cash flows.
Because
of competition for technical personnel, we may not be able to
recruit or retain necessary personnel.
We believe our future success will depend in large part upon our
ability to attract and retain highly skilled managerial,
technical, sales and marketing, finance and manufacturing
personnel. In particular, we may need to increase the number of
technical staff members with experience in high-speed networking
applications as we further develop our product lines.
Competition for these highly skilled employees in our industry
is intense. In making employment decisions, particularly in the
high-technology industries, job candidates often consider the
value of the equity they are to receive in connection with their
employment. Therefore, significant volatility in the price of
our common stock may adversely affect our ability to attract or
retain technical personnel. Furthermore, changes to accounting
principles generally accepted in the United States relating to
the expensing of stock options may limit our ability to grant
the sizes or types of stock awards that job candidates may
require to accept employment with us. Our failure to attract and
retain these qualified employees could significantly harm our
business. The loss of the services of any of our qualified
employees, the inability to attract or retain qualified
personnel in the future or delays in hiring required personnel
could hinder the development and introduction of and negatively
impact our ability to sell our products. In addition, employees
may leave our company and subsequently compete against us.
Moreover, companies in our industry whose employees accept
positions with competitors frequently claim that their
competitors have engaged in unfair hiring practices. We have
been subject to claims of this type and may be subject to such
claims in the future as we seek to hire qualified personnel.
Some of these claims may result in material litigation. We could
incur substantial costs in defending ourselves against these
claims, regardless of their merits.
Our
failure to protect our intellectual property may significantly
harm our business.
Our success and ability to compete is dependent in part on our
proprietary technology. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as
confidentiality agreements to establish
28
and protect our proprietary rights. We license certain of our
proprietary technology, including our digital diagnostics
technology, to customers who include current and potential
competitors, and we rely largely on provisions of our licensing
agreements to protect our intellectual property rights in this
technology. Although a number of patents have been issued to us,
we have obtained a number of other patents as a result of our
acquisitions, and we have filed applications for additional
patents, we cannot assure you that any patents will issue as a
result of pending patent applications or that our issued patents
will be upheld. Additionally, significant technology used in our
product lines is not the subject of any patent protection, and
we may be unable to obtain patent protection on such technology
in the future. Any infringement of our proprietary rights could
result in significant litigation costs, and any failure to
adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in
loss of a competitive advantage and decreased revenues.
Despite our efforts to protect our proprietary rights, existing
patent, copyright, trademark and trade secret laws afford only
limited protection. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same
extent as do the laws of the United States. Attempts may be made
to copy or reverse engineer aspects of our products or to obtain
and use information that we regard as proprietary. Accordingly,
we may not be able to prevent misappropriation of our technology
or deter others from developing similar technology. Furthermore,
policing the unauthorized use of our products is difficult and
expensive. We are currently engaged in pending litigation to
enforce certain of our patents, and additional litigation may be
necessary in the future to enforce our intellectual property
rights or to determine the validity and scope of the proprietary
rights of others. In connection with the pending litigation,
substantial management time has been, and will continue to be,
expended. In addition, we have incurred, and we expect to
continue to incur, substantial legal expenses in connection with
these pending lawsuits. These costs and this diversion of
resources could significantly harm our business.
Claims
that we infringe third-party intellectual property rights could
result in significant expenses or restrictions on our ability to
sell our products.
The networking industry is characterized by the existence of a
large number of patents and frequent litigation based on
allegations of patent infringement. We have been involved in the
past as a defendant in patent infringement lawsuits, and are
currently defending a patent infringement lawsuit filed against
Optium by JDS Uniphase Corporation and Emcore Corporation. From
time to time, other parties may assert patent, copyright,
trademark and other intellectual property rights to technologies
and in various jurisdictions that are important to our business.
Any claims asserting that our products infringe or may infringe
proprietary rights of third parties, if determined adversely to
us, could significantly harm our business. Any claims, with or
without merit, could be time-consuming, result in costly
litigation, divert the efforts of our technical and management
personnel, cause product shipment delays or require us to enter
into royalty or licensing agreements, any of which could
significantly harm our business. In addition, our agreements
with our customers typically require us to indemnify our
customers from any expense or liability resulting from claimed
infringement of third party intellectual property rights. In the
event a claim against us was successful and we could not obtain
a license to the relevant technology on acceptable terms or
license a substitute technology or redesign our products to
avoid infringement, our business would be significantly harmed.
Numerous patents in our industry are held by others, including
academic institutions and competitors. Optical subsystem
suppliers may seek to gain a competitive advantage or other
third parties may seek an economic return on their intellectual
property portfolios by making infringement claims against us. In
the future, we may need to obtain license rights to patents or
other intellectual property held by others to the extent
necessary for our business. Unless we are able to obtain those
licenses on commercially reasonable terms, patents or other
intellectual property held by others could inhibit our
development of new products. Licenses granting us the right to
use third party technology may not be available on commercially
reasonable terms, if at all. Generally, a license, if granted,
would include payments of up-front fees, ongoing royalties or
both. These payments or other terms could have a significant
adverse impact on our operating results.
29
Our
products may contain defects that may cause us to incur
significant costs, divert our attention from product development
efforts and result in a loss of customers.
Our products are complex and defects may be found from time to
time. Networking products frequently contain undetected software
or hardware defects when first introduced or as new versions are
released. In addition, our products are often embedded in or
deployed in conjunction with our customers products which
incorporate a variety of components produced by third parties.
As a result, when problems occur, it may be difficult to
identify the source of the problem. These problems may cause us
to incur significant damages or warranty and repair costs,
divert the attention of our engineering personnel from our
product development efforts and cause significant customer
relation problems or loss of customers, all of which would harm
our business.
Our
business and future operating results may be adversely affected
by events outside our control.
Our business and operating results are vulnerable to events
outside of our control, such as earthquakes, fire, power loss,
telecommunications failures and uncertainties arising out of
terrorist attacks in the United States and overseas. Our
corporate headquarters and a portion of our manufacturing
operations are located in California. California in particular
has been vulnerable to natural disasters, such as earthquakes,
fires and floods, and other risks which at times have disrupted
the local economy and posed physical risks to our property. We
are also dependent on communications links with our overseas
manufacturing locations and would be significantly harmed if
these links were interrupted for any significant length of time.
We presently do not have adequate redundant, multiple site
capacity if any of these events were to occur, nor can we be
certain that the insurance we maintain against these events
would be adequate.
The
conversion of our outstanding convertible subordinated notes
would result in substantial dilution to our current
stockholders.
We currently have outstanding
21/2%
convertible senior subordinated notes due 2010 in the principal
amount of $92 million and
21/2%
convertible subordinated notes due 2010 in the principal amount
of $50 million. The $50 million in principal amount of
our
21/2% notes
are convertible, at the option of the holder, at any time on or
prior to maturity into shares of our common stock at a
conversion price of $3.705 per share. The $92 million in
principal amount of our
21/2% senior
notes are convertible at a conversion price of $3.28, with the
underlying principal payable in cash, upon the trading price of
our common stock reaching $4.92 for a period of time. An
aggregate of approximately 13,500,000 shares of common
stock would be issued upon the conversion of all outstanding
convertible subordinated notes at these exchange rates, which
would dilute the voting power and ownership percentage of our
existing stockholders. We have previously entered into privately
negotiated transactions with certain holders of our convertible
subordinated notes for the repurchase of notes in exchange for a
greater number of shares of our common stock than would have
been issued had the principal amount of the notes been converted
at the original conversion rate specified in the notes, thus
resulting in more dilution. Although we do not currently have
any plans to enter into similar transactions in the future, if
we were to do so there would be additional dilution to the
voting power and percentage ownership of our existing
stockholders.
Delaware
law, our charter documents and our stockholder rights plan
contain provisions that could discourage or prevent a potential
takeover, even if such a transaction would be beneficial to our
stockholders.
Some provisions of our certificate of incorporation and bylaws,
as well as provisions of Delaware law, may discourage, delay or
prevent a merger or acquisition that a stockholder may consider
favorable. These include provisions:
|
|
|
|
|
authorizing the board of directors to issue additional preferred
stock;
|
|
|
|
prohibiting cumulative voting in the election of directors;
|
|
|
|
limiting the persons who may call special meetings of
stockholders;
|
|
|
|
prohibiting stockholder actions by written consent;
|
30
|
|
|
|
|
creating a classified board of directors pursuant to which our
directors are elected for staggered three-year terms;
|
|
|
|
permitting the board of directors to increase the size of the
board and to fill vacancies;
|
|
|
|
requiring a super-majority vote of our stockholders to amend our
bylaws and certain provisions of our certificate of
incorporation; and
|
|
|
|
establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that
can be acted on by stockholders at stockholder meetings.
|
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law which limit the right of a
corporation to engage in a business combination with a holder of
15% or more of the corporations outstanding voting
securities, or certain affiliated persons.
In addition, in September 2002, our board of directors adopted a
stockholder rights plan under which our stockholders received
one share purchase right for each share of our common stock held
by them. Subject to certain exceptions, the rights become
exercisable when a person or group (other than certain exempt
persons) acquires, or announces its intention to commence a
tender or exchange offer upon completion of which such person or
group would acquire, 20% or more of our common stock without
prior board approval. Should such an event occur, then, unless
the rights are redeemed or have expired, our stockholders, other
than the acquirer, will be entitled to purchase shares of our
common stock at a 50% discount from its then-Current Market
Price (as defined) or, in the case of certain business
combinations, purchase the common stock of the acquirer at a 50%
discount.
Although we believe that these charter and bylaw provisions,
provisions of Delaware law and our stockholder rights plan
provide an opportunity for the board to assure that our
stockholders realize full value for their investment, they could
have the effect of delaying or preventing a change of control,
even under circumstances that some stockholders may consider
beneficial.
We do
not currently intend to pay dividends on Finisar common stock
and, consequently, a stockholders ability to achieve a
return on such stockholders investment will depend on
appreciation in the price of the common stock.
We have never declared or paid any cash dividends on Finisar
common stock and we do not currently intend to do so for the
foreseeable future. We currently intend to invest our future
earnings, if any, to fund our growth. Therefore, a stockholder
is not likely to receive any dividends on such
stockholders common stock for the foreseeable future.
Our
stock price has been and is likely to continue to be
volatile.
The trading price of our common stock has been and is likely to
continue to be subject to large fluctuations. Our stock price
may increase or decrease in response to a number of events and
factors, including:
|
|
|
|
|
trends in our industry and the markets in which we operate;
|
|
|
|
changes in the market price of the products we sell;
|
|
|
|
changes in financial estimates and recommendations by securities
analysts;
|
|
|
|
acquisitions and financings;
|
|
|
|
quarterly variations in our operating results;
|
|
|
|
the operating and stock price performance of other companies
that investors in our common stock may deem comparable; and
|
|
|
|
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
31
performance. If any of the foregoing occurs, our stock price
could fall and we may be exposed to class action lawsuits that,
even if unsuccessful, could be costly to defend and a
distraction to management.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our principal facilities are located in California,
Pennsylvania, Texas, Malaysia and China.
Information regarding our principal properties as of
April 30, 2009 is as follows:
|
|
|
|
|
|
|
Location
|
|
Use
|
|
Size
|
|
|
|
|
|
(Square Foot)
|
|
|
Owned
|
|
|
|
|
|
|
Ipoh, Malaysia
|
|
Manufacturing operations
|
|
|
640,000
|
|
Leased
|
|
|
|
|
|
|
Sunnyvale, California
|
|
Corporate headquarters, research and development, sales and
marketing, general and administrative and limited manufacturing
operations
|
|
|
92,000
|
|
Fremont, California
|
|
Wafer fabrication operations
|
|
|
44,000
|
|
Boston, Massachusetts
|
|
Research and development
|
|
|
25,000
|
|
Champaign, Illinois
|
|
Research and development
|
|
|
2,500
|
|
Shanghai, China
|
|
General administrative and manufacturing operations of our
subsidiary, Transwave Fiber (Shanghai) Inc.
|
|
|
152,000
|
|
Shenzhen, China
|
|
Manufacturing operations
|
|
|
5,980
|
|
Allen, Texas
|
|
Principal manufacturing operations for our AOC division. A
portion of this facility is currently subleased.
|
|
|
160,000
|
|
Austin, Texas
|
|
Network performance test systems testing and training center
|
|
|
16,000
|
|
Singapore
|
|
Research and development and logistics
|
|
|
13,600
|
|
Hyderabad, India
|
|
Information technology support center
|
|
|
6,230
|
|
Horsham, Pennsylvania
|
|
Manufacturing, research and development, engineering, sales and
administration, executive offices
|
|
|
80,970
|
|
Waterloo, Australia
|
|
Manufacturing, research and development, engineering,
administration offices
|
|
|
9,990
|
|
Nes Ziona, Israel
|
|
Research and development, engineering and manufacturing
operations
|
|
|
16,670
|
|
We believe our principal facilities are in good condition and
are suitable and adequate to accommodate our needs for the
foreseeable future.
|
|
Item 3.
|
Legal
Proceedings
|
Stock
Option Derivative Litigation
On November 30, 2006, we announced that we had undertaken a
voluntary review of our historical stock option grant practices
subsequent to our initial public offering in November 1999. The
review was initiated by senior management, and preliminary
results of the review were discussed with the Audit Committee of
the our board of directors. Based on the preliminary results of
the review, senior management concluded, and the Audit
32
Committee agreed, that it was likely that the measurement dates
for certain stock option grants differed from the recorded grant
dates for such awards and that we would likely need to restate
our historical financial statements to record non-cash charges
for compensation expense relating to some past stock option
grants. The Audit Committee thereafter conducted a further
investigation and engaged independent legal counsel and
financial advisors to assist in that investigation. The Audit
Committee concluded that measurement dates for certain option
grants differed from the recorded grant dates for such awards.
Our management, in conjunction with the Audit Committee,
conducted a further review to finalize revised measurement dates
and determine the appropriate accounting adjustments to our
historical financial statements. The announcement of the
investigation resulted in delays in filing our quarterly reports
on
Form 10-Q
for the quarters ended October 29, 2006, January 28,
2007, and January 27, 2008 and our annual report on
Form 10-K
for the fiscal year ended April 30, 2007. On
December 4, 2007, we filed all four of these reports which
included revised financial statements.
Following our announcement on November 30, 2006 that the
Audit Committee of the board of directors had voluntarily
commenced an investigation of our historical stock option grant
practices, we were named as a nominal defendant in several
shareholder derivative cases. These cases have been consolidated
into two proceedings pending in federal and state courts in
California. The federal court cases have been consolidated in
the United States District Court for the Northern District of
California. The state court cases have been consolidated in the
Superior Court of California for the County of Santa Clara.
The plaintiffs in all cases have alleged that certain of our
current or former officers and directors caused us to grant
stock options at less than fair market value, contrary to our
public statements (including its financial statements), and
that, as a result, those officers and directors are liable to
us. No specific amount of damages has been alleged, and by the
nature of the lawsuits, no damages will be alleged against us.
On May 22, 2007, the state court granted our motion to stay
the state court action pending resolution of the consolidated
federal court action. On June 12, 2007, the plaintiffs in
the federal court case filed an amended complaint to reflect the
results of the stock option investigation announced by the Audit
Committee in June 2007. On August 28, 2007, we and the
individual defendants filed motions to dismiss the complaint. On
January 11, 2008, the Court granted the motions to dismiss,
with leave to amend. On May 12, 2008, the plaintiffs filed
an amended complaint. We and the individual defendants filed
motions to dismiss the amended complaint on July 1, 2008.
The Courts ruling on the motions remains pending.
505
Patent Litigation
DirecTV
Litigation
On April 4, 2005, we filed an action for patent
infringement in the United States District Court for the Eastern
District of Texas against the DirecTV Group, Inc., DirecTV
Holdings, LLC, DirecTV Enterprises, LLC, DirecTV Operations,
LLC, DirecTV, Inc., and Hughes Network Systems, Inc.
(collectively, DirecTV). The lawsuit involves our
U.S. Patent No. 5,404,505, or the 505 patent,
which relates to technology used in information transmission
systems to provide access to a large database of information. On
June 23, 2006, following a jury trial, the jury returned a
verdict that our patent had been willfully infringed and awarded
us damages of $78,920,250. In a post-trial hearing held on
July 6, 2006, the Court determined that, due to
DirecTVs willful infringement, those damages would be
enhanced by an additional $25 million. Further, the Court
awarded us pre-judgment interest on the jurys verdict and
court costs in the aggregate amount of approximately
$13.4 million. The Court denied our motion for injunctive
relief, but ordered DirecTV to pay a compulsory ongoing license
fee to us at the rate of $1.60 per set-top box activated by or
on behalf of DirecTV for the period beginning June 16, 2006
through the duration of the patent, which expires in April 2012.
DirecTV appealed to the United States Court of Appeals for the
Federal Circuit. In its appeal, DirecTV raised issues related to
claim construction, infringement, invalidity, willful
infringement and enhanced damages. We cross-appealed raising
issues related to the denial of our motion for a permanent
injunction, the trial courts refusal to enhance future
damages for willfulness and the trial courts determination
that some of the asserted patent claims are invalid. The appeals
were consolidated.
On April 18, 2008, the appeals court issued is decision
affirming in part, reversing in part, and remanding the case for
further proceedings before the trial court in Texas.
Specifically, the appeals court ruled that the lower
courts interpretation of some of the patent claim terms
was too broad and issued its own, narrower interpretation of
33
those terms. The appeals court also determined that one of the
seven patent claims (Claim 16) found infringed by the jury
was invalid, that DirecTVs infringement of the 505
patent was not willful, and that the trial court did not err in
its determination that various claims of the 505 patent
were invalid for indefiniteness. As a result, the judgment,
including the compulsory license, was vacated and the case was
remanded to the trial court to reconsider infringement and
validity of the six remaining patent claims and releasing to
DirecTV the escrow funds it had deposited.
On July 11, 2008, the United States District Court for the
Northern District of California issued an order in the Comcast
lawsuit described below in which it held that one of the claims
of the 505 patent, Claim 25, is invalid. The order in the
Comcast lawsuit also, in effect, ruled invalid a related claim,
Claim 24, which was one of the six remaining claims of the
505 patent that were returned to the trial court for
retrial in the DirectTV lawsuit.
On December 1, 2008, both parties filed motions for summary
judgment in the trial court on the issue of validity. On
May 19, 2009, the Court granted DirecTVs motions for
summary judgment and entered final judgment in the case in favor
of DirecTV. We have filed a notice of appeal with respect to
this ruling.
Comcast
Litigation
On July 7, 2006, Comcast Cable Communications Corporation,
LLC (Comcast), filed a complaint against us in the
United States District Court for the Northern District of
California, San Francisco Division. Comcast sought a
declaratory judgment that our 505 patent is not infringed
and is invalid. The 505 patent is the same patent alleged
by us in our lawsuit against DirecTV.
At a status conference held on April 24, 2008, the Court
accepted our proposal to narrow the issues for trial and proceed
only with our principal claim (Claim 25), subject to our
providing a covenant not to sue Comcast on the other previously
asserted claims. On May 22, 2008, Comcast filed its renewed
motion for summary judgment of invalidity and non-infringement.
On July 11, 2008, the Court issued an order granting
Comcasts motion for summary judgment on the basis of
invalidity and also entered a final judgment in favor of
Comcast. On July 25, 2008 we filed our notice of appeal to
the Federal Circuit. On April 10, 2009, the Federal Circuit
affirmed the District Court ruling.
EchoStar
Litigation
On July 10, 2006, EchoStar Satellite LLC, EchoStar
Technologies Corporation and NagraStar LLC (collectively,
EchoStar), filed an action against us in the United
States District Court for the District of Delaware seeking a
declaration that EchoStar does not infringe, and has not
infringed, any valid claim of our 505 patent. The
505 patent is the same patent that is in dispute in the
DirecTV and Comcast lawsuits. On December 4, 2007, the
Court approved the parties stipulation to stay the case
pending issuance of the Federal Circuits mandate in the
DirecTV case. This stay expired when the mandate of the Federal
Circuit issued in the DirecTV case on April 18, 2008. The
Court has yet to set a case schedule.
XM/Sirius
Litigation
On April 27, 2007, we filed an action for patent
infringement in the United States District Court for the Eastern
District of Texas, Lufkin Division, against XM Satellite Radio
Holdings, Inc., XM Satellite Radio, Inc., and XM Radio, Inc.
(collectively, XM), and Sirius Satellite Radio, Inc.
and Satellite CD Radio, Inc. (collectively, Sirius).
The lawsuit alleged that XM and Sirius had infringed and
continued to infringe our 505 patent and sought an
injunction to prevent further infringement, actual damages to be
proven at trial, enhanced damages for willful infringement and
attorneys fees. The cased had been stayed pending further
action in the DirecTV case on remand and the re-examination of
the 505 patent descried below. Subsequent to the
May 19, 2009 decision granting summary judgment in favor of
DirecTV in the DirecTV case, the case against XM/Sirius was
dismissed without prejudice on June 9, 2009.
34
Requests
for Re-Examination of the 505 Patent
Four requests for re-examination of our 505 patent have
been filed with the PTO. The 505 patent is the patent that
is in dispute in the DirecTV, EchoStar, Comcast and XM/Sirius
lawsuits. The PTO has granted each of these requests, and these
proceedings have been combined into a single re-examination.
During the re-examination, some or all of the claims in the
505 patent could be invalidated or revised to narrow their
scope, either of which could have a material adverse impact on
our position in the related 505 lawsuits.
Securities
Class Action
A securities class action lawsuit was filed on November 30,
2001 in the United States District Court for the Southern
District of New York, purportedly on behalf of all persons who
purchased our common stock from November 17, 1999 through
December 6, 2000. The complaint named as defendants
Finisar, Jerry S. Rawls, our President and Chief Executive
Officer, Frank H. Levinson, our former Chairman of the Board and
Chief Technical Officer, Stephen K. Workman, our Senior Vice
President, Finance and Chief Financial Officer, and an
investment banking firm that served as an underwriter for our
initial public offering in November 1999 and a secondary
offering in April 2000. The complaint, as subsequently amended,
alleges violations of Sections 11 and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(b) of the Securities
Exchange Act of 1934, on the grounds that the prospectuses
incorporated in the registration statements for the offerings
failed to disclose, among other things, that (i) the
underwriter had solicited and received excessive and undisclosed
commissions from certain investors in exchange for which the
underwriter allocated to those investors material portions of
the shares of our stock sold in the offerings and (ii) the
underwriter had entered into agreements with customers whereby
the underwriter agreed to allocate shares of our stock sold in
the offerings to those customers in exchange for which the
customers agreed to purchase additional shares of our stock in
the aftermarket at pre-determined prices. No specific damages
are claimed. Similar allegations have been made in lawsuits
relating to more than 300 other initial public offerings
conducted in 1999 and 2000, which were consolidated for pretrial
purposes. In October 2002, all claims against the individual
defendants were dismissed without prejudice. On
February 19, 2003, the Court denied defendants motion
to dismiss the complaint.
In July 2004, we and the individual defendants accepted a
settlement proposal made to all of the issuer defendants. Under
the terms of the settlement, the plaintiffs would dismiss and
release all claims against participating defendants in exchange
for a contingent payment guaranty by the insurance companies
collectively responsible for insuring the issuers in all related
cases, and the assignment or surrender to the plaintiffs of
certain claims the issuer defendants may have against the
underwriters. Under the guaranty, the insurers would have been
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 failed to recover $1 billion and payment was
required under the guaranty, we would have been responsible to
pay our pro rata portion of the shortfall, up to the amount of
the self-insured retention under its insurance policy, which
could have been up to $2 million. The Court gave
preliminary approval to the settlement in February 2005. Before
the Court issued a final decision on the settlement, on
December 5, 2006, the United States Court of Appeals for
the Second Circuit vacated the class certification of
plaintiffs claims against the underwriters in six cases
designated as focus or test cases. Thereafter, the parties
withdrew the settlement.
In February 2009, the parties reached an understanding regarding
the principal elements of a settlement, subject to formal
documentation and Court approval. Under the new proposed
settlement, the underwriter defendants would pay a total of
$486 million, and the issuer defendants and their insurers
would pay a total of $100 million to settle all of the
cases. We would be responsible for a pro rata share of the
issuers contribution to the settlement and certain costs
anticipated to total between $350,000 and $400,000. On
June 10, 2009, the Court granted preliminary approval of
the settlement and set a hearing on final approval for
September 10, 2009. If this settlement is not approved by
the Court, we intend to defend the lawsuit vigorously. Because
of the inherent uncertainty of litigation, 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.
35
Section 16(b)
Lawsuit
A lawsuit was filed on October 3, 2007 in the United States
District Court for the Western District of Washington by Vanessa
Simmonds, a purported holder of our common stock, against two
investment banking firms that served as underwriters for the
initial public offering of Finisar common stock in November
1999. None of our officers, directors or employees were named as
defendants in the complaint. On February 28, 2008, the
plaintiff filed an amended complaint. The complaint, as amended,
alleges that: (i) the defendants, other underwriters of the
offering, and unspecified officers, directors and our principal
shareholders constituted a group that owned in
excess of 10% of our outstanding common stock between
November 11, 1999 and November 20, 2000; (ii) the
defendants were therefore subject to the short swing
prohibitions of Section 16(b) of the Securities Exchange
Act of 1934; and (iii) the defendants engaged in purchases
and sales, or sales and purchases, of our common stock within
periods of less than six months in violation of the provisions
of Section 16(b). The complaint seeks disgorgement of all
profits allegedly received by the defendants, with interest and
attorneys fees, for transactions in violation of
Section 16(b). Finisar, as the statutory beneficiary of any
potential Section 16(b) recovery, is named as a nominal
defendant in the complaint.
This case is one of 54 lawsuits containing similar allegations
relating to initial public offerings of technology company
issuers, which were coordinated (but not consolidated) by the
Court. On July 25, 2008, the real defendants in all 54
cases filed a consolidated motion to dismiss, and a majority of
the nominal defendants (including us) filed a consolidated
motion to dismiss, the amended complaints. On March 19,
2009, the Court dismissed the amended complaints naming the
nominal defendants that had moved to dismiss, without prejudice,
because the plaintiff had not properly demanded action by their
respective boards of directors before filing suit; and dismissed
the amended complaints naming nominal defendants that had not
moved to dismiss, with prejudice, finding the claims time-barred
by the applicable statute of limitation. Also on March 19,
2009, the Court entered judgment against the plaintiff in all 54
cases. The plaintiff has appealed the order and judgments. The
real defendants have cross-appealed the dismissal of certain
amended complaints without prejudice, contending that dismissal
should have been with prejudice because those amended complaints
are barred by the applicable statute of limitation.
JDSU/Emcore
Patent Litigation
Litigation is pending with JDS Uniphase Corporation and Emcore
Corporation with respect to certain cable television
transmission products acquired in connection with our
acquisition of Optium Corporation. On September 11,
2006, JDSU and Emcore filed a complaint in the United States
District Court for the Western District of Pennsylvania alleging
that our 1550 nm HFC externally modulated transmitter used in
cable television applications, in addition to possibly
products as yet unidentified, infringes on two
U.S. patents. On March 14, 2007, JDSU and Emcore filed
a second complaint in the United States District Court for the
Western District of Pennsylvania alleging that our 1550 nm HFC
quadrature amplitude modulated transmitter used in cable
television applications, in addition to possibly products
as yet unidentified, infringes on another
U.S. patent. We have answered both of these complaints
denying that we have infringed any of the asserted patents and
asserting that those patents are invalid. The plaintiffs are
seeking for the court to declare that Optium has willfully
infringed on such patents and to be awarded up to three times
the amount of any compensatory damages found, if any, plus any
other damages and costs incurred. On December 10, 2007, we
filed a complaint in the United States District Court for the
Western District of Pennsylvania seeking a declaration that the
patents asserted against our HFC externally modulated
transmitter are unenforceable due to inequitable conduct
committed by the patent applicants
and/or the
attorneys or agents during prosecution.
On February 18, 2009, the Court granted JDSUs and
Emcores motion for summary judgment dismissing our
declaratory judgment action on inequitable conduct. We have
appealed this ruling. The Court has consolidated the remaining
two actions and has scheduled a single trial to begin
October 19, 2009.
Export
Compliance
During mid-2007, Optium became aware that certain of its analog
RF over fiber products may, depending on end use and
customization, be subject to the International Traffic in Arms
Regulations, or ITAR. Accordingly, Optium filed a detailed
voluntary disclosure with the United States Department of State
describing the details of
36
possible inadvertent ITAR violations with respect to the export
of a limited number of certain prototype products, as well as
related technical data and defense services. Optium may have
also made unauthorized transfers of
ITAR-restricted
technical data and defense services to foreign persons in the
workplace. Additional information has been provided upon request
to the Department of State with respect to this matter. In late
2008, a grand jury subpoena from the office of the
U.S. Attorney for the Eastern District of Pennsylvania was
received requesting documents from 2005 through the present
referring to, relating to or involving the subject matter of the
above referenced voluntary disclosure and export activities.
While the Department of State encourages voluntary disclosures
and generally affords parties mitigating credit under such
circumstances, we nevertheless could be subject to continued
investigation and potential regulatory consequences ranging from
a no-action letter, government oversight of facilities and
export transactions, monetary penalties, and in extreme cases,
debarment from government contracting, denial of export
privileges and criminal sanctions, any of which would adversely
affect our results of operations and cash flow. The Department
of State and U.S. Attorney inquiries may require us to
expend significant management time and incur significant legal
and other expenses. We cannot predict how long it will take or
how much more time and resources it will have to expend to
resolve these government inquiries, nor can we predict the
outcome of these inquiries.
In connection with a review of our compliance with applicable
export regulations in late 2008, we discovered that we had made
certain deemed exports to foreign national employees
with respect to certain of its commercial products without the
necessary deemed export licenses or license exemptions under the
Export Administration Regulations, or EAR. Accordingly, We filed
a detailed voluntary disclosure with the United States
Department of Commerce describing these deemed export
violations. In June 2009, we received notification from the
Department of Commerce that it had completed its investigation
into the matter with the issuance of a warning letter.
Other
Litigation
In the ordinary course of business, we are a party to
litigation, claims and assessments in addition to those
described above. Based on information currently available,
management does not believe the impact of these other matters
will have a material adverse effect on our business, financial
condition, results of operations or cash flows .
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
37
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Since our initial public offering on November 11, 1999, our
common stock has traded on the Nasdaq National Market under the
symbol FNSR. The following table sets forth the
range of high and low closing sales prices of our common stock
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2009 Quarter Ended:
|
|
|
|
|
|
|
|
|
April 30, 2009
|
|
$
|
0.74
|
|
|
$
|
0.66
|
|
February 1, 2009
|
|
$
|
0.55
|
|
|
$
|
0.51
|
|
November 2, 2008
|
|
$
|
0.63
|
|
|
$
|
0.56
|
|
August 3, 2008
|
|
$
|
1.35
|
|
|
$
|
1.30
|
|
Fiscal 2008 Quarter Ended:
|
|
|
|
|
|
|
|
|
April 30, 2008
|
|
$
|
1.93
|
|
|
$
|
1.13
|
|
January 27, 2008
|
|
$
|
2.45
|
|
|
$
|
1.35
|
|
October 28, 2007
|
|
$
|
4.05
|
|
|
$
|
2.24
|
|
July 29, 2007
|
|
$
|
4.10
|
|
|
$
|
3.39
|
|
According to records of our transfer agent, we had 431
stockholders of record as of May 30, 2009 and we believe
there is a substantially greater number of beneficial holders.
We have never declared or paid dividends on our common stock and
currently do not intend to pay dividends in the foreseeable
future so that we may reinvest our earnings in the development
of our business. The payment of dividends in the future will be
at the discretion of the Board of Directors.
38
|
|
Item 6.
|
Selected
Financial Data
|
You should read the following selected financial data in
conjunction with Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the notes thereto included elsewhere in this report. The
statement of operations data set forth below for the fiscal
years ended April 30, 2009, 2008 and 2007 and the balance
sheet data as of April 30, 2009 and 2008 are derived from,
and are qualified by reference to, our audited consolidated
financial statements included elsewhere in this report. The
statement of operations data set forth below for the fiscal
years ended April 30, 2006 and 2005 and the balance sheet
data as of April 30, 2007, 2006 and 2005 are derived from
audited financial statements not included in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components
|
|
$
|
497,058
|
|
|
$
|
401,625
|
|
|
$
|
381,263
|
|
|
$
|
325,956
|
|
|
$
|
241,582
|
|
Network performance test systems
|
|
|
44,179
|
|
|
|
38,555
|
|
|
|
37,285
|
|
|
|
38,337
|
|
|
|
39,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
541,237
|
|
|
|
440,180
|
|
|
|
418,548
|
|
|
|
364,293
|
|
|
|
280,823
|
|
Cost of revenues
|
|
|
365,572
|
|
|
|
292,161
|
|
|
|
270,272
|
|
|
|
250,186
|
|
|
|
206,836
|
|
Amortization of acquired developed technology
|
|
|
6,039
|
|
|
|
6,501
|
|
|
|
6,002
|
|
|
|
17,671
|
|
|
|
22,268
|
|
Impairment of acquired developed technology
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
853
|
|
|
|
3,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
168,378
|
|
|
|
141,518
|
|
|
|
142,274
|
|
|
|
95,583
|
|
|
|
48,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
92,057
|
|
|
|
76,544
|
|
|
|
64,559
|
|
|
|
54,412
|
|
|
|
64,232
|
|
Sales and marketing
|
|
|
37,747
|
|
|
|
40,006
|
|
|
|
36,122
|
|
|
|
33,144
|
|
|
|
30,456
|
|
General and administrative
|
|
|
40,761
|
|
|
|
43,710
|
|
|
|
39,150
|
|
|
|
33,467
|
|
|
|
26,598
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
Acquired in-process research and development
|
|
|
10,500
|
|
|
|
|
|
|
|
5,770
|
|
|
|
|
|
|
|
1,558
|
|
Amortization of purchased intangibles
|
|
|
2,686
|
|
|
|
1,748
|
|
|
|
1,814
|
|
|
|
1,747
|
|
|
|
1,104
|
|
Impairment of tangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,798
|
|
Impairment of goodwill and intangible assets
|
|
|
238,507
|
|
|
|
40,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,064
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
422,258
|
|
|
|
202,114
|
|
|
|
147,415
|
|
|
|
125,834
|
|
|
|
143,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(253,880
|
)
|
|
|
(60,596
|
)
|
|
|
(5,141
|
)
|
|
|
(30,251
|
)
|
|
|
(95,132
|
)
|
Interest income
|
|
|
1,762
|
|
|
|
5,805
|
|
|
|
6,204
|
|
|
|
3,482
|
|
|
|
2,396
|
|
Interest expense
|
|
|
(9,687
|
)
|
|
|
(17,236
|
)
|
|
|
(16,044
|
)
|
|
|
(15,842
|
)
|
|
|
(14,468
|
)
|
Loss on convertible debt exchange
|
|
|
|
|
|
|
|
|
|
|
(31,606
|
)
|
|
|
|
|
|
|
|
|
Gain on repurchase of convertible debt
|
|
|
3,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(3,803
|
)
|
|
|
(298
|
)
|
|
|
(724
|
)
|
|
|
9,346
|
|
|
|
(12,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
effect of an accounting change
|
|
|
(261,770
|
)
|
|
|
(72,325
|
)
|
|
|
(47,311
|
)
|
|
|
(33,265
|
)
|
|
|
(119,786
|
)
|
Provision for (benefit from) income taxes
|
|
|
(6,962
|
)
|
|
|
2,233
|
|
|
|
2,810
|
|
|
|
2,367
|
|
|
|
856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
|
(254,808
|
)
|
|
|
(74,558
|
)
|
|
|
(50,121
|
)
|
|
|
(35,632
|
)
|
|
|
(120,642
|
)
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(254,808
|
)
|
|
$
|
(74,558
|
)
|
|
$
|
(48,908
|
)
|
|
$
|
(35,632
|
)
|
|
$
|
(120,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of change in accounting principle
|
|
$
|
(0.61
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.52
|
)
|
Cumulative effect of change in accounting principle
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.00
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted:
|
|
|
(0.61
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per share basic
and diluted
|
|
|
420,456
|
|
|
|
308,680
|
|
|
|
307,814
|
|
|
|
290,518
|
|
|
|
232,210
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments
|
|
$
|
37,221
|
|
|
$
|
119,255
|
|
|
$
|
132,472
|
|
|
$
|
118,786
|
|
|
$
|
102,362
|
|
Working capital
|
|
|
144,199
|
|
|
|
66,932
|
|
|
|
118,383
|
|
|
|
157,712
|
|
|
|
91,464
|
|
Total assets
|
|
|
380,701
|
|
|
|
480,203
|
|
|
|
533,030
|
|
|
|
496,878
|
|
|
|
480,315
|
|
Long-term liabilities
|
|
|
161,615
|
|
|
|
177,814
|
|
|
|
220,198
|
|
|
|
263,447
|
|
|
|
265,274
|
|
Total stockholders equity
|
|
|
114,789
|
|
|
|
108,683
|
|
|
|
170,511
|
|
|
|
164,478
|
|
|
|
135,223
|
|
|
|
Item 7.
|
Managements
discussion and analysis of financial condition and results of
operation
|
Managements discussion and analysis of financial condition
and results of operations, or MD&A, is provided as a
supplement to the accompanying consolidated financial statements
and footnotes to help provide an understanding of our financial
condition, changes in our financial condition and results of
operations. The MD&A is organized as follows:
|
|
|
|
|
Forward-looking statements. This section
discusses how forward-looking statements made by us in the
MD&A and elsewhere in this report are based on
managements present expectations about future events and
are inherently susceptible to uncertainty and changes in
circumstances.
|
|
|
|
Business Overview. This section provides an
introductory overview and context for the discussion and
analysis that follows in MD&A.
|
|
|
|
Critical Accounting Policies and
Estimates. This section discusses those
accounting policies that are both considered important to our
financial condition and operating results and require
significant judgment and estimates on the part of management in
their application.
|
|
|
|
Results of Operations. This section provides
analysis of the Companys results of operations for the
three fiscal years ended April 30, 2009. A brief
description is provided of transactions and events that impact
comparability of the results being analyzed.
|
|
|
|
Financial Condition and Liquidity. This
section provides an analysis of our cash position and cash
flows, as well as a discussion of our financing arrangements and
financial commitments.
|
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 under Item 1A. Risk
Factors. The following discussion should be read together
with our consolidated financial statements and related notes
thereto included elsewhere in this document.
Business
Overview
We are a leading provider of optical subsystems and components
that connect local area networks, or LANs, storage area
networks, or SANs, and metropolitan area networks, or MANs and
wide area networks, or WANs. Our optical subsystems consist
primarily of transmitters, receivers, transceivers and
transponders which provide the fundamental optical-electrical
interface for connecting the equipment used in building these
networks. These products rely on the use of semiconductor lasers
in conjunction with integrated circuit design and novel
packaging technology to provide a cost-effective means for
transmitting and receiving digital signals over fiber optic
cable using a wide range of network protocols, transmission
speeds and physical configurations over distances from
70 meters up to 200 kilometers. We supply optical
transceivers and transponders that allow point-to-point
communications on a fiber using a single specified wavelength
or, bundled with multiplexing technologies, can be used to
supply multi-gigabit bandwidth over several wavelengths on the
same fiber. We also provide products for dynamically switching
network traffic from one optical link to another across multiple
wavelengths without first converting to an electrical signal
known as reconfigurable optical add/drop multiplexers, or
ROADMs. Our line of
40
optical components consists primarily of packaged lasers and
photodetectors used in transceivers, primarily for LAN and SAN
applications and passive optical components used in building
MANs. Our manufacturing operations are vertically integrated,
and we utilize internal sources for many of the key components
used in making our products, including lasers, photodetectors
and ICs designed by our internal IC engineering teams. We sell
our optical subsystem and component products to manufacturers of
storage and networking equipment such as Alcatel-Lucent,
Brocade, Cisco Systems, EMC, Emulex, Ericsson, Hewlett-Packard
Company, Huawei, IBM, Juniper, Qlogic, Siemens and Tellabs.
Historically, we have also provided network performance test
systems through our Network Tools Division, primarily to
original equipment manufacturers such as Brocade, EMC, Emulex,
Hewlett-Packard Company and Qlogic for testing and validating
equipment designs.
Since October 2000, we have completed the acquisition of ten
privately-held companies and certain businesses and assets from
six other companies in order to broaden our product offerings
and provide new sources of revenue, production capabilities and
access to advanced technologies that we believe will enable us
to reduce our product costs and develop innovative and more
highly integrated product platforms while accelerating the
timeframe required to develop such products.
We recognize revenue when persuasive evidence of an arrangement
exists, title and risk of loss pass to the customer, which is
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, we allocate revenue to the separate elements based
upon each elements fair value as determined by the list
price for such element.
We sell our products through our direct sales force, with the
support of our manufacturers representatives, directly to
domestic customers and indirectly through distribution channels
to international customers. The evaluation and qualification
cycle prior to the initial sale for our optical subsystems may
span a year or more, while the sales cycle for our network
performance test systems is usually considerably shorter.
The market for optical subsystems and components is
characterized by declining average selling prices resulting from
factors such as industry over-capacity, increased competition,
the introduction of new products and the growth in unit volumes
as manufacturers continue to deploy network and storage systems.
We anticipate that our average selling prices will continue to
decrease in future periods, although the timing and amount of
these decreases cannot be predicted with any certainty.
Our cost of revenues consists of materials, salaries and related
expenses for manufacturing personnel, manufacturing overhead,
warranty expense, inventory adjustments for obsolete and excess
inventory and the amortization of acquired developed technology
associated with acquisitions that we have made. We manufacture
our optical subsystem products at our subsidiary in Ipoh,
Malaysia. We manufacture VCSELs used in our
LAN/SAN
products at our facility in Allen, Texas. We manufacture long
wavelength FP and certain DFB lasers used in our MAN and telecom
products at our facility in Fremont, California. We manufacture
certain passive components used in our MAN and telecom products
at our facility in Shanghai, China. We assemble and test our
ROADM products at our facility in Waterloo, Australia. We
conduct manufacturing engineering, supply chain management,
quality assurance and documentation control at our facility in
Sunnyvale, California. As a result of building a vertically
integrated business model, our manufacturing cost structure has
become more fixed. While this can be beneficial during periods
when demand is strong, it can be more difficult to reduce costs
during periods when demand for our products is weak, product mix
is unfavorable or selling prices are generally lower. While we
have undertaken measures to reduce our operating costs there can
be no assurance that we will be able to reduce our cost of
revenues enough to achieve or sustain profitability.
Our gross profit margins vary among our product families, and
have generally been higher on our network test systems than on
our optical subsystems and components. Our optical products sold
for longer distance MAN and telecom applications typically have
higher gross margins than our products for shorter distance LAN
and SAN applications. Our overall gross margins have fluctuated
from period to period as a result of overall revenue levels,
shifts in product mix, the introduction of new products,
decreases in average selling prices and our ability to reduce
product costs.
41
Research and development expenses consist primarily of salaries
and related expenses for design engineers and other technical
personnel, the cost of developing prototypes and fees paid to
consultants. We charge all research and development expenses to
operations as incurred. We believe that continued investment in
research and development is critical to our long-term success.
Sales and marketing expenses consist primarily of commissions
paid to manufacturers representatives, salaries and
related expenses for personnel engaged in sales, marketing and
field support activities and other costs associated with the
promotion of our products.
General and administrative expenses consist primarily of
salaries and related expenses for administrative, finance and
human resources personnel, professional fees, and other
corporate expenses.
Acquired in-process research and development represents the
amount of the purchase price in a business combination allocated
to research and development projects underway at the acquired
company that had not reached the technologically feasible stage
as of the closing of the acquisition and for which we had no
alternative future use.
A portion of the purchase price in a business combination is
allocated to goodwill and intangibles. Prior to May 1,
2002, goodwill and purchased intangibles were amortized over
their estimated useful lives. Subsequent to May 1, 2002,
goodwill and intangible assets with indefinite lives are no
longer amortized but are subject to annual impairment testing.
The cost of definite lived intangibles are amortized on a
straight-line basis over their estimated economic life.
Impairment charges consist of write downs of the carrying value
of certain intangible assets and goodwill arising from various
business combinations to their fair value.
Restructuring costs generally include termination costs for
employees associated with a formal restructuring plan and the
cost of facilities or other unusable assets abandoned or sold.
Other income and expenses generally consist of bank fees, gains
or losses as a result of the periodic sale of assets and
other-than-temporary decline in the value of investments.
Combination
with Optium Corporation
On August 29, 2008, we completed a business combination
with Optium Corporation, a leading designer and manufacturer of
high performance optical subsystems for use in
telecommunications and CATV network systems, through the merger
of Optium with a wholly-owned subsidiary of Finisar. We believe
that the combination of the two companies created the
worlds largest supplier of optical components, modules and
subsystems for the communications industry and will leverage the
Finisars leadership position in the storage and data
networking sectors of the industry and Optiums leadership
position in the telecommunications and CATV sectors to create a
more competitive industry participant. In addition, as a result
of the combination, we expect to realize cost synergies related
to operating expenses and manufacturing costs resulting from
(1) the transfer of production to lower cost locations,
(2) improved purchasing power associated with being a
larger company and (3) cost synergies associated with the
integration of components into product designs previously
purchased in the open market by Optium. We have accounted for
the combination using the purchase method of accounting and as a
result have included the operating results of Optium in our
consolidated financial results since the August 29, 2008
consummation date. At the closing of the merger, we issued
160,808,659 shares of Finisar common stock, valued at
approximately $242.8 million, in exchange for all of the
outstanding common stock of Optium. The value of the shares
issued was calculated using the five day average of the closing
price of the Companys common stock from the second trading
day before the merger announcement date on May 16, 2008
through the second trading day following the announcement, or
$1.51 per share. The Optium results are included in our optical
subsystems and components segment.
Pending
Sale of Network Performance Test Systems Business
On July 8, 2009, we entered into an agreement to sell the
assets of our Network Tools Division (excluding accounts
receivable and payable) to JDSU for $40.6 million in cash.
JDSU will assume certain liability associated
42
with the network performance test business, and we will provide
manufacturing support services to JDSU during a transition
period. The sale is expected to be completed on or about
July 15, 2009.
Following the completion of the sale, we will no longer offer
network performance test products. These products accounted for
$37.3 million, $38.6 million and $44.2 million in
revenues during fiscal 2007, 2008 and 2009, respectively. Gross
profit and operating profit margins on sales of network
performance test products have generally been higher than on our
optical subsystem and component products. Accordingly, we expect
that our revenues and profitability will be adversely affected
following the sale unless and until we are able to achieve
significant growth in our optical subsystems and components
business.
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. We
believe there have been no material changes to our critical
accounting policies during the fiscal year ended April 30,
2009 compared to prior years.
Stock-Based
Compensation Expense
We account for stock-based compensation in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which requires the measurement
and recognition of compensation expense for all stock-based
payment awards made to employees and directors including
employee stock options and employee stock purchases under our
Employee Stock Purchase Plan based on estimated fair values.
SFAS 123R requires companies to estimate the fair value of
stock-based payment awards on the date of grant using an option
pricing model. We use the Black-Scholes option pricing model to
determine the fair value of stock based awards under
SFAS 123R. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the
requisite service periods in our consolidated statements of
operations.
Stock-based compensation expense recognized in our consolidated
statements of operations for the fiscal years ended after
April 30, 2006 includes compensation expense for
stock-based payment awards granted prior to, but not yet vested
as of, the adoption of SFAS 123R, based on the grant date
fair value estimated in accordance with the provisions of
SFAS 123 and compensation expense for stock-based payment
awards granted subsequent to April 30, 2006 based on the
grant date fair value estimated in accordance with the
provisions of SFAS 123R. Compensation expense for
expected-to-vest stock-based awards that were granted on or
prior to April 30, 2006 was valued under the
multiple-option approach and will continue to be amortized using
the accelerated attribution method. Subsequent to April 30,
2006, compensation expense for expected-to-vest stock-based
awards is valued under the single-option approach and amortized
on a straight-line basis, net of estimated forfeitures.
Revenue
Recognition, Warranty and Sales Returns
Our revenue recognition policy follows SEC Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition.
Specifically, we recognize 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. For units of
accounting which include more than one deliverable, we generally
recognize all revenue and cost of revenue for the unit of
accounting over the period in which the last undelivered item is
delivered.
43
At the time revenue is recognized, we establish an accrual for
estimated warranty expenses associated with our sales, recorded
as a component of cost of revenues. Our standard warranty period
usually extends 12 months from the date of sale although it
can extend for longer periods of three to five years for certain
products sold to certain customers. Our warranty accrual
represents our best estimate of the amounts necessary to settle
future and existing claims on products sold as of the balance
sheet date. While we believe that our warranty accrual is
adequate and that the judgment applied is appropriate, such
amounts estimated to be due and payable could differ materially
from what actually transpire in the future. If our actual
warranty costs are greater than the accrual, costs of revenue
will increase in the future. We also provide an allowance for
estimated customer returns, which is netted against revenue.
This provision is based on our historical returns, analysis of
credit memo data and our return policies. If the historical data
used by us to calculate the estimated sales returns does not
properly reflect future returns, revenue could be overstated.
Allowance
for Doubtful Accounts
We evaluate the collectability of our accounts receivable based
on a combination of factors. In circumstances where, subsequent
to delivery, we become aware of a customers potential
inability to meet its obligations, we record a specific
allowance for the doubtful account to reduce the net recognized
receivable to the amount we reasonably believe will be
collected. For all other customers, we recognize an allowance
for doubtful accounts based on the length of time the
receivables are past due. A material adverse change in a major
customers ability to meet its financial obligations to us
could result in a material reduction in the estimated amount of
accounts receivable that can ultimately be collected and an
increase in our general and administrative expenses for the
shortfall.
Slow
Moving and Obsolete Inventories
We make inventory commitment and purchase decisions based upon
sales forecasts. To mitigate the component supply constraints
that have existed in the past and to fill orders with
non-standard configurations, we build inventory levels for
certain items with long lead times and enter into certain
longer-term commitments for certain items. We permanently write
off 100% of the cost of inventory that we specifically identify
and consider obsolete or excessive to fulfill future sales
estimates. We define obsolete inventory as inventory that will
no longer be used in the manufacturing process. We periodically
discard obsolete inventory. Excess inventory is generally
defined as inventory in excess of projected usage, and is
determined using our best estimate of future demand at the time,
based upon information then available to us. In making these
assessments, we are required to make judgments as to the future
demand for current or committed inventory levels. We use a
12-month
demand forecast, and in addition to the demand forecast, we also
consider:
|
|
|
|
|
parts and subassemblies that can be used in alternative finished
products;
|
|
|
|
parts and subassemblies that are unlikely to be engineered out
of our products; and
|
|
|
|
known design changes which would reduce our ability to use the
inventory as planned.
|
Significant differences between our estimates and judgments
regarding future timing of product transitions, volume and mix
of customer demand for our products and actual timing, volume
and demand mix may result in additional write-offs in the
future, or additional usage of previously written-off inventory
in future periods for which we would benefit from a reduced cost
of revenues in those future periods.
Investment
in Equity Securities
For strategic reasons, we may make minority investments in
private or public companies or extend loans or receive equity or
debt from these companies for services rendered or assets sold.
Our minority investments in private companies are primarily
motivated by our desire to gain early access to new technology.
Our investments in these companies are passive in nature in that
we generally do not obtain representation on the boards of
directors. Our investments have generally been part of a larger
financing in which the terms were negotiated by other investors,
typically venture capital investors. These investments are
generally made in exchange for preferred stock with a
liquidation preference that helps protect the underlying value
of our investment. At the time we made our
44
investments, in most cases the companies had not completed
development of their products and we did not enter into any
significant supply agreements with the companies in which we
invested. In determining if and when a decline in the market
value of these investments below their carrying value is
other-than-temporary, we evaluate the market conditions,
offering prices, trends of earnings and cash flows, price
multiples, prospects for liquidity and other key measures of
performance. Our 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. As of
April 30, 2009, the carrying value of these investments
totaled $14.3 million. Future adverse changes in market
conditions or poor operating results at any of the companies in
which we hold a minority position could result in losses or an
inability to recover the carrying value of these investments.
Restructuring
Accrual
Liability for costs associated with an exit or disposal activity
is recognized when the liability is incurred in accordance with
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities
(SFAS 146). During the second quarter of fiscal
2006, we consolidated our Sunnyvale facilities into one building
and permanently exited a portion of our Scotts Valley facility.
As a result of these activities, we recorded restructuring
charges of approximately $3.1 million. These restructuring
charges included $290,000 of miscellaneous costs required to
effect the closures and approximately $2.8 million of
non-cancelable facility lease payments. Of the $3.1 million
in restructuring charges, $1.9 million related to our
optical subsystems and components segment and $1.2 million
related to our network performance test systems segment. During
the first quarter of fiscal 2009, we recorded additional
restructuring charges of $0.6 million for the remaining
portion of the Scotts Valley facility that had been used for a
product of our network performance test systems segment which
was sold in first quarter of fiscal 2009. See Note 6 to our
consolidated financial statements for additional details
regarding the sale of product line.
The facilities consolidation charges were calculated using
estimates that were based upon the remaining future lease
commitments for vacated facilities from the date of facility
consolidation, net of estimated future sublease income. The
estimated costs of vacating these leased facilities were based
on market information and trend analyses, including information
obtained from third party real estate sources. As of
April 30, 2009, $900,000 of committed facilities payments
remained accrued and is expected to be fully utilized by fiscal
2011.
Goodwill,
Intangibles and Other Long-Lived Assets
Our long-lived assets include significant investments in
goodwill and other intangible assets. In June 2001, the
Financial Accounting Standards Board, or FASB, issued SFAS
no. 141, Business Combinations
(SFAS 141) and SFAS no. 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 141 requires business
combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. SFAS 141 also
includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. SFAS 142
prohibits the amortization of goodwill and intangible assets
with indefinite useful lives. SFAS 142 requires that these
assets be reviewed for impairment at least annually. Intangible
assets with finite lives are amortized over their estimated
useful lives.
SFAS 142 requires that goodwill be tested for impairment at
the reporting unit level at adoption and at least annually
thereafter, utilizing a two-step methodology. The initial step
requires us to determine the fair value of each reporting unit
and compare it to the carrying value, including goodwill, of
such unit. We operate two reporting units, optical subsystems
and components and network performance test systems. If the fair
value of the reporting unit exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying
value of the reporting unit exceeds its fair value, the goodwill
of the unit may be impaired. The amount, if any, of the
impairment is then measured in the second step in which. we
determine the implied value of goodwill based on the allocation
of the estimated fair value determined in the initial step to
all assets and liabilities of the reporting unit.
45
We are required to make judgments about the recoverability of
our long-lived assets, other than goodwill, whenever events or
changes in circumstances indicate that the carrying value of
these assets may be impaired or not recoverable. In order to
make such judgments, we are required to make assumptions about
the value of these assets in the future including future
prospects for earnings and cash flows. If impairment is
indicated, we write those assets down to their fair value which
is generally determined based on discounted cash flows.
Judgments and assumptions about the future are complex,
subjective and can be affected by a variety of factors including
industry and economic trends, our market position and the
competitive environment of the businesses in which we operate.
Accounting
for Income Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes,
(SFAS 109). Under this method, income tax
expense is recognized for the amount of taxes payable or
refundable for the current year. Deferred tax assets and
liabilities are recognized using enacted tax rates for the
effect of temporary differences between the book and tax bases
of recorded assets and liabilities and their reported amounts,
along with net operating loss carryforwards and credit
carryforwards. SFAS 109 also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely
than not that a portion of the deferred tax asset will not be
realized.
We provide for income taxes based upon the geographic
composition of worldwide earnings and tax regulations governing
each region. The calculation of tax liabilities involves
significant judgment in estimating the impact of uncertainties
in the application of complex tax laws. Also, our current
effective tax rate assumes that United States income taxes are
not provided for the undistributed earnings of
non-United
States subsidiaries. We intend to indefinitely reinvest the
earnings of all foreign corporate subsidiaries accumulated in
fiscal 2008 and subsequent years.
Effective May 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, Accounting for Income Taxes
(FIN 48). FIN 48 seeks to reduce the
diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position that an entity takes or expects to
take in a tax return. Additionally, FIN 48 provides
guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosures and
transition. Under FIN 48, an entity may only recognize or
continue to recognize tax positions that meet a more
likely than not threshold. See Note 19 to our
consolidated financial statements for additional information.
46
Results
of Operations
The following table sets forth certain statement of operations
data as a percentage of total revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components
|
|
|
91.8
|
%
|
|
|
91.2
|
%
|
|
|
91.1
|
%
|
Network performance test systems
|
|
|
8.2
|
|
|
|
8.8
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues
|
|
|
67.5
|
|
|
|
66.4
|
|
|
|
64.6
|
|
Amortization of acquired developed technology
|
|
|
1.1
|
|
|
|
1.5
|
|
|
|
1.4
|
|
Impairment of acquired developed technology
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31.3
|
|
|
|
32.1
|
|
|
|
34.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
17.0
|
|
|
|
17.4
|
|
|
|
15.4
|
|
Sales and marketing
|
|
|
7.0
|
|
|
|
9.1
|
|
|
|
8.6
|
|
General and administrative
|
|
|
7.5
|
|
|
|
9.9
|
|
|
|
9.5
|
|
Acquired in-process research and development
|
|
|
1.9
|
|
|
|
|
|
|
|
1.4
|
|
Amortization of purchased intangibles
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Impairment of goodwill and intangible assets
|
|
|
44.1
|
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
78.0
|
|
|
|
45.9
|
|
|
|
35.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(46.7
|
)
|
|
|
(13.8
|
)
|
|
|
(1.3
|
)
|
Interest income
|
|
|
0.3
|
|
|
|
1.3
|
|
|
|
1.5
|
|
Interest expense
|
|
|
(1.8
|
)
|
|
|
(3.9
|
)
|
|
|
(3.8
|
)
|
Loss on convertible debt exchange
|
|
|
|
|
|
|
|
|
|
|
(7.6
|
)
|
Gain on repurchase of convertible debt
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(0.7
|
)
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of change in
accounting principle
|
|
|
(48.2
|
)
|
|
|
(16.5
|
)
|
|
|
(11.4
|
)
|
Provision for (benefit from) income taxes
|
|
|
(1.4
|
)
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
|
(46.8
|
)
|
|
|
(17.0
|
)
|
|
|
(12.0
|
)
|
Cumulative effect of accounting change in accounting principle,
net of taxes
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(46.8
|
)%
|
|
|
(17.0
|
)%
|
|
|
(11.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal Years Ended April 30, 2009 and 2008
Revenues. Revenues increased
$101.1 million, or 23%, to $541.2 million in fiscal
2009 compared to $440.2 million in fiscal 2008. Sales of
optical subsystems and components and network test systems
represented 91.8% and 8.2%, respectively, of total revenues in
the fiscal 2009, compared to 91.2% and 8.8%, respectively, in
fiscal 2008.
Optical subsystems and components revenues increased
$95.4 million, or 23.8%, to $497.1 million in fiscal
2009 compared to $401.6 million in fiscal 2008. Revenues
for fiscal 2009 included $91.3 million from Optiums
operations following the consummation of the combination on
August 29, 2008. The increase in revenues was primarily due
to a $79.1 million increase in sales of products for 10/40
Gbps applications partially offset by a $6.1 million
decrease in sales of products for lower speed LAN/SAN
applications and an 8.6 million decrease in sales of
products for lower speed MAN application. Sales of ROADM and
CATV products contributed $22.2 and
47
$8.8 million, respectively, to fiscal 2009 revenues.
Excluding Optium product revenues, optical subsystems and
components revenues increased $4.1 million, or 1%, to
$405.7 million compared to $401.6 million in the
fiscal 2008. This increase was primarily due to a
$19.2 million increase in sales of products for all 10/40
Gbps applications, partially offset by a $9.0 million
decrease in sales of products for lower speed MAN applications
and a $6.1 million decrease in sales of products for lower
speed LAN/SAN applications.
Network test systems revenues increased by $5.6 million, or
14.5%, to $44.2 million in fiscal 2009 compared to
$38.6 million in fiscal 2008. This increase was primarily
due to the introduction of several new products for testing 8
Gbps Fibre Channel, 3/6 Gbps SAS/SATA and 10 Gbps Fibre Channel
over Ethernet products being developed by OEM system
manufacturers.
Amortization of Acquired Developed
Technology. Amortization of acquired developed
technology, a component of cost of revenues, increased $786,000,
or 12.1%, to $7.3 million in fiscal 2009 compared to
$6.5 million in fiscal 2008. The increase was primarily due
$1.0 million of amortization of assets associated with the
Optium merger.
Gross Profit. Gross profit increased
$26.9 million, or 19.0% to $168.4 million in fiscal
2009 compared to $141.5 million in fiscal 2008. The
increase in gross profit was partially due to the inclusion of
$23.4 million of gross profits from Optiums
operations for eight months of the twelve month period ended
April 30, 2009. Gross profit as a percentage of total
revenues was 31.3% in fiscal 2009 compared to 32.1% in fiscal
2008. We recorded charges of $15.4 million for obsolete and
excess inventory in fiscal 2009 compared to $14.1 million
in fiscal 2008. We sold inventory that had been written-off in
previous periods resulting in a benefit of $8.6 million in
fiscal 2009 and $6.0 million in fiscal 2008. As a result,
we recognized a net charge of $6.8 million in fiscal 2009
compared to $8.1 million in fiscal 2008. Manufacturing
overhead includes stock-based compensation charges of
$3.4 million in fiscal 2009 and $3.1 million in fiscal
2008. Additionally, manufacturing overhead in fiscal 2008
included $1.1 million of other payroll related charges
associated with the completion of our previously reported stock
option investigation. Excluding amortization of acquired
developed technology, the net impact of excess and obsolete
inventory charges, stock-based compensation charges and other
stock option related charges, gross profit would have been
$185.9 million, or 34.3% of revenues, in fiscal 2009
compared to $160.3 million, or 36.4% of revenues, in fiscal
2008. The decrease in adjusted gross profit margin was primarily
due to inclusion of Optiums operating results for the
eight months ended April 30, 2009.
Research and Development Expenses. Research
and development expenses increased $15.5 million, or 20.3%,
to $92.1 million in fiscal 2009 compared to
$76.5 million in fiscal 2008. The increase was primarily
due to $13.9 million in expenses related to Optiums
operations following the merger, and an increase in employee
related expenses and costs of materials associated with new
product development. Included in research and development
expenses were stock-based compensation charges of
$6.3 million in fiscal 2009 and $4.4 million fiscal
2008. Additionally, research and development expenses in fiscal
2008 included payroll related charges of $2.9 million
incurred in connection with the completion of our stock option
investigation. Research and development expenses as a percent of
revenues decreased to 17.0% in fiscal 2009 compared to 17.4%
fiscal 2008.
Sales and Marketing Expenses. Sales and
marketing expenses decreased by $2.6 million, or 5.7%, to
$37.7 million in fiscal 2009 compared to $40.0 million
in fiscal 2008. The decrease in sales and marketing expenses was
primarily due to lower payroll related expenses and external
sales commissions, partially offset by $3.1 million in
expenses related to Optiums operations following the
merger. Included in sales and marketing expenses were
stock-based compensation charges of $2.1 million in fiscal
2009 and $2.0 million in fiscal 2008. Additionally, sales
and marketing expenses in fiscal 2008 included payroll related
charges of $1.0 million incurred in connection with the
completion of our previously reported stock option
investigation. Sales and marketing expenses as a percent of
revenues decreased to 7.0% in fiscal 2009 compared to 9.1%
fiscal 2008.
General and Administrative Expenses. General
and administrative expenses decreased $3.0 million, or
6.7%, to $40.8 million in fiscal 2009 compared to
$43.8 million in fiscal 2008. The decrease was primarily
due to a $7.9 million decrease in legal and consulting fees
as a result of the completion of our stock option investigation
and a $1.5 million reduction in litigation and intellectual
property related legal fees. This decrease was partially offset
by the addition of $4.8 million in expenses related to
Optiums operations following the merger and other
personnel and IT related spending. Included in general and
administrative expenses were stock-based compensation charges
48
of $3.1 million in fiscal 2009 and $2.0 million in
fiscal 2008. Additionally, general and administrative expenses
for fiscal 2008 included payroll related charges of
$1.1 million incurred in connection with the completion of
our stock option investigation. General and administrative
expenses as a percent of revenues decreased to 7.5% in fiscal
2009 compared to 9.9% in fiscal 2008.
Acquired In-process Research and
Development. In-process research and development,
or IPR&D, expenses were $10.5 million in fiscal 2009,
compared to $0 in fiscal 2008. The IPR&D charges were
related to the Optium merger.
Amortization of Purchased
Intangibles. Amortization of purchased
intangibles increased $900,000, or 52.9%, to $2.7 million
in fiscal 2009 compared to $1.7 million in fiscal 2008. The
increase was primarily due to $1.6 million of amortization of
additional intangible assets acquired in the Optium merger
partially offset by a reduction in amortization of certain
assets associated with our AZNA and Kodeos acquisitions.
Impairment of Goodwill and Intangible
Assets. The number of shares to be exchanged in
the Optium merger was fixed at 6.262 shares of our common
stock for each share of Optium common stock. The closing price
of our common stock on May 16, 2008 was $1.53, while a
five-day
average used to calculate the consideration paid in the merger
was $1.51. The preliminary allocation of the merger
consideration resulted in the recognition of an additional
$150 million of goodwill which, when combined with the
$88 million goodwill acquired prior to the merger, resulted
in total goodwill of approximately $238 million. The actual
operating results and outlook for both companies between the
date of the definitive agreement and the effective date of the
merger had not changed to any significant degree, with both
companies separately reporting record revenues for their interim
quarters.
Between the effective date of the merger and November 2,
2008, the end of the second quarter of fiscal 2009, we concluded
that there were sufficient indicators to require an interim
goodwill impairment analysis. Among these indicators were a
significant deterioration in the macroeconomic environment
largely caused by the widespread unavailability of business and
consumer credit, a significant decrease in our market
capitalization as a result of a decrease in the trading price of
our common stock to $0.61 at the end of the quarter and a
decrease in internal expectations for near term revenues,
especially those expected to result from the Optium merger. For
purposes of this analysis, our estimates of fair value were
based on a combination of the income approach, which estimates
the fair value of our reporting units based on future discounted
cash flows, and the market approach, which estimates the fair
value of our reporting units based on comparable market prices.
As of the filing of our quarterly report on
Form 10-Q
for the second quarter of fiscal 2009, we had not completed our
analysis due to the complexities involved in determining the
implied fair value of the goodwill for the optical subsystems
and components reporting unit, which is based on the
determination of the fair value of all assets and liabilities of
this reporting unit. However, based on the work performed
through the date of the filing, we concluded that an impairment
loss was probable and could be reasonably estimated.
Accordingly, we recorded a $178.8 million non-cash goodwill
impairment charge, representing our best estimate of the
impairment loss during the second quarter of fiscal 2009.
While finalizing our impairment analysis during the third
quarter of fiscal 2009, we concluded that there were additional
indicators sufficient to require another interim goodwill
impairment analysis. Among these indicators were a worsening of
the macroeconomic environment largely caused by the
unavailability of business and consumer credit, an additional
decrease in our market capitalization as a result of a decrease
in the trading price of our common stock to $0.51 at the end of
the quarter and a further decrease in internal expectations for
near term revenues. For purposes of this analysis, our estimates
of fair value were again based on a combination of the income
approach and the market approach. As of the filing of our
quarterly report on
Form 10-Q
for the third quarter of fiscal 2009, we had not completed our
analysis due to the complexities involved in determining the
implied fair value of the goodwill for the optical subsystems
and components reporting unit, which is based on the
determination of the fair value of all assets and liabilities of
this reporting unit. However, based on the work performed
through the date of the filing, we concluded that an impairment
loss was probable and could be reasonably estimated.
Accordingly, we recorded an additional $46.5 million
non-cash goodwill impairment charge, representing our best
estimate of the impairment loss during the third quarter of
fiscal 2009.
As of the first day of the fourth quarter of fiscal 2009, the
Company performed the required annual impairment testing of
goodwill and indefinite-lived intangible assets and determined
that the remaining balance of goodwill of
49
$13.8 million was impaired and accordingly recognized an
additional impairment charge of $13.8 million in the fourth
quarter of fiscal 2009.
During fiscal 2009, we recorded a total of $238.5 million
in goodwill impairment charges. At April 30, 2009, the
carrying value of goodwill was zero.
Interest Income. Interest income decreased
$4.0 million, or 69.0%, to $1.8 million in fiscal 2009
compared to $5.8 million in fiscal 2008. This decrease was
due to decreases in our cash balances, primarily as a result of
the principal repayment of $100.0 million on our
51/4%
convertible notes due October 15, 2008.
Interest Expense. Interest expense decreased
$7.5 million, or 43.6%, to $9.7 million in fiscal 2009
compared to $17.2 million in fiscal 2008. The decrease was
primarily related to the principal repayment of
$100.0 million on our
51/4%
convertible notes due October 15, 2008. Of the total
interest expense for fiscal 2009 and fiscal 2008, approximately
$7.9 million and $12.3 million, respectively, was
related to our convertible subordinated notes due in 2008 and
2010 and other borrowings and $1.8 million and
$4.9 million, respectively, represented a non-cash charge
to amortize the beneficial conversion feature of the notes due
in 2008.
Gain on Debt Repurchase. During fiscal 2009,
we repurchased $8.0 million in principal value of our 2.5%
convertible notes due October 15, 2010 at a discount to par
value of 50.1% and recorded a gain on the repurchase of
$3.8 million.
Other Income (Expense), Net. Other expense was
$3.8 million in fiscal 2009 compared to other income of
$0.3 million in fiscal 2008. The increase in other expense
in fiscal 2009 was primarily due to unrealized non-cash charges
of $1.6 million related to the re-measurement of foreign
currency denominated accounts receivable and payable on the
books of a subsidiary, a loss of $1.0 million on disposal
of fixed assets, a loss of $0.8 million on impairment of an
investment in equity security and an increase of $400,000 in
realized foreign currency losses.
Provision for Income Taxes. We recorded an
income tax benefit for fiscal 2009 of $7.0 million which
included a non-cash benefit of $7.8 million from the
reversal of previously recorded deferred tax liabilities as a
result of the impairment of goodwill in fiscal 2009 and current
tax expense of $900,000 for minimum federal, state taxes and
foreign income taxes arising in certain foreign jurisdictions in
which we conduct business. We recorded an income tax provision
of $2.2 million for fiscal 2008. The income tax provision
for fiscal 2008 includes a non-cash charge $1.8 million 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 of
$0.5 million for minimum federal and state taxes and
foreign income taxes arising in certain foreign jurisdictions in
which we conduct business. Due to the uncertainty regarding the
timing and extent of our future profitability, we have recorded
a valuation allowance to offset our deferred tax assets which
represent future income tax benefits associated with our
operating losses. There can be no assurance that our deferred
tax assets subject to the valuation allowance will ever be
realized.
Comparison
of Fiscal Years Ended April 30, 2008 and 2007
Revenues. Revenues increased
$21.6 million, or 5.2%, to $440.2 million in fiscal
2008 compared to $418.5 million in fiscal 2007. Sales of
optical subsystems and components and network test systems
represented 91.2% and 8.8%, respectively, of total revenues in
fiscal 2008, compared to 91.1% and 8.9%, respectively, in fiscal
2007.
Optical subsystems and components revenues increased
$20.4 million, or 5.3%, to $401.6 million in fiscal
2008 compared to $381.3 million in fiscal 2007. Sales of
products for short distance LAN/SAN applications decreased
$9.3 million, or 4.1%, and sales of products for MAN and
telecom applications increased $29.7 million, or 19.3%. The
decrease in revenues from the sale of products for short
distance LAN/SAN applications was primarily due to a decrease in
sales of components used in these applications. The increase in
revenues from the sales of MAN and telecom products was
primarily the result of increased sales of 10 Gbps products to
existing customers.
Network performance test systems revenues increased
$1.3 million, or 3.4%, to $38.6 million in fiscal 2008
compared to $37.3 million in fiscal 2007. The increase in
revenues was primarily due to the introduction during
50
fiscal 2008 of several new products for 8 Gbps Fibre Channel
applications as OEM system manufacturers began to design their
product offerings for these higher speed applications and the
introduction of products for 3-6 Gbps SAS/SATA applications.
Amortization of Acquired Developed
Technology. Amortization of acquired developed
technology, a component of cost of revenues, increased $499,000,
or 8.3%, in fiscal 2008 to $6.5 million compared to
$6.0 million in fiscal 2007. The increase reflects the
amortization of additional assets as a result of the
acquisitions of AZNA and Kodeos which were completed in the
fourth quarter of fiscal 2007, partially offset by the roll-off
during fiscal 2008 of certain fully amortized assets associated
with the Honeywell and Infineon acquisitions.
Gross Profit. Gross profit decreased $756,000,
or 0.5%, to $141.5 million in fiscal 2008 compared to
$142.3 million in fiscal 2007. Gross profit as a percentage
of total revenue was 32.2% in fiscal 2008 compared to 34.0% in
fiscal 2007. We recorded a write down of $14.1 million for
obsolete and excess inventory in fiscal 2008 and
$12.1 million in fiscal 2007. We sold inventory that was
written down in previous periods resulting in a benefit of
$6.0 million in fiscal 2008 and $4.1 million in fiscal
2007. As a result, we recognized a net non-cash write down of
$8.1 million in fiscal 2008 compared to $8.0 million
in fiscal 2007. Manufacturing overhead includes non-cash
stock-based compensation expense of $3.1 million in fiscal
2008 and $3.5 million in fiscal 2007. Also included in
manufacturing expense in fiscal 2008 was a charge of
$1.1 million related to personal income taxes that we
assumed related to the results of the investigation of our
historical stock option granting practices. Excluding the
amortization and impairment of acquired developed technology,
the net impact of excess and obsolete inventory write downs,
stock-based compensation expense, and the assumed personal
income taxes, gross profit would have been $160.3 million,
or 36.4% of revenue, in fiscal 2008, compared to
$159.8 million, or 38.2% of revenue, in fiscal 2007. The
decrease in adjusted gross profit margin was primarily due to
declines in sales prices for our LAN/SAN products as a result of
competitive pricing pressures.
Research and Development Expenses. Research
and development expenses increased $12.0 million, or 18.6%,
to $76.5 million in fiscal 2008 compared to
$64.6 million in fiscal 2007. The increase was primarily
due to the acquisitions of AZNA and Kodeos which contributed an
additional $7.2 million in spending in fiscal 2008, of
which, $1.2 million was related to AZNA purchase-related
retention payments. Also included in research and development
expenses in fiscal 2008 were charges of $1.6 million
related to personal income taxes of certain employees that we
assumed related to the results of the investigation of our
historical stock option granting practices. Research and
development expenses include non-cash stock-based compensation
expense of $4.4 million in fiscal 2008 and
$4.0 million in fiscal 2007. The remaining increase of
$2.8 million in research and development expense was
primarily due to personnel costs related to spending for the
development of new higher data rate transceiver products.
Research and development expenses as a percent of revenues
increased to 17.4% in fiscal 2008 compared to 15.4% in fiscal
2007. Excluding the assumed personal income taxes of certain
employees and the AZNA purchase-related retention payments,
fiscal 2008 research and development expenses would have been
16.7% of revenue.
Sales and Marketing Expenses. Sales and
marketing expenses increased $3.9 million, or 10.8%, to
$40.0 million in fiscal 2008 compared to $36.1 million
in fiscal 2007. The increase in sales and marketing expenses was
primarily due to personnel related costs added in anticipation
of revenue growth in the last half of the fiscal year. Included
in sales and marketing expenses in fiscal 2008 were charges of
$742,000 related to personal income taxes of certain employees
that we assumed related to the results of the investigation of
our historical stock option granting practices and $213,000
related to retention payments as a result of the AZNA purchase.
Sales and marketing expenses include non-cash stock-based
compensation expense of $2.0 million in fiscal 2008 and
$1.9 million in fiscal 2007. Sales and marketing expenses
as a percent of revenues increased to 9.1% in fiscal 2008
compared to 8.6% in fiscal 2007. Excluding the assumed personal
income taxes and the AZNA purchase-related retention payments,
fiscal 2008 sales and marketing expenses would have been 8.9% of
revenue.
General and Administrative Expenses. General
and administrative expenses increased $8.1 million, or
22.8%, to $43.7 million in fiscal 2008 compared to
$39.1 million in fiscal 2007. The increase was primarily
due to a $2.4 million increase in professional services
expense related to the investigation of our historical stock
option granting practices, charges of $835,000 related to the
assumption of personal income taxes, also a result of the stock
option investigation, and $274,000 related to AZNA
purchase-related retention payments. Total professional
51
services expense related to the investigation of our historical
stock option granting practices was $7.9 million in fiscal
2008 compared to $5.5 million in fiscal 2007. General and
administrative expenses include non-cash stock-based
compensation expense of $2.0 million in fiscal 2008
compared to $2.4 million in fiscal 2007. General and
administrative expenses as a percent of revenues increased to
9.1% in fiscal 2008 compared to 8.5% in fiscal 2007. Excluding
the charges associated with the investigation, general and
administrative expenses would have been $31.5 million or
7.2% of revenue in fiscal 2008 compared to $30.1 million,
or 7.2% of revenue in fiscal 2007.
Acquired In-process Research and
Development. We recorded no in-process research
and development, or IPR&D, expenses in fiscal 2008,
compared to $5.8 million in fiscal 2007. The fiscal 2007
IPR&D charges were related to the fourth quarter
acquisitions of AZNA and Kodeos.
Amortization of Purchased
Intangibles. Amortization of purchased
intangibles decreased $66,000, or 3.6%, to $1.7 million in
fiscal 2008 compared to $1.8 million in fiscal 2007. The
decrease was due to the roll-off of certain fully amortized
assets during fiscal 2008 associated with the acquisition of
assets from Intersan in the amount of $990,000, offset by the
additional amortization related to our fiscal 2007 acquisitions
of AZNA and Kodeos of $924,000.
Impairment of Goodwill and Intangible
Assets. Based on our annual goodwill impairment
analysis, we determined that the goodwill related to our network
performance test systems reporting unit was impaired and had an
estimated implied fair value of zero. As a result, we recorded
an estimated impairment charge of $40.1 million in the
fourth quarter of fiscal 2008.
Interest Income. Interest income decreased
$399,000, or 6.4%, to $5.8 million in fiscal 2008 compared
to $6.2 million in fiscal 2007. The decrease was primarily
the result of decreasing investment balances and lower interest
rates during fiscal 2008.
Interest Expense. Interest expense increased
$1.2 million, or 7.4%, to $17.2 million in fiscal 2008
compared to $16.0 million in fiscal 2007. Interest expense
is primarily related to our convertible subordinated notes due
in 2008 and 2010. Interest expense related to these notes was
approximately $14.4 million and $13.8 million in
fiscal 2008 and 2007, respectively, of which, $4.9 million
and $4.8 million respectively, represented the amortization
of the beneficial conversion feature of these notes. The
remaining interest expense in fiscal 2008 and 2007 consisted
primarily of interest on a convertible note issued in connection
with the AZNA acquisition, interest on a bank note, and imputed
interest of a financing liability associated with the
sale/leaseback of a building.
Loss on Convertible Debt Exchange. In fiscal
2007, we exchanged $100 million of our
21/2%
convertible subordinated notes due in 2010 for $100 million
of new
21/2%
convertible senior subordinated notes also due in 2010. Among
other features, the new notes eliminated a put option that would
have allowed the holders to require the redemption of the debt
on October 15, 2007 for cash or shares. As a result of the
exchange, we recorded a non-cash charge for the extinguishment
of the original notes of $31.6 million in fiscal 2007.
Other Income (Expense), Net. Other income
(expense), net, consisted of a net expense of $298,000 in fiscal
2008 compared to $724,000 in fiscal 2007. Other expense
primarily consists of non-cash amortization of subordinated loan
costs which was $1.3 million in fiscal 2008 and
$1.2 million in fiscal 2007. Also included in fiscal 2008
was a net gain of $960,000 which was primarily related to a
non-cash gain associated with marking to fair value the
liability for certain stock option modifications and gains on
the disposal of abandoned equipment, offset by a loss on the
sale of shares and the issuance of a call option on the
remaining shares held in a minority investment. Also included in
fiscal 2007 was a net gain of $507,000 which was primarily
related to gains on the disposal of abandoned equipment.
Provision for Income Taxes. We recorded an
income tax provision of $2.2 million for fiscal 2008
compared to $2.8 million for fiscal 2007. The income tax
provision in fiscal 2008 and 2007 is primarily the result of
establishing a deferred tax liability to reflect tax
amortization of goodwill for which no book amortization has
occurred. The decrease of $577,000 was primarily due to the tax
effect of the write-off of goodwill in our network performance
systems reporting unit. Due to the uncertainty regarding the
timing and extent of our future profitability, we have recorded
a valuation allowance to offset potential income tax benefits
associated with our operating losses. As a result, we did not
record any income tax benefit in either fiscal 2008 or 2007.
There can be no assurance that deferred tax assets subject to
the valuation allowance will ever be realized.
52
Cumulative effect of adoption of
SFAS 123R. Upon the adoption of or SFAS 123R
on May 1, 2006, we recorded in fiscal 2007 an additional
$1.2 million cumulative benefit from change in accounting
principle, net of tax, reflecting the net cumulative impact of
estimated forfeitures related to unvested stock options as of
May 1, 2006 that were previously not included in the
determination of historic stock-based compensation expense under
APB 25 in periods prior to May 1, 2006.
Liquidity
and Capital Resources
Net cash provided by operating activities totaled $400,000 in
fiscal 2009, compared to $34.6 million in fiscal 2008 and
$29.0 million in fiscal 2007. The decrease in cash provided
by operating activities in fiscal 2009 was due to our net loss
as adjusted to exclude goodwill impairment charges,
depreciation, amortization and other non-cash related items in
the income statement totaling to $305.1 million and changes
in working capital requirements which were primarily related to
an increase in accounts receivable, principally due to longer
payment terms granted to several large customers and a number of
customers acquired as a result of the Optium merger. In fiscal
2009, accrued liabilities decreased by $9.8 million
primarily because of the reduction in financing liability of
$11.2 million related to the termination of a
sale-leaseback agreement with the landlord for one of our
facilities located in Sunnyvale, California. This decrease was
partially offset by an increase in liability relating to the
sales of accounts receivable made under our non-recourse
accounts receivable sales agreement with Silicon Valley Bank.
Accrued compensation decreased by $4.7 million due to
reduced salaries and bonuses under the salary reduction plan
that we announced in fourth quarter of fiscal 2009, lower
headcount and the reversal of $800,000 of accrued payroll tax
liability relating to the stock compensation investigation which
was completed during fiscal 2009. Deferred income taxes
decreased mainly because of a $7.8 million reversal of
previously recorded deferred tax liabilities as a result of the
impairment of goodwill in fiscal 2009. Cash provided by
operating activities for fiscal 2008 primarily consisted of
operating losses as adjusted to exclude depreciation,
amortization and other non-cash related items in the income
statement totaling $6.6 million and changes in additional
working capital which were primarily related to a decrease in
accounts receivable and an increase in other accrued
liabilities. Working capital uses of cash in fiscal 2008
included cash inflows of $23.2 million offset by outflows
of $6.9 million. Cash inflows were primarily due to a
$1.4 million increase in accounts payable, an
$8.9 million decrease in account receivable, a
$7.3 million increase in other accrued liabilities and a
$3.8 million increase in accrued compensation. The increase
in accounts payable was primarily due to the timing of payments.
The decrease in accounts receivable was primarily due to the
sale of receivables, partially offset by an increase in
revenues. The increase in inventories was due to increases in
revenues and unit volume. The increase in other assets was
primarily due to an increase in other accounts receivable. The
increase in accrued compensation was primarily due to employee
stock purchase plan withholding and higher payroll related
accruals. The increase in deferred income taxes was primarily
due to the book and tax differences associated with the
amortization of goodwill related to certain asset acquisitions.
Cash outflows were primarily due to a $1.2 million increase
in inventories and a $5.5 million increase in other assets,
primarily related to an increase in receivables from
subcontractors due to an increased volume of business with them.
Net cash provided by investing activities totaled
$45.0 million in fiscal 2009 and $5.0 million in
fiscal 2008 compared to net cash used in investing activities of
$38.0 million in fiscal 2007. Net cash provided by
investing activities in fiscal 2009 was primarily related to the
$38.4 million in net maturities of available-for-sale
investments and $30.1 million of cash obtained as a result
of the Optium merger, offset by $23.9 million of purchases
of equipment to support production expansion. Cash provided by
investing activities in fiscal 2008 primarily consisted of
$30.8 million in proceeds from net sales of short-term
investments, $1.6 million in proceeds from the sale of an
equity investment, $600,000 in proceeds from the sale of
property and equipment and $600,000 in maturity of restricted
securities. The use of cash in investing activities in fiscal
2008 was primarily related to purchases of equipment of
$27.2 million to support increased production volumes and a
$2.0 million equity investment in a private company
accounted for under the cost method. Cash provided by investing
activities in fiscal 2007 primarily consisted of
$5.0 million in maturity of restricted securities and
$1.7 million in proceeds from the sale of property and
equipment. The use of cash in investing activities in fiscal
2007 was primarily related to our acquisitions of AZNA and
Kodeos, purchases of equipment to support increased production
volumes and net purchases of short-term investments of
$11.7 million.
53
Net cash used in financing activities totaled $87.7 million
in fiscal 2009 compared to $16.3 million in fiscal 2008 and
net cash provided by financing activities of $1.8 million
in fiscal 2007. Cash used in financing activities for fiscal
2009 primarily reflected repayments of $107.9 million on
our outstanding convertible notes and $4.2 million of bank
borrowings, partially offset by proceeds of $20.0 million
from bank borrowings and $4.5 million from the exercise of
stock options and purchases under our stock purchase plan. The
$107.9 million of repayments on our convertible notes
included retirement of our outstanding
51/4%
convertible subordinated notes, in the principal amount of
$92 million, through a combination of private purchases and
repayment at maturity, and repurchase of $8.0 million
principal value of our
21/2%
convertible notes at a discount resulting in a realized gain of
$3.8 million. Cash used by financing activities in fiscal
2008 primarily consisted of repurchases of $8.2 million in
principal amount of our outstanding
51/4%
convertible notes due in October 2008, repayment of
$6.0 million of convertible notes issued in conjunction
with the AZNA acquisition and repayments of $2.0 million
under an equipment loan, partially offset by proceeds from the
exercise of employee stock options. Cash provided by financing
activities in fiscal 2007 primarily consisted of proceeds of
$4.1 million from the exercise of employee stock options
and purchases of stock under our employee stock purchase plan
offset by repayments of an equipment loan.
Cash
Requirements
Our anticipated cash requirements for the next 12 months
are primarily to fund:
|
|
|
|
|
Operations
|
|
|
|
Research and development
|
|
|
|
Debt repayments
|
|
|
|
Restructuring payments
|
|
|
|
Capital expenditures
|
Our contractual obligations at April 30, 2009 totaled
$224.6 million, as shown in the following table (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Current portion of long-term debt
|
|
$
|
6,107
|
|
|
$
|
6,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
15,305
|
|
|
|
|
|
|
$
|
9,555
|
|
|
$
|
5,750
|
|
|
|
|
|
Convertible debt
|
|
|
142,000
|
|
|
|
|
|
|
|
142,000
|
|
|
|
|
|
|
|
|
|
Interest on debt
|
|
|
7,845
|
|
|
|
4,740
|
|
|
|
2,802
|
|
|
|
303
|
|
|
|
|
|
Operating leases
|
|
|
50,381
|
|
|
|
7,959
|
|
|
|
11,838
|
|
|
|
8,303
|
|
|
|
22,281
|
|
Purchase obligations
|
|
|
2,965
|
|
|
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
224,603
|
|
|
$
|
21,771
|
|
|
$
|
166,195
|
|
|
$
|
14,356
|
|
|
$
|
22,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At April 30, 2009, total long-term debt and convertible
debt was $163.4 million, compared to $257.6 million at
April 30, 2008.
Long-term debt consists of a note payable to a financial
institution under which we borrowed $9.9 million in
December 2005. At April 30, 2009, the remaining principal
balance outstanding under this note was $3.7 million. This
note is payable in 60 equal monthly installments beginning in
January 2006 and is secured by certain property and equipment.
Long-term debt also includes borrowings made by our Malaysian
subsidiary under two separate loan agreements entered by them
with a Malaysian bank in July 2008. The first loan is payable in
20 equal quarterly installments of $750,000 beginning in January
2009 and the second loan is payable in 20 equal quarterly
installments of $250,000 beginning in October 2008. Both loans
are secured by certain property of our Malaysian subsidiary,
guaranteed by us and subject to certain covenants. We were in
compliance with all covenants associated with these loans as of
April 30, 2009. At April 30, 2009, the principal
balance outstanding under these notes was $17.7 million.
54
Convertible debt consists of a series of convertible
subordinated notes in the aggregate principal amount of
$50.0 million due October 15, 2010 and a series of
convertible senior subordinated notes in the aggregate principal
amount of $92.0 million due October 15, 2010. The
notes are convertible by the holders at any time prior to
maturity into shares of Finisar common stock at specified
conversion prices. The notes are redeemable by us, in whole or
in part. Aggregate annual interest payments on both series of
notes are approximately $3.6 million.
Interest on debt consists of the scheduled interest payments on
our short-term, long-term, and convertible debt.
Operating lease obligations consist primarily of base rents for
facilities we occupy at various locations.
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 $3.0 million have been expensed and recorded
on the balance sheet as non-cancelable purchase obligations as
of April 30, 2009.
Sources
of Liquidity
At April 30, 2009, our principal sources of liquidity
consisted of $37.1 million of cash, cash equivalents and
available-for-sale investments and borrowings
available under various credit facilities with Silicon Valley
Bank.
Available
Credit Facilities
On March 14, 2008, we entered into a revolving line of
credit agreement with Silicon Valley Bank. Under the terms of
the agreement, the bank provided a $50 million revolving
line of credit that was available to us through March 13,
2009. On October 28, 2008, this agreement was amended to
decrease the amount available under the revolving line to
$45 million, subject to certain restrictions and
limitations, and to extend the term of the credit facility
through July 15, 2010. Borrowings under this line are
collateralized by substantially all of our assets except our
intellectual property rights and bear interest, at our option,
at either the banks prime rate plus 0.5% or LIBOR plus
3.0%. The facility is subject to financial covenants including
an adjusted quick ratio covenant and an EBITDA covenant which
are tested as of the last day of each month. On April 30,
2009, this agreement was amended further to add an unrestricted
cash covenant, which currently restricts our borrowing
availability under this line to $25 million. We were not in
compliance with the adjusted quick ratio covenant at
November 30, 2008 or December 31, 2008 and received a
waiver from the bank for such non-compliance. We were in
compliance with all covenants associated with this facility as
of April 30, 2009. There were no outstanding borrowings
under this revolving line of credit at April 30, 2009.
On April 29, 2005, we entered into a letter of credit
reimbursement agreement with Silicon Valley Bank. There have
been several amendments to this agreement, the latest being on
April 30, 2009. Under the terms of the latest amended
agreement, Silicon Valley Bank will provide to the Company,
through October 24, 2009, a $4.0 million letter of
credit facility covering existing letters of credit issued by
Silicon Valley Bank and any other letters of credit that we may
require. Outstanding letters of credit secured under this
agreement at April 30, 2009 totaled $3.4 million.
On October 24, 2004, we entered into a non-recourse
accounts receivable purchase agreement with Silicon Valley Bank.
There have been several amendments to this agreement, the latest
being on October 28, 2008. Under the terms of the amended
agreement, we may sell to Silicon Valley Bank, through
October 24, 2009 up to $16 million of qualifying
receivables whereby all right, title and interest in the
Companys invoices are purchased by Silicon Valley Bank.
During fiscal 2009, 2008 and 2007, we sold receivables totaling
$37.7 million, $22.2 million and $14.7 million,
respectively, under this facility.
On July 8, 2009, the Company received a written commitment
from Silicon Valley Bank to further modify the Companys
existing credit facilities in order to facilitate the Exchange
Offers. Principal modifications include:
|
|
|
|
|
A reduction in the total size of the Companys secured
revolving line of credit from $45 million to
$25 million; and
|
|
|
|
Revised covenants that permit the use of borrowings under the
secured revolving line of credit for a portion of the Exchange
Consideration in connection with the Exchange Offers and the use
of up to an aggregate of $50 million of cash from all
sources for that purpose.
|
55
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 and we
will require additional financing to repay all of our remaining
convertible subordinated notes which mature in October 2010. 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.
Off-Balance-Sheet
Arrangements
At April 30, 2009 and April 30, 2008, we did not have
any off-balance sheet arrangements or relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which are typically established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Pending
Adoption of New Accounting Standards
In June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial Assets
(SFAS 166), an amendment of
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. The Boards objective in issuing this
Statement is to improve the relevance, representational
faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its
financial position, financial performance, and cash flows; and a
transferors continuing involvement, if any, in transferred
financial assets. This Statement must be applied as of the
beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for
interim and annual reporting periods thereafter. Earlier
application is prohibited. This Statement must be applied to
transfers occurring on or after the effective date. We are
currently evaluating the potential impact, if any, of the
adoption of SFAS 166 on our consolidated results of
operations and financial condition.
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events (SFAS 165).
SFAS 165 requires an entity to recognize in the financial
statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of
the balance sheet. For nonrecognized subsequent events that must
be disclosed to keep the financial statements from being
misleading, an entity will be required to disclose the nature of
the event as well as an estimate of its financial effect, or a
statement that such an estimate cannot be made. In addition,
SFAS 165 requires an entity to disclose the date through
which subsequent events have been evaluated. SFAS 165 is
effective for us beginning in the first quarter of fiscal 2010
and is required to be applied prospectively. The impact of
SFAS 165 will depend upon the nature of subsequent events
that occur after the effective date.
In April 2009, the FASB released three FSPs intended to provide
additional application guidance and enhanced disclosures
regarding fair value measurements and impairments of securities.
FSP
FAS 157-4,
Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
(FSP 157-4),
provides additional guidelines for estimating fair value in
accordance with SFAS 157. FSP
FAS 115-2,
Recognition and Presentation of Other-Than-Temporary
Impairments
(FSP 115-2),
provides additional guidance related to the disclosure of
impairment losses on securities and the accounting for
impairment losses on debt securities.
FSP 115-2
does not amend existing guidance related to other-than-temporary
impairments of equity securities. FSP
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial Instruments
(FSP 107-1
and APB
28-1),
increases the frequency of fair value disclosures. All of the
aforementioned FSPs are effective for interim and annual periods
ending after June 15, 2009 and will be effective for us
beginning with the first quarter of fiscal 2010. We do not
expect the adoption of these FSPs will have a material impact on
our results of operations, financial position or our financial
statement disclosures as applicable.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements
of nongovernmental entities that are presented in
56
conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will be effective for interim or
annual periods ending on or after September 15, 2009 and
will be effective for us beginning in the second quarter of
fiscal 2010. We do not expect the adoption of SFAS 162 to
have a material effect on our consolidated results of operations
and financial condition.
In May 2008, the FASB issued FSP Accounting Principles Board
(APB)
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-1).
FSP APB 14-1
requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner
that reflects the issuers non-convertible debt borrowing
rate. FSP APB
14-1 is
effective for fiscal years beginning after December 15,
2008 on a retroactive basis and will be adopted by us in the
first quarter of fiscal 2010. We are currently evaluating the
potential impact of the adoption of FSP APB
14-1 on our
consolidated results of operations and financial condition.
In April 2008, the FASB issued
FSP 142-3,
Determination of the Useful Life of Intangible Assets
(FSP 142-3).
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used in determining the useful
life of a recognized intangible asset under SFAS 142. This
new guidance applies prospectively to intangible assets that are
acquired individually or with a group of other assets in
business combinations and asset acquisitions.
FSP 142-3
is effective for fiscal years beginning after December 15,
2008, and early adoption is prohibited. The impact of
FSP 142-3
will depend upon the nature, terms, and size of any acquisitions
we may consummate after the effective date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS 160).
SFAS 160 addresses the accounting and reporting standards
for ownership interests in subsidiaries held by parties other
than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest,
changes in a parents ownership interest, and the valuation
of retained noncontrolling equity investments when a subsidiary
is deconsolidated. FAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008, and will be adopted by us in
fiscal 2010. We are currently assessing the impact of this
standard on our future consolidated results of operations and
financial condition.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations (SFAS 141R).
FAS 141R establishes principles and requirements for how
the acquirer of a business recognizes and measures in our
financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of
the financial statement to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective
for financial statements issued for fiscal years beginning after
December 15, 2008. Accordingly, any business combinations
we engage in subsequent to May 1, 2009 will be accounted
for in accordance with SFAS 141R. We expect SFAS 141R
will have an impact on our consolidated financial statements,
but the nature and magnitude of the specific effects will depend
upon the nature, terms and size of the acquisitions we
consummate.
|
|
Item 7A.
|
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 sold most of our
investments during fiscal 2009 to meet our working capital
requirements and other debt obligations. At April 30, 2009,
our investments exposing us to interest rate risk were only
$100,000 as compared to $71.6 million at April 30,
2008.
57
The following table summarizes the expected maturity, average
interest rate and fair market value of the available-for-sale
debt securities held by us (and related receivables) and debt
securities issued by us as of April 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
2012 and
|
|
|
|
|
|
Market
|
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total Cost
|
|
|
Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
$
|
113
|
|
|
$
|
92
|
|
Average interest rate
|
|
|
5.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
|
|
|
$
|
50,000
|
|
|
|
|
|
|
$
|
50,000
|
|
|
$
|
24,625
|
|
Average interest rate
|
|
|
|
|
|
|
2.50
|
%
|
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
|
|
|
$
|
92,000
|
|
|
|
|
|
|
$
|
92,000
|
|
|
$
|
45,310
|
|
Average interest rate
|
|
|
|
|
|
|
2.50
|
%
|
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
The following table summarizes the expected maturity, average
interest rate and fair market value of the available-for-sale
debt securities held by us (and related receivables) and debt
securities issued by us as of April 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
2011 and
|
|
|
|
|
|
Market
|
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Total Cost
|
|
|
Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
$
|
61,763
|
|
|
$
|
8,514
|
|
|
$
|
662
|
|
|
$
|
70,939
|
|
|
$
|
71,064
|
|
Average interest rate
|
|
|
3.17
|
%
|
|
|
4.44
|
%
|
|
|
5.16
|
%
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
92,026
|
|
|
|
|
|
|
|
|
|
|
$
|
92,026
|
|
|
$
|
88,443
|
|
Average interest rate
|
|
|
5.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
|
|
|
|
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
$
|
38,128
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
|
|
|
|
|
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
$
|
74,157
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
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. At
April 30, 2009, we had investments in four privately-held
companies that totaled $14.3 million and were accounted for
under the cost method. 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
held no such investments at April 30, 2009. We recorded
losses of $0 in fiscal 2009, $0 in fiscal 2008 and $237,000 in
fiscal 2007, 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. There were
no impairment losses on these assets during fiscal 2009, 2008 or
2007. 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.
We have subsidiaries located in China, Malaysia, Europe, Israel,
Australia and Singapore. Due to the relative volume of
transactions through these subsidiaries, we do not believe that
we have significant exposure to foreign
58
currency exchange risks. We currently do not use derivative
financial instruments to mitigate this exposure. In July 2005,
China and Malaysia changed the system by which the value of
their currencies are determined. Both currencies moved from a
fixed rate pegged to the U.S. dollar to a managed float
pegged to a basket of currencies. We expect that this will have
a minor negative impact on our future costs. We continue to
review this issue and may consider hedging certain foreign
exchange risks through the use of currency forwards or options
in future years.
59
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
FINISAR
CORPORATION CONSOLIDATED FINANCIAL STATEMENTS INDEX
60
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Finisar Corporation
We have audited the accompanying consolidated balance sheets of
Finisar Corporation as of April 30, 2009 and 2008, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended April 30, 2009. Our audits also
included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Finisar Corporation at April 30, 2009
and 2008, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
April 30, 2009, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
As discussed in Note 2 to the consolidated financial
statements, on May 1, 2007 the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Finisar Corporations internal control
over financial reporting as of April 30, 2009, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated July 8, 2009
expressed an unqualified opinion thereon.
San Jose, California
July 8, 2009
61
FINISAR
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,129
|
|
|
$
|
79,442
|
|
Short-term available-for-sale investments
|
|
|
92
|
|
|
|
30,577
|
|
Accounts receivable, net of allowance for doubtful accounts of
$1,069 and $635 at April 30, 2009 and April 30, 2008
|
|
|
81,820
|
|
|
|
48,005
|
|
Accounts receivable, other
|
|
|
10,033
|
|
|
|
12,408
|
|
Inventories
|
|
|
112,300
|
|
|
|
82,554
|
|
Prepaid expenses
|
|
|
7,122
|
|
|
|
7,652
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
248,496
|
|
|
|
260,638
|
|
Long-term available-for-sale investments
|
|
|
|
|
|
|
9,236
|
|
Property, plant and improvements, net
|
|
|
84,040
|
|
|
|
89,847
|
|
Purchased technology, net
|
|
|
16,663
|
|
|
|
11,850
|
|
Other intangible assets, net
|
|
|
14,316
|
|
|
|
3,899
|
|
Goodwill
|
|
|
|
|
|
|
88,242
|
|
Minority investments
|
|
|
14,289
|
|
|
|
13,250
|
|
Other assets
|
|
|
2,897
|
|
|
|
3,241
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
380,701
|
|
|
$
|
480,203
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
48,421
|
|
|
$
|
43,040
|
|
Accrued compensation
|
|
|
11,428
|
|
|
|
14,397
|
|
Other accrued liabilities (Note 10)
|
|
|
30,713
|
|
|
|
23,397
|
|
Deferred revenue
|
|
|
4,663
|
|
|
|
5,312
|
|
Current portion of other long-term liabilities
|
|
|
|
|
|
|
424
|
|
Current portion of long-term debt (Note 12)
|
|
|
6,107
|
|
|
|
2,012
|
|
Current portion of convertible notes, net of beneficial
conversion feature of $0 and $2,026 at April 30, 2009 and
April 30, 2008
|
|
|
|
|
|
|
101,918
|
|
Non-cancelable purchase obligations
|
|
|
2,965
|
|
|
|
3,206
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
104,297
|
|
|
|
193,706
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Convertible notes, net of current portion
|
|
|
142,000
|
|
|
|
150,000
|
|
Long-term debt, net of current portion (Note 12)
|
|
|
15,305
|
|
|
|
3,626
|
|
Other non-current liabilities
|
|
|
3,161
|
|
|
|
15,285
|
|
Deferred income taxes
|
|
|
1,149
|
|
|
|
8,903
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
265,912
|
|
|
|
371,520
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding at April 30,
2009 and 2008
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 750,000,000 shares
authorized, 477,492,057 shares issued and outstanding at
April 30, 2009 and 308,839,226 shares issued and
outstanding at April 30, 2008
|
|
|
477
|
|
|
|
309
|
|
Additional paid-in capital
|
|
|
1,811,298
|
|
|
|
1,540,241
|
|
Accumulated other comprehensive income
|
|
|
2,662
|
|
|
|
12,973
|
|
Accumulated deficit
|
|
|
(1,699,648
|
)
|
|
|
(1,444,840
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
114,789
|
|
|
|
108,683
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
380,701
|
|
|
$
|
480,203
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
62
FINISAR
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components
|
|
$
|
497,058
|
|
|
$
|
401,625
|
|
|
$
|
381,263
|
|
Network performance test systems
|
|
|
44,179
|
|
|
|
38,555
|
|
|
|
37,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
541,237
|
|
|
|
440,180
|
|
|
|
418,548
|
|
Cost of revenues
|
|
|
365,572
|
|
|
|
292,161
|
|
|
|
270,272
|
|
Impairment of acquired developed technology
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
Amortization of acquired developed technology
|
|
|
6,039
|
|
|
|
6,501
|
|
|
|
6,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
168,378
|
|
|
|
141,518
|
|
|
|
142,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
92,057
|
|
|
|
76,544
|
|
|
|
64,559
|
|
Sales and marketing
|
|
|
37,747
|
|
|
|
40,006
|
|
|
|
36,122
|
|
General and administrative
|
|
|
40,761
|
|
|
|
43,710
|
|
|
|
39,150
|
|
Acquired in-process research and development (Note 3)
|
|
|
10,500
|
|
|
|
|
|
|
|
5,770
|
|
Amortization of purchased intangibles
|
|
|
2,686
|
|
|
|
1,748
|
|
|
|
1,814
|
|
Impairment of goodwill and intangible assets
|
|
|
238,507
|
|
|
|
40,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
422,258
|
|
|
|
202,114
|
|
|
|
147,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(253,880
|
)
|
|
|
(60,596
|
)
|
|
|
(5,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,762
|
|
|
|
5,805
|
|
|
|
6,204
|
|
Interest expense
|
|
|
(9,687
|
)
|
|
|
(17,236
|
)
|
|
|
(16,044
|
)
|
Loss on convertible debt exchange
|
|
|
|
|
|
|
|
|
|
|
(31,606
|
)
|
Gain on repurchase of convertible debt
|
|
|
3,838
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(3,803
|
)
|
|
|
(298
|
)
|
|
|
(724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of change in
accounting principle
|
|
|
(261,770
|
)
|
|
|
(72,325
|
)
|
|
|
(47,311
|
)
|
Provision for (benefit from) income taxes
|
|
|
(6,962
|
)
|
|
|
2,233
|
|
|
|
2,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
|
(254,808
|
)
|
|
|
(74,558
|
)
|
|
|
(50,121
|
)
|
Cumulative effect of change in accounting principle, net of taxes
|
|
|
|
|
|
|
|
|
|
|
(1,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(254,808
|
)
|
|
$
|
(74,558
|
)
|
|
$
|
(48,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of change in accounting principle
|
|
$
|
(0.61
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.16
|
)
|
Cumulative effect of change in accounting principle
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
|
(0.61
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per share basic
and diluted
|
|
|
420,456
|
|
|
|
308,680
|
|
|
|
307,814
|
|
See accompanying notes.
63
FINISAR
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Income
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at April 30, 2006
|
|
|
305,512,111
|
|
|
$
|
306
|
|
|
$
|
1,487,464
|
|
|
$
|
(3,616
|
)
|
|
$
|
1,698
|
|
|
$
|
(1,321,374
|
)
|
|
$
|
164,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unamortized deferred compensation
|
|
|
|
|
|
|
|
|
|
|
(3,616
|
)
|
|
|
3,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants and stock options, net of repurchase of
unvested shares
|
|
|
2,260,837
|
|
|
|
2
|
|
|
|
3,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,639
|
|
Issuance of common stock through employee stock purchase plan
|
|
|
860,025
|
|
|
|
1
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,681
|
|
Stock-based compensation expense related to employee stock
options and employee stock purchases
|
|
|
|
|
|
|
|
|
|
|
11,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,637
|
|
Beneficial conversion on issuance of debt
|
|
|
|
|
|
|
|
|
|
|
29,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,733
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(1,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,213
|
)
|
Unrealized gain on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,645
|
|
|
|
|
|
|
|
5,645
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,819
|
|
|
|
|
|
|
|
3,819
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,908
|
)
|
|
|
(48,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
|
308,632,973
|
|
|
$
|
309
|
|
|
$
|
1,529,322
|
|
|
$
|
|
|
|
$
|
11,162
|
|
|
$
|
(1,370,282
|
)
|
|
$
|
170,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants and stock options, net of repurchase of
unvested shares
|
|
|
206,253
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179
|
|
Stock-based compensation expense related to employee stock
options and employee stock purchases
|
|
|
|
|
|
|
|
|
|
|
10,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,740
|
|
Unrealized loss on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,165
|
)
|
|
|
|
|
|
|
(4,165
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,976
|
|
|
|
|
|
|
|
5,976
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,558
|
)
|
|
|
(74,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2008
|
|
|
308,839,226
|
|
|
$
|
309
|
|
|
$
|
1,540,241
|
|
|
$
|
|
|
|
$
|
12,973
|
|
|
$
|
(1,444,840
|
)
|
|
$
|
108,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and stock issued under restricted
stock awards plan
|
|
|
2,823,846
|
|
|
|
2
|
|
|
|
1,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,138
|
|
Issuance of common stock through employee stock purchase plan
|
|
|
5,020,326
|
|
|
|
5
|
|
|
|
3,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,386
|
|
Assumption of stock options, related to acquisition of Optium
|
|
|
|
|
|
|
|
|
|
|
8,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,986
|
|
Stock-based compensation expense related to employee stock
options and employee stock purchases
|
|
|
|
|
|
|
|
|
|
|
14,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,894
|
|
Issuance of stock related to acquisition of Optium
|
|
|
160,808,659
|
|
|
|
161
|
|
|
|
242,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,821
|
|
Unrealized loss on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(925
|
)
|
|
|
|
|
|
|
(924
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,386
|
)
|
|
|
|
|
|
|
(9,387
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(254,808
|
))
|
|
|
(254,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(265,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2009
|
|
|
477,492,057
|
|
|
$
|
477
|
|
|
$
|
1,811,298
|
|
|
|
|
|
|
$
|
2,662
|
|
|
$
|
(1,699,648
|
)
|
|
$
|
114,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
64
FINISAR
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(254,808
|
)
|
|
$
|
(74,558
|
)
|
|
$
|
(48,908
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
30,490
|
|
|
|
25,377
|
|
|
|
25,047
|
|
Stock-based compensation expense
|
|
|
14,978
|
|
|
|
11,564
|
|
|
|
11,822
|
|
Acquired in-process research and development
|
|
|
10,500
|
|
|
|
|
|
|
|
5,770
|
|
Amortization of beneficial conversion feature of convertible
notes
|
|
|
1,817
|
|
|
|
4,943
|
|
|
|
4,791
|
|
Amortization of purchased technology and finite lived intangibles
|
|
|
2,687
|
|
|
|
1,749
|
|
|
|
1,814
|
|
Impairment of goodwill and intangible assets
|
|
|
238,507
|
|
|
|
40,106
|
|
|
|
|
|
Impairment of acquired developed technology
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
Amortization of acquired developed technology
|
|
|
6,038
|
|
|
|
6,501
|
|
|
|
6,002
|
|
Amortization of discount on restricted securities
|
|
|
|
|
|
|
(11
|
)
|
|
|
(92
|
)
|
Loss (gain) on sales of equipment
|
|
|
996
|
|
|
|
(516
|
)
|
|
|
1,214
|
|
Other than temporary decline in fair market value of equity
security
|
|
|
1,920
|
|
|
|
|
|
|
|
|
|
Gain on sale of minority investment
|
|
|
|
|
|
|
|
|
|
|
(1,198
|
)
|
Loss on convertible debt exchange
|
|
|
|
|
|
|
238
|
|
|
|
31,606
|
|
Gain on repurchase of convertible debt
|
|
|
(3,838
|
)
|
|
|
|
|
|
|
|
|
Loss on sale of product line
|
|
|
919
|
|
|
|
|
|
|
|
|
|
Loss (gain) on remeasurement of derivative liability
|
|
|
(1,135
|
)
|
|
|
1,135
|
|
|
|
|
|
Share of losses of equity investee
|
|
|
|
|
|
|
|
|
|
|
237
|
|
Loss on sale of equity investment
|
|
|
12
|
|
|
|
15
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(33,399
|
)
|
|
|
8,891
|
|
|
|
2,449
|
|
Inventories
|
|
|
459
|
|
|
|
(1,159
|
)
|
|
|
(17,364
|
)
|
Other assets
|
|
|
922
|
|
|
|
(5,496
|
)
|
|
|
(333
|
)
|
Deferred income taxes
|
|
|
(7,277
|
)
|
|
|
1,756
|
|
|
|
2,176
|
|
Accounts payable
|
|
|
4,396
|
|
|
|
1,432
|
|
|
|
3,227
|
|
Accrued compensation
|
|
|
(4,611
|
)
|
|
|
3,847
|
|
|
|
(737
|
)
|
Other accrued liabilities
|
|
|
(9,759
|
)
|
|
|
9,021
|
|
|
|
113
|
|
Deferred revenue
|
|
|
(680
|
)
|
|
|
(214
|
)
|
|
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
382
|
|
|
|
34,621
|
|
|
|
29,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and improvements
|
|
|
(23,918
|
)
|
|
|
(27,198
|
)
|
|
|
(22,340
|
)
|
Purchases of short and long-term investments
|
|
|
(4,125
|
)
|
|
|
(84,236
|
)
|
|
|
(164,796
|
)
|
Sale/maturity of short and long-term investments
|
|
|
42,567
|
|
|
|
115,051
|
|
|
|
153,141
|
|
Maturity of restricted securities
|
|
|
|
|
|
|
625
|
|
|
|
4,951
|
|
Acquisition of subsidiaries, net of cash acquired
|
|
|
30,137
|
|
|
|
521
|
|
|
|
(10,708
|
)
|
Proceeds from sale of property and equipment
|
|
|
229
|
|
|
|
643
|
|
|
|
512
|
|
Proceeds from sale of minority investment
|
|
|
|
|
|
|
|
|
|
|
1,198
|
|
Proceeds from sale of equity investment
|
|
|
90
|
|
|
|
1,569
|
|
|
|
|
|
Purchases of minority investments
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
44,980
|
|
|
|
4,975
|
|
|
|
(38,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of convertible notes
|
|
|
(95,956
|
)
|
|
|
(8,224
|
)
|
|
|
|
|
Repayment of convertible notes related to acquisition
|
|
|
(11,918
|
)
|
|
|
(5,959
|
)
|
|
|
|
|
Proceeds from term loan and revolving line of credit
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
Repayments of liability related to sale-leaseback of building
|
|
|
(101
|
)
|
|
|
(359
|
)
|
|
|
(296
|
)
|
Repayments of borrowings under notes
|
|
|
(4,225
|
)
|
|
|
(1,897
|
)
|
|
|
(2,036
|
)
|
Proceeds from exercise of stock options, warrants and stock
purchase plan, net of repurchase of unvested shares
|
|
|
4,525
|
|
|
|
179
|
|
|
|
4,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(87,675
|
)
|
|
|
(16,260
|
)
|
|
|
1,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(42,313
|
)
|
|
|
23,336
|
|
|
|
(7,255
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
79,442
|
|
|
|
56,106
|
|
|
|
63,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
37,129
|
|
|
$
|
79,442
|
|
|
$
|
56,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
6,776
|
|
|
$
|
9,190
|
|
|
$
|
9,514
|
|
Cash paid for taxes
|
|
$
|
1,100
|
|
|
$
|
182
|
|
|
$
|
659
|
|
Supplemental schedule of non-cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of convertible promissory note on acquisition of
subsidiary
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with acquisitions
|
|
$
|
242,821
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
FINISAR
CORPORATION
Description
of Business
Finisar Corporation (the Company) is a leading
provider of optical subsystems and components that connect local
area networks, or LANs, storage area networks, or SANs, and
metropolitan area networks, or MANs, and wide area networks, or
WANs. The Companys optical subsystems consist primarily of
transceivers and transponders which provide the fundamental
optical-electrical interface for connecting the equipment used
in building these networks. These products rely on the use of
semiconductor lasers in conjunction with integrated circuit
design and novel packaging technology to provide a
cost-effective means for transmitting and receiving digital
signals over fiber optic cable using a wide range of network
protocols, transmission speeds and physical configurations over
distances from meters up to 200 kilometers. The Company also
provides products for dynamically switching network traffic from
one optical link to another across multiple wavelengths without
first converting to an electrical signal known as reconfigurable
optical add/drop multiplexers, or ROADMs. The Companys
line of optical components consists primarily of packaged lasers
and photodetectors used in transceivers, primarily for LAN and
SAN applications and passive optical components used in building
MANs. The Companys manufacturing operations are vertically
integrated and include integrated circuit design and internal
assembly and test capabilities for the Companys optical
subsystem products, as well as key components used in those
subsystems. The Company sells its optical subsystem and
component products to manufacturers of storage and networking
equipment such as Alcatel-Lucent, Brocade, Cisco Systems, EMC,
Emulex, Ericsson, Hewlett-Packard Company, Huawei, IBM, Juniper,
Qlogic, Siemens and Tellabs.
The Company also provides network performance test systems
through its Network Tools Division primarily to leading storage
equipment manufacturers such as Brocade, EMC, Emulex,
Hewlett-Packard Company and Qlogic for testing and validating
equipment designs.
Finisar Corporation was incorporated in California in April 1987
and reincorporated in Delaware in November 1999. Finisars
principal executive offices are located at 1389 Moffett Park
Drive, Sunnyvale, California 94089, and its telephone number at
that location is
(408) 548-1000.
The consolidated financial statements include the accounts of
Finisar Corporation and its wholly-owned subsidiaries
(collectively Finisar or the Company).
Intercompany accounts and transactions have been eliminated in
consolidation.
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. The first three
quarters of fiscal 2009 ended on August 3, 2008,
November 2, 2009 and February 1, 2009, respectively.
The first three quarters of fiscal 2008 ended on July 29,
2007, October 28, 2007, and January 27, 2008. The
first three quarters of fiscal 2007 ended on July 30, 2006,
October 29, 2006, and January 28, 2007.
Reclassifications
Certain reclassifications have been made to the prior year
financial statements to conform to the current year
presentation. These changes had no impact on previously reported
net income or retained earnings.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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.
66
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies
|
Revenue
Recognition
The Companys revenue transactions consist predominately of
sales of products to customers. The Company follows the
Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 104, Revenue
Recognition, and Emerging Issues Task Force
(EITF) Issue
00-21,
Revenue Arrangements with Multiple Deliverables.
Specifically, the Company recognizes revenue when persuasive
evidence of an arrangement exists, title and risk of loss have
passed to the customer, generally upon shipment, the price is
fixed or determinable, and collectability is reasonably assured.
For those arrangements with multiple elements, or in related
arrangements with the same customer, the arrangement is divided
into separate units of accounting if certain criteria are met,
including whether the delivered item has stand-alone value to
the customer and whether there is objective and reliable
evidence of the fair value of the undelivered items. The
consideration received is allocated among the separate units of
accounting based on their respective fair values, and the
applicable revenue recognition criteria are applied to each of
the separate units. In cases where there is objective and
reliable evidence of the fair value of the undelivered item in
an arrangement but no such evidence for the delivered item, the
residual method is used to allocate the arrangement
consideration. For units of accounting which include more than
one deliverable, the Company generally recognizes all revenue
and cost of revenue for the unit of accounting over 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
us. Accounts receivable from distributors are recognized and
inventory is relieved when title to inventories transfers,
typically upon shipment from us at which point we have 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 (SFAS 13), establishes
standards for the way that public business enterprises report
information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The Company has determined that it operates in
two segments consisting of optical subsystems and components and
network performance test systems.
Concentrations
of Credit Risk
Financial instruments which potentially subject Finisar to
concentrations of credit risk include cash, cash equivalents,
short-term, long-term investments and accounts receivable.
Finisar places its cash, cash equivalents and short-term,
long-term and restricted investments with high-credit quality
financial institutions. Such investments are generally in excess
of Federal Deposit Insurance Corporation (FDIC) insurance
limits. Concentrations of credit risk, with respect to accounts
receivable, exist to the extent of amounts presented in the
financial statements.
67
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
been within managements expectations. The Companys
five largest customers represented 46.0% and 44.0% of total
accounts receivable at April 30, 2009 and 2008. As of
April 30, 2009, two customers accounted for 14% and 12%,
respectively, of total accounts receivable. One customer
accounted for 23.0% of total accounts receivable at
April 30, 2008.
Current
Vulnerabilities Due to Certain Concentrations
Finisar sells products primarily to customers located in North
America. During fiscal 2009, 2008 and 2007, sales of optical
subsystems and components to Cisco Systems represented 16.2%,
20.6% and 20.8%, respectively, of total revenues. No other
customer accounted for more than 10% of total revenues in any of
these fiscal years.
Included in the Companys consolidated balance sheet at
April 30, 2009, are the net assets of the Companys
manufacturing operations, substantially all of which are located
at its overseas manufacturing facilities and which total
approximately to $68.2 million.
Foreign
Currency Translation
The functional currency of our foreign subsidiaries is the local
currency. Assets and liabilities denominated in foreign
currencies are translated using the exchange rate on the balance
sheet dates. Revenues and expenses are translated using average
exchange rates prevailing during the year. Any translation
adjustments resulting from this process are shown separately as
a component of accumulated other comprehensive income. Foreign
currency transaction gains and losses are included in the
determination of net loss.
Research
and Development
Research and development expenditures are charged to operations
as incurred.
Advertising
Costs
Advertising costs are expensed as incurred. Advertising is used
infrequently in marketing the Companys products.
Advertising costs during fiscal 2009, 2008 and 2007 were
$31,000, $32,000 and $75,000, 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.
68
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Accounting
In February 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159
expands the use of fair value accounting to eligible financial
assets and liabilities. SFAS 159 is effective as of the
beginning of an entitys first fiscal year commencing after
November 15, 2007. The Company evaluated its existing
financial instruments and elected not to adopt the fair value
option to account for its financial instruments. As a result,
SFAS 159 did not have any impact on the Companys
financial condition or results of operations as of
April 30, 2009 and for fiscal 2009. However, because the
SFAS 159 election is based on an
instrument-by-instrument
election at the time the Company first recognizes an eligible
item or enters into an eligible firm commitment, the Company may
decide to elect the fair value option on new items should
business reasons support doing so in the future.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157),
which is effective for fiscal years beginning after
November 15, 2007 and for interim periods within those
years. This statement defines fair value, establishes a
framework for measuring fair value and expands the related
disclosure requirements. This statement applies to accounting
pronouncements that require or permit fair value measurements
with certain exclusions. The statement provides that a fair
value measurement assumes that the transaction to sell an asset
or transfer a liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the
most advantageous market for the asset or liability in an
orderly transaction between market participants on the
measurement date. SFAS 157 defines fair value based upon an
exit price model.
SFAS 157 establishes a valuation hierarchy for disclosure
of the inputs to valuation used to measure fair value. Valuation
techniques used to measure fair value under SFAS 157 must
maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first
two are considered observable and the last unobservable, that
may be used to measure fair value which are the following:
Level 1 inputs are unadjusted quoted prices in active
markets for identical assets or liabilities. Level 2 inputs
are quoted prices for similar assets and liabilities in active
markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument. Level 3 inputs are unobservable inputs based on
our own assumptions used to measure assets and liabilities at
fair value. A financial asset or liabilitys classification
within the hierarchy is determined based on the lowest level
input that is significant to the fair value measurement.
The Company adopted the effective portions of SFAS 157 on
May 1, 2008. In February 2008, the FASB issued FASB Staff
Positions (FSP)
157-1 and
157-2
(FSP 157-1
and FAP
157-2).
FSP 157-1
amends SFAS 157 to exclude SFAS No. 13,
Accounting for Leases, and its related interpretive
accounting pronouncements that address
69
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
leasing transactions, while
FSP 157-2
delays the effective date of the application of SFAS 157 to
fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. Non-recurring nonfinancial
assets and nonfinancial liabilities for which the Company has
not applied the provisions of SFAS 157 include those
measured at fair value in goodwill impairment testing,
intangible assets measured at fair value for impairment testing,
asset retirement obligations initially measured at fair value,
and those initially measured at fair value in a business
combination. In October 2008, the FASB issued
FSP 157-3
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
(FSP 157-3).
FSP 157-3
clarifies the application of SFAS 157 in a market that is
not active, and provides guidance on the key considerations in
determining the fair value of a financial asset when the market
for that financial asset is not active.
For disclosure purposes, the Company is required to measure the
fair value of outstanding debt on a recurring basis. Long-term
debt is reported at amortized cost in accordance with
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments. As of April 30, 2009 and 2008,
based on quoted market prices (Level 1), the fair value of
the Companys convertible subordinated debt was
approximately $78.1 million and $200.7 million,
respectively. See Note 11, Convertible Debt.
The Company classifies investments within Level 1 if quoted
prices are available in active markets. Level 1 assets
include instruments valued based on quoted market prices in
active markets which generally include money market funds,
corporate publicly traded equity securities on major exchanges
and U.S. Treasury notes with quoted prices on active
markets.
The Company classifies items in Level 2 if the investments
are valued using observable inputs to quoted market prices,
benchmark yields, reported trades, broker/dealer quotes or
alternative pricing sources with reasonable levels of price
transparency. These investments include corporate bonds and
mortgage-backed debt.
The Company did not hold financial assets and liabilities which
were valued using unobservable inputs as of April 30, 2009.
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.
In quantifying the amount of excess inventory, the Company
assumes that the last twelve months of demand is generally
indicative of the demand for the next twelve months. Inventory
on hand that is in excess of that demand is written down.
Obligations to purchase inventory acquired by subcontractors
based on forecasts provided by the Company are recognized at the
time such obligations arise.
Property,
Equipment and Improvements
Property, equipment and improvements are stated at cost, net of
accumulated depreciation and amortization. Property, plant,
equipment and improvements 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 25 years. Land is carried at acquisition
cost and not depreciated. Leased land is depreciated over the
life of the lease.
70
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill
and Other Intangible Assets
Goodwill, purchased technology, and other intangible assets
result from acquisitions accounted for under the purchase
method. Amortization of purchased technology and other
intangibles has been provided on a straight-line basis over
periods ranging from three to seven years. The amortization of
goodwill ceased with the adoption of SFAS No. 142,
Goodwill and Other Intangibles, beginning in the first
quarter of fiscal 2003. Intangible assets with finite lives are
amortized over their estimated useful lives. Goodwill is
assessed for impairment annually or more frequently when an
event occurs or circumstances change between annual tests that
would more likely than not reduce the fair value of the
reporting unit below its carrying value.
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 property, improvements
and finite-lived intangible 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.
Stock-Based
Compensation Expense
The Company accounts for stock-based compensation in accordance
with SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which requires the
measurement and recognition of compensation expense for all
stock-based payment awards made to employees and directors
including employee stock options and employee stock purchases
under the Companys Employee Stock Purchase Plan based on
estimated fair values. SFAS 123R requires companies to
estimate the fair value of stock-based payment awards on the
date of grant using an option pricing model. The Company uses
the Black-Scholes option pricing model to determine the fair
value of stock based awards under SFAS 123R. The value of
the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the
Companys consolidated statements of operations.
Stock-based compensation expense recognized in the
Companys consolidated statements of operations for the
fiscal years ended April 30, 2009, 2008 and 2007 includes
compensation expense for stock-based payment awards granted
prior to, but not yet vested as of, the adoption of
SFAS 123R, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123 and compensation
expense for stock-based payment awards granted subsequent to
April 30, 2006 based on the grant date fair value estimated
in accordance with the provisions of SFAS 123R.
Compensation expense for expected-to-vest stock-based awards
that were granted on or prior to April 30, 2006 was valued
under the multiple-option approach and will continue to be
amortized using the accelerated attribution method. Subsequent
to April 30, 2006, compensation expense for
expected-to-vest stock-based awards is valued under the
single-option approach and amortized on a straight-line basis,
net of estimated forfeitures.
Net
Loss Per Share
Basic and diluted net loss per share are 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), convertible redeemable preferred stock (on an
if-converted basis) and convertible notes (on an as-if-converted
basis) outstanding during the period.
71
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents common stock equivalents related to
potentially dilutive securities excluded from the calculation of
basic and diluted net loss per share because they are
anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Employee stock options
|
|
|
5,541
|
|
|
|
10,269
|
|
|
|
16,229
|
|
Conversion of convertible subordinated notes
|
|
|
13,495
|
|
|
|
31,657
|
|
|
|
34,520
|
|
Conversion of convertible notes
|
|
|
|
|
|
|
8,932
|
|
|
|
4,705
|
|
Warrants assumed in acquisition
|
|
|
304
|
|
|
|
21
|
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,340
|
|
|
|
50,879
|
|
|
|
55,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
SFAS No. 130, Reporting Comprehensive Income
(SFAS 130), establishes rules for reporting
and display of comprehensive income and its components.
SFAS 130 requires unrealized gains or losses on the
Companys available-for-sale securities and foreign
currency translation adjustments to be included in comprehensive
income.
The components of comprehensive loss for the fiscal years ended
April 30, 2009, 2008 and 2007 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net loss
|
|
$
|
(254,808
|
)
|
|
$
|
(76,434
|
)
|
|
$
|
(45,399
|
)
|
Foreign currency translation adjustment
|
|
|
(9,386
|
)
|
|
|
5,976
|
|
|
|
3,819
|
|
Change in unrealized gain (loss) on securities, net of
reclassification adjustments for realized gain/(loss)
|
|
|
(925
|
)
|
|
|
(4,165
|
)
|
|
|
5,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(265,119
|
)
|
|
$
|
(74,623
|
)
|
|
$
|
(35,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the determination of net loss was a loss of
$0.7 million and gains on foreign currency transactions of
$0.1 million and $0.3 million for the fiscal years
ended April 30, 2009, April 30, 2008 and 2007,
respectively.
The components of accumulated other comprehensive loss, net of
taxes, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net unrealized gains/(losses) on available-for-sale securities
|
|
$
|
(21
|
)
|
|
$
|
904
|
|
Cumulative translation adjustment
|
|
|
2,683
|
|
|
|
12,069
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
2,662
|
|
|
$
|
12,973
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
(SFAS 109). Under this method, income tax
expense is recognized for the amount of taxes payable or
refundable for the current year. Deferred tax assets and
liabilities are recognized using enacted tax rates for the
effect of temporary differences between the book and tax bases
of recorded assets and liabilities and their reported amounts,
along with net operating loss carryforwards and credit
carryforwards. SFAS 109 also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely
than not that a portion of the deferred tax asset will not be
realized.
72
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company provides for income taxes based upon the geographic
composition of worldwide earnings and tax regulations governing
each region. The calculation of tax liabilities involves
significant judgment in estimating the impact of uncertainties
in the application of complex tax laws. Also, the Companys
current effective tax rate assumes that United States income
taxes are not provided for the undistributed earnings of
non-United
States subsidiaries. The Company intends to indefinitely
reinvest the earnings of all foreign corporate subsidiaries
accumulated in fiscal 2009 and subsequent years.
Effective May 1, 2007, the Company adopted FIN 48.
FIN 48 seeks to reduce the diversity in practice associated
with certain aspects of measurement and recognition in
accounting for income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position that an entity takes or expects to take in a tax
return. Additionally, FIN 48 provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition. Under
FIN 48, an entity may only recognize or continue to
recognize tax positions that meet a more likely than
not threshold. See Note 19 Income
Taxes.
Pending
Adoption of New Accounting Standards
In June 2009, the FASB issued SFAS. 166, Accounting for
Transfers of Financial Assets (SFAS 140),
an amendment of SFAS. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. The Boards objective in issuing
this Statement is to improve the relevance, representational
faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its
financial position, financial performance, and cash flows; and a
transferors continuing involvement, if any, in transferred
financial assets. This Statement must be applied as of the
beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for
interim and annual reporting periods thereafter. Earlier
application is prohibited. This Statement must be applied to
transfers occurring on or after the effective date. The Company
is currently evaluating the potential impact, if any, of the
adoption of SFAS 166 on its consolidated results of
operations and financial condition.
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events (SFAS 165).
SFAS 165 requires an entity to recognize in the financial
statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of
the balance sheet. For nonrecognized subsequent events that must
be disclosed to keep the financial statements from being
misleading, an entity will be required to disclose the nature of
the event as well as an estimate of its financial effect, or a
statement that such an estimate cannot be made. In addition,
SFAS. 165 requires an entity to disclose the date through which
subsequent events have been evaluated. SFAS No. 165 is
effective for the Company beginning in the first quarter of
fiscal 2010 and is required to be applied prospectively. The
impact of SFAS 165 will depend upon the nature of
subsequent events that occur after the effective date.
In April 2009, the FASB released three FSPs intended to provide
additional application guidance and enhanced disclosures
regarding fair value measurements and impairments of securities.
FSP
FAS 157-4,
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
(FSP 157-4),
provides additional guidelines for estimating fair value in
accordance with SFAS 157. FSP
FAS 115-2,
Recognition and Presentation of Other-Than-Temporary
Impairments
(FSP 115-2),
provides additional guidance related to the disclosure of
impairment losses on securities and the accounting for
impairment losses on debt securities.
FSP 115-2
does not amend existing guidance related to other-than-temporary
impairments of equity securities. FSP
FAS 107-1
and APB
28-1,
Interim Disclosures about Fair Value of Financial Instruments
(FSP 107-1
and APB
28-1),
increases the frequency of fair value disclosures. All of the
aforementioned FSPs are effective for interim and annual periods
ending after June 15, 2009 and will be effective for the
Company beginning with the first quarter of fiscal 2010. The
Company does not expect the adoption of these FSPs will have a
material impact on its results of operations, financial position
or its financial statement disclosures as applicable.
73
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements
of nongovernmental entities that are presented in conformity
with generally accepted accounting principles (the GAAP
hierarchy). SFAS 162 will be effective for interim or
annual periods ending on or after September 15, 2009 and
will be effective for the Company beginning in the second
quarter of fiscal 2010. The Company does not expect the adoption
of SFAS 162 to have a material effect on its consolidated
results of operations and financial condition.
In May 2008, the FASB issued FSP Accounting Principles Board
(APB)
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement)
(FSP APB 14-1).
FSP APB 14-1
requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner
that reflects the issuers non-convertible debt borrowing
rate.
FSP APB 14-1
is effective for fiscal years beginning after December 15,
2008 on a retroactive basis and will be adopted by the Company
in the first quarter of fiscal 2010. The Company is currently
evaluating the potential impact of the adoption of FSP APB
14-1 on its
consolidated results of operations and financial condition.
In April 2008, the FASB issued
FSP 142-3,
Determination of the Useful Life of Intangible Assets
(FSP 142-3).
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used in determining the useful
life of a recognized intangible asset under SFAS 142. This
new guidance applies prospectively to intangible assets that are
acquired individually or with a group of other assets in
business combinations and asset acquisitions.
FSP 142-3
is effective for fiscal years beginning after December 15,
2008, and early adoption is prohibited. The impact of
FSP 142-3
will depend upon the nature, terms, and size of any acquisitions
the Company may consummate after the effective date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51 (SFAS 160).
SFAS 160 addresses the accounting and reporting standards
for ownership interests in subsidiaries held by parties other
than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest,
changes in a parents ownership interest, and the valuation
of retained noncontrolling equity investments when a subsidiary
is deconsolidated. FAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008, and will be adopted by the Company
in fiscal 2010. The Company is currently assessing the impact of
this standard on its future consolidated results of operations
and financial condition.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations (SFAS 141R).
SFAS 141R establishes principles and requirements for how
the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of
the financial statement to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective
for financial statements issued for fiscal years beginning after
December 15, 2008. Accordingly, any business combinations
the Company engages in subsequent to May 1, 2009 will be
accounted for in accordance with SFAS 141R. The Company
expects FAS No. 141R will have an impact on its
consolidated financial statements when effective, but the nature
and magnitude of the specific effects will depend upon the
nature, terms and size of the acquisitions it consummates after
the effective date.
74
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Business
Combinations and Asset Acquisitions
|
Acquisition
of Optium
On August 29, 2008, the Company consummated the combination
with Optium, a leading designer and manufacturer of high
performance optical subsystems for use in telecommunications and
cable TV network systems, through the merger of Optium with a
wholly-owned subsidiary of the Company. The Companys
management and board of directors believe that the combination
of the two companies created the worlds largest supplier
of optical components, modules and subsystems for the
communications industry and will leverage the Companys
leadership position in the storage and data networking sectors
of the industry and Optiums leadership position in the
telecommunications and CATV sectors to create a more competitive
industry participant. In addition, as a result of the
combination, management expects to realize cost synergies
related to operating expenses and manufacturing costs resulting
from (1) the transfer of production to lower cost
locations, (2) improved purchasing power associated with
being a larger company and (3) cost synergies associated
with the integration of components into product designs
previously purchased in the open market by Optium. The Company
has accounted for the combination using the purchase method of
accounting and as a result has included the operating results of
Optium in its consolidated financial results since the
August 29, 2008 consummation date. The Optium results are
included in the Companys optical subsystems and components
segment. The following table summarizes the components of the
total preliminary purchase price (in thousands):
|
|
|
|
|
Fair value of Finisar common stock issued
|
|
$
|
242,821
|
|
Fair value of vested Optium stock options and warrants assumed
|
|
|
8,561
|
|
Direct transaction costs
|
|
|
2,431
|
|
|
|
|
|
|
Total preliminary purchase price
|
|
$
|
253,813
|
|
|
|
|
|
|
At the closing of the merger, the Company issued
160,808,659 shares of its common stock, valued at
approximately $242.8 million, in exchange for all of the
outstanding common stock of Optium. The value of the shares
issued was calculated using the five day average of the closing
price of the Companys common stock from the second trading
day before the merger announcement date on May 16, 2008
through the second trading day following the announcement, or
$1.51 per share. There were approximately 17,202,600 shares
of the Companys common stock issuable upon the exercise of
the outstanding options, warrants and restricted stock awards
that the Company assumed in accordance with the terms of the
merger agreement. The number of shares was calculated based on
the fixed conversion ratio of 6.262 shares of Finisar
common stock for each share of Optium common stock. The purchase
price includes $8.6 million representing the fair market
value of the vested options and warrants assumed.
Direct transaction costs include estimated legal and accounting
fees and other external costs directly related to the merger.
The Company also expects to recognize approximately
$6.5 million of non-cash stock-based compensation expense
related to the unvested options and restricted stock awards
assumed on the acquisition date. This expense will be recognized
beginning from the acquisition date over the remaining service
period of the awards. The stock options and warrants were valued
using the Black-Scholes option pricing model using the following
weighted average assumptions:
|
|
|
|
|
Interest rate
|
|
2.17 - 4.5%
|
|
|
Volatility
|
|
47 - 136%
|
|
|
Expected life
|
|
|
1 - 6 years
|
|
Expected dividend yield
|
|
0%
|
|
|
In the fourth quarter of fiscal 2009, the valuation of the
vested options assumed was completed and an adjustment of
$425,000 was made to the preliminary purchase price for the
increase in the fair market value of the
75
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
vested options assumed as compared to the initial valuation. The
following table summarizes the components of the total
preliminary purchase price after this adjustment (in thousands):
|
|
|
|
|
Fair value of Finisar common stock issued
|
|
$
|
242,821
|
|
Fair value of vested Optium stock options and warrants assumed
|
|
|
8,986
|
|
Direct transaction costs
|
|
|
2,431
|
|
|
|
|
|
|
Total preliminary purchase price
|
|
$
|
254,238
|
|
|
|
|
|
|
Preliminary
Purchase Price Allocation
The Company accounted for the combination with Optium using the
purchase method of accounting. The purchase price was allocated
to tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values at the acquisition
date of August 29, 2008. The excess of the purchase price
over the fair value of the net assets acquired was allocated to
goodwill. The Company believes the fair value assigned to the
assets acquired and liabilities assumed was based on reasonable
assumptions.
As noted above the valuation of the vested options assumed in
the combination was completed in the fourth quarter of fiscal
2009, and an adjustment of $425,000 was made to the preliminary
purchase price to reflect an increase in the value of the
assumed options.
The total purchase price has been preliminarily allocated to the
fair value of assets acquired and liabilities assumed as follows
(in thousands):
|
|
|
|
|
Tangible assets acquired and liabilities assumed:
|
|
|
|
|
Cash and short-term investments
|
|
$
|
31,825
|
|
Other current assets
|
|
|
64,234
|
|
Fixed assets
|
|
|
19,129
|
|
Other non-current assets
|
|
|
1,498
|
|
Accounts payable and accrued liabilities
|
|
|
(47,340
|
)
|
Other liabilities
|
|
|
(973
|
)
|
|
|
|
|
|
Net tangible assets
|
|
|
68,373
|
|
Identifiable intangible assets
|
|
|
25,100
|
|
In-process research and development
|
|
|
10,500
|
|
Goodwill
|
|
|
150,265
|
|
|
|
|
|
|
Total preliminary purchase price allocation
|
|
$
|
254,238
|
|
|
|
|
|
|
The Companys allocation of the purchase price is based
upon preliminary estimates and assumptions with respect to fair
value. These estimates and assumptions could change
significantly during the purchase price allocation period, which
is up to one year from the acquisition date. Any change could
result in material variances between the Companys future
financial results and the amounts presented in these
consolidated financial statements.
Identifiable
Intangible Assets
Intangible assets consist primarily of developed technology,
customer relationships and trademarks. Developed technology is
comprised of products that have reached technological
feasibility and are a part of Optiums product lines. This
proprietary know-how can be leveraged to develop new technology
and products and improve our existing products. Customer
relationships represent Optiums underlying relationships
with its customers. Trademarks represent the fair value of brand
name recognition associated with the marketing of Optiums
products.
76
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair values of identified intangible assets were calculated
using an income approach and estimates and assumptions provided
by both Finisar and Optium management. The rates utilized to
discount net cash flows to their present values were based on
the Companys weighted average cost of capital and ranged
from 15% to 30%. This discount rate was determined after
consideration for the Companys rate of return on debt
capital and equity and the weighted average return on invested
capital. The amounts assigned to developed technology, customer
relationships, and trademarks were $12.1 million,
$11.9 million and $1.1 million, respectively. The
Company expects to amortize developed technology, customer
relationships, and trademarks on a straight-line basis over
their weighted average expected useful lives of 10, 5, and
1 years, respectively. Developed technology is amortized
into cost of sales while customer relationships and trademarks
are amortized into operating expenses.
In-Process
Research and Development
The Company expensed in-process research and development
(IPR&D) upon acquisition as it represented
incomplete Optium research and development projects that had not
reached technological feasibility and had no alternative future
use as of the date of the merger. Technological feasibility is
established when an enterprise has completed all planning,
designing, coding, and testing activities that are necessary to
establish that a product can be produced to meet its design
specifications including functions, features, and technical
performance requirements. The value assigned to IPR&D of
$10.5 million was determined by considering the importance
of each project to the Companys overall development plan,
estimating costs to develop the purchased IPR&D into
commercially viable products, estimating the resulting net cash
flows from the projects when completed and discounting the net
cash flows to their present values based on the percentage of
completion of the IPR&D projects.
Pro Forma
Financial Information
The unaudited financial information in the table below
summarizes the combined results of operations of the Company and
Optium on a pro forma basis after giving effect to the merger
with Optium at the beginning of each period presented. The pro
forma information is for informational purposes only and is not
necessarily indicative of the results of operations that would
have been achieved if the merger had happened at the beginning
of each of the periods presented.
The unaudited pro forma financial information for fiscal 2009
combines the historical results of the Company for fiscal 2009
with the historical results of Optium for one month ended
August 29, 2008 and the three months ended August 2,
2008. The unaudited pro forma financial information for fiscal
2008 combines the historical results of the Company for fiscal
2008 with the historical results of Optium for twelve months
ended April 30, 2008.
The following pro forma financial information for all periods
presented includes purchase accounting adjustments for
amortization charges from acquired identifiable intangible
assets and depreciation on acquired property and equipment
(unaudited; in thousands, except per share information):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
593,229
|
|
|
$
|
587,206
|
|
Net loss
|
|
$
|
(264,607
|
)
|
|
$
|
(79,676
|
)
|
Net loss per share basic and diluted
|
|
$
|
(0.63
|
)
|
|
$
|
(0.19
|
)
|
Acquisition
of AZNA LLC
On March 26, 2007, the Company completed the acquisition of
AZNA LLC (AZNA), a privately-held company located in
Wilmington, Massachusetts for $19.7 million. Under the
terms of the agreement, Finisar acquired all outstanding
securities of AZNA in exchange for the issuance of convertible
promissory notes in the aggregate principal amount of
$17.0 million and cash payments of $2.7 million. One
of the notes issued, for $1.4 million, and a portion of the
cash paid, $1.5 million, were placed in escrow for one year
following the closing
77
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date to satisfy indemnification provisions of the purchase
agreement. In addition, the Company paid additional cash
consideration of $1.8 million to certain of AZNAs
equity interest holders contingent upon their continued
employment with the Company for a 12 -month period subsequent to
the closing date. This additional consideration was recorded as
compensation expense. The acquisition was intended to broaden
the Companys product offering and increase its competitive
advantage in cost, reach and capabilities in telecommunications
applications. AZNA designs and develops photonic components
and subsystems for the communications and instrumentation
industries. Its proprietary technology, chirp managed lasers
(CMLs), manage the inherent chirp associated with
the direct modulation of these lasers by integrating a standard
DFB laser chip with a passive optical spectrum reshaper filter
to achieve longer reach and more dispersion tolerance.
AZNAs products enable telecommunications equipment
manufacturers to provide longer reach optical transmitter
solutions at lower cost, better performance and less complexity
compared to those based on external modulators. The results of
operations of AZNA (beginning with the closing date of the
acquisition) and the estimated fair value of assets acquired
were included in the optical subsystems and components segment
of the Companys consolidated financial statements
beginning in the fourth quarter of fiscal 2007.
Acquisition
of Kodeos Communications, Inc.
On April 11, 2007, the Company completed the acquisition of
Kodeos Communications, Inc. (Kodeos), a
privately-held company located in South Plainfield, New Jersey
for a cash payment of $7.4 million, with additional
consideration of up to $3.5 million in cash to be paid to
certain Kodeos shareholders and employees, contingent upon
reaching certain technical and financial performance milestones
during the period from the closing date to December 31,
2007. None of the technical or financial performance milestones
were achieved, and no additional consideration was paid. The
Company expects to extend its technologys capabilities in
datacom and telecommunications applications with Kodeos
Maximum Likelihood Sequence Estimator (MSLE)
technology. The MLSE is used on the receiver side of the optical
link and increases the distortion tolerance, transmission
distance and performance of a 300-pin transponder. The results
of operations of Kodeos (beginning with the closing date of the
acquisition) and the estimated fair value of assets acquired
were included in the optical subsystems and components segment
of the Companys consolidated financial statements
beginning in the fourth quarter of fiscal 2007.
Acquisition
Summary
The following is a summary of business combinations made by the
Company during the three-year period ended April 30, 2009.
All of the business combinations were included in the Optical
subsystems and components segment of the Companys
consolidated financial statements and were accounted for under
the purchase method of accounting:
|
|
|
|
|
Entity Name
|
|
Description of Business
|
|
Acquisition Date
|
|
Fiscal 2009
|
|
|
|
|
Optium Inc
|
|
Optical components
|
|
August 29, 2008
|
Fiscal 2007
|
|
|
|
|
AZNA
|
|
Optical components
|
|
March 26, 2007
|
Kodeos
|
|
Optical components
|
|
April 11, 2007
|
The following is a summary of the consideration paid by the
Company for each of these business combinations. For
transactions in which shares of Finisar common stock were issued
at closing, the value of the shares was determined in accordance
with
EITF 99-12,
Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business
Combination, using the average closing price of Finisar
common stock for the five day period ending two days after the
announcement of the transaction.
78
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Number and
|
|
|
|
|
|
Options and
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of
|
|
|
Convertible
|
|
|
Warrants
|
|
|
Cash Including
|
|
|
Total
|
|
Entity Name
|
|
Stock Value
|
|
|
Shares(1)
|
|
|
Note
|
|
|
Assumed
|
|
|
Acquisition Costs
|
|
|
Consideration
|
|
|
|
$(000)
|
|
|
|
|
|
(000) $
|
|
|
|
|
|
$(000)
|
|
|
$(000)
|
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optium
|
|
$
|
242,821
|
|
|
|
160,808,659
|
|
|
|
|
|
|
$
|
8,986
|
|
|
$
|
2,431
|
|
|
$
|
254,238
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AZNA
|
|
$
|
|
|
|
|
|
|
|
$
|
16,950
|
|
|
|
|
|
|
$
|
3,006
|
|
|
$
|
19,956
|
|
Kodeos
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,592
|
|
|
|
7,592
|
|
|
|
|
(1) |
|
Shares of common stock. |
The following is a summary of the initial purchase price
allocation for each of the Companys business combinations
and asset acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets Acquired
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
In-process
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
|
Developed
|
|
|
Research &
|
|
|
Customer
|
|
|
|
|
|
|
|
|
|
|
Entity Name
|
|
Assets
|
|
|
Technology
|
|
|
Development
|
|
|
Base
|
|
|
Tradename
|
|
|
Goodwill
|
|
|
Total
|
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optium
|
|
$
|
68,373
|
|
|
$
|
12,100
|
|
|
$
|
10,500
|
|
|
$
|
11,900
|
|
|
$
|
1,100
|
|
|
$
|
150,265
|
|
|
$
|
254,238
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AZNA
|
|
$
|
4,573
|
|
|
$
|
7,300
|
|
|
$
|
4,200
|
|
|
$
|
2,856
|
|
|
$
|
72
|
|
|
$
|
955
|
|
|
$
|
19,956
|
|
Kodeos
|
|
$
|
130
|
|
|
$
|
2,080
|
|
|
$
|
1,570
|
|
|
$
|
350
|
|
|
|
|
|
|
$
|
3,462
|
|
|
$
|
7,592
|
|
The amounts allocated to current technology were determined
based on discounted cash flows which result from the expected
sale of products that were being manufactured and sold at the
time of the acquisition over their expected useful life. The
amounts allocated to IPR&D were determined through
established valuation techniques in the high-technology industry
and were expensed upon acquisition because technological
feasibility had not been established and no future alternative
uses existed. Research and development costs to bring the
products from the acquired companies to technological
feasibility are not expected to have a material impact on the
Companys future results of operations or cash flows.
Goodwill represents the excess of purchase consideration over
the fair value of the assets, including identifiable intangible
assets, net of the fair value of liabilities assumed. Intangible
assets related to the acquisitions, excluding goodwill, are
amortized to expense on a straight-line basis over their
estimated useful lives ranging from three to five years. For
income tax purposes, intangible assets including goodwill
related to the asset acquisitions are amortized to expense on a
straight-line basis, generally over 15 years.
The consolidated statements of operations of Finisar presented
throughout this report include the operating results of the
acquired companies from the date of each respective acquisition.
79
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Intangible
Assets Including Goodwill
|
Goodwill
The following table reflects changes in the carrying amount of
goodwill by reporting unit (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
|
|
|
|
|
|
|
Optical Subsystems
|
|
|
Performance
|
|
|
Consolidated
|
|
|
|
and Components
|
|
|
Test Systems
|
|
|
Total
|
|
|
Balance at April 30, 2006
|
|
$
|
84,426
|
|
|
$
|
40,106
|
|
|
$
|
124,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition related to acquisition of subsidiary
|
|
|
4,417
|
|
|
|
|
|
|
|
4,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
$
|
88,843
|
|
|
$
|
40,106
|
|
|
$
|
128,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction related to acquisition of subsidiary
|
|
|
(601
|
)
|
|
|
|
|
|
|
(601
|
)
|
Impairment of goodwill
|
|
|
|
|
|
|
(40,106
|
)
|
|
|
(40,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2008
|
|
$
|
88,242
|
|
|
$
|
|
|
|
$
|
88,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition related to acquisition of subsidiary
|
|
|
150,265
|
|
|
|
|
|
|
|
150,265
|
|
Impairment of goodwill
|
|
|
(238,507
|
)
|
|
|
|
|
|
|
(238,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2007, the Company recorded goodwill of
$4.4 million in the optical subsystems and components
reporting unit related to the acquisitions of AZNA and Kodeos.
As of the first day of the fourth quarters of fiscal 2007, the
Company performed the required annual impairment testing of
goodwill and indefinite-lived intangible assets and determined
that no impairment charge was required.
During fiscal 2008, the Company recorded a $601,000 reduction of
goodwill in the optical subsystems and components reporting unit
due primarily to claims for indemnification related to the
Kodeos acquisition. The Company performed its annual assessment
of goodwill as of the first day of the fourth quarter of fiscal
2008. The assessment was completed in late June 2008, in
connection with the closing of the 2008 fiscal year and
concluded that the carrying value of the network performance
test systems reporting unit exceeded its fair value. This
conclusion was based, among other things, on the assumed
disposition of the Companys NetWisdom product line, which
had been planned at the beginning of the fourth quarter.
Accordingly, in late June 2008, the Company performed an
additional analysis, as required by SFAS 142, which
indicated that an impairment loss was probable because the
implied fair value of goodwill related to its network
performance test systems reporting unit was zero. As a result,
the Company recorded an estimated impairment charge of
$40.1 million in the fourth quarter of fiscal 2008. The
Company completed its determination of the implied fair value of
the affected goodwill during the first quarter of fiscal 2009,
which did not result in a revision of the estimated charge.
On May 16, 2008, the Company entered into an agreement to
combine with Optium Corporation through the merger of Optium
with a wholly-owned subsidiary of the Company. The number of
shares to be exchanged in the transaction was fixed at
6.262 shares of Finisar common stock for each share of
Optium common stock. The closing price of Finisars common
stock on May 16, 2008 was $1.53 while a
five-day
average used to calculate the consideration paid in the merger
was $1.51. The preliminary allocation of the merger
consideration resulted in the recognition of an additional
$150 million of goodwill which, when combined with the
$88 million in goodwill acquired prior to the merger,
resulted in a total goodwill balance of approximately
$238 million. The actual operating results and outlook for
both companies between the date of the definitive agreement and
the effective date of the merger had not changed to any
significant degree, with both companies separately reporting
record revenues for their interim quarters.
Between the effective date of the merger and November 2,
2008, the end of the second quarter of fiscal 2009, the Company
concluded that there were sufficient indicators to require an
interim goodwill impairment analysis.
80
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Among these indicators were a significant deterioration in the
macroeconomic environment largely caused by the widespread
unavailability of business and consumer credit, a significant
decrease in the Companys market capitalization as a result
of a decrease in the trading price of its common stock to $0.61
at the end of the quarter and a decrease in internal
expectations for near term revenues, especially those expected
to result from the Optium merger. For the purposes of this
analysis, the Companys estimates of fair value were based
on a combination of the income approach, which estimates the
fair value of its reporting units based on future discounted
cash flows, and the market approach, which estimates the fair
value of its reporting units based on comparable market prices.
As of the filing of its quarterly report on
Form 10-Q
for the second quarter of fiscal 2009, the Company had not
completed its analysis due to the complexities involved in
determining the implied fair value of the goodwill for the
optical subsystems and components reporting unit, which is based
on the determination of the fair value of all assets and
liabilities of this reporting unit. However, based on the work
performed through the date of the filing, the Company concluded
that an impairment loss was probable and could be reasonably
estimated. Accordingly, it recorded a $178.8 million
non-cash goodwill impairment charge, representing its best
estimate of the impairment loss during the second quarter of
fiscal 2009.
While finalizing its impairment analysis during the third
quarter of fiscal 2009, the Company concluded that there were
additional indicators sufficient to require another interim
goodwill impairment analysis. Among these indicators were a
worsening of the macroeconomic environment largely caused by the
unavailability of business and consumer credit, an additional
decrease in the Companys market capitalization as a result
of a decrease in the trading price of its common stock to $0.51
at the end of the quarter and a further decrease in internal
expectations for near term revenues. For purposes of this
analysis, the Companys estimates of fair value were again
based on a combination of the income approach and the market
approach. As of the filing of its quarterly report on
Form 10-Q
for the third quarter of fiscal 2009, the Company had not
completed its analysis due to the complexities involved in
determining the implied fair value of the goodwill for the
optical subsystems and components reporting unit, which is based
on the determination of the fair value of all assets and
liabilities of this reporting unit. However, based on the work
performed through the date of the filing, the Company concluded
that an impairment loss was probable and could be reasonably
estimated. Accordingly, it recorded an additional
$46.5 million non-cash goodwill impairment charge,
representing its best estimate of the impairment loss during the
third quarter of fiscal 2009.
As of the first day of the fourth quarter of fiscal 2009, the
Company performed the required annual impairment testing of
goodwill and indefinite-lived intangible assets and determined
that the remaining balance of goodwill of $13.8 million was
impaired and accordingly recognized an additional impairment
charge of $13.8 million in the fourth quarter of fiscal
2009.
During fiscal 2009, we recorded $238.5 million in goodwill
impairment charges. At April 30, 2009 the carrying value of
goodwill was zero.
Intangible
Assets
The following table reflects intangible assets subject to
amortization as of April 30, 2009 and April 30, 2008
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Purchased technology
|
|
$
|
121,866
|
|
|
$
|
(105,203
|
)
|
|
$
|
16,663
|
|
Purchased trade name
|
|
|
4,797
|
|
|
|
(4,187
|
)
|
|
|
610
|
|
Purchased customer relationships
|
|
|
18,864
|
|
|
|
(5,158
|
)
|
|
|
13,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
145,527
|
|
|
$
|
(114,548
|
)
|
|
$
|
30,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2008
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Purchased technology
|
|
$
|
111,846
|
|
|
$
|
(99,996
|
)
|
|
$
|
11,850
|
|
Purchased trade name
|
|
|
3,697
|
|
|
|
(3,345
|
)
|
|
|
352
|
|
Purchased customer relationships
|
|
|
6,964
|
|
|
|
(3,417
|
)
|
|
|
3,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
122,507
|
|
|
$
|
(106,758
|
)
|
|
$
|
15,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortization expense on these intangible assets for fiscal
2009 was $8.7 million compared to $8.3 million for
fiscal 2008 and $7.9 million for fiscal 2007.
During the third quarter of fiscal 2007, the Company determined
that the remaining intangible assets related to certain customer
relationships acquired from InterSAN, Inc. in May 2005 had been
impaired and had a fair value of zero. Accordingly, an
impairment charge of $619,000 was recorded against the remaining
net book value of these assets in the network performance test
systems reporting unit during the third quarter of fiscal 2007.
During the fourth quarter of fiscal 2009, the Company determined
that the net carrying value of technology acquired from Kodeos
had been impaired and had a fair value of zero. Accordingly, an
impairment charge of $1.2 million was recorded against the
remaining net book value of these assets in the optics reporting
unit during the fourth quarter of fiscal 2009.
Estimated amortization expense for each of the next five fiscal
years ending April 30, is as follows (in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2010
|
|
$
|
7,371
|
|
2011
|
|
|
6,522
|
|
2012
|
|
|
5,448
|
|
2013
|
|
|
10,831
|
|
2014 and beyond
|
|
|
807
|
|
|
|
|
|
|
total
|
|
$
|
30,979
|
|
|
|
|
|
|
82
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Available-for-sale
Securities
The following table presents the summary of the Companys
available-for-sale investments measured at fair value on a
recurring basis as of April 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Remaining
|
|
|
Unobservable
|
|
|
|
|
Assets Measured at Fair Value on a Recurring Basis
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
Cash equivalents and available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
25
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25
|
|
Mortgage-backed debt
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents and available-for-sale investments
|
|
$
|
25
|
|
|
$
|
92
|
|
|
$
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,129
|
|
Short-term available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Long-term available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains and losses on available-for-sale
investments were not material at April 30, 2009.
The following table presents a summary of the Companys
available-for-sale investments as of April 30, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
|
Investment Type
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
|
|
|
As of April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
65,551
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
65,551
|
|
|
|
|
|
Corporate
|
|
|
30,358
|
|
|
|
68
|
|
|
|
(44
|
)
|
|
|
30,382
|
|
|
|
|
|
Government agency
|
|
|
4,250
|
|
|
|
104
|
|
|
|
|
|
|
|
4,354
|
|
|
|
|
|
Corporate equity securities
|
|
|
2,022
|
|
|
|
779
|
|
|
|
|
|
|
|
2,801
|
|
|
|
|
|
Mortgage-backed
|
|
|
2,280
|
|
|
|
11
|
|
|
|
(14
|
)
|
|
|
2,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
104,461
|
|
|
$
|
962
|
|
|
$
|
(58
|
)
|
|
$
|
105,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
65,552
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
65,552
|
|
|
|
|
|
Short-term investments
|
|
|
29,734
|
|
|
|
873
|
|
|
|
(30
|
)
|
|
|
30,577
|
|
|
|
|
|
Long-term investments
|
|
|
9,175
|
|
|
|
89
|
|
|
|
(28
|
)
|
|
|
9,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
104,461
|
|
|
$
|
962
|
|
|
$
|
(58
|
)
|
|
$
|
105,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company monitors its investment portfolio for impairment on
a periodic basis in accordance with FASB Staff Position (FSP)
FAS 115-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. In order to determine
whether a decline in value is other-than-temporary, the Company
evaluates, among other factors: the duration and extent to which
the fair value has been less than the carrying value; the
Companys financial condition and business outlook,
including key operational and cash flow metrics, current market
conditions and future trends in its industry; the Companys
relative competitive position within the industry; and the
Companys intent and ability to retain the investment for a
period of time sufficient to allow for any anticipated recovery
in fair value. 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. The decline in value of these investments, shown
in the table above as Gross Unrealized Losses, is
primarily related to changes in interest rates and is considered
to be temporary in nature. The number of investments that have
been in a continuous unrealized loss position for more than
twelve months is not material.
The gross realized gains and losses for fiscal 2009, and 2008
were immaterial. Realized gains and losses were calculated based
on the specific identification method.
The following is a summary of the Companys
available-for-sale investments by contractual maturity (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Amortized
|
|
|
Market
|
|
|
Amortized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Mature in less than one year
|
|
$
|
113
|
|
|
$
|
92
|
|
|
$
|
60,484
|
|
|
$
|
60,543
|
|
Mature in one to five years
|
|
|
|
|
|
|
|
|
|
|
8,175
|
|
|
|
8,243
|
|
Mature in various dates
|
|
|
|
|
|
|
|
|
|
|
2,280
|
|
|
|
2,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113
|
|
|
$
|
92
|
|
|
$
|
70,939
|
|
|
$
|
71,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of an Available-for-sale Equity Security
During fiscal 2007, the Companys ownership percentage in
an 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.
During fiscal 2008, the Company disposed of 2.9 million
shares of the stock held by the Company as a result of this
investment, through open market sales and a privately negotiated
transaction with a third party and recognized a loss of
approximately $848,000. During fiscal 2008, the Company also
granted an option to a third party to acquire the remaining
3.8 million shares held by the Company. The Company
determined that this option should be accounted for under the
provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which
requires the Company to calculate the fair value of the option
at the end of each reporting period, upon the exercise of the
option or at the time the option expires and recognize the
change in fair value through other income (expense), net. As of
April 30, 2008, the Company had recorded a current
liability of $1.1 million related to the fair value of this
option. As of April 30, 2008 the fair market value of the
3.8 million shares underlying the options was
$2.8 million, which was included in short-term
available-for-sale investments. As of April 30, 2008, the
related unrealized gain of $779,000 was included in accumulated
other comprehensive income, respectively.
During the first quarter of fiscal 2009, the third party did not
exercise its option to purchase any of the shares and the option
expired. Accordingly, the Company reduced the carrying value of
the option liability to zero and recorded $1.1 million of
other income during the first quarter and also recorded a
$700,000 loss as the Company determined that the carrying value
of these shares was other than temporarily impaired.
84
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the second quarter of fiscal 2009, the Company sold
300,000 shares of this investment for
$90,000 resulting in a realized loss of $12,000 and
classified the remaining 3.5 million shares as
available-for-sale securities in accordance with
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. As of November 2, 2008, the
Company determined that the full carrying value of these shares
was other-than-temporarily impaired and recorded a loss of
$1.2 million during the second quarter of fiscal 2009 in
accordance with
FSP 115-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.
Cost
Method Investments
Included in minority investments at April 30, 2009 is
$14.3 million representing the carrying value of the
Companys minority investment in four privately held
companies accounted for under the cost method. At April 30,
2008, the value of these minority investments was
$13.3 million. The $1 million increase was due the
conversion of a convertible note of one of these companies, plus
accrued interest, into preferred stock of that company which
occurred in the first quarter of fiscal 2009.
During the first quarter of fiscal 2009, the Company completed
the sale of a product line related to its network test systems
segment to a third party for an 11% equity interest in the
acquiring company in the form of preferred stock and a note
convertible into preferred stock. For accounting purposes, no
value has been placed on the equity interest due to the
uncertainty in the recoverability of this investment and note.
The sale included the transfer of certain assets, liabilities
and the retention of certain obligations related to the sale of
the product line resulting in a net loss of approximately
$919,000 which was included in operating expenses.
During fiscal 2009, 2008 and 2007, the Company did not record
any charges for impairments in the value of these minority
investments.
The Companys investments in these early stage companies
were primarily motivated by its desire to gain early access to
new technology. The Companys investments were passive in
nature in that the Company generally did not obtain
representation on the board of directors of the companies in
which it invested. At the time the Company made its investments,
in most cases the companies had not completed development of
their products and the Company did not enter into any
significant supply agreements with any of the companies in which
it invested. 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.
Gain
on Sale of a Minority Investment
In November 2005, the Company sold its equity interest in
Sensors Unlimited, Inc. and received cash payments from Goodrich
Corporation totaling $11.0 million related to the sale. The
Company had not valued this interest for accounting purposes.
Accordingly, the Company recorded a gain of $11.0 million
related to this transaction in the third quarter of fiscal 2006
and classified this amount as other income (expense), net on the
consolidated statement of operations.
In April 2007, the Company received a final cash payment from
Goodrich Corporation totaling $1.2 million for funds that
had been held in escrow related to the sale of the
Companys equity interest in Sensors Unlimited, Inc. The
Company had not valued this interest for accounting purposes.
Accordingly, the Company recorded a gain of $1.2 million
related to this transaction in the fourth quarter of fiscal 2007
and classified this amount as other income (expense), net on the
consolidated statement of operations.
85
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Raw materials
|
|
$
|
37,590
|
|
|
$
|
19,540
|
|
Work-in-process
|
|
|
36,871
|
|
|
|
30,424
|
|
Finished goods
|
|
|
37,839
|
|
|
|
32,590
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
112,300
|
|
|
$
|
82,554
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2009, the Company recorded charges of
$15.4 million for excess and obsolete inventory and sold
inventory components that were written-off in prior periods of
$8.6 million, resulting in a net charge to cost of revenues
of $6.8 million. In fiscal 2008, the Company recorded
charges of $14.1 million for excess and obsolete inventory
and sold inventory components that were written-off in prior
periods of $6.0 million, resulting in a net charge to cost
of revenues of $8.1 million. In fiscal 2007, the Company
recorded charges of $12.1 million for excess and obsolete
inventory and sold inventory components that were written-off in
prior periods of $4.1 million, resulting in a net charge to
cost of revenues of $8.0 million.
|
|
8.
|
Property,
Equipment and Improvements
|
Property, equipment and improvements consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Land
|
|
$
|
|
|
|
$
|
9,747
|
|
Building
|
|
|
7,416
|
|
|
|
12,019
|
|
Computer equipment
|
|
|
38,888
|
|
|
|
40,255
|
|
Office equipment, furniture and fixtures
|
|
|
3,926
|
|
|
|
3,383
|
|
Machinery and equipment
|
|
|
158,123
|
|
|
|
158,983
|
|
Leasehold improvements
|
|
|
17,830
|
|
|
|
14,302
|
|
Construction-in-process
|
|
|
445
|
|
|
|
2,941
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
226,628
|
|
|
|
241,630
|
|
Accumulated depreciation and amortization
|
|
|
(142,588
|
)
|
|
|
(151,783
|
)
|
|
|
|
|
|
|
|
|
|
Property, equipment and improvements (net)
|
|
$
|
84,040
|
|
|
$
|
89,847
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Sale-leaseback
and Impairment of Tangible Assets
|
During the quarter ended January 31, 2005, the Company
recorded an impairment charge of $18.8 million to write
down the carrying value of one of its corporate office
facilities located in Sunnyvale, California upon entering into a
sale-leaseback agreement. The property was written down to its
appraised value, which was based on the work of an independent
appraiser in conjunction with the sale-leaseback agreement. Due
to retention by the Company of an option to acquire the leased
properties at fair value at the end of the fifth year of the
lease, the sale-leaseback transaction was recorded in the
quarter ended April 30, 2005 as a financing transaction
under which the sale would not be recorded until the option
expired or was otherwise terminated.
During the first quarter of fiscal 2009, the Company amended the
sale-leaseback agreement with the landlord to immediately
terminate the Companys option to acquire the leased
properties. Accordingly, the Company finalized the sale of the
property by disposing of the remaining net book value of the
facility and the corresponding
86
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value of the land resulting in a loss on disposal of
approximately $12.2 million. This loss was offset by an
$11.9 million reduction in the carrying value of the
financing liability and other related accounts, resulting in the
recognition of a net loss on the sale of this property of
approximately $343,000 during the first quarter. As of
August 3, 2008, the carrying value of the property and the
financing liability had been reduced to zero.
|
|
10.
|
Other
accrued liabilities
|
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Warranty accrual (Note 23)
|
|
$
|
6,613
|
|
|
$
|
2,132
|
|
Other liabilities
|
|
|
24,100
|
|
|
|
21,265
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30,713
|
|
|
$
|
23,397
|
|
|
|
|
|
|
|
|
|
|
The Companys convertible subordinated and senior
subordinated notes as of April 30, 2009 and 2008 are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Due in
|
|
Description
|
|
Amount
|
|
|
Rate
|
|
|
Fiscal Year
|
|
|
As of April 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2010
|
|
$
|
50,000
|
|
|
|
2.50
|
%
|
|
|
2011
|
|
Convertible senior subordinated notes due 2010
|
|
|
92,000
|
|
|
|
2.50
|
%
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2008
|
|
$
|
92,026
|
|
|
|
5.25
|
%
|
|
|
2009
|
|
Convertible subordinated notes due 2010
|
|
|
50,000
|
|
|
|
2.50
|
%
|
|
|
2011
|
|
Convertible senior subordinated notes due 2010
|
|
|
100,000
|
|
|
|
2.50
|
%
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
242,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2009 and 2008, the fair value of the
Companys convertible subordinated and convertible senior
subordinated notes based on quoted market prices was
approximately $78.1 million and $200.7 million,
respectively.
Convertible
Subordinated Notes Due 2008
On October 15, 2001, the Company sold $125 million
aggregate principal amount of
51/4%
convertible subordinated notes due October 15, 2008.
Interest on the notes was
51/4%
per annum on the principal amount, payable semiannually on April
15 and October 15. The notes were convertible, at the
option of the holder, at any time on or prior to maturity into
shares of the Companys common stock at a conversion price
of $5.52 per share, which is equal to a conversion rate of
approximately 181.159 shares per $1,000 principal amount of
notes.
Because the market value of the Companys common stock rose
above the conversion price between the day the notes were priced
and the day the proceeds were collected, the Company recorded a
discount of $38.3 million related to the intrinsic value of
the beneficial conversion feature. This amount was amortized to
interest expense over the life of the convertible notes, or
sooner upon conversion. During fiscal 2009, 2008 and 2007, the
Company recorded interest expense amortization of
$1.8 million, $4.9 million and $4.8 million,
respectively.
87
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the fourth quarter of fiscal 2008, the Company
repurchased $8.2 million in principal amount plus $200,000
of accrued interest of its
51/4%
convertible subordinated notes due October 2008 for
approximately $8.3 million in cash. In connection with the
purchase, the Company recorded additional non-cash interest of
approximately $215,000 representing the remaining unamortized
discount for the beneficial conversion feature related to the
repurchased convertible notes. In addition, the Company recorded
a charge of $23,000 related to unamortized debt issue costs
related to these notes.
During the second quarter of fiscal 2009, the Company retired,
through a combination of cash purchases in private transactions
and repayment upon maturity, the remaining $92.0 million of
outstanding principal and the accrued interest under these notes.
Unamortized debt issuance costs associated with these notes were
$0 and $225,000 at April 30, 2009 and 2008, respectively.
Amortization of prepaid debt issuance costs are classified as
other income (expense), net on the consolidated statements of
operations. Amortization of prepaid debt issuance costs were
$225,000 for the year ended April 30, 2009, $566,000 for
the year ended April 30, 2008 and $542,000 for the year
ended April 30, 2007.
Convertible
Subordinated Notes due 2010
On October 15, 2003, the Company sold $150 million
aggregate principal amount of
21/2%
convertible subordinated notes due October 15, 2010.
Interest on the notes is
21/2%
per annum, payable semiannually on April 15 and October 15.
The notes are convertible, at the option of the holder, at any
time on or prior to maturity into shares of the Companys
common stock at a conversion price of $3.705 per share, which is
equal to a conversion rate of approximately 269.9055 shares
per $1,000 principal amount of notes. The conversion price is
subject to adjustment.
At issuance of the notes the Company purchased and pledged to a
collateral agent, as security for the exclusive benefit of the
holders of the notes, approximately $14.4 million of
U.S. government securities, which was 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 the notes. At April 30, 2008 and
2007, approximately $0 and $625,000, respectively, of cash and
U.S. government securities remained pledged as security for
the note holders.
The notes are subordinated to all of the Companys existing
and future senior indebtedness and effectively subordinated to
all existing and future indebtedness and other liabilities of
its subsidiaries. Because the notes are subordinated, in the
event of bankruptcy, liquidation, dissolution or acceleration of
payment on the senior indebtedness, holders of the notes will
not receive any payment until holders of the senior indebtedness
have been paid in full. The indenture does not limit the
incurrence by the Company or its subsidiaries of senior
indebtedness or other indebtedness. The Company may redeem the
notes, in whole or in part, at any time up to, but not
including, the maturity date at specified redemption prices,
plus accrued and unpaid interest, if the closing price of the
Companys common stock exceeds $5.56 per share for at least
20 trading days within a period of 30 consecutive trading
days.
Upon a change in control of the Company, each holder of the
notes may require the Company to repurchase some or all of the
notes at a repurchase price equal to 100% of the principal
amount of the notes plus accrued and unpaid interest. The
Company may, at its option, pay all or a portion of the
repurchase price in shares of the Companys common stock
valued at 95% of the average of the closing sales prices of its
common stock for the five trading days immediately preceding and
including the third trading day prior to the date the Company is
required to repurchase the notes. The Company cannot pay the
repurchase price in common stock unless the Company satisfies
the conditions described in the indenture under which the notes
have been issued.
The notes were issued in fully registered form and are
represented by one or more global notes, deposited with the
trustee as custodian for DTC and registered in the name of
Cede & Co., DTCs nominee. Beneficial interests
in the global notes will be shown on, and transfers will be
effected only through, records maintained by DTC and its
participants.
88
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In separate, privately-negotiated transactions on
October 6, 2006, the Company exchanged $100 million in
principal amount of its outstanding
21/2%
convertible notes due 2010 for a new series of notes described
below. The exchange primarily resulted in the elimination the
single-day
put option which would have allowed the holders of the original
notes to require the Company to repurchase some or all of the
notes, for cash or common stock of the Company (at the option of
the Company), on October 15, 2007. In accordance with the
provisions of Emerging Issues Task Force (EITF)
96-19,
Debtors Accounting for a Modification or Exchange of
Debt Instruments
(EITF 96-19),
and
EITF 05-07,
Accounting for Modifications to Conversion Options Embedded
in Debt Instruments and Related Issues
(EITF 05-07),
the exchange was treated as the extinguishment of the original
debt and issuance of new debt. Accordingly, the Company recorded
a non-cash loss on debt extinguishment of $31.6 million
during the second quarter of fiscal 2007 which included
$1.9 million of unamortized debt issuance costs related to
the $100 million of the notes that were exchanged. The
remaining $50 million in outstanding principal amount of
the original notes were not modified, and had been classified as
a current liability as a result of the put option. On
October 15, 2007, none of the note holders exercised the
right to require the Company to repurchase these notes, and the
put option terminated. Accordingly, the Company reclassified the
$50 million in principal amount to long-term liabilities.
Unamortized debt issuance costs associated with these notes were
$341,350 and $575,000 at April 30, 2009 and 2008,
respectively. Amortization of prepaid debt issuance costs are
classified as other income (expense), net on the consolidated
statements of operations. Amortization of prepaid debt issuance
costs were $234,000 in fiscal 2009, $234,000 in fiscal 2008 and
$468,000 in fiscal 2007.
Convertible
Senior Subordinated Notes Due 2010
On October 6, 2006, the Company entered into separate,
privately-negotiated, exchange agreements with certain holders
of its existing
21/2% Convertible
Subordinated Notes due 2010 (the Old Notes),
pursuant to which holders of an aggregate of $100 million
of the Old Notes agreed to exchange their Old Notes for
$100 million in aggregate principal amount of a new series
of
21/2% Convertible
Senior Subordinated Notes due 2010 (the
New Notes), plus accrued and unpaid interest on
the Old Notes at the day prior to the closing of the exchange.
Interest on the New Notes is
21/2%
per annum, payable semiannually on April 15 and October 15.
The New Notes become convertible, at the option of the holder,
upon the Companys common stock reaching $4.92 for a period
of time at a conversion price of $3.28 per share, which is equal
to a rate of approximately 304.9055 shares of Finisar
common stock per $1,000 principal amount of the New Notes. The
conversion price is subject to adjustment. As noted above, this
exchange was treated as the issuance of new debt under
EITF 96-19
and 05-07.
The New Notes contain a net share settlement feature which
requires that, upon conversion of the New Notes into common
stock of the Company, Finisar will pay holders in cash for up to
the principal amount of the converted New Notes and that any
amounts in excess of the cash amount will be settled in shares
of Finisar common stock.
The New Notes are subordinated to all of the Companys
existing and future senior indebtedness and effectively
subordinated to all existing and future indebtedness and other
liabilities of its subsidiaries. Because the New Notes are
subordinated, in the event of bankruptcy, liquidation,
dissolution or acceleration of payment on the senior
indebtedness, holders of the New Notes will not receive any
payment until holders of the senior indebtedness have been paid
in full. The indenture does not limit the incurrence by the
Company or its subsidiaries of senior indebtedness or other
indebtedness. The Company may redeem the New Notes, in whole or
in part, at any time up to, but not including, the maturity date
at specified redemption prices, plus accrued and unpaid
interest, if the closing price of the Companys common
stock exceeds $4.92 per share for at least 20 trading days
within a period of 30 consecutive trading days.
Upon a change in control of the Company, each holder of the New
Notes may require the Company to repurchase some or all of the
New Notes at a repurchase price equal to 100% of the principal
amount of the New Notes plus accrued and unpaid interest. The
Company may, at its option, pay all or a portion of the
repurchase price in shares of the Companys common stock
valued at 95% of the average of the closing sales prices of its
common
89
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock for the five trading days immediately preceding and
including the third trading day prior to the date the Company is
required to repurchase the New Notes. The Company cannot pay the
repurchase price in common stock unless the Company satisfies
the conditions described in the indenture under which the New
Notes have been issued.
The New Notes were issued in fully registered form and are
represented by one or more global notes, deposited with the
trustee as custodian for DTC and registered in the name of
Cede & Co., DTCs nominee. Beneficial interests
in the global notes will be shown on, and transfers will be
effected only through, records maintained by DTC and its
participants.
The Company has agreed to use its best efforts to file a shelf
registration statement covering the New Notes and the common
stock issuable upon conversion of the stock and keep such
registration statement effective until two years after the
latest date on which the Company issued New Notes (or such
earlier date when the holders of the New Notes and the
common stock issuable upon conversion of the New Notes are able
to sell their securities immediately pursuant to
Rule 144(k) under the Securities Act). The Company will not
receive any of the proceeds from the sale by any selling
security holders of the New Notes or the underlying common
stock. If the Company does not comply with these registration
obligations, the Company is required to pay liquidated damages
to the holders of the New Notes or the common stock issuable
upon conversion. As of April 30, 2009 and April 30,
2008, the Company had not complied with these registration
requirements. Accordingly, it had accrued a liability of
approximately $830,822 and $609,000 for liquidated damages,
respectively.
The Company considered the embedded derivative in the New Notes,
that is, the conversion feature, and concluded that it is
indexed to the Companys common stock and would be
classified as equity under
EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock, were
it to be accounted for separately and thus is not required to be
bifurcated and accounted for separately from the debt.
The Company also considered the Companys call feature and
the holders put feature in the event of a change in
control under the provisions of
EITF 00-19
and related guidance, and concluded that they need not be
accounted for separately from the debt.
During fiscal 2007, the Company incurred fees of approximately
$2 million related to the exchange transactions which were
capitalized and will be amortized over the life of the New Notes.
During the third quarter of fiscal 2009, the Company purchased
$8.0 million in principal amount plus $41,000 of
accrued interest of the New notes for approximately
$3.9 million in cash. In connection with the purchase, the
Company recorded a gain of approximately $3.8 million.
Unamortized debt issuance costs associated with the New Notes
were $700,000 and $1.2 million at April 30, 2009 and
2008, respectively. Amortization of prepaid loan costs are
classified as other income (expense), net on the consolidated
statement of operations. Amortization of prepaid loan costs were
$481,000 in each of the years ended April 30, 2009 and 2008
and $240,000 in fiscal 2007.
Convertible
Note Acquisition of AZNA LLC
On March 26, 2007, the Company completed the acquisition of
AZNA LLC, a privately-held optical subsystems and components
company, in exchange for the issuance of two promissory notes to
the majority holder of AZNAs equity interest. The
promissory notes, as originally issued, had an aggregate
principal amount of approximately $17.0 million and an
interest rate of 5.0% and were payable on March 26, 2008.
The notes were payable, at the Companys option, in cash or
shares of Finisar common stock, with the value of such shares to
be based on the trading price of the stock at the time the
shares were registered for re-sale pursuant to the Securities
Act of 1933, as amended. The exact number of shares of Finisar
common stock to be issued pursuant to the convertible promissory
notes was dependent on the trading price of Finisars
common stock on the dates of conversion of the notes, but could
not exceed in the aggregate 9.99% of either the total shares
outstanding or voting power outstanding
90
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the Company as of the date of the notes. The Company was
obligated to repay the notes in cash if the registration of the
underlying shares was delayed more than 12 months after the
closing.
On March 21, 2008, the Company amended one of the two
original convertible promissory notes. The amended promissory
note was in the principal amount of $16.5 million, which
included the original principal amount of $15.6 million and
accrued interest under the original note from its issue date,
and was payable in three installments, together with interest
from the date of the amended note at the rate of 12% per annum.
The first installment of $4.5 million was paid in cash on
March 26, 2008. The second installment of $6.2 million
was paid in cash on May 22, 2008, and the final installment
of $11.9 million was paid in cash during the first quarter
of fiscal 2009. The amendment to the note qualified for
modification accounting under the applicable accounting guidance
and, accordingly, no adjustment to the carrying value of the
note was recorded and the impact of the revised interest rate
was recorded prospectively as incurred.
The second promissory note issued in the AZNA transaction, in
the principal amount of $1.4 million, was paid in cash on
March 26, 2008.
In December 2005, the Company entered into a note and security
agreement with a financial institution. Under this agreement,
the Company borrowed $9.9 million at an interest rate of
5.9% per annum. The note is payable in 60 equal monthly
installments beginning in January 2006 and is secured by certain
property and equipment of the Company. The Companys bank
issued an irrevocable transferable standby letter of credit in
the amount of $9.9 million for the benefit of the lender
under the letter of credit facility described in Note 14.
The agreement allows for periodic reductions of the amount
required under the irrevocable transferable standby letter of
credit at the discretion of the lender. At April 30, 2008,
the remaining principal balance outstanding under this note was
$5.6 million and the amount of the letter of credit
securing this loan was $6.0 million. In fiscal 2009, the
Company amended the note and security agreement to remove the
requirement of a transferable standby letter of credit for the
benefit of the lender. At April 30, 2009, the remaining
principal balance outstanding under this note was
$3.7 million. As of April 30, 2009, the Company
recorded $2.1 million of this debt, as Current
portion of long-term debt and recorded the remaining
$1.6 million as Long-term debt, net of current
portion on the consolidated balance sheet. As of
April 30, 2008, the Company recorded $2.0 million of
this debt, as Current portion of long-term debt and
recorded the remaining $3.6 million as Long-term
debt, net of current portion.
In July 2008, the Companys Malaysian subsidiary entered
into two separate loan agreements with a Malaysian bank. Under
these agreements, the Companys Malaysian subsidiary
borrowed a total of $20 million at an initial interest rate
of 5.05% per annum. The first loan is payable in 20 equal
quarterly installments of $750,000 beginning in January 2009,
and the second loan is payable in 20 equal quarterly
installments of $250,000 beginning in October 2008. Both loans
are secured by certain property of the Companys Malaysian
subsidiary, guaranteed by the Company and subject to certain
covenants. The Company was in compliance with all covenants
associated with these loans as of April 30, 2009. At
April 30, 2009, the principal balance outstanding under
these loans was $17.7 million. As of April 30, 2009,
the Company recorded $4.0 million of this debt, as
Current portion of long-term debt and recorded the
remaining $13.7 million as Long-term debt, net of
current portion on the consolidated balance sheet.
|
|
13.
|
Revolving
Line of Credit Agreement
|
On March 14, 2008, the Company entered into a revolving
line of credit agreement with Silicon Valley Bank which was
amended on April 30, 2009. The amended credit facility
allows for advances in the aggregate amount of $45 million
subject to certain restrictions and limitations. Borrowings
under this line are collateralized by substantially all of the
Companys assets except its intellectual property rights
and bear interest, at the Companys option, at either the
banks prime rate plus 0.5% or LIBOR plus 3%. The maturity
date is July 15, 2010. The facility is subject to financial
covenants including an adjusted quick ratio covenant and an
EBITDA covenant which are tested as of the last day of each
month. The Companys borrowing availability under this line
currently is restricted
91
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to $25 million, based upon the unrestricted cash covenant.
The Company was not in compliance with the adjusted quick ratio
covenant at November 30, 2008 or December 31, 2008 and
received a waiver from the bank for such noncompliance. The
Company was in compliance with all covenants associated with
this facility as of April 30, 2009. There were no
outstanding borrowings under this revolving line of credit at
April 30, 2009.
|
|
14.
|
Letter of
Credit Reimbursement Agreement
|
In April 2005, the Company entered into a letter of credit
reimbursement agreement with Silicon Valley Bank. Several
amendments were made to the agreement subsequently. The last
amendment was on April 30, 2009. Under the terms of the
amended agreement, Silicon Valley Bank will provide to the
Company, through October 24, 2009, a $4.0 million
letter of credit facility covering existing letters of credit
issued by Silicon Valley Bank and any other letters of credit
that may be required by the Company. The cost related to the
credit facility consisted of the banks out of pocket
expenses associated with the credit facility. The credit
facility is unsecured but includes a negative pledge that
requires that the Company will not create a security interest in
any of its assets in favor of a subsequent creditor without the
approval of Silicon Valley Bank. Outstanding letters of credit
secured under this agreement at April 30, 2009 and
April 30, 2008 totaled to $3.4 million and
$9.4 million, respectively.
|
|
15.
|
Non-recourse
Accounts Receivable Purchase Agreement
|
On October 28, 2004, the Company entered into an amended
non-recourse accounts receivable purchase agreement with Silicon
Valley Bank. Several amendments were made to the agreement
subsequently. The last amendment was on October 28, 2008.
Under the terms of the amended agreement, the Company may sell
to Silicon Valley Bank, through October 24, 2009, up to
$16 million of qualifying receivables whereby all right,
title and interest in the Companys invoices are purchased
by Silicon Valley Bank. In these non-recourse sales, the Company
removes sold receivables from its books and records no liability
related to the sale, as the Company has assessed that the sales
should be accounted for as true sales in accordance
with SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. The discount interest for the facility is based
on the number of days in the discount period multiplied by
Silicon Valley Banks prime rate plus 0.25% and a
non-refundable administrative fee of 0.25% of the face amount of
each invoice.
During fiscal 2009, 2008 and 2007, the Company sold receivables
totaling $37.7 million, $22.2 million and
$14.7 million, respectively, under this facility.
The Companys future commitments at April 30, 2009
included minimum payments under non-cancelable operating lease
agreements and non-cancelable purchase obligations as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due in the Fiscal Year Ended April 30,
|
|
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Operating leases
|
|
$
|
50,381
|
|
|
$
|
7,959
|
|
|
$
|
6,651
|
|
|
$
|
5,187
|
|
|
$
|
4,566
|
|
|
$
|
3,737
|
|
|
$
|
22,281
|
|
Purchase obligations
|
|
$
|
2,965
|
|
|
$
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
53,346
|
|
|
$
|
10,924
|
|
|
$
|
6,651
|
|
|
$
|
5,187
|
|
|
$
|
4,566
|
|
|
$
|
3,737
|
|
|
$
|
22,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense under the non-cancelable operating leases was
approximately $6.0 million, $4.0 million and
$3.7 million for the years ended April 30, 2009, 2008
and 2007, respectively. The Company subleases a portion of its
facilities that it considers to be in excess of its
requirements. Sublease income was $0.7 million,
$0.5 million and $0.3 million for the years ended
April 30, 2009, 2008 and 2007, respectively. Certain leases
have scheduled rent increases which have been included in the
above table. Other leases contain provisions to adjust rental
rates for inflation during their terms, most of which are based
on to-be-published indices. Rents subject to these adjustments
are included in the above table based on current rates.
Purchase obligations consist of standby repurchase obligations
and are related to excess materials purchased and held by the
Companys manufacturing subcontractors at their facilities
on behalf of the Company to fulfill the
92
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
subcontractors obligations under the Companys
purchase orders. The Companys purchase obligations of
$3.0 million have been expensed and recorded on the balance
sheet as non-cancelable purchase obligations as of
April 30, 2009.
Common
Stock and Preferred Stock
As of April 30, 2009, Finisar is authorized to issue
750,000,000 shares of $0.001 par value common stock
and 5,000,000 shares of $0.001 par value preferred
stock. The board of directors has the authority to issue the
undesignated preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof.
The holder of each share of common stock has the right to one
vote and is entitled to receive dividends when and as declared
by the Companys Board of Directors. The Company has never
declared or paid dividends on its common stock.
Common stock subject to future issuance as of April 30,
2009 is as follows:
|
|
|
|
|
Conversion of convertible notes
|
|
|
13,495,277
|
|
Exercise of outstanding options
|
|
|
77,450,473
|
|
Vesting of restricted stock awards
|
|
|
11,053,092
|
|
Available for grant under stock compensation plans
|
|
|
28,292,066
|
|
Reserved for issuance under the employee stock purchase plan
|
|
|
7,039,771
|
|
|
|
|
|
|
|
|
|
137,330,679
|
|
|
|
|
|
|
Warrants
In connection with the acquisition of Shomiti Systems, Inc.
(Shomiti) in fiscal 2001, the Company assumed
warrants to purchase stock of Shomiti. Upon completion of the
acquisition, these warrants entitled the holders to purchase
10,153 shares of Finisar common stock at an exercise price
of $11.49 per share. All of these warrants expired during fiscal
2008.
In connection with the acquisition of Genoa Corporation
(Genoa) in fiscal 2003, the Company both assumed
outstanding warrants to purchase stock of Genoa and issued new
warrants to purchase Finisar common stock as a part of the
consideration paid to Genoas equity holders. The assumed
warrants entitled the holders to purchase an aggregate of
29,766 shares of Finisar common stock at an exercise price
of $15.25 per share and expired at various dates through 2008.
None of the assumed warrants were exercised. During fiscal 2008,
warrants to purchase an aggregate of 8,365 shares of common
stock expired, and the remaining assumed warrants to purchase an
aggregate of 21,401 shares expired during fiscal 2009. The
new warrants issued by the Company to Genoas equity
holders entitled the holders to purchase an aggregate of
999,835 shares of Finisar common stock at an exercise price
of $1.00 per share. During fiscal 2008, 2007 and 2006, warrants
to purchase 79,987, 2,011 and 471,627 shares of Finisar
common stock were exercised, respectively. The remaining
warrants expired on April 3, 2008.
Preferred
Stock
The Company has authority to issue up to 5,000,000 shares
of preferred stock, $0.001 par value. The preferred stock
may be issued in one or more series having such rights,
preferences and privileges as may be designated by the
Companys board of directors. In September 2002, the
Companys board of directors designated 500,000 shares
of its preferred stock as Series RP Preferred Stock, which
is reserved for issuance under the Companys stockholder
rights plan described below. As of April 30, 2009 and 2008,
no shares of the Companys preferred stock were issued and
outstanding.
93
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stockholder
Rights Plan
In September 2002, Finisars board of directors adopted a
stockholder rights plan. Under the rights plan, stockholders
received one share purchase right for each share of Finisar
common stock held. The rights, which will initially trade with
the common stock, effectively allow Finisar stockholders to
acquire Finisar common stock at a discount from the then current
market value when a person or group acquires 20% or more of
Finisars common stock without prior board approval. When
the rights become exercisable, Finisar stockholders, other than
the acquirer, become entitled to exercise the rights, at an
exercise price of $14.00 per right, for the purchase of
one-thousandth of a share of Finisar Series RP Preferred
Stock or, in lieu of the purchase of Series RP Preferred
Stock, Finisar common stock having a market value of twice the
exercise price of the rights. Alternatively, when the rights
become exercisable, the board of directors may authorize the
issuance of one share of Finisar common stock in exchange for
each right that is then exercisable. In addition, in the event
of certain business combinations, the rights permit the purchase
of the common stock of an acquirer at a 50% discount. Rights
held by the acquirer will become null and void in each case.
Prior to a person or group acquiring 20%, the rights can be
redeemed for $0.001 each by action of the board of directors.
The rights plan contains an exception to the 20% ownership
threshold for Finisars founder, former Chairman of the
Board and former Chief Technical Officer, Frank H. Levinson.
Under the terms of the rights plan, Dr. Levinson and
certain related persons and trusts are permitted to acquire
additional shares of Finisar common stock up to an aggregate
amount of 30% of Finisars outstanding common stock,
without prior board approval.
Employee
Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, which includes
its
sub-plan,
the International Employee Stock Purchase Plan (together the
Purchase Plan), under which 16,750,000 shares
of the Companys common stock have been reserved for
issuance. The Purchase Plan permits eligible employees to
purchase Finisar common stock through payroll deductions, which
may not exceed 20% of the employees total compensation.
Stock may be purchased under the plan at a price equal to 85% of
the fair market value of Finisar common stock on either the
first or the last day of the offering period, whichever is
lower. No shares were issued under the Purchase Plan during
fiscal 2008. During fiscal 2009 and fiscal 2007, the Company
issued 5,020,326 shares and 860,025 shares under the
Purchase Plan, respectively. At April 30, 2009,
7,039,771 shares were available for issuance under the
Purchase Plan.
Employee
Stock Option Plans
In September 1999, Finisars 1999 Stock Option Plan was
adopted by the board of directors and approved by the
stockholders. 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
(RSUs) and other stock-based awards which vest upon
the attainment of designated performance goals or the
satisfaction of specified service requirements or, in the case
of certain RSUs or other stock-based awards, become payable upon
the expiration of a designated time period following such
vesting events. Options generally vest over five years and have
a maximum term of 10 years. As of April 30, 2009 and
2008, no shares were subject to repurchase.
94
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of activity under the Companys employee stock
option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Available
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options for Common Stock
|
|
for Grant
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
($000s)
|
|
|
Balance at April 30, 2006
|
|
|
20,067,862
|
|
|
|
41,849,962
|
|
|
$
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares
|
|
|
15,275,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(8,974,558
|
)
|
|
|
8,974,558
|
|
|
$
|
3.44
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(2,259,152
|
)
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
2,446,253
|
|
|
|
(2,446,253
|
)
|
|
$
|
2.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2007
|
|
|
28,815,162
|
|
|
|
46,119,115
|
|
|
$
|
2.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares
|
|
|
15,431,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(23,648,646
|
)
|
|
|
23,648,646
|
|
|
$
|
2.42
|
|
|
|
|
|
|
|
|
|
RSUs granted
|
|
|
301,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(185,305
|
)
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
16,725,592
|
|
|
|
(16,725,592
|
)
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2008
|
|
|
37,022,529
|
|
|
|
52,856,864
|
|
|
$
|
2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in authorized shares
|
|
|
15,441,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options assumed on acquisition of Optium
|
|
|
|
|
|
|
14,951,405
|
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(23,353,768
|
)
|
|
|
23,353,768
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
RSUs granted
|
|
|
(12,589,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(1,471,267
|
)
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
RSUs canceled
|
|
|
(468,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
12,240,297
|
|
|
|
(12,240,297
|
)
|
|
$
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2009
|
|
|
28,292,066
|
|
|
|
77,450,473
|
|
|
$
|
1.83
|
|
|
|
7.26
|
|
|
$
|
7,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the difference between the exercise price and the
value of Finisar common stock at April 30, 2009. |
The following table summarizes significant ranges of outstanding
and exercisable options as of April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding(1)
|
|
|
Contractual Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
$ 0.02 $ 0.34
|
|
|
5,278,206
|
|
|
|
9.33
|
|
|
$
|
0.16
|
|
|
|
4,161,290
|
|
|
$
|
0.11
|
|
$ 0.38 $ 0.42
|
|
|
19,164,493
|
|
|
|
9.58
|
|
|
$
|
0.42
|
|
|
|
5,311,923
|
|
|
$
|
0.42
|
|
$ 0.47 $ 1.27
|
|
|
10,158,155
|
|
|
|
6.73
|
|
|
$
|
1.11
|
|
|
|
7,313,027
|
|
|
$
|
1.09
|
|
$ 1.30 $ 1.76
|
|
|
12,266,570
|
|
|
|
5.51
|
|
|
$
|
1.60
|
|
|
|
9,798,132
|
|
|
$
|
1.60
|
|
$ 1.77 $ 2.24
|
|
|
9,988,262
|
|
|
|
5.37
|
|
|
$
|
1.87
|
|
|
|
8,580,110
|
|
|
$
|
1.86
|
|
$ 2.28 $ 3.10
|
|
|
10,539,126
|
|
|
|
7.42
|
|
|
$
|
2.80
|
|
|
|
5,000,496
|
|
|
$
|
2.82
|
|
$ 3.14 $ 21.56
|
|
|
9,778,062
|
|
|
|
6.24
|
|
|
$
|
4.90
|
|
|
|
5,574,124
|
|
|
$
|
5.75
|
|
$21.69 $104.96
|
|
|
277,599
|
|
|
|
1.35
|
|
|
$
|
22.18
|
|
|
|
277,599
|
|
|
$
|
22.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,450,473
|
|
|
|
|
|
|
|
|
|
|
|
46,016,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys vested and
expected-to-vest
stock options and exercisable stock options as of April 30,
2009 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
($000s)
|
|
|
Vested and
expected-to-vest
options
|
|
|
70,190,126
|
|
|
$
|
1.87
|
|
|
|
7.09
|
|
|
$
|
6,364
|
|
Exercisable options
|
|
|
46,016,701
|
|
|
$
|
2.05
|
|
|
|
6.29
|
|
|
$
|
3,582
|
|
The aggregate intrinsic value in the preceding table represents
the total pretax intrinsic value, based on the Companys
closing stock price of $0.66 as of April 30, 2009, which
would have been received by the option holders had all option
holders exercised their options as of that date. The total
number of
in-the-money
options exercisable as of April 30, 2009 was approximately
9.5 million.
Restricted
Stock Units
During fiscal 2009 and fiscal 2008, the Company issued
12.6 million and 301,197 RSUs, respectively under the 2005
Plan. Typically, vesting of RSUs occurs over one to four years
and is subject to the employees continuing service to the
Company. The compensation expense related to these awards of
$8.2 million and $0.5 million for fiscal 2009 and
fiscal 2008, respectively, was determined using the fair market
value of the Companys common stock on the date of the
grant and is recognized under a straight line method over the
awards vesting period.
A summary of the changes in RSUs outstanding under the
Companys employee stock plans during fiscal 2009 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
Nonvested at April 30, 2008
|
|
|
301,197
|
|
|
$
|
1.56
|
|
Granted
|
|
|
12,589,690
|
|
|
$
|
0.65
|
|
Vested
|
|
|
(1,369,297
|
)
|
|
$
|
0.58
|
|
Forfeited
|
|
|
(468,498
|
)
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2009
|
|
|
11,053,092
|
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of RSUs outstanding at
April 30, 2009 was $7.3 million.
As of April 30, 2009, the Company had $4.3 million of
unrecognized compensation expense, net of estimated forfeitures,
related to RSU grants. These expenses are expected to be
recognized over a weighted-average period of 16 months. As
of April 30, 2009, $2.6 million in compensation
expense related to RSUs has been recognized to date.
Valuation
and Expense Information Under SFAS 123R
On May 1, 2006, the Company adopted SFAS 123R, which
requires the measurement and recognition of compensation expense
for all stock-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.
96
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock-based compensation expense
related to employee stock options and employee stock purchases
under SFAS 123R for the fiscal years ended April 30,
2009, 2008 and 2007 which was reflected in the Companys
operating results (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cost of revenues
|
|
$
|
3,387
|
|
|
$
|
3,091
|
|
|
$
|
3,518
|
|
Research and development
|
|
|
6,337
|
|
|
|
4,377
|
|
|
|
4,015
|
|
Sales and marketing
|
|
|
2,141
|
|
|
|
2,048
|
|
|
|
1,910
|
|
General and administrative
|
|
|
3,113
|
|
|
|
2,048
|
|
|
|
2,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,978
|
|
|
$
|
11,564
|
|
|
$
|
11,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total stock-based compensation capitalized as part of
inventory was $636,916 and $572,000 as of April 30, 2009
and 2008, respectively.
As of April 30, 2009, total compensation cost related to
unvested stock options not yet recognized was $23.0 million
which is expected to be recognized over the next 31 months
on a weighted-average basis.
Compensation expense for
expected-to-vest
stock-based awards that were granted on or prior to
April 30, 2006 was valued under the multiple-option
approach and will continue to be amortized using the accelerated
attribution method. Subsequent to April 30, 2006,
compensation expense for
expected-to-vest
stock-based awards is valued under the single-option approach
and amortized on a straight-line basis, net of estimated
forfeitures.
The fair value of options granted in fiscal 2009, 2008 and 2007
was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Option Plans
|
|
|
Employee Stock Purchase Plan
|
|
|
|
Year Ended April 30,
|
|
|
Year Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Expected term (in years)
|
|
|
5.26
|
|
|
|
5.44
|
|
|
|
5.25
|
|
|
|
0.75
|
|
|
|
0.75
|
|
|
|
0.50
|
|
Volatility
|
|
|
79
|
%
|
|
|
86
|
%
|
|
|
98
|
%
|
|
|
102
|
%
|
|
|
57
|
%
|
|
|
69
|
%
|
Risk-free interest rate
|
|
|
1.96
|
%
|
|
|
4.03
|
%
|
|
|
4.73
|
%
|
|
|
0.45
|
%
|
|
|
3.34
|
%
|
|
|
4.45
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
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 Company calculated the 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 approximates the
expected term.
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
consolidated statement of operations for fiscal 2009, 2008 and
2007 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. SFAS 123R 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.
97
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average grant-date per share fair value of options
granted in fiscal 2009, 2008 and 2007 was $0.33, $2.08 and
$2.64, respectively. The weighted-average estimated per share
fair value of shares granted under the Purchase Plan in fiscal
2009, 2008, and 2007 was $0.21, $0.50 and $0.90, respectively.
The Black-Scholes option-pricing model requires the input of
highly subjective assumptions, including the expected life of
the stock-based award and the stock price volatility. The
assumptions listed above represent managements best
estimates, but these estimates involve inherent uncertainties
and the application of management judgment. As a result, if
other assumptions had been used, recorded and pro forma
stock-based compensation expense could have been materially
different from that depicted above. In addition, the Company is
required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If the
actual forfeiture rate is materially different from this
estimate, the stock-based compensation expense could be
materially different.
Extension
of Stock Option Exercise Periods for Former
Employees
The Company could not issue shares of its common stock under its
registration statements on
Form S-8
during the period in which it was not current in its obligations
to file periodic reports under the Securities Exchange Act of
1934 due to the pendency of an investigation into its historical
stock option grant practices, as more fully described in
Note 21. Pending Litigation Stock Option
Derivative Litigation. As a result, during parts of 2006
and 2007, options vested and held by certain former employees of
the Company could not be exercised until the completion of the
Companys stock option investigation and the Companys
filing obligations had been met. The Company extended the
expiration date of these stock options to June 30, 2008.
This extension was treated as a modification of the award in
accordance with FAS 123R. As a result of this modification,
the Company recorded additional stock-based compensation expense
of $386,000 during the third quarter of fiscal 2008. As a result
of the extension, the fair value of $991,000 related to these
stock options had been reclassified to current liabilities
subsequent to the modification and is subject to
mark-to-market
provisions at the end of each reporting period until the earlier
of the final settlement or June 30, 2008. The Company
recognized a benefit of $650,000 during the fourth quarter of
fiscal 2008 as a result of a decrease in the fair value of these
options at the end of the reporting period. The remaining
accrued balance for these stock options as of April 30,
2008 was approximately $341,000.
During the first quarter of fiscal 2009, the Company recognized
a benefit of approximately $332,000 as a result of a decrease in
the fair value of these options on June 30, 2008. The
remaining accrued balance of $9,000 related to these stock
options was reclassified to equity as of August 3, 2008.
These transactions represented the final settlement of these
options.
Amendment
of Certain Stock Options
During the third quarter of fiscal 2008, the Company completed a
tender offer to holders of certain options granted under the
1999 Stock Option Plan and the 2005 Plan that had original
exercise prices per share that were less than the fair market
value per share of the common stock underlying the option on the
options grant date, as determined by the Company for
financial accounting purposes. Under this offer, employees
subject to taxation in the United States had the opportunity to
cancel these options and exchange them for new options with an
adjusted exercise price equal to the fair market value per share
of the Companys common stock on the corrected date of
grant so as to avoid unfavorable tax consequences under Internal
Revenue Code Section 409A. The Company also committed to
issue restricted stock units to those optionees accepting the
offer whose new options have exercise prices that exceed the
exercise price of the cancelled options, in order to compensate
the optionees for the increase in the exercise price. In
connection with the offer, the Company canceled and replaced
options to purchase 14.2 million shares of its common stock
and committed to issue 301,197 RSUs to offer participants. The
Company recorded a charge of $371,000 related to the issuance of
the RSUs, which was recorded as operating expense for the third
quarter of fiscal 2008.
98
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impact
of Certain Stock Option Restatement Items
Because virtually all holders of options issued by the Company
were neither involved in nor aware of its accounting treatment
of stock options, the Company has taken and intends to take
actions to deal with certain adverse tax consequences that may
be incurred by the holders of certain incorrectly priced options
due to an investigation into its historical stock option grant
practices, as more fully described in Note 21.
Pending Litigation Stock Option Derivative
Litigation. The primary adverse tax consequence is that
incorrectly priced stock options vesting after December 31,
2004 may subject the option holder to a penalty income tax
under Internal Revenue Code Section 409A (and, as
applicable, similar penalty taxes under California and other
state tax laws). During the third quarter of fiscal 2008, the
Company recorded a charge of $3.9 million representing the
employee income tax liability that has been assumed by the
Company related to the option exchange program, which was
designed to avoid the adverse consequences of Section 409A.
|
|
18.
|
Employee
Benefit Plan
|
The Company maintains a defined contribution retirement plan
under the provisions of Section 401(k) of the Internal
Revenue Code which covers all eligible employees. Employees are
eligible to participate in the plan on the first day of the
month immediately following twelve months of service with
Finisar.
Under the plan, each participant may contribute up to 20% of his
or her pre-tax gross compensation up to a statutory limit, which
was $15,500 for calendar year 2008 and $16,500 for calendar year
2009. All amounts contributed by participants and earnings on
participant contributions are fully vested at all times. The
Company may contribute an amount equal to one-half of the first
6% of each participants contribution. The Company
suspended contributions to the plan beginning in the fourth
quarter of fiscal 2009. The Companys expenses related to
this plan were $1,591,000, $1,523,000 and $1,255,000 for the
fiscal years ended April 30, 2009, 2008 and 2007,
respectively.
The components of provision for (benefit from) income taxes
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(225
|
)
|
|
$
|
|
|
|
$
|
157
|
|
State
|
|
|
86
|
|
|
|
157
|
|
|
|
86
|
|
Foreign
|
|
|
1,023
|
|
|
|
320
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
884
|
|
|
|
477
|
|
|
|
635
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(7,135
|
)
|
|
|
1,491
|
|
|
|
2,019
|
|
State
|
|
|
(711
|
)
|
|
|
265
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,846
|
)
|
|
|
1,756
|
|
|
|
2,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
(6,962
|
)
|
|
$
|
2,233
|
|
|
$
|
2,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loss before income taxes consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
U.S.
|
|
$
|
(278,530
|
)
|
|
$
|
(82,149
|
)
|
|
$
|
(51,100
|
)
|
Foreign
|
|
|
16,760
|
|
|
|
9,824
|
|
|
|
3,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(261,770
|
)
|
|
$
|
(72,325
|
)
|
|
$
|
(47,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the income tax provision (benefit) at the
federal statutory rate and the effective rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Expected income tax provision (benefit) at U.S. federal
statutory rate
|
|
|
(35.00
|
)%
|
|
|
(35.00
|
)%
|
|
|
(35.00
|
)%
|
Stock compensation expense
|
|
|
1.40
|
|
|
|
3.69
|
|
|
|
3.61
|
|
Loss on debt extinguishment
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
22.00
|
|
Goodwill impairment
|
|
|
21.04
|
|
|
|
16.32
|
|
|
|
0.00
|
|
Non-deductible interest
|
|
|
0.57
|
|
|
|
3.60
|
|
|
|
4.56
|
|
Valuation allowance
|
|
|
9.62
|
|
|
|
18.70
|
|
|
|
11.92
|
|
Foreign (income) taxed at different rates
|
|
|
(1.85
|
)
|
|
|
(4.31
|
)
|
|
|
(2.65
|
)
|
In-process R&D
|
|
|
1.59
|
|
|
|
0.00
|
|
|
|
1.16
|
|
Other
|
|
|
(0.03
|
)
|
|
|
0.09
|
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.66
|
)%
|
|
|
3.09
|
%
|
|
|
5.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of deferred taxes consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
$
|
9,556
|
|
|
$
|
9,228
|
|
|
$
|
7,387
|
|
Accruals and reserves
|
|
|
12,025
|
|
|
|
12,524
|
|
|
|
9,272
|
|
Tax credits
|
|
|
12,014
|
|
|
|
9,525
|
|
|
|
16,633
|
|
Net operating loss carryforwards
|
|
|
166,944
|
|
|
|
147,447
|
|
|
|
146,060
|
|
Gain/loss on investments under equity or cost method
|
|
|
10,981
|
|
|
|
10,587
|
|
|
|
11,862
|
|
Depreciation and amortization
|
|
|
3,944
|
|
|
|
4,417
|
|
|
|
4,699
|
|
Purchase accounting for intangible assets
|
|
|
4,161
|
|
|
|
14,263
|
|
|
|
11,115
|
|
Capital loss carryforward
|
|
|
709
|
|
|
|
1,005
|
|
|
|
|
|
Acquired intangibles
|
|
|
22,524
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
5,753
|
|
|
|
6,658
|
|
|
|
10,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
248,611
|
|
|
|
215,654
|
|
|
|
217,769
|
|
Valuation allowance
|
|
|
(240,616
|
)
|
|
|
(205,924
|
)
|
|
|
(207,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
7,995
|
|
|
|
9,730
|
|
|
|
10,696
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill amortization for tax
|
|
|
|
|
|
|
(7,846
|
)
|
|
|
(6,090
|
)
|
Tax basis difference on convertible debt
|
|
|
(7,995
|
)
|
|
|
(9,638
|
)
|
|
|
(10,696
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
(92
|
)
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(7,995
|
)
|
|
|
(17,576
|
)
|
|
|
(16,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
0
|
|
|
$
|
(7,846
|
)
|
|
$
|
(6,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon future
taxable earnings, the timing and amount of which are uncertain.
Due to operating losses in previous years, management believes
that it is not more likely than not that the deferred tax assets
will be realizable in future periods. The Companys
valuation allowance increased/(decreased) from the prior year by
approximately $34.7 million, ($1.1) million and
($2.2) million in fiscal years 2009, 2008 and 2007,
respectively.
As of April 30, 2009, approximately $16.8 million of
deferred tax assets, which is not included in the above table,
was attributable to certain employee stock option deductions.
When realized, the benefit of the tax deduction related to these
options will be accounted for as a credit to stockholders
equity rather than as a reduction of the income tax provision
At April 30, 2009, the Company had federal, state and
foreign net operating loss carryforwards of approximately
$489.0 million, $159.8 million and $13.4 million,
respectively, and federal and state tax credit carryforwards of
approximately $14.4 million and $10.1 million,
respectively. The net operating loss and tax credit
carryforwards will expire at various dates beginning in 2010, if
not utilized. Utilization of the Companys U.S. net
operating loss and tax credit carryforwards may be subject to a
substantial annual limitation due to the ownership change
limitations set forth in 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.
101
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys manufacturing operations in Malaysia operate
under a tax holiday which expires in fiscal 2011. This tax
holiday has had no effect on the Companys net loss and net
loss per share in fiscal years 2007, 2008, and 2009 due to a
cumulative net operating losses position within the tax holiday
period.
As of April 30, 2009 there was no provision for
U.S. income taxes for undistributed earnings of the
Companys foreign subsidiaries as it is currently the
Companys intention to reinvest these earnings indefinitely
in operations outside the United States. The Company believes it
is not practicable to determine the Companys tax liability
that may arise in the event of a future repatriation. If
repatriated, these earnings could result in a tax expense at the
current U.S. federal statutory tax rate of 35%, subject to
available net operating losses and other factors. Tax on
undistributed earnings may also be reduced by foreign tax
credits that may be generated in connection with the
repatriation of earnings.
The Company adopted the provisions of FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes,
(FIN 48) on May 1, 2007. The amount of
gross unrecognized tax benefits as of May 1, 2008 and
April 30, 2009 was $11.7 million and
$12.5 million, respectively.
A reconciliation of the beginning and ending amount of the gross
unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits balance at May 1, 2007
|
|
|
|
|
|
$
|
9,600
|
|
Add:
|
|
|
|
|
|
|
|
|
Additions based on tax positions related to the current year
|
|
|
400
|
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits balance at April 30, 2008
|
|
|
|
|
|
$
|
11,700
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits balance at May 1, 2008
|
|
|
|
|
|
$
|
11,700
|
|
Add:
|
|
|
|
|
|
|
|
|
Additions based on tax positions related to the current year
|
|
|
515
|
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits balance at April 30, 2009
|
|
|
|
|
|
$
|
12,474
|
|
|
|
|
|
|
|
|
|
|
Excluding the effects of recorded valuation allowances for
deferred tax assets, $10.5 million of the unrecognized tax
benefits would favorably impact the effective tax rate in future
periods if recognized.
It is the Companys belief that no significant changes in
the unrecognized tax benefit positions will occur within
12 months of April 30, 2009.
The Company records interest and penalties related to
unrecognized tax benefits in income tax expense. At
April 30, 2009, there were no accrued interest or penalties
related to uncertain tax positions. The Company estimated no
interest or penalties for the year ended April 30, 2009.
The Company and its subsidiaries are subject to taxation in
various state jurisdictions as well as the U.S. The
Companys U.S. federal and state income tax returns
are generally not subject to examination by the tax authorities
for tax years before 2003. For all federal and state net
operating loss and credit carryovers, the statute of limitations
does not begin until the carryover items are utilized. The
taxing authorities can examine the validity of the carryover
items and if necessary, adjustments may be made to the carryover
items. The Companys Malaysia, Singapore, and China income
tax returns are generally not subject to examination by the tax
authorities for tax years before 2004, 2002, and 2004,
respectively. The Companys Israel subsidiary is under
audit by Israel Tax Authority (ITA) for tax years ended 2005 to
2007. The Company anticipates no material tax adjustments.
102
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
20.
|
Segments
and Geographic Information
|
The Company designs, develops, manufactures and markets optical
subsystems, components and network performance test systems for
high-speed data communications. The Company views its business
as having two principal operating segments, consisting of
optical subsystems and components, and network performance test
systems.
Optical subsystems consist primarily of transceivers and
transponders sold to original equipment manufacturers. These
products rely on the use of digital and analog RF semiconductor
lasers in conjunction with integrated circuit design and novel
packaging technology to provide a cost-effective means for
transmitting and receiving digital signals over fiber optic
cable using a wide range of network protocols, transmission
speeds and physical configurations over distances of 70 meters
to 200 kilometers. The Company also provides wavelength
selective switch reconfigurable optical add/drop multiplexer
products, or WSS ROADMs, and linecards that enable network
operators to switch wavelengths in MAN and WAN networks without
the need for converting to an electrical signal. Optical
components consist primarily of packaged lasers and
photodetectors used in transceivers, primarily for LAN and SAN
applications.
Network performance test systems include products designed to
test the reliability and performance of equipment for a variety
of protocols including Fibre Channel, Gigabit Ethernet, 10
Gigabit Ethernet, iSCSI, SAS and SATA. These test systems are
sold to both manufacturers and end-users of the equipment.
Both of the Companys operating segments and its corporate
sales function report to the Chairman of the Board and the 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.
103
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information about reportable segment revenues and income is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components
|
|
$
|
497,058
|
|
|
$
|
401,625
|
|
|
$
|
381,263
|
|
Network performance test systems
|
|
|
44,179
|
|
|
|
38,555
|
|
|
|
37,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
541,237
|
|
|
$
|
440,180
|
|
|
$
|
418,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components
|
|
$
|
29,663
|
|
|
$
|
24,479
|
|
|
$
|
24,132
|
|
Network performance test systems
|
|
|
827
|
|
|
|
898
|
|
|
|
915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization expense
|
|
$
|
30,490
|
|
|
$
|
25,377
|
|
|
$
|
25,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical subsystems and components
|
|
|
1,272
|
|
|
|
(8,569
|
)
|
|
|
14,689
|
|
Network performance test systems
|
|
|
3,828
|
|
|
|
(3,672
|
)
|
|
|
(6,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
|
5,100
|
|
|
|
(12,241
|
)
|
|
|
8,445
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired developed technology
|
|
|
(6,039
|
)
|
|
|
(6,501
|
)
|
|
|
(6,002
|
)
|
Impairment of acquired developed technology
|
|
|
(1,248
|
)
|
|
|
|
|
|
|
|
|
In-process research and development
|
|
|
(10,500
|
)
|
|
|
|
|
|
|
(5,770
|
)
|
Amortization of other intangibles
|
|
|
(2,686
|
)
|
|
|
(1,748
|
)
|
|
|
(1,814
|
)
|
Impairment of goodwill and intangible assets
|
|
|
(238,507
|
)
|
|
|
(40,106
|
)
|
|
|
|
|
Gain/(loss) on debt extinguishment
|
|
|
3,838
|
|
|
|
|
|
|
|
(31,606
|
)
|
Interest income (expense), net
|
|
|
(7,925
|
)
|
|
|
(11,431
|
)
|
|
|
(9,840
|
)
|
Other non-operating income (expense), net
|
|
|
(3,803
|
)
|
|
|
(298
|
)
|
|
|
(724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated amounts
|
|
|
(266,870
|
)
|
|
|
(60,084
|
)
|
|
|
(55,756
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(261,770
|
)
|
|
$
|
(72,325
|
)
|
|
$
|
(47,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of total assets by segment (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Optical subsystems and components
|
|
$
|
346,025
|
|
|
$
|
378,531
|
|
Network performance test systems
|
|
|
20,295
|
|
|
|
34,447
|
|
Other assets
|
|
|
14,381
|
|
|
|
67,225
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
380,701
|
|
|
$
|
480,203
|
|
|
|
|
|
|
|
|
|
|
Cash, short-term, restricted and minority investments are the
primary components of other assets in the above table.
104
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of operations within geographic areas
based on the location of the entity purchasing the
Companys products (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenues from sales to unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
181,829
|
|
|
$
|
125,580
|
|
|
$
|
149,097
|
|
Malaysia
|
|
|
90,774
|
|
|
|
108,260
|
|
|
|
102,665
|
|
China
|
|
|
76,454
|
|
|
|
47,258
|
|
|
|
32,969
|
|
Rest of the world
|
|
|
192,180
|
|
|
|
159,082
|
|
|
|
133,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
541,237
|
|
|
$
|
440,180
|
|
|
$
|
418,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues generated in the United States. are all from sales to
customers located in the United States.
The following is a summary of long-lived assets within
geographic areas based on the location of the assets (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
86,958
|
|
|
$
|
172,354
|
|
Malaysia
|
|
|
28,067
|
|
|
|
32,553
|
|
Rest of the world
|
|
|
17,180
|
|
|
|
5,422
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,205
|
|
|
$
|
210,329
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of capital expenditure by reportable
segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Optical subsystems and components
|
|
$
|
23,584
|
|
|
$
|
26,996
|
|
Network performance test systems
|
|
|
334
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
23,918
|
|
|
$
|
27,198
|
|
|
|
|
|
|
|
|
|
|
Stock
Option Derivative Litigation
On November 30, 2006, the Company announced that it had
undertaken a voluntary review of its historical stock option
grant practices subsequent to its initial public offering in
November 1999. The review was initiated by senior management,
and preliminary results of the review were discussed with the
Audit Committee of the Companys board of directors. Based
on the preliminary results of the review, senior management
concluded, and the Audit Committee agreed, that it was likely
that the measurement dates for certain stock option grants
differed from the recorded grant dates for such awards and that
the Company would likely need to restate its historical
financial statements to record non-cash charges for compensation
expense relating to some past stock option grants. The Audit
Committee thereafter conducted a further investigation and
engaged independent legal counsel and financial advisors to
assist in that investigation. The Audit Committee concluded that
measurement dates for certain option grants differed from the
recorded grant dates for such awards. The Companys
management, in conjunction with the Audit Committee, conducted a
further review to finalize revised measurement dates and
determine the appropriate accounting adjustments to its
historical financial statements. The announcement of the
investigation
105
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
resulted in delays in filing the Companys quarterly
reports on
Form 10-Q
for the quarters ended October 29, 2006, January 28,
2007, and January 27, 2008, and the Companys annual
report on
Form 10-K
for the fiscal year ended April 30, 2007. On
December 4, 2007, the Company filed all four of these
reports which included revised financial statements.
Following the Companys announcement on November 30,
2006 that the Audit Committee of the board of directors had
voluntarily commenced an investigation of the Companys
historical stock option grant practices, the Company was named
as a nominal defendant in several shareholder derivative cases.
These cases have been consolidated into two proceedings pending
in federal and state courts in California. The federal court
cases have been consolidated in the United States District Court
for the Northern District of California. The state court cases
have been consolidated in the Superior Court of California for
the County of Santa Clara. The plaintiffs in all cases have
alleged that certain of the Companys current or former
officers and directors caused the Company to grant stock options
at less than fair market value, contrary to the Companys
public statements (including its financial statements), and
that, as a result, those officers and directors are liable to
the Company. No specific amount of damages has been alleged, and
by the nature of the lawsuits, no damages will be alleged
against the Company. On May 22, 2007, the state court
granted the Companys motion to stay the state court action
pending resolution of the consolidated federal court action. On
June 12, 2007, the plaintiffs in the federal court case
filed an amended complaint to reflect the results of the stock
option investigation announced by the Audit Committee in June
2007. On August 28, 2007, the Company and the individual
defendants filed motions to dismiss the complaint. On
January 11, 2008, the Court granted the motions to dismiss,
with leave to amend. On May 12, 2008, the plaintiffs filed
an amended complaint. The Company and the individual defendants
filed motions to dismiss the amended complaint on July 1,
2008. The Courts ruling on the motions remains pending.
505
Patent Litigation
DirecTV
Litigation
On April 4, 2005, the Company filed an action for patent
infringement in the United States District Court for the Eastern
District of Texas against the DirecTV Group, Inc., DirecTV
Holdings, LLC, DirecTV Enterprises, LLC, DirecTV Operations,
LLC, DirecTV, Inc., and Hughes Network Systems, Inc.
(collectively, DirecTV). The lawsuit involves the
Companys U.S. Patent No. 5,404,505, or the
505 patent, which relates to technology used in
information transmission systems to provide access to a large
database of information. On June 23, 2006, following a jury
trial, the jury returned a verdict that the Companys
patent had been willfully infringed and awarded the Company
damages of $78,920,250. In a post-trial hearing held on
July 6, 2006, the Court determined that, due to
DirecTVs willful infringement, those damages would be
enhanced by an additional $25 million. Further, the Court
awarded the Company pre-judgment interest on the jurys
verdict and court costs in the aggregate amount of approximately
$13.5 million. The Court denied the Companys motion
for injunctive relief, but ordered DirecTV to pay a compulsory
ongoing license fee to the Company at the rate of $1.60 per
set-top box activated by or on behalf of DirecTV for the period
beginning June 16, 2006 through the duration of the patent,
which expires in April 2012.
DirecTV appealed to the United States Court of Appeals for the
Federal Circuit. In its appeal, DirecTV raised issues related to
claim construction, infringement, invalidity, willful
infringement and enhanced damages. The Company cross-appealed
raising issues related to the denial of the Companys
motion for a permanent injunction, the trial courts
refusal to enhance future damages for willfulness and the trial
courts determination that some of the asserted patent
claims are invalid. The appeals were consolidated.
On April 18, 2008, the appeals court issued its decision
affirming in part, reversing in part, and remanding the case for
further proceedings before the trial court in Texas.
Specifically, the appeals court ruled that the lower
courts interpretation of some of the patent claim terms
was too broad and issued its own, narrower interpretation of
those terms. The appeals court also determined that one of the
seven patent claims (Claim 16) found infringed by the jury
was invalid, that DirecTVs infringement of the 505
patent was not willful, and that the trial court did not err in
its determination that various claims of the 505 patent
were invalid for indefiniteness. As a result, the judgment,
106
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including the compulsory license, was vacated and the case was
remanded to the trial court to reconsider infringement and
validity of the six remaining patent claims and releasing to
DirecTV the escrow funds it had deposited.
On July 11, 2008, the United States District Court for the
Northern District of California issued an order in the Comcast
lawsuit described below in which it held that one of the claims
of the 505 patent, Claim 25, is invalid. The order in the
Comcast lawsuit also, in effect, ruled invalid a related claim,
Claim 24, which is one of the six remaining claims of the
505 patent that were returned to the trial court for
retrial in the DirectTV lawsuit.
On December 1, 2008, both parties filed motions for summary
judgment on the issue of validity in the trial court. On
May 19, 2009, the Court granted DirecTVs motions for
summary judgment and entered final judgment in the case in favor
of DirecTV. The Company has filed a notice of appeal with
respect to this ruling.
Comcast
Litigation
On July 7, 2006, Comcast Cable Communications Corporation,
LLC (Comcast), filed a complaint against the Company
in the United States District Court for the Northern District of
California, San Francisco Division. Comcast sought a
declaratory judgment that the Companys 505 patent is
not infringed and is invalid. The 505 patent is the same
patent alleged by the Company in its lawsuit against DirecTV.
At a status conference held on April 24, 2008, the Court
accepted the Companys proposal to narrow the issues for
trial and proceed only with the Companys principal claim
(Claim 25), subject to the Company providing a covenant not to
sue Comcast on the other previously asserted claims. On
May 22, 2008, Comcast filed its renewed motion for summary
judgment of invalidity and non-infringement. On July 11,
2008, the Court issued an order granting Comcasts motion
for summary judgment on the basis of invalidity and also entered
a final judgment in favor of Comcast. On July 25, 2008 the
Company filed its notice of appeal to the Federal Circuit. On
April 10, 2009, the Federal Circuit affirmed the District
Court ruling.
EchoStar
Litigation
On July 10, 2006, EchoStar Satellite LLC, EchoStar
Technologies Corporation and NagraStar LLC (collectively,
EchoStar), filed an action against the Company in
the United States District Court for the District of Delaware
seeking a declaration that EchoStar does not infringe, and has
not infringed, any valid claim of the Companys 505
patent. The 505 patent is the same patent that is in
dispute in the DirecTV and Comcast lawsuits. On December 4,
2007, the Court approved the parties stipulation to stay
the case pending issuance of the Federal Circuits mandate
in the DirecTV case. This stay expired when the mandate of the
Federal Circuit issued in the DirecTV case on April 18,
2008. The Court has yet to set a case schedule.
XM/Sirius
Litigation
On April 27, 2007, the Company filed an action for patent
infringement in the United States District Court for the Eastern
District of Texas, Lufkin Division, against XM Satellite Radio
Holdings, Inc., XM Satellite Radio, Inc., and XM Radio, Inc.
(collectively, XM), and Sirius Satellite Radio, Inc.
and Satellite CD Radio, Inc. (collectively, Sirius).
The lawsuit alleged that XM and Sirius had infringed and
continued to infringe the Companys 505 patent and
sought an injunction to prevent further infringement, actual
damages to be proven at trial, enhanced damages for willful
infringement and attorneys fees. The cased had been stayed
pending further action in the DirecTV case on remand and the
re-examination of the 505 patent descried below.
Subsequent to the May 19, 2009 decision granting summary
judgment in favor of DirecTV in the DirecTV case, the case
against XM/Sirius was dismissed without prejudice on
June 9, 2009.
107
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Requests
for Re-Examination of the 505 Patent
Four requests for re-examination of the Companys 505
patent have been filed with the PTO. The 505 patent is the
patent that is in dispute in the DirecTV, EchoStar, Comcast and
XM/Sirius lawsuits. The PTO has granted each of these requests,
and these proceedings have been combined into a single
re-examination. During the re-examination, some or all of the
claims in the 505 patent could be invalidated or revised
to narrow their scope, either of which could have a material
adverse impact on the Companys position in the related
505 lawsuits.
Securities
Class Action
A securities class action lawsuit was filed on November 30,
2001 in the United States District Court for the Southern
District of New York, purportedly on behalf of all persons who
purchased the Companys common stock from November 17,
1999 through December 6, 2000. The complaint named as
defendants the Company, Jerry S. Rawls, its President and Chief
Executive Officer, Frank H. Levinson, its former Chairman of the
Board and Chief Technical Officer, Stephen K. Workman, its
Senior Vice President and Chief Financial Officer, and an
investment banking firm that served as an underwriter for the
Companys initial public offering in November 1999 and a
secondary offering in April 2000. The complaint, as subsequently
amended, alleges violations of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(b) of the
Securities Exchange Act of 1934, on the grounds that the
prospectuses incorporated in the registration statements for the
offerings failed to disclose, among other things, that
(i) the underwriter had solicited and received excessive
and undisclosed commissions from certain investors in exchange
for which the underwriter allocated to those investors material
portions of the shares of the Companys stock sold in the
offerings and (ii) the underwriter had entered into
agreements with customers whereby the underwriter agreed to
allocate shares of the Companys stock sold in the
offerings to those customers in exchange for which the customers
agreed to purchase additional shares of the Companys stock
in the aftermarket at pre-determined prices. No specific damages
are claimed. Similar allegations have been made in lawsuits
relating to more than 300 other initial public offerings
conducted in 1999 and 2000, which were consolidated for pretrial
purposes. In October 2002, all claims against the individual
defendants were dismissed without prejudice. On
February 19, 2003, the Court denied defendants motion
to dismiss the complaint.
In July 2004, the Company and the individual defendants accepted
a settlement proposal made to all of the issuer defendants.
Under the terms of the settlement, the plaintiffs would dismiss
and release all claims against participating defendants in
exchange for a contingent payment guaranty by the insurance
companies collectively responsible for insuring the issuers in
all related cases, and the assignment or surrender to the
plaintiffs of certain claims the issuer defendants may have
against the underwriters. Under the guaranty, the insurers would
have been 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 failed to recover
$1 billion and payment was required under the guaranty, the
Company would have been responsible to pay its pro rata portion
of the shortfall, up to the amount of the self-insured retention
under its insurance policy, which could have been up to
$2 million. The Court gave preliminary approval to the
settlement in February 2005. Before the Court issued a final
decision on the settlement, on December 5, 2006, the United
States Court of Appeals for the Second Circuit vacated the class
certification of plaintiffs claims against the
underwriters in six cases designated as focus or test cases.
Thereafter, the parties withdrew the settlement.
In February 2009, the parties reached an understanding regarding
the principal elements of a settlement, subject to formal
documentation and Court approval. Under the new proposed
settlement, the underwriter defendants would pay a total of
$486 million, and the issuer defendants and their insurers
would pay a total of $100 million to settle all of the
cases. The Company would be responsible for a pro rata share of
the issuers contribution to the settlement and certain
costs anticipated to total between $350,000 and $400,000. On
June 10, 2009, the Court granted preliminary approval of
the settlement and set a hearing on final approval for
September 10, 2009. If this settlement is not approved by
the Court, the Company intends to defend the lawsuit vigorously.
Because of the inherent uncertainty of litigation, the Company
cannot predict its outcome. If, as a result of this dispute, the
Company is required to pay significant monetary damages, its
business would be substantially harmed.
108
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Section 16(b)
Lawsuit
A lawsuit was filed on October 3, 2007 in the United States
District Court for the Western District of Washington by Vanessa
Simmonds, a purported holder of the Companys common stock,
against two investment banking firms that served as underwriters
for the initial public offering of the Companys common
stock in November 1999. None of the Companys officers,
directors or employees were named as defendants in the
complaint. On February 28, 2008, the plaintiff filed an
amended complaint. The complaint, as amended, alleges that:
(i) the defendants, other underwriters of the offering, and
unspecified officers, directors and the Companys principal
shareholders constituted a group that owned in
excess of 10% of the Companys outstanding common stock
between November 11, 1999 and November 20, 2000;
(ii) the defendants were therefore subject to the
short swing prohibitions of Section 16(b) of
the Securities Exchange Act of 1934; and (iii) the
defendants engaged in purchases and sales, or sales and
purchases, of the Companys common stock within periods of
less than six months in violation of the provisions of
Section 16(b). The complaint seeks disgorgement of all
profits allegedly received by the defendants, with interest and
attorneys fees, for transactions in violation of
Section 16(b). The Company, as the statutory beneficiary of
any potential Section 16(b) recovery, is named as a nominal
defendant in the complaint.
This case is one of 54 lawsuits containing similar allegations
relating to initial public offerings of technology company
issuers, which were coordinated (but not consolidated) by the
Court. On July 25, 2008, the real defendants in all 54
cases filed a consolidated motion to dismiss, and a majority of
the nominal defendants (including the Company) filed a
consolidated motion to dismiss, the amended complaints. On
March 19, 2009, the Court dismissed the amended complaints
naming the nominal defendants that had moved to dismiss, without
prejudice, because the plaintiff had not properly demanded
action by their respective boards of directors before filing
suit; and dismissed the amended complaints naming nominal
defendants that had not moved to dismiss, with prejudice,
finding the claims time-barred by the applicable statute of
limitation. Also on March 19, 2009, the Court entered
judgment against the plaintiff in all 54 cases. The plaintiff
has appealed the order and judgments. The real defendants have
cross-appealed the dismissal of certain amended complaints
without prejudice, contending that dismissal should have been
with prejudice because those amended complaints are barred by
the applicable statute of limitation.
JDSU/Emcore
Patent Litigation
Litigation is pending with JDS Uniphase Corporation and Emcore
Corporation with respect to certain cable television
transmission products acquired in connection with the
Companys acquisition of Optium Corporation. On
September 11, 2006, JDSU and Emcore filed a complaint in
the United States District Court for the Western District of
Pennsylvania alleging that the Companys 1550 nm HFC
externally modulated transmitter used in cable television
applications, in addition to possibly products as yet
unidentified, infringes on two U.S. patents. On
March 14, 2007, JDSU and Emcore filed a second complaint in
the United States District Court for the Western District of
Pennsylvania alleging that the Companys 1550 nm HFC
quadrature amplitude modulated transmitter used in cable
television applications, in addition to possibly products
as yet unidentified, infringes on another
U.S. patent. The plaintiffs are seeking for the court to
declare that Optium has willfully infringed on such patents and
to be awarded up to three times the amount of any compensatory
damages found, if any, plus any other damages and costs
incurred. The Company has answered both of these complaints
denying that it has infringed any of the asserted patents and
asserting that those patents are invalid. On December 10,
2007, the Company filed a complaint in the United States
District Court for the Western District of Pennsylvania seeking
a declaration that the patents asserted against the
Companys HFC externally modulated transmitter are
unenforceable due to inequitable conduct committed by the patent
applicants
and/or the
attorneys or agents during prosecution.
On February 18, 2009, the Court granted JDSUs and
Emcores motion for summary judgment dismissing the
Companys declaratory judgment action on inequitable
conduct. The Company has appealed this ruling. The court has
consolidated the remaining two actions and has scheduled a
single trial to begin October 19, 2009.
109
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Export
Compliance
During mid-2007, Optium became aware that certain of its analog
RF over fiber products may, depending on end use and
customization, be subject to the International Traffic in Arms
Regulations, or ITAR. Accordingly, Optium filed a detailed
voluntary disclosure with the United States Department of State
describing the details of possible inadvertent ITAR violations
with respect to the export of a limited number of certain
prototype products, as well as related technical data and
defense services. Optium may have also made unauthorized
transfers of ITAR-restricted technical data and defense services
to foreign persons in the workplace. Additional information has
been provided upon request to the Department of State with
respect to this matter. In late 2008, a grand jury subpoena from
the office of the U.S. Attorney for the Eastern District of
Pennsylvania was received requesting documents from 2005 through
the present referring to, relating to or involving the subject
matter of the above referenced voluntary disclosure and export
activities.
While the Department of State encourages voluntary disclosures
and generally affords parties mitigating credit under such
circumstances, the Company nevertheless could be subject to
continued investigation and potential regulatory consequences
ranging from a no-action letter, government oversight of
facilities and export transactions, monetary penalties, and in
extreme cases, debarment from government contracting, denial of
export privileges and criminal sanctions, any of which would
adversely affect the Companys results of operations and
cash flow. The Department of State and U.S. Attorney
inquiries may require the Company to expend significant
management time and incur significant legal and other expenses.
The Company cannot predict how long it will take or how much
more time and resources it will have to expend to resolve these
government inquiries, nor can it predict the outcome of these
inquiries.
In connection with a review of its compliance with applicable
export regulations in late 2008, the Company discovered that it
had made certain deemed exports to foreign national
employees with respect to certain of its commercial products
without the necessary deemed export licenses or license
exemptions under the Export Administration Regulations, or EAR.
Accordingly, the Company filed a detailed voluntary disclosure
with the United States Department of Commerce describing these
deemed export violations. In June 2009, the Company received
notification from the Department of Commerce that it had
completed its investigation into the matter with the issuance of
a warning letter.
Other
Litigation
In the ordinary course of business, the Company is a party to
litigation, claims and assessments in addition to those
described above. Based on information currently available,
management does not believe the impact of these other matters
will have a material adverse effect on its business, financial
condition, results of operations or cash flows of the Company.
|
|
22.
|
Restructuring
Charges
|
During the second quarter of fiscal 2006, the Company
consolidated its Sunnyvale facilities into one building and
permanently exited a portion of its Scotts Valley facility. As a
result of these activities, the Company recorded restructuring
charges of approximately $3.1 million. These restructuring
charges included $290,000 of miscellaneous costs required to
effect the closures and approximately $2.8 million of
non-cancelable facility lease payments. Of the $3.1 million
in restructuring charges, $1.9 million related to the
Companys optical subsystems and components segment and
$1.2 million related to its network performance test
systems segment. During the first quarter of fiscal 2009, the
Company recorded additional restructuring charges of
$0.6 million for the remaining portion of the Scotts Valley
facility that had been used for a product line of our network
test systems segment which was sold in first quarter of fiscal
2009. See Note 6 for additional details regarding the sale
of this product line.
The facilities consolidation charges were calculated using
estimates and were based upon the remaining future lease
commitments for vacated facilities from the date of facility
consolidation, net of estimated future sublease
110
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income. The estimated costs of vacating these leased facilities
were based on market information and trend analyses, including
information obtained from third party real estate sources.
As of April 30, 2009, $900,000 of committed facilities
payments related to restructuring activities remained accrued
and is expected to be fully utilized by the end of fiscal 2011.
The Company generally offers a one year limited warranty for its
products. The specific terms and conditions of these warranties
vary depending upon the product sold. The Company estimates the
costs that may be incurred under its basic limited warranty and
records a liability in the amount of such costs based on revenue
recognized. Factors that affect the Companys warranty
liability include the historical and anticipated rates of
warranty claims. The Company periodically assesses the adequacy
of its recorded warranty liabilities and adjusts the amounts as
necessary.
Changes in the Companys warranty liability during the
period are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance
|
|
$
|
2,132
|
|
|
$
|
1,818
|
|
Warranty liability acquired on merger with Optium
|
|
$
|
2,884
|
|
|
|
|
|
Additions during the period based on product sold
|
|
|
2,151
|
|
|
|
2,547
|
|
Settlements
|
|
|
(1,297
|
)
|
|
|
(398
|
)
|
Changes in liability for pre-existing warranties, including
expirations
|
|
|
743
|
|
|
|
(1,835
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,613
|
|
|
$
|
2,132
|
|
|
|
|
|
|
|
|
|
|
Frank H. Levinson, the Companys former Chairman of the
Board and Chief Technical Officer and a member of the
Companys board of directors until August 29, 2008, is
a member of the board of directors of Fabrinet, Inc., a
privately held contract manufacturer. In June 2000, the Company
entered into a volume supply agreement, at rates which the
Company believes to be market, with Fabrinet under which
Fabrinet serves as a contract manufacturer for the Company. In
addition, Fabrinet purchases certain products from the Company.
The Company recorded purchases of $28.5 million from
Fabrinet and Fabrinet purchased products from the Company
totaling to $16.2 million during the four months ended
August 29, 2008. During the fiscal years ended
April 30, 2008 and 2007, the Company recorded purchases
from Fabrinet of approximately $70.2 million and
$77.2 million, respectively, and Fabrinet purchased
products from the Company totaling approximately
$33.6 million and $42.8 million, respectively. At
August 29, 2008 and at April 30, 2008 the Company owed
Fabrinet approximately $7.1 million and $7.0 million,
respectively, and Fabrinet owed the Company $6.0 million
and $5.7 million, respectively.
In connection with the acquisition by VantagePoint Venture
Partners of the 34 million shares of common stock of the
Company held by Infineon Technologies AG that the Company had
previously issued to Infineon as consideration for its
acquisition of Infineons optical transceiver product
lines, the Company entered into an agreement with VantagePoint
under which the Company agreed to use its reasonable best
efforts to elect a nominee of VantagePoint to the Companys
board of directors, provided that the nominee was reasonably
acceptable to the boards Nominating and Corporate
Governance Committee as well as the full board of directors. In
June 2005, David C. Fries, a Managing Director of VantagePoint,
was elected to the board of directors pursuant to that
agreement. The Company also agreed to file a registration
statement to provide for the resale of the shares held by
VantagePoint and certain distributees of VantagePoint. As a
result of the reduction in VantagePoints holdings of the
Companys common stock following distributions by
VantagePoint to its partners, the Companys obligations
111
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
regarding the election of a nominee of VantagePoint to the
Companys board of directors have terminated, and the
Company is no longer obligated to maintain a registration
statement for the resale of shares held by VantagePoint and its
distributees.
|
|
26.
|
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 liability
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 April 30, 2009.
To date, the Company has not incurred material costs to defend
lawsuits or settle claims related to these indemnification
agreements.
|
|
27.
|
Subsequent
Events (Unaudited)
|
Pending
Sale of Network Tools Division
Historically, the Company has offered a line of network
performance test systems through our Network Tools Division. We
have sold these products primarily to leading storage equipment
manufacturers, such as Biocode, EMC, Emulex, Hewlett-Packard and
Qlogic for testing and validating their equipment designs.
On July 8, 2009, the Company entered into an agreement to
sell substantially all of the assets of the Network Tools
Division (excluding accounts receivable and payable) to JDS
Uniphase Corporation for $40.6 million in cash. JDSU will
assume certain liabilities associated with the network
performance test equipment business, and the Company will
provide manufacturing support services to JDSU during a
transition period. The sale will be completed on or about
July 16, 2009.
Exchange
Offers
On July 9, 2009, the Company announced that it had
commenced separate concurrent Modified Dutch Auction
tender offers (each an Exchange Offer and together,
the Exchange Offers) to exchange shares of its
common stock and cash for an aggregate of up to $95 million
principal amount of the following series of its outstanding
convertible notes (the Notes):
|
|
|
|
|
2.50% Convertible Subordinated Notes due 2010 (the
Subordinated Notes); and
|
|
|
|
2.50% Convertible Senior Subordinated Notes due 2010 (the
Senior Subordinated Notes)
|
112
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is conducting the Exchange Offers in order to reduce
the aggregate principal amount of its outstanding indebtedness.
As of July 9, 2009, approximately $50 million
aggregate principal amount of the Subordinated Notes and
approximately $92 million aggregate principal amount of the
Senior Subordinated Notes were outstanding.
The Company is offering to exchange up to an aggregate of
$37.5 million principal amount, or 75%, of the outstanding
Subordinated Notes. The Company will also exchange up to an
aggregate of $57.5 million principal amount, or 62.5%, of
the outstanding Senior Subordinated Notes, with such Exchange
Offer being conditioned on a minimum of $42 million
principal amount of Senior Subordinated Notes being validly
tendered and not withdrawn.
For each $1,000 principal amount of Notes, tendering holders
will receive consideration with a value not greater than $750
nor less than $700 (the Exchange Consideration),
with such value determined by a Modified Dutch
Auction procedure, plus accrued and unpaid interest to,
but excluding, the settlement date, payable in cash. A separate
Modified Dutch Auction procedure will be conducted
for each of the Exchange Offers. A Modified Dutch
Auction tender offer allows holders of the Notes to
indicate the principal amount of Notes that such holders desire
to tender and the consideration within the specified range at
which they wish to tender such Notes for each Exchange Offer.
The mix of Exchange Consideration will consist of (i) $525
in cash, and (ii) a number of shares of common stock with a
value equal to the Exchange Consideration minus $525 (the
Equity Consideration). The number of shares of
common stock representing the Equity Consideration to be
received by holders as part of Exchange Consideration will be
determined on the basis of the trading price of the common stock
during a
5-trading
day VWAP period (the 5-day VWAP) starting on
July 13 and ending on July 17, 2009, as further
described in a Schedule TO (including the Offer to Exchange and
related Letter of Transmittal attached as exhibits thereto)
filed by Finisar with the Securities and Exchange Commission
(the SEC) on July 9, 2009.
The portion of the Exchange Consideration consisting of cash
will be paid using a portion of the approximately
$40.6 million in aggregate proceeds to be received from the
sale of the Company Network Tools Division, expected to be
consummated on or about July 15, 2009, and with available
cash and borrowings.
The Exchange Offers are scheduled to expire at 5:00 p.m.,
New York City time, on Thursday, August 6, 2009, unless
they are extended. Tendered Notes may be withdrawn at any time
on or prior to the expiration of the Exchange Offers.
Further information regarding the terms and conditions of the
Exchange Offers is set forth in the Offer to Exchange, the
Letter of Transmittal and related materials filed with the SEC.
Amended
Credit Facilities
On July 7, 2009, the Company received a written commitment
from Silicon Valley Bank to modify the Companys existing
credit facilities, as described in Notes 13, 14 and 15, in
order to facilitate the Exchange Offers. Principal modifications
include:
|
|
|
|
|
A reduction in the total size of the Companys secured
revolving line of credit from $45 million to
$25 million; and
|
|
|
|
Revised covenants that permit the use of borrowings under the
secured revolving line of credit for a portion of the Exchange
Consideration in connection with the Exchange Offers and the use
of up to an aggregate of $50 million of cash from all
sources for that purpose.
|
113
FINISAR
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FINISAR
CORPORATION
Summarized quarterly data for fiscal 2009 and 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
April 30,
|
|
|
Feb 1,
|
|
|
Nov 2,
|
|
|
Aug 3,
|
|
|
April 30,
|
|
|
Jan. 27,
|
|
|
Oct. 28,
|
|
|
July 29,
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Total Revenues
|
|
$
|
116,664
|
|
|
$
|
136,355
|
|
|
$
|
159,506
|
|
|
$
|
128,712
|
|
|
$
|
121,005
|
|
|
$
|
112,741
|
|
|
$
|
100,699
|
|
|
$
|
105,735
|
|
Gross profit
|
|
$
|
29,653
|
|
|
$
|
41,159
|
|
|
$
|
48,144
|
|
|
$
|
49,422
|
|
|
$
|
39,809
|
|
|
$
|
37,616
|
|
|
$
|
31,790
|
|
|
$
|
32,303
|
|
Income (loss) from operations
|
|
$
|
(22,830
|
)
|
|
$
|
(49,760
|
)
|
|
$
|
(189,025
|
)
|
|
$
|
7,735
|
|
|
$
|
(40,409
|
)
|
|
$
|
(8,202
|
)
|
|
$
|
(7,422
|
)
|
|
$
|
(4,563
|
)
|
Net income (loss)
|
|
$
|
(24,626
|
)
|
|
$
|
(47,357
|
)
|
|
$
|
(186,831
|
)
|
|
$
|
4,006
|
|
|
$
|
(44,108
|
)
|
|
$
|
(11,489
|
)
|
|
$
|
(10,813
|
)
|
|
$
|
(8,148
|
)
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
Shares used in computing net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
476,972
|
|
|
|
474,797
|
|
|
|
426,601
|
|
|
|
310,133
|
|
|
|
308,786
|
|
|
|
308,663
|
|
|
|
308,635
|
|
|
|
308,634
|
|
Diluted
|
|
|
476,972
|
|
|
|
474,797
|
|
|
|
426,601
|
|
|
|
311,614
|
|
|
|
308,786
|
|
|
|
308,663
|
|
|
|
308,635
|
|
|
|
308,634
|
|
114
|
|
ITEM 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosures
|
None.
|
|
ITEM 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Attached as exhibits to this report are certifications of our
Chairman of the Board and our Chief Executive Officer, our
co-principal executive officers, and our Chief Financial
Officer, which are required in accordance with
Rule 13a-14
under the Securities Exchange Act of 1934, as amended (the
Exchange Act). This Controls and
Procedures section includes information concerning the
controls and controls evaluation referred to in the
certifications, and it should be read in conjunction with the
certifications for a more complete understanding of the topics
presented.
Based on their evaluation of our disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of
April 30, 2009, our management, with the participation of
our Chairman of the Board, Chief Executive Officer and Chief
Financial Officer, has concluded that our disclosure controls
and procedures were effective as of the end of the period
covered by this report for the purpose of ensuring that the
information required to be disclosed by us in this report is
made known to them by others on a timely basis, and that the
information is accumulated and communicated to our management in
order to allow timely decisions regarding required disclosure,
and that such information is recorded, processed, summarized,
and reported by us within the time periods specified in the
SECs rules.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting for our
Company. Internal control over financial reporting is defined in
Rule 13a-15(f)
under the Exchange Act as a process designed by, and under the
supervision of, a companys principal executive and
principal financial officers, and effected by a companys
board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles, and includes those policies and
procedures that:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our
management, including our Chairman of the Board, Chief Executive
Officer and Chief Financial Officer, we conducted an assessment
of the effectiveness of our internal control over financial
reporting as of April 30, 2009. In making this assessment,
our management used the criteria set forth in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management
determined that we maintained effective internal control over
financial reporting as of April 30, 2009.
115
The effectiveness of internal control over financial reporting
as of April 30, 2009 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
Changes
in Internal Controls
Cycle counting of parts in inventory is an important financial
control process that is conducted at all of our primary
manufacturing facilities throughout the fiscal year. During the
quarter ended February 1, 2009, the cycle counting process
at our Ipoh, Malaysia manufacturing facility was discontinued as
a result of discrepancies noted between the actual physical
location of a number of parts compared to their location as
indicated by our management information systems. Because of the
failure of this control, we augmented our inventory procedures
shortly after the end of the quarter to include physical
inventory counts covering a substantial portion of the inventory
held at this site in order to verify quantities on hand at each
period end. We evaluated the cause of discrepancies in the cycle
counting process at the Ipoh facility, made appropriate
operational and system changes and restarted the cycle count
process for finished goods during the quarter ended
April 30, 2009. We will continue to augment the process
with additional physical inventory counts as warranted until the
cycle count process is fully operational once again. Other than
these changes in inventory procedures, there were no changes in
our internal control over financial reporting during the quarter
ended April 30, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
116
Report of
Independent Registered Public Accounting Firm
On Internal Control Over Financial Reporting
The Board of Directors and Stockholders of Finisar Corporation:
We have audited Finisar Corporations internal control over
financial reporting as of April 30, 2009, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Finisar
Corporations management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Finisar Corporation maintained, in all material
respects, effective internal control over financial reporting as
of April 30, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Finisar Corporation as of
April 30, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
April 30, 2009 and our report dated July 8, 2009
expressed an unqualified opinion thereon.
San Jose, CA
July 8, 2009
117
|
|
ITEM 9B.
|
Other
Information
|
None.
PART III
The SEC allows us to include information required in this report
by referring to other documents or reports we have already filed
or will soon be filing. This is called incorporation by
reference. We intend to file our definitive proxy
statement for our 2009 annual meeting of stockholders (the
Proxy Statement) pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year
covered by this report, and certain information to be contained
therein is incorporated in this report by reference.
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item is incorporated by
reference from the sections captioned
Proposal No. 1 Election of
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance to be contained in the
Proxy Statement.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference from the section captioned Executive
Compensation and Related Matters to be contained in the
Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item is incorporated by
reference from the sections captioned Principal
Stockholders and Share Ownership by Management and
Equity Compensation Plan Information to be contained
in the Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference from the section captioned Certain Relationships
and Related Transactions to be contained in the Proxy
Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference from the section captioned
Proposal No. 2 Ratification of
Appointment of Independent Auditors to be contained in the
Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) The following documents are filed as a part of this
Annual Report:
(1) Financial Statements
Consolidated Financial Statements: The following consolidated
financial statements are included in Part II, Item 8
of this report.
|
|
|
|
|
Consolidated Balance Sheets as of April 30, 2009 and 2008
|
|
|
61
|
|
Consolidated Statements of Operations for the years ended
April 30, 2009, 2008 and 2007
|
|
|
62
|
|
Consolidated Statement of Stockholders Equity for the
years ended April 30, 2009, 2008 and 2007
|
|
|
63
|
|
Consolidated Statements of Cash Flows for the years ended
April 30, 2009, 2008 and 2007
|
|
|
64
|
|
Notes to Consolidated Financial Statements
|
|
|
65
|
|
(2) Financial Statement Schedules
118
Schedule II
Consolidated Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Balance Acquired on
|
|
|
Costs and
|
|
|
Deductions
|
|
|
End of
|
|
|
|
of Period
|
|
|
Merger with Optium
|
|
|
Expenses
|
|
|
Write-Offs
|
|
|
Period
|
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended April 30, 2009
|
|
$
|
635
|
|
|
$
|
210
|
|
|
$
|
361
|
|
|
$
|
137
|
|
|
$
|
1,069
|
|
Year ended April 30, 2008
|
|
$
|
1,607
|
|
|
|
|
|
|
$
|
239
|
|
|
$
|
1,211
|
|
|
$
|
635
|
|
Year ended April 30, 2007
|
|
$
|
2,198
|
|
|
|
|
|
|
$
|
(387
|
)
|
|
$
|
204
|
|
|
$
|
1,607
|
|
(3) Exhibits
The exhibits listed in the Exhibit Index are filed as part
of this report (see page 112)
119
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, in the City of Sunnyvale, State of
California, on this 8th day of July, 2009.
FINISAR CORPORATION
Jerry S. Rawls
Chairman of the Board of Directors
(Co-Principal Executive Officer)
POWER OF
ATTORNEY
Know all persons by these presents, that each person whose
signature appears below constitutes and appoints Jerry S. Rawls,
Eitan Gertel and Stephen K. Workman, and each of them, as such
persons true and lawful
attorneys-in-fact
and agents, with full power of substitution and resubstitution,
for such person and in such persons name, place and stead,
in any and all capacities, to sign any and all amendments to
this report on
Form 10-K,
and to file same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of
them, or their or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in
the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jerry
S. Rawls
Jerry
S. Rawls
|
|
Chairman of the Board of Directors
(Co-Principal Executive Officer)
|
|
July 8, 2009
|
|
|
|
|
|
/s/ Eitan
Gertel
Eitan
Gertel
|
|
Chief Executive Officer
(Co-Principal Executive Officer)
|
|
July 8, 2009
|
|
|
|
|
|
/s/ Stephen
K. Workman
Stephen
K. Workman
|
|
Senior Vice President, Finance, Chief Financial Officer and
Secretary (Principal Financial and Accounting Officer)
|
|
July 8, 2009
|
|
|
|
|
|
/s/ Roger
C. Ferguson
Roger
C. Ferguson
|
|
Director
|
|
July 8, 2009
|
|
|
|
|
|
/s/ David
C. Fries
David
C. Fries
|
|
Director
|
|
July 8, 2009
|
|
|
|
|
|
/s/ Christopher
J. Crespi
Christopher
J. Crespi
|
|
Director
|
|
July 8, 2009
|
|
|
|
|
|
/s/ Larry
D. Mitchell
Larry
D. Mitchell
|
|
Director
|
|
July 8, 2009
|
120
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
N. Stephens
Robert
N. Stephens
|
|
Director
|
|
July 8, 2009
|
|
|
|
|
|
/s/ Morgan
M. Jones
Morgan
M. Jones
|
|
Director
|
|
July 8 2009
|
|
|
|
|
|
/s/ Dominique
Trempont
Dominique
Trempont
|
|
Director
|
|
July 8, 2009
|
121
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
2
|
.1
|
|
Agreement and Plan of Reorganization, dated as of May 15, 2008,
by and among Registrant, Fig Combination Corporation and Optium
Corporation(1)
|
|
3
|
.1
|
|
Amended and Restated Bylaws of Registrant(2)
|
|
3
|
.2
|
|
Restated Certificate of Incorporation of Registrant(3)
|
|
3
|
.3
|
|
Certificate of Amendment to Restated Certificate of
Incorporation of Registrant, filed with the Delaware Secretary
of State on June 19, 2001(4)
|
|
3
|
.4
|
|
Certificate of Elimination regarding the Registrants
Series A Preferred Stock(5)
|
|
3
|
.5
|
|
Certificate of Designation(6)
|
|
3
|
.6
|
|
Certificate of Amendment to Restated Certificate of
Incorporation of Registrant, filed with the Delaware Secretary
of State on May 11, 2005(7)
|
|
3
|
.7
|
|
Amended and Restated Certificate of Incorporation of
Registrant(8)
|
|
4
|
.1
|
|
Specimen certificate representing the common stock(9)
|
|
4
|
.2
|
|
Form of Rights Agreement between the Registrant and American
Stock Transfer and Trust Company, as Rights Agent (including as
Exhibit A the form of Certificate of Designation, Preferences
and Rights of the Terms of the Series RP Preferred Stock, as
Exhibit B the form of Right Certificate, and as Exhibit C the
Summary of Terms of Rights Agreement)(10)
|
|
4
|
.3
|
|
Indenture between the Registrant and U.S. Bank Trust National
Association, a national banking association, dated October 15,
2003(11)
|
|
4
|
.4
|
|
Indenture between the Registrant and U.S. Bank Trust National
Association, a national banking association, dated October 12,
2006(12)
|
|
10
|
.1
|
|
Form of Indemnity Agreement between Registrant and
Registrants directors and officers(13)
|
|
10
|
.2*
|
|
1989 Stock Option Plan(14)
|
|
10
|
.3*
|
|
1999 Stock Option Plan(15)
|
|
10
|
.4*
|
|
1999 Employee Stock Purchase Plan, as amended and restated
effective March 2, 2005(16)
|
|
10
|
.5
|
|
Purchase Agreement by and between FSI International, Inc. and
Finisar Corporation, dated February 4, 2005(17)
|
|
10
|
.6
|
|
Assignment and Assumption of Purchase and Sale Agreement between
Finisar Corporation and Finistar (CA-TX) Limited Partnership,
dated February 4, 2005(18)
|
|
10
|
.7
|
|
Lease Agreement by and between Finistar (CA-TX) Limited
Partnership and Finisar Corporation, dated February 4, 2005(19)
|
|
10
|
.8*
|
|
Finisar Corporation 2005 Stock Incentive Plan(20)
|
|
10
|
.9*
|
|
Form of Stock Option Agreement for options granted under the
2005 Stock Incentive Plan(21)
|
|
10
|
.10*
|
|
International Employee Stock Purchase Plan(22)
|
|
10
|
.11
|
|
Form of Exchange Agreement by and between Finisar Corporation
and certain holders of
21/2% Convertible
Subordinated Notes due 2010, dated October 6, 2006(23)
|
|
10
|
.12
|
|
Registration Rights Agreement among Finisar Corporation and the
initial purchasers of
21/2% Convertible
Senior Subordinated Notes due 2010, dated October 12, 2006(24)
|
|
10
|
.13
|
|
Loan and Security Agreement dated as of March 14, 2008 by and
between Silicon Valley Bank and Finisar Corporation(25)
|
|
10
|
.14
|
|
Non-Recourse Receivables Purchase Agreement dated as of October
28, 2004 by and between Silicon Valley Bank and Finisar
Corporation, and amendments thereto(26)
|
|
10
|
.15
|
|
Letter of Credit Reimbursement Agreement dated as of April 29,
2005 by and between Silicon Valley Bank and Finisar Corporation,
and amendments thereto(27)
|
|
10
|
.16*
|
|
Optium Corporation 2000 Stock Incentive Plan(28)
|
|
10
|
.17*
|
|
Optium Corporation 2006 Stock Option and Incentive Plan and
Israeli Addendum to 2006 Stock Option and Incentive Plan(29)
|
122
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
10
|
.18*
|
|
Form of Amended and Restated Warrant to Purchase Common Stock(30)
|
|
10
|
.19*
|
|
Deferred Stock Award Agreement, dated March 11, 2008, by and
between Optium Corporation and Eitan Gertel(31)
|
|
10
|
.20*
|
|
Deferred Stock Award Agreement, dated March 11, 2008, by and
between Optium Corporation and Christopher Brown(32)
|
|
10
|
.21*
|
|
Deferred Stock Award Agreement, dated March 11, 2008, by and
between Optium Corporation and Mark Colyar(33)
|
|
10
|
.22
|
|
First Amendment to lease for 200 Precision Road, Horsham, PA by
and between Horsham Property Assoc., L.P. and Optium Corporation
dated January 4, 2008(34)
|
|
10
|
.23*
|
|
Form of Deferred Stock Award for Israeli grantees under Optium
Corporation 2006 Stock Option and Incentive Plan(35)
|
|
10
|
.24*
|
|
Form of Deferred Stock Award for directors under Optium
Corporation 2006 Stock Option and Incentive Plan(36)
|
|
10
|
.25*
|
|
Form of Stock Option Grant Notice under the Optium Corporation
2006 Stock Option and Incentive Plan(37)
|
|
10
|
.26*
|
|
Form of Stock Option Grant Notice for Australian Employees under
the Optium Corporation 2006 Stock Option and Incentive Plan(38)
|
|
10
|
.27*
|
|
Form of Employee Incentive Stock Option Agreement under the
Optium Corporation 2006 Stock Option and Incentive Plan(39)
|
|
10
|
.28*
|
|
Form of Employee Non-Qualified Stock Option Agreement under the
Optium Corporation 2006 Stock Option and Incentive Plan(40)
|
|
10
|
.29*
|
|
Form of Non-Employee Non-Qualified Stock Option Agreement under
the Optium Corporation 2006 Stock Option and Incentive Plan(41)
|
|
10
|
.30*
|
|
Form of Australian Employee Non-Qualified Stock Option Agreement
under the Optium Corporation 2006 Stock Option and Incentive
Plan(42)
|
|
10
|
.31*
|
|
Form of Deferred Stock Award under Optium Corporation 2006 Stock
Option and Incentive Plan(43)
|
|
10
|
.32
|
|
Lease Agreement, dated December 7, 2007, by and between Charvic
Pty Ltd and Optium Australia Pty Limited for premises located at
244 Young Street, Waterloo, NSW, Australia(44)
|
|
10
|
.33
|
|
Agreement and Plan of Merger by and among Optium Corporation,
CLP Acquisition I Corp., Kailight Photonics, Inc. and the
Stockholders Representatives named therein dated March 27, 2007
as amended by the Acknowledgement and Agreement to the Agreement
and Plan of Merger dated April 11, 2007(45)
|
|
10
|
.34
|
|
Lease Agreement between Optium Corporation and 200 Precision
Drive Investors, LLC for the premises located at 200 Precision
Drive, Horsham, Pennsylvania, dated September 26, 2006(46)
|
|
10
|
.35
|
|
Unprotected Lease Agreement by and among Kailight Photonics,
Ltd., Niber Promotions and Investments, Ltd., Atido Holding Ltd.
and Roller Electric Works, Ltd. dated May 11, 2006(47)
|
|
10
|
.36*
|
|
Employment Agreement between Optium Corporation and Eitan
Gertel, dated as of April 14, 2006(48)
|
|
10
|
.37*
|
|
Employment Agreement between Optium Corporation and Mark Colyar,
dated as of April 14, 2006(49)
|
|
10
|
.38*
|
|
Employment Agreement between Optium Corporation and Christopher
Brown, dated as of August 28, 2006(50)
|
|
10
|
.39*
|
|
Stock Option and Grant Notice, dated March 3, 2007, for Eitan
Gertel(51)
|
|
10
|
.40*
|
|
Stock Option and Grant Notice, dated March 3, 2007, for Mark
Colyar(52)
|
|
10
|
.41*
|
|
Stock Option and Grant Notice, dated March 3, 2007, for
Christopher Brown(53)
|
|
10
|
.42*
|
|
Stock Option and Grant Notices, dated March 14, 2006, February
14, 2006, June 23, 2005 and May 1, 2003, for Eitan Gertel(54)
|
|
10
|
.43*
|
|
Stock Option and Grant Notices, dated April 14, 2006, April 5,
2005, March 1, 2004 and May 1, 2003, for Mark Colyar(55)
|
|
10
|
.44*
|
|
Stock Option and Grant Notices, dated August 28, 2006, for
Christopher Brown(56)
|
|
10
|
.45*
|
|
Deferred Stock Award Agreement, dated September 25, 2007, for
Eitan Gertel(57)
|
123
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
10
|
.46*
|
|
Deferred Stock Award Agreement, dated September 25, 2007, for
Mark Colyar(58)
|
|
10
|
.47*
|
|
Deferred Stock Award Agreement, dated September 25, 2007, for
Christopher Brown(59)
|
|
10
|
.48*
|
|
Deferred Stock Award Agreement, dated August 25, 2008, for Eitan
Gertel(60)
|
|
10
|
.49*
|
|
Deferred Stock Award Agreement, dated August 25, 2008, for Mark
Colyar(61)
|
|
10
|
.50*
|
|
Deferred Stock Award Agreement, dated August 25, 2008, for
Christopher Brown(62)
|
|
10
|
.51
|
|
Sixth Amendment to Non-Recourse Receivables Purchase Agreement
dated as of October 28, 2008 by and between Silicon Valley Bank
and Finisar Corporation(63)
|
|
10
|
.52
|
|
Sixth Amendment to Letter of Credit Reimbursement Agreement
dated as of October 28, 2008 by and between Silicon Valley Bank
and Finisar Corporation(64)
|
|
10
|
.53
|
|
First Loan Modification Agreement dated as of October 30, 2008
by and between Silicon Valley Bank and Finisar Corporation(65)
|
|
10
|
.54*
|
|
Finisar Executive Retention and Severance Plan, as Amended and
Restated Effective January 1, 2009(66)
|
|
10
|
.55*
|
|
Amended and Restated Executive Employment Agreement between
Finisar Corporation and Christopher Brown, dated December 31,
2008(67)
|
|
10
|
.56*
|
|
Amended and Restated Executive Employment Agreement between
Finisar Corporation and Mark Colyar, dated December 31, 2008(68)
|
|
10
|
.57*
|
|
Amended and Restated Executive Employment Agreement between
Finisar Corporation and Eitan Gertel, dated December 31, 2008(69)
|
|
10
|
.58*
|
|
Form of Restricted Stock Unit Issuance Agreement(70)
|
|
10
|
.59*
|
|
Form of Restricted Stock Unit Issuance Agreement
Officers(71)
|
|
10
|
.60*
|
|
Form of Restricted Stock Unit Issuance Agreement
International(72)
|
|
10
|
.61*
|
|
Form of Restricted Stock Unit Issuance Agreement
Israel(73)
|
|
10
|
.62
|
|
Second Loan Modification Agreement dated as of February 6, 2009
by and between Silicon Valley Bank and Finisar Corporation
|
|
10
|
.63
|
|
Seventh Amendment to Letter of Credit Reimbursement Agreement
dated as of June 10, 2009 by and between Silicon Valley Bank and
Finisar Corporation
|
|
10
|
.64
|
|
Third Loan Modification Agreement dated as of June 10, 2009 by
and between Silicon Valley Bank and Finisar Corporation
|
|
18
|
|
|
Letter regarding change in accounting principle(74)
|
|
21
|
|
|
List of Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm
|
|
24
|
|
|
Power of Attorney (incorporated by reference to the signature
page of this Annual Statement)
|
|
31
|
.1
|
|
Certification of Co-Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certification of Co-Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.3
|
|
Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certification of Co-Principal Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of Co-Principal Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.3
|
|
Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Compensatory plan or management contract |
|
(1) |
|
Incorporated by reference to Exhibit 2.1 to
Registrants Current Report on
Form 8-K
filed May 16, 2008. |
|
(2) |
|
Incorporated by reference to Exhibit 3.1 to
Registrants Current Report on
Form 8-K
filed December 4, 2007. |
124
|
|
|
(3) |
|
Incorporated by reference to Exhibit 3.5 to
Registrants Registration Statement on
Form S-1/A
filed October 19, 1999 (File
No. 333-87017). |
|
(4) |
|
Incorporated by reference to Exhibit 3.6 to
Registrants Annual Report on
Form 10-K
filed July 18, 2001. |
|
(5) |
|
Incorporated by reference to Exhibit 3.8 to
Registrants Registration Statement on
Form S-3
filed December 18, 2001 (File
No. 333-75380). |
|
(6) |
|
Incorporated by reference to Exhibit 99.2 to
Registrants Registration Statement on
Form 8-A12G
filed on September 27, 2002. |
|
(7) |
|
Incorporated by reference to Exhibit 3.3 to
Registrants Registration Statement on
Form S-3
filed May 18, 2005 (File
No. 333-125034). |
|
(8) |
|
Incorporated by reference to Exhibit 3.11 to
Registrants Annual Report on
Form 10-K
filed July 29, 2005. |
|
(9) |
|
Incorporated by reference to the same numbered exhibit to
Registrants Registration Statement on
Form S-1/A
filed October 19, 1999 (File No.
333-87017). |
|
(10) |
|
Incorporated by reference to Exhibit 4.2 to
Registrants Current Report on
Form 8-K
filed September 27, 2002. |
|
(11) |
|
Incorporated by reference to Exhibit 4.4 to
Registrants Quarterly Report on
Form 10-Q
filed December 10, 2003. |
|
(12) |
|
Incorporated by reference to Exhibit 4.8 to
Registrants Current Report on
Form 8-K
filed October 17, 2006. |
|
(13) |
|
Incorporated by reference to Exhibit 10.1 to
Registrants Registration Statement on
Form S-1/A
filed October 19, 1999 (File
No. 333-87017). |
|
(14) |
|
Incorporated by reference to Exhibit 10.2 to
Registrants Registration Statement on
Form S-1/A
filed October 19, 1999 (File
No. 333-87017). |
|
(15) |
|
Incorporated by reference to Exhibit 10.3 to
Registrants Registration Statement on
Form S-1
filed September 13, 1999 (File
No. 333-87017). |
|
(16) |
|
Incorporated by reference to Exhibit 99.1 to
Registrants Registration Statement on
Form S-8
filed May 23, 2005 (File
No. 333-125147). |
|
(17) |
|
Incorporated by reference to Exhibit 10.23 to
Registrants Current Report on
Form 8-K
filed February 9, 2005. |
|
(18) |
|
Incorporated by reference to Exhibit 10.24 to
Registrants Current Report on
Form 8-K
filed February 9, 2005. |
|
(19) |
|
Incorporated by reference to Exhibit 10.25 to
Registrants Current Report on
Form 8-K
filed February 9, 2005. |
|
(20) |
|
Incorporated by reference to Exhibit 99.1 to
Registrants Current Report on
Form 8-K
filed October 19, 2005. |
|
(21) |
|
Incorporated by reference to Exhibit 10.1 to
Registrants Current Report on
Form 8-K
filed June 14, 2005. |
|
(22) |
|
Incorporated by reference to Exhibit 99.2 to
Registrants Registration Statement on
Form S-8
filed May 23, 2005 (File
No. 333-125147). |
|
(23) |
|
Incorporated by reference to Exhibit 10.36 to
Registrants Current Report on
Form 8-K
filed October 17, 2006. |
|
(24) |
|
Incorporated by reference to Exhibit 10.37 to
Registrants Current Report on
Form 8-K
filed October 17, 2006. |
|
(25) |
|
Incorporated by reference to Exhibit 10.20 to
Registrants Annual Report on
Form 10-K
filed June 30, 2008. |
|
(26) |
|
Incorporated by reference to Exhibit 10.21 to
Registrants Annual Report on
Form 10-K
filed June 30, 2008. |
|
(27) |
|
Incorporated by reference to Exhibit 10.22 to
Registrants Annual Report on
Form 10-K
filed June 30, 2008. |
|
(28) |
|
Incorporated by reference to Exhibit 99.1 to
Registrants Registration Statement on
Form S-8
filed on September 19, 2008. |
|
(29) |
|
Incorporated by reference to Exhibit 99.2 to
Registrants Registration Statement on
Form S-8
filed on September 19, 2008. |
|
(30) |
|
Incorporated by reference to Exhibit 99.3 to
Registrants Registration Statement on
Form S-8
filed on September 19, 2008. |
|
(31) |
|
Incorporated by reference to Exhibit 10.1 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on March 13, 2008. |
|
(32) |
|
Incorporated by reference to Exhibit 10.2 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on March 13, 2008. |
125
|
|
|
(33) |
|
Incorporated by reference to Exhibit 10.3 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on March 13, 2008. |
|
(34) |
|
Incorporated by reference to Exhibit 10.6 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on March 13, 2008. |
|
(35) |
|
Incorporated by reference to Exhibit 10.1 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on December 13, 2007. |
|
(36) |
|
Incorporated by reference to Exhibit 10.2 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on December 13, 2007. |
|
(37) |
|
Incorporated by reference to Exhibit 10.2 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on December 12, 2006. |
|
(38) |
|
Incorporated by reference to Exhibit 10.2 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on March 7, 2007. |
|
(39) |
|
Incorporated by reference to Exhibit 10.3 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on December 12, 2006. |
|
(40) |
|
Incorporated by reference to Exhibit 10.4 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on December 12, 2006. |
|
(41) |
|
Incorporated by reference to Exhibit 10.5 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on December 12, 2006. |
|
(42) |
|
Incorporated by reference to Exhibit 10.3 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on March 7, 2007. |
|
(43) |
|
Incorporated by reference to Exhibit 10.1 to Optium
Corporations Current Report on
Form 8-K
filed on September 28, 2007. |
|
(44) |
|
Incorporated by reference to Exhibit 10.3 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on December 13, 2007. |
|
(45) |
|
Incorporated by reference to Exhibit 2.1 to Optium
Corporations Current Report on
Form 8-K
filed on May 21, 2007. |
|
(46) |
|
Incorporated by reference to Exhibit 10.23 to Optium
Corporations Registration Statement on
Form S-1/A
(333-135472)
filed on October 11, 2006. |
|
(47) |
|
Incorporated by reference to Exhibit 10.1 to Optium
Corporations Current Report on
Form 8-K
filed on May 21, 2007. |
|
(48) |
|
Incorporated by reference to Exhibit 10.17 to Optium
Corporations Registration Statement on
Form S-1
(333-135472)
filed on June 29, 2006. |
|
(49) |
|
Incorporated by reference to Exhibit 10.18 to Optium
Corporations Registration Statement on
Form S-1
(333-135472)
filed on June 29, 2006. |
|
(50) |
|
Incorporated by reference to Exhibit 10.22 to Optium
Corporations Registration Statement on
Form S-1/A
(333-135472)
filed on September 28, 2006. |
|
(51) |
|
Incorporated by reference to Exhibit 10.4 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on March 7, 2007. |
|
(52) |
|
Incorporated by reference to Exhibit 10.5 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on March 7, 2007. |
|
(53) |
|
Incorporated by reference to Exhibit 10.6 to Optium
Corporations Quarterly Report on
Form 10-Q
filed on March 7, 2007. |
|
(54) |
|
Incorporated by reference to Exhibit 10.36 to Optium
Corporations Annual Report on
Form 10-K
filed on October 24, 2007. |
|
(55) |
|
Incorporated by reference to Exhibit 10.37 to Optium
Corporations Annual Report on
Form 10-K
filed on October 24, 2007. |
126
|
|
|
(56) |
|
Incorporated by reference to Exhibit 10.38 to Optium
Corporations Annual Report on
Form 10-K
filed on October 24, 2007. |
|
(57) |
|
Incorporated by reference to Exhibit 10.2 to Optium
Corporations Current Report on
Form 8-K
filed on September 28, 2007. |
|
(58) |
|
Incorporated by reference to Exhibit 10.3 to Optium
Corporations Current Report on
Form 8-K
filed on September 28, 2007. |
|
(59) |
|
Incorporated by reference to Exhibit 10.4 to Optium
Corporations Current Report on
Form 8-K
filed on September 28, 2007. |
|
(60) |
|
Incorporated by reference to Exhibit 10.55 to
Registrants Quarterly Report on
Form 10-Q
filed December 17, 2008. |
|
(61) |
|
Incorporated by reference to Exhibit 10.56 to
Registrants Quarterly Report on
Form 10-Q
filed December 17, 2008. |
|
(62) |
|
Incorporated by reference to Exhibit 10.57 to
Registrants Quarterly Report on
Form 10-Q
filed December 17, 2008. |
|
(63) |
|
Incorporated by reference to Exhibit 10.58 to
Registrants Quarterly Report on
Form 10-Q
filed December 17, 2008. |
|
(64) |
|
Incorporated by reference to Exhibit 10.59 to
Registrants Quarterly Report on
Form 10-Q
filed December 17, 2008. |
|
(65) |
|
Incorporated by reference to Exhibit 10.60 to
Registrants Quarterly Report on
Form 10-Q
filed December 17, 2008. |
|
(66) |
|
Incorporated by reference to Exhibit 99.1 to
Registrants Current Report on
Form 8-K
filed on January 7, 2009. |
|
(67) |
|
Incorporated by reference to Exhibit 99.2 to
Registrants Current Report on
Form 8-K
filed on January 7, 2009. |
|
(68) |
|
Incorporated by reference to Exhibit 99.3 to
Registrants Current Report on
Form 8-K
filed on January 7, 2009. |
|
(69) |
|
Incorporated by reference to Exhibit 99.4 to
Registrants Current Report on
Form 8-K
filed on January 7, 2009. |
|
(70) |
|
Incorporated by reference to Exhibit 10.61 to
Registrants Quarterly Report on
Form 10-Q
filed March 12, 2009. |
|
(71) |
|
Incorporated by reference to Exhibit 10.62 to
Registrants Quarterly Report on
Form 10-Q
filed March 12, 2009. |
|
(72) |
|
Incorporated by reference to Exhibit 10.63 to
Registrants Quarterly Report on
Form 10-Q
filed March 12, 2009. |
|
(73) |
|
Incorporated by reference to Exhibit 10.64 to
Registrants Quarterly Report on
Form 10-Q
filed March 12, 2009. |
|
(74) |
|
Incorporated by reference to Exhibit 18 to
Registrants Quarterly Report on
Form 10-Q
filed December 17, 2008. |
127