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, FinanceCorporate Development and Investor Relations and our former Senior Vice President and Chief Financial Officer, and an investment banking firm that served as an underwriter for our initial public offering in November 1999 and a secondary offering in April 2000. The complaint, as subsequently amended, alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(b) of the Securities Exchange Act of 1934, on the grounds that the prospectuses incorporated in the registration statements for the offerings failed to disclose, among other things, that (i) the underwriter had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriter allocated to those investors material portions of the shares of our stock sold in the offerings and (ii) the underwriter had entered into agreements with customers whereby the underwriter agreed to allocate shares of our stock sold in the offerings to those customers in exchange for which the customers agreed to purchase additional shares of our stock in the aftermarket at pre-determined prices. No specific damages are claimed. Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, which were consolidated for pretrial purposes. In October 2002, all claims against the individual defendants were dismissed without prejudice. On February 19, 2003, the Court denied defendants’ motion to dismiss the complaint.
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 APB14-1”). FSP APB14-1 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 issuer’s non-convertible debt borrowing rate. FSP APB14-1 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 APB14-1 on our consolidated results of operations and financial condition.
In April 2008, the FASB issuedFSP 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 ofFSP 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 parent’s 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 |
OurAs of April 30, 2010, our exposure to market risk for changes in interest rates relatesrelated 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.long-term debt.
57
The following table summarizes theprincipal cash flows and related weighted average interest rates by expected maturity average interest ratedates 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, 20092010 (in thousands):.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended April 30, | | | | Fair
| | | Fiscal Years Ended April 30, | | | | Fair
| |
| | | | | | 2012 and
| | | | Market
| | | | | | | | | | | | | 2016 and
| | | | Market
| |
| | 2010 | | 2011 | | Thereafter | | Total Cost | | Value | | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 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 | | |
Fixed rate debt | | | $ | 29,581 | | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 29,581 | | | $ | 29,491 | |
Average interest rate | | | — | | | | 2.50 | % | | | 2.50 | % | | | — | | | | — | | | | 2.50 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2.50 | % | | | — | |
Fixed rate | | | — | | | $ | 92,000 | | | | — | | | $ | 92,000 | | | $ | 45,310 | | | $ | — | | | | — | | | | — | | | | — | | | | — | | | $ | 100,000 | | | $ | 100,000 | | | $ | 159,220 | |
Average interest rate | | | — | | | | 2.50 | % | | | 2.50 | % | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5.00 | % | | | 5.00 | % | | | | |
Variable rate debt | | | $ | 4,000 | | | $ | 4,000 | | | $ | 9,500 | | | $ | 1,750 | | | | — | | | | — | | | $ | 19,250 | | | $ | 18,183 | |
Average interest rate | | | | 3.24 | % | | | 3.24 | % | | | 3.24 | % | | | 3.24 | % | | | — | | | | — | | | | 3.24 | % | | | | |
The following table summarizes the expected maturity, averageOur variable rate debt were primarily dependent upon LIBOR rates. A hypothetical 10% change in interest rate and fair market valuerates would not have a material impact on our financial position, results 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 | % | | | — | | | | — | |
operations or cash flows.
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, 2009,2010, we had investments in four privately-held companies that totaled $14.3$12.3 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 of $2.0 million during fiscal 2010. We concluded that there were sufficient indicators during the second quarter of fiscal 2010 to require an investment impairment analysis of our investment in one of these companies. Among these indicators was the completion of a new round of equity financing by the investee and the resultant conversion of the Company’s preferred stock holdings to common stock. We determined that the value of our minority equity investment was impaired and recorded a $2.0 million impairment loss as other expense during the second quarter of fiscal 2010. No impairment losses were recorded in fiscal 2009 2008 or 2007.and fiscal 2008. If our investment in a privately-held company becomes readily marketable equity securities upon the company’s 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.
5953
| |
Item 8. | Financial Statements and Supplementary Data |
FINISAR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS INDEX
| | | | |
| | | 6155 | |
| | | 6256 | |
| | | 6357 | |
| | | 6458 | |
| | | 6559 | |
| | | 6660 | |
| | | 114106 | |
6054
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, 20092010 and 2008,2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2009.2010. 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 Company’s 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, 20092010 and 2008,2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2009,2010, 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 Corporation’s internal control over financial reporting as of April 30, 2009,2010, 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, 20091, 2010 expressed an unqualified opinion thereon.
San Jose, California
July 8, 20091, 2010
6155
FINISAR CORPORATION
| | | | | | | | | | | | | | | | |
| | April 30, | | | April 30, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
| | (In thousands, except share and per share data) | | | (In thousands, except share and per share data) | |
|
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 37,129 | | | $ | 79,442 | | | $ | 207,024 | | | $ | 37,221 | |
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, net of allowance for doubtful accounts of $2,085 at April 30, 2010 and $1,069 at April 30, 2009 | | | | 127,617 | | | | 81,820 | |
Accounts receivable, other | | | 10,033 | | | | 12,408 | | | | 12,855 | | | | 10,033 | |
Inventories | | | 112,300 | | | | 82,554 | | | | 139,525 | | | | 107,764 | |
Prepaid expenses | | | 7,122 | | | | 7,652 | | | | 9,194 | | | | 6,795 | |
Current assets associated with discontinued operations | | | | — | | | | 4,863 | |
| | | | | | | | | | |
Total current assets | | | 248,496 | | | | 260,638 | | | | 496,215 | | | | 248,496 | |
Long-term available-for-sale investments | | | — | | | | 9,236 | | |
Property, plant and improvements, net | | | 84,040 | | | | 89,847 | | |
Property, equipment and improvements, net | | | | 89,214 | | | | 81,606 | |
Purchased technology, net | | | 16,663 | | | | 11,850 | | | | 11,689 | | | | 16,459 | |
Other intangible assets, net | | | 14,316 | | | | 3,899 | | | | 11,713 | | | | 13,427 | |
Goodwill | | | — | | | | 88,242 | | |
Minority investments | | | 14,289 | | | | 13,250 | | | | 12,289 | | | | 14,289 | |
Other assets | | | 2,897 | | | | 3,241 | | | | 5,610 | | | | 2,584 | |
Non-current assets associated with discontinued operations | | | | — | | | | 3,527 | |
| | | | | | | | | | |
Total assets | | $ | 380,701 | | | $ | 480,203 | | | $ | 626,730 | | | $ | 380,388 | |
| | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 48,421 | | | $ | 43,040 | | | $ | 76,838 | | | $ | 48,421 | |
Accrued compensation | | | 11,428 | | | | 14,397 | | | | 18,289 | | | | 11,428 | |
Other accrued liabilities (Note 10) | | | 30,713 | | | | 23,397 | | |
Other accrued liabilities (Note 11) | | | | 21,076 | | | | 30,513 | |
Deferred revenue | | | 4,663 | | | | 5,312 | | | | 6,571 | | | | 1,703 | |
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 | | |
Current portion of convertible debt (Note 12) | | | | 28,839 | | | | — | |
Current portion of long-term debt (Note 13) | | | | 4,000 | | | | 6,107 | |
Non-cancelable purchase obligations | | | 2,965 | | | | 3,206 | | | | 722 | | | | 2,965 | |
Current liabilities associated with discontinued operations | | | | — | | | | 3,160 | |
| | | | | | | | | | |
Total current liabilities | | | 104,297 | | | | 193,706 | | | | 156,335 | | | | 104,297 | |
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 | | |
Convertible notes, net of current portion (Note 12) | | | | 100,000 | | | | 134,255 | |
Long-term debt, net of current portion (Note 13) | | | | 15,250 | | | | 15,305 | |
Other non-current liabilities | | | 3,161 | | | | 15,285 | | | | 5,893 | | | | 2,511 | |
Deferred income taxes | | | 1,149 | | | | 8,903 | | | | 606 | | | | 1,149 | |
Non-current liabilities associated with discontinued operations | | | | — | | | | 650 | |
| | | | | | | | | | |
Total liabilities | | | 265,912 | | | | 371,520 | | | | 278,084 | | | | 258,167 | |
| | | | | | |
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 | | |
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at April 30, 2010 and April 30, 2009 | | | | — | | | | — | |
Common stock, $0.001 par value, 750,000,000 shares authorized, 75,824,913 shares issued and outstanding at April 30, 2010 and 59,686,507 shares issued and outstanding at April 30, 2009 | | | | 76 | | | | 60 | |
Additional paid-in capital | | | 1,811,298 | | | | 1,540,241 | | | | 2,030,373 | | | | 1,831,224 | |
Accumulated other comprehensive income | | | 2,662 | | | | 12,973 | | | | 15,791 | | | | 2,662 | |
Accumulated deficit | | | (1,699,648 | ) | | | (1,444,840 | ) | | | (1,697,594 | ) | | | (1,711,725 | ) |
| | | | | | | | | | |
Total stockholders’ equity | | | 114,789 | | | | 108,683 | | | | 348,646 | | | | 122,221 | |
| | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 380,701 | | | $ | 480,203 | | | $ | 626,730 | | | $ | 380,388 | |
| | | | | | | | | | |
See accompanying notes.
6256
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 | |
| | | | | | | | | | | | |
| | Fiscal Years Ended April 30, | |
| | 2010 | | | 2009 | | | 2008 | |
| | (In thousands, except per share data) | |
|
Revenues | | $ | 629,880 | | | $ | 497,058 | | | $ | 401,625 | |
Cost of revenues | | | 445,370 | | | | 352,096 | | | | 281,770 | |
Impairment of acquired developed technology | | | — | | | | 1,248 | | | | — | |
Amortization of acquired developed technology | | | 4,769 | | | | 4,907 | | | | 4,667 | |
| | | | | | | | | | | | |
Gross profit | | | 179,741 | | | | 138,807 | | | | 115,188 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Research and development | | | 94,770 | | | | 80,136 | | | | 63,067 | |
Sales and marketing | | | 30,702 | | | | 27,730 | | | | 27,013 | |
General and administrative | | | 36,772 | | | | 35,818 | | | | 38,343 | |
Acquired in-process research and development | | | — | | | | 10,500 | | | | — | |
Restructuring charges | | | 4,173 | | | | — | | | | — | |
Amortization of purchased intangibles | | | 2,028 | | | | 2,145 | | | | 1,192 | |
Impairment of goodwill and intangible assets | | | — | | | | 238,507 | | | | — | |
| | | | | | | | | | | | |
Total operating expenses | | | 168,445 | | | | 394,836 | | | | 129,615 | |
| | | | | | | | | | | | |
Income (loss) from operations | | | 11,296 | | | | (256,029 | ) | | | (14,427 | ) |
| | | | | | | | | | | | |
Interest income | | | 144 | | | | 1,762 | | | | 5,805 | |
Interest expense | | | (8,957 | ) | | | (14,597 | ) | | | (21,876 | ) |
Gain (loss) on debt extinguishment | | | (25,039 | ) | | | 3,064 | | | | — | |
Other income (expense), net | | | (1,890 | ) | | | (3,654 | ) | | | (113 | ) |
| | | | | | | | | | | | |
Loss from continuing operations before income taxes | | | (24,446 | ) | | | (269,454 | ) | | | (30,611 | ) |
Provision (benefit) for income taxes | | | (1,640 | ) | | | (6,962 | ) | | | 2,233 | |
| | | | | | | | | | | | |
Loss from continuing operations | | | (22,806 | ) | | | (262,492 | ) | | | (32,844 | ) |
| | | | | | | | | | | | |
Income (loss) from discontinued operations, net of income taxes | | $ | 36,937 | | | $ | 2,149 | | | $ | (46,169 | ) |
| | | | | | | | | | | | |
Net income (loss) | | $ | 14,131 | | | $ | (260,343 | ) | | $ | (79,013 | ) |
| | | | | | | | | | | | |
Net income (loss) per share — basic and diluted | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | |
Loss per share from continuing operations | | $ | (0.35 | ) | | $ | (4.99 | ) | | $ | (0.85 | ) |
Income (loss) per share from discontinued operations | | $ | 0.57 | | | $ | 0.04 | | | $ | (1.20 | ) |
Net income (loss) per share | | $ | 0.22 | | | $ | (4.95 | ) | | $ | (2.05 | ) |
Diluted: | | | | | | | | | | | | |
Loss per share from continuing operations | | $ | (0.35 | ) | | $ | (4.99 | ) | | $ | (0.85 | ) |
Income (loss) per share from discontinued operations | | $ | 0.57 | | | $ | 0.04 | | | $ | (1.20 | ) |
Net income (loss) per share | | $ | 0.22 | | | $ | (4.95 | ) | | $ | (2.05 | ) |
Shares used in computing net income (loss) per share: | | | | | | | | | | | | |
Basic | | | 64,952 | | | | 52,557 | | | | 38,585 | |
Diluted | | | 64,952 | | | | 52,557 | | | | 38,585 | |
See accompanying notes.
6357
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Other
| | | | | | | |
| | | | | | | | Additional
| | | Comprehensive
| | | | | | Total
| |
| | Common Stock | | | Paid-in
| | | Income
| | | Accumulated
| | | Stockholders’
| |
| | Shares | | | Amount | | | Capital | | | (Loss) | | | Deficit | | | Equity | |
| | | | | | | | (In thousands, except share data) | | | | |
|
Balance at April 30, 2007 | | | 38,579,122 | | | $ | 39 | | | $ | 1,549,101 | | | $ | 11,162 | | | $ | (1,372,369 | ) | | $ | 187,933 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of warrants, stock options, net of repurchase of unvested shares | | | 25,781 | | | | — | | | | 179 | | | | — | | | | — | | | | 179 | |
Employee share-based compensation expense | | | — | | | | — | | | | 10,740 | | | | — | | | | — | | | | 10,740 | |
Change in unrealized loss onavailable-for-sale investments | | | — | | | | — | | | | — | | | | (4,165 | ) | | | — | | | | (4,165 | ) |
Change in cumulative foreign currency translation adjustment | | | — | | | | — | | | | — | | | | 5,976 | | | | — | | | | 5,976 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (79,013 | ) | | | (79,013 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (77,202 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at April 30, 2008 | | | 38,604,903 | | | $ | 39 | | | $ | 1,560,020 | | | $ | 12,973 | | | $ | (1,451,382 | ) | | $ | 121,650 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options and restricted stock issued under restricted stock awards plan | | | 352,981 | | | | — | | | | 1,138 | | | | — | | | | — | | | | 1,138 | |
Issuance of common stock through employee stock purchase plan | | | 627,541 | | | | 1 | | | | 3,385 | | | | — | | | | — | | | | 3,386 | |
Employee share-based compensation expense | | | — | | | | — | | | | 14,894 | | | | — | | | | — | | | | 14,894 | |
Assumption of stock options related to acquisition of Optium | | | — | | | | — | | | | 8,986 | | | | — | | | | — | | | | 8,986 | |
Issuance of stock related to acquisition of Optium | | | 20,101,082 | | | | 20 | | | | 242,801 | | | | — | | | | — | | | | 242,821 | |
Change in unrealized loss onavailable-for-sale investments | | | — | | | | — | | | | — | | | | (925 | ) | | | — | | | | (925 | ) |
Change in cumulative foreign currency translation adjustment | | | — | | | | — | | | | — | | | | (9,386 | ) | | | — | | | | (9,386 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | (260,343 | ) | | | (260,343 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | (270,654 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at April 30, 2009 | | | 59,686,507 | | | $ | 60 | | | $ | 1,831,224 | | | $ | 2,662 | | | $ | (1,711,725 | ) | | $ | 122,221 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options, warrants and restricted stock issued under restricted stock awards plan | | | 1,555,694 | | | | 1 | | | | 4,861 | | | | — | | | | — | | | | 4,862 | |
Issuance of common stock through employee stock purchase plan | | | 1,256,571 | | | | 1 | | | | 3,604 | | | | — | | | | — | | | | 3,605 | |
Employee share-based compensation expense | | | — | | | | — | | | | 15,860 | | | | — | | | | — | | | | 15,860 | |
Income tax benefit on exercise of stock options | | | — | | | | — | | | | 112 | | | | — | | | | — | | | | 112 | |
Shares issued on conversion of convertible debt | | | 3,539,048 | | | | 4 | | | | 16,379 | | | | — | | | | — | | | | 16,383 | |
Reacquisition of convertible debt equity component | | | — | | | | — | | | | (226 | ) | | | — | | | | — | | | | (226 | ) |
Loss on conversion of convertible debt | | | — | | | | — | | | | 27,477 | | | | — | | | | — | | | | 27,477 | |
Common stock offering | | | 9,787,093 | | | | 10 | | | | 131,082 | | | | — | | | | — | | | | 131,092 | |
Change in unrealized loss onavailable-for-sale investments | | | — | | | | — | | | | — | | | | 21 | | | | — | | | | 21 | |
Change in cumulative foreign currency translation adjustment | | | — | | | | — | | | | — | | | | 13,108 | | | | — | | | | 13,108 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | 14,131 | | | | 14,131 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 27,260 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at April 30, 2010 | | | 75,824,913 | | | $ | 76 | | | $ | 2,030,373 | | | $ | 15,791 | | | $ | (1,697,594 | ) | | $ | 348,646 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes.
6458
FINISAR CORPORATION
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended April 30, | | | Fiscal Years Ended April 30, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | (In thousands) | | | (In thousands) | |
|
Operating activities | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (254,808 | ) | | $ | (74,558 | ) | | $ | (48,908 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | | | |
Net income (loss) | | | $ | 14,131 | | | $ | (260,343 | ) | | $ | (79,013 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | | |
Depreciation and amortization | | | 30,490 | | | | 25,377 | | | | 25,047 | | | | 30,530 | | | | 30,340 | | | | 25,192 | |
Stock-based compensation expense | | | 14,978 | | | | 11,564 | | | | 11,822 | | | | 15,650 | | | | 14,978 | | | | 11,564 | |
Amortization of beneficial conversion feature of convertible notes | | | | — | | | | 1,817 | | | | 4,943 | |
Non-cash interest cost on 2.5% convertible senior subordinated notes | | | | 3,033 | | | | 4,910 | | | | 4,640 | |
Acquired in-process research and development | | | 10,500 | | | | — | | | | 5,770 | | | | — | | | | 10,500 | | | | — | |
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 | | | | 2,105 | | | | 2,687 | | | | 1,749 | |
Impairment of goodwill and intangible assets | | | 238,507 | | | | 40,106 | | | | — | | |
Amortization of acquired developed technology | | �� | | 4,940 | | | | 6,038 | | | | 6,501 | |
Impairment of acquired developed technology | | | 1,248 | | | | — | | | | — | | | | — | | | | 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 | | |
Impairment of minority investments | | | | 2,000 | | | | — | | | | — | |
Loss (gain) on sale or retirement of assets | | | | 330 | | | | 996 | | | | (516 | ) |
Other than temporary decline in fair market value of equity security | | | 1,920 | | | | — | | | | — | | | | — | | | | 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 | | | | — | | |
Loss (gain) on debt extinguishment | | | | 23,552 | | | | (3,063 | ) | | | 238 | |
Gain on remeasurement of derivative liability | | | | — | | | | (1,135 | ) | | | 1,135 | |
Loss (gain) on sale of equity investment | | | | (375 | ) | | | — | | | | — | |
Loss (gain) on sale of a product line | | | | (1,250 | ) | | | 919 | | | | — | |
Gain on sale of discontinued operations | | | | (36,053 | ) | | | — | | | | | |
Impairment of goodwill | | | | — | | | | 238,507 | | | | 40,106 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | (33,399 | ) | | | 8,891 | | | | 2,449 | | | | (45,797 | ) | | | (33,399 | ) | | | 8,891 | |
Inventories | | | 459 | | | | (1,159 | ) | | | (17,364 | ) | | | (26,655 | ) | | | 459 | | | | (1,159 | ) |
Other assets | | | 922 | | | | (5,496 | ) | | | (333 | ) | | | (6,230 | ) | | | 922 | | | | (5,496 | ) |
Deferred income taxes | | | (7,277 | ) | | | 1,756 | | | | 2,176 | | | | (1,999 | ) | | | (7,277 | ) | | | 1,756 | |
Accounts payable | | | 4,396 | | | | 1,432 | | | | 3,227 | | | | 28,417 | | | | 4,396 | | | | 1,432 | |
Accrued compensation | | | (4,611 | ) | | | 3,847 | | | | (737 | ) | | | 6,500 | | | | (4,611 | ) | | | 3,847 | |
Other accrued liabilities | | | (9,759 | ) | | | 9,021 | | | | 113 | | | | (5,728 | ) | | | (9,759 | ) | | | 9,021 | |
Deferred revenue | | | (680 | ) | | | (214 | ) | | | 1,375 | | | | 4,666 | | | | (680 | ) | | | (214 | ) |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 382 | | | | 34,621 | | | | 29,011 | | | | 11,767 | | | | 370 | | | | 34,617 | |
| | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of property, equipment and improvements | | | (23,918 | ) | | | (27,198 | ) | | | (22,340 | ) | | | (31,408 | ) | | | (23,918 | ) | | | (27,198 | ) |
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 | | |
Proceeds from sale of property and equipment | | | | 33 | | | | 229 | | | | 643 | |
Sale of available- for-sale andheld-to-maturity investments, net | | | | — | | | | 38,534 | | | | 30,804 | |
Proceeds from sale of equity investment | | | | 375 | | | | 102 | | | | 1,584 | |
Purchase of minority investments | | | | — | | | | — | | | | (2,000 | ) |
Maturity of restricted securities | | | — | | | | 625 | | | | 4,951 | | | | — | | | | — | | | | 625 | |
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 | ) | | | — | | |
Purchase of intangible assets | | | | (375 | ) | | | — | | | | — | |
Proceeds from disposal of product line | | | | 1,250 | | | | — | | | | — | |
Proceeds from sale of discontinued operation | | | | 40,683 | | | | — | | | | — | |
Purchases of subsidiaries, net of cash assumed | | | | — | | | | 30,137 | | | | 521 | |
| | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 44,980 | | | | 4,975 | | | | (38,042 | ) | |
Net cash provided by investing activities | | | | 10,558 | | | | 45,084 | | | | 4,979 | |
| | | | | | | | | | | | | | |
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 | | | | — | | | | — | | |
Proceeds from term loan | | | | 5,500 | | | | 20,000 | | | | — | |
Net proceeds from issuance of 5% convertible notes | | | | 98,057 | | | | — | | | | — | |
Repayments of liability related to sale-leaseback of building | | | (101 | ) | | | (359 | ) | | | (296 | ) | | | — | | | | (101 | ) | | | (359 | ) |
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 | | |
Repayment of convertible notes issued in connection with acquisition | | | | — | | | | (11,918 | ) | | | (5,959 | ) |
Repayments of long-term debt | | | | (7,663 | ) | | | (4,225 | ) | | | (1,897 | ) |
Repayment of convertible notes | | | | (87,951 | ) | | | (95,956 | ) | | | (8,224 | ) |
Net proceeds from common stock offering | | | | 131,090 | | | | — | | | | — | |
Proceeds from exercise of stock options and stock purchase plan, net of repurchase of unvested shares | | | | 8,445 | | | | 4,525 | | | | 179 | |
| | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (87,675 | ) | | | (16,260 | ) | | | 1,776 | | | | 147,478 | | | | (87,675 | ) | | | (16,260 | ) |
| | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (42,313 | ) | | | 23,336 | | | | (7,255 | ) | | | 169,803 | | | | (42,221 | ) | | | 23,336 | |
Cash and cash equivalents at beginning of year | | | 79,442 | | | | 56,106 | | | | 63,361 | | | | 37,221 | | | | 79,442 | | | | 56,106 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 37,129 | | | $ | 79,442 | | | $ | 56,106 | | | $ | 207,024 | | | $ | 37,221 | | | $ | 79,442 | |
| | | | | | | | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 6,776 | | | $ | 9,190 | | | $ | 9,514 | | | $ | 5,305 | | | $ | 6,776 | | | $ | 9,190 | |
Cash paid for taxes | | $ | 1,100 | | | $ | 182 | | | $ | 659 | | | $ | 711 | | | $ | 1,100 | | | $ | 182 | |
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 | | | $ | — | | | $ | — | | |
| | | | | | | | |
Issuance of common stock and assumption of options and warrants in connection with merger | | | | — | | | $ | 251,382 | | | | — | |
Issuance of common stock for repayment of convertible debt | | | $ | 16,383 | | | | — | | | | — | |
See accompanying notes
6559
FINISAR CORPORATION
Description of Business
Finisar Corporation (the “Company”(“the Company”) was incorporated in California in April 1987 and reincorporated in Delaware in November 1999. The Company is a leading provider of optical subsystems and components that connectare used to interconnect equipment in local area networks, or LANs, storage area networks, or SANs, and metropolitan area networks, or MANs,fiber-to-the-home networks, or FTTx, cable television networks, or CATV, and wide area networks, or WANs. The Company’s 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, including switches, routers and file servers used in wireline networks as well as antennas and base stations for wireless networks. 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 at speeds ranging from less than 1 gigabit per second, or Gbps, to 100 Gbps using a wide range of network protocols transmission speeds and physical configurations over distances from 70 meters up to 200 kilometers. The Company supplies optical transceivers and transponders that allowpoint-to-point communications on a fiber using a single specified wavelength or, bundled with multiplexing technologies, can be used to supply multi-gigabit bandwith over several wavelengths on the same fiber. The Company also provides products that are used for dynamically switching network traffic from one optical link to another across multiple wavelengths without first converting to an electrical signal, known as wavelength selective switches, or WSS. These products are sometimes combined with other components and sold as linecards, also known as reconfigurable optical add/drop multiplexers, or ROADMs. The Company’s 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. Demand for the Company’s products is largely driven by the continually growing need for additional bandwidth created by the ongoing proliferation of data and video traffic that must be handled by both wireline and wireless networks.
The Company’s manufacturing operations are vertically integrated and include integrated circuit design and internal assembly and test capabilities for the Company’s optical subsystem products, as well as key components used in those subsystems. The Company utilizes its internal sources for many of the key components used in making its products including lasers, photodetectors and integrated circuits, or ICs, designed by its own internal IC engineering teams. The Company also has internal assembly and test capabilities that make use of internally designed equipment for the automated testing of the optical subsystems and components.
The Company sells its optical subsystem and component products to manufacturers of storage andsystems, 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.
The Company also providesformerly provided network performance test systems through its Network Tools Division. On July 15, 2009, the Company consummated the sale of substantially all of the assets of the Network Tools Division primarily to leading storage equipment manufacturers suchJDS Uniphase Corporation (“JDSU”). In accordance with the accounting guidance provided by Financial Accounting Standards Board (“FASB”), the operating results of this business and the associated assets and liabilities are reported as Brocade, EMC, Emulex, Hewlett-Packard Company and Qlogicdiscontinued operations in the accompanying consolidated financial statements for testing and validating equipment designs.
Finisar Corporation was incorporated in California in April 1987 and reincorporated in Delaware in November 1999. Finisar’s principal executive offices are located at 1389 Moffett Park Drive, Sunnyvale, California 94089, and its telephone number at that location is(408) 548-1000.all periods presented. See Note 3 for further details regarding the sale of the assets of the division.
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.
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FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 2010 ended on August 2, 2009, November 1, 2009, and January 31, 2010. 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.
Convertible Senior Subordinated Notes
In May 2008, the Company adopted authoritative guidance issued by the FASB for accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). This guidance addresses instruments commonly referred to as Instrument C which requires the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer’s option. It requires that issuers of these instruments account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity and then accreting the resulting discount on the debt as additional interest expense over the expected life of the debt. It is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and requires retrospective application to all periods presented. On May 1, 2009, the Company adopted the provisions of this accounting pronouncement on a retrospective basis and as a result has recorded additional interest expense of $4.9 million in fiscal 2009 and $4.6 million in fiscal 2008, in its consolidated statement of operations. In addition, the retrospective adoption of this guidance decreased debt issuance costs included in other assets by an aggregate of $313,000, decreased convertible senior notes, net included in long-term liabilities by $7.7 million, and increased total stockholders’ equity by $7.4 million after a charge of $12.1 million to accumulated deficit on its consolidated balance sheet as of April 30, 2009. See Note 12 for the impact of the adoption of this guidance on prior period balances.
Reverse Stock Split
On September 25, 2009, the Company effected a1-for-8 reverse split of its common stock. The number of authorized shares of common stock was not changed. The reverse stock split reduced the Company’s issued and outstanding shares of common stock as of September 25, 2009 from 517,161,351 shares to 64,645,169 shares.
All share and per-share information in the accompanying financial statements have been restated retroactively to reflect the reverse stock split. The common stock and additional paid-in capital accounts at April 30, 2009, 2008 and 2007 were adjusted retroactively to reflect the reverse stock split.
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.
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FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
2. | Summary of Significant Accounting Policies |
Revenue Recognition
The Company’s revenue transactions consist predominately of sales of products to customers. The Company followsProduct revenues are generally recognized in the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition,and Emerging Issues Task Force (“EITF”) Issue00-21,Revenue Arrangements with Multiple Deliverables.Specifically, the Company recognizes revenue whenperiod in which persuasive evidence of an arrangement exists, title
61
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 Company’s 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 to distributors with price protection and rights of return 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.
The Company’s discontinued operations had some arrangements with multiple elements and related arrangements with the same customer. Such arrangements were divided into separate units of accounting if certain criteria were met, including whether the delivered item had stand-alone value to the customer and whether there was objective and reliable evidence of the fair value of the undelivered items. The consideration received was allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria was applied to each of the separate units. In cases where there was 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 was used to allocate the arrangement consideration. For units of accounting which included more than one deliverable, the Company generally recognized all revenue and cost of revenue for the unit of accounting over the period in which the last undelivered item was delivered.
Segment Reporting
Statement of Financial Accounting Standards (“SFAS”) No. 131,Disclosures about Segments of an Enterprise and Related Information(“SFAS 13”),FASB’s authoritative guidance regarding segment reporting 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 131It also establishes standards for related disclosures about products and services, geographic areas and major customers. ThePrior to the first quarter of fiscal 2010, the Company hashad determined that it operatesoperated in two segments consisting of optical subsystems and components and network performance test systems. After the sale of the assets of the Network Tools Division to JDSU in the first quarter of fiscal 2010, the Company has one reportable segment comprising optical subsystems and components. Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for SANs and LANs and MAN applications. Optical subsystems also include multiplexers, de-multiplexers and optical add/drop modules for use in MAN applications. Optical components consist primarily of packaged lasers and photo-detectors which are incorporated in transceivers, primarily for LAN and SAN applications.
Concentrations of Credit Risk
Financial instruments which potentially subject Finisarthe Company to concentrations of credit risk include cash, cash equivalents, short-term, long-term investments and accounts receivable. FinisarThe Company 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)FDIC insurance limits.
Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Generally, the Company does not require collateral or other security to support customer receivables. The Company performs periodic credit evaluations of its customers and maintains an allowance for
6762
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 not been within management’s expectations.material. The Company’s five largest customers represented 46.0%44% and 44.0%48% of total accounts receivable at April 30, 2010 and April 30, 2009, respectively. As of April 30, 2010, two customers accounted for 12% and 2008.10%, respectively, of total accounts receivable. As of April 30, 2009, two customers accounted for 14%19% and 12%17%, respectively, of total accounts receivable.
The Company sells products primarily to customers located in Asia and North America. Sales to the Company’s five largest customers represented 43%, 42% and 44% of total revenues during fiscal 2010, 2009 and 2008 respectively. One customer, accounted for 23.0%Cisco Systems, represented more than 10% of total accounts receivable at April 30, 2008.revenues during each of these periods.
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 Company’s consolidated balance sheet at April 30, 2009,2010 are the net assets of the Company’s manufacturing operations substantially all of which are located overseas at its overseasIpoh, Malaysia, Shanghai, China and Australia manufacturing facilities and which total approximately to $68.2$101.1 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.income (loss). 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 Company’s 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
Finisar’s 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-saleAvailable-for-Sale Investments
Available-for-sale investments consist of interest bearing securitiesInvestments with original maturities of greater than three months fromand remaining maturities of less than one year are classified as short-term investments. All of the dateCompany’s short-term investments are classified asavailable-for-sale.Available-for-sale investments also consist 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) 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.
Other Investments
The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. For entities in which the Company holds an interest of greater than 20% or in which
63
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 isother-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 Company’s 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 Company’s 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 ofauthoritative guidance regarding fair valuation defines fair value accounting to eligible financial assets and liabilities. SFAS 159 is effective as of the beginning of an entity’s 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 Company’s financial condition or results of operations as of April 30, 2009 and for fiscal 2009. However, because the SFAS 159 election is based on aninstrument-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 requireThe guidance requires or permitpermits fair value measurements with certain exclusions. The statementIt 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 157The guidance 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 157this guidance must maximize the use of observable inputs and minimize the use of unobservable inputs. The standardIt 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. 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. instrument; and
Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s 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 and157-2(“FSP 157-1 and “FAP157-2”).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, whileFSP 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 issuedFSP 157-3Determining 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 Company’s 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.
notes. 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 includeinclude: government agencies, corporate bonds and mortgage-backed debt.commercial paper. See Note 6 for additional details regarding the fair value of the Company’s investments.
The Company did not hold financial assets and liabilities which were valued using unobservable inputs as of April 30, 2010 or April 30, 2009.
Allowance for Doubtful Accounts
The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where, subsequent to delivery, the Company becomes aware of a customer’s potential inability to meet its obligations, it records a specific allowance for the doubtful account to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an allowance for doubtful accounts based on the length of time the receivables are past due and historical actual bad debt history. A material adverse change in a major customer’s ability to meet its financial obligations to the
64
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company could result in a material reduction in the estimated amount of accounts receivable that can ultimately be collected and an increase in the Company’s general and administrative expenses for the shortfall.
Inventories
Inventories are stated at the lower of cost (determined on afirst-in, first-out basis) or market.
The Company permanently writes down to its estimated net realizable value 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 management’s 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 Company’s products, and (3) known design changes which would reduce the Company’s 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.down to its estimated net realizable value. 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 resultresulting from acquisitions are accounted for under the purchase method. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization of purchased technology and other intangibles has been provided on a straight-line basis over periods ranging from three to seventen 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 impairment tests that would more likely than not reduce the fair value of the reporting unit holding the goodwill 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.
Restructuring Costs
The Company recognizes liability for exit and disposal activities when the liability is incurred. Facilities consolidation charges are calculated using estimates and are based upon the remaining future lease commitments for vacated facilities from the date of facility consolidation, net of estimated future sublease income. The estimated
65
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
costs of vacating these leased facilities are based on market information and trend analyses, including information obtained from third party real estate sources.
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 measurementmeasures and recognition ofrecognizes compensation expense for all stock-based payment awards made to employees and directors including employee stock options and employee stock purchases under the Company’s 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.awards. 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 Company’s consolidated statements of operations.
Stock-based compensation expense recognized in the Company’s 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 forexpected-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 forexpected-to-vest stock-based awards is valued under the single-option approach and amortized on a straight-line basis, net of estimated forfeitures.
Net LossIncome (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 lossincome (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net lossincome (loss) per share has been computed using theweighted-average number of shares of common stock and dilutive potential common shares from options, restricted stock units 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.
The following table presents common shares related to potentially dilutive securities excluded from the calculation of diluted net income (loss) per share from continuing operations because they are anti-dilutive (in thousands):
| | | | | | | | | | | | |
| | Fiscal Years Ended April 30, | |
| | 2010 | | | 2009 | | | 2008 | |
|
Employee stock options | | $ | 1,718 | | | $ | 693 | | | $ | 1,284 | |
Conversion of convertible subordinated notes | | | 662 | | | | 1,687 | | | | 3,957 | |
Conversion of 5% convertible senior notes due 2029 | | | 5,124 | | | | — | | | | — | |
Conversion of convertible notes | | | — | | | | — | | | | 1,117 | |
Warrants assumed in acquisition | | | 34 | | | | 38 | | | | 3 | |
| | | | | | | | | | | | |
| | $ | 7,538 | | | $ | 2,418 | | | $ | 6,361 | |
| | | | | | | | | | | | |
Comprehensive Income (Loss)
FASB authoritative guidance establishes rules for reporting and display of comprehensive income or loss and its components and requires unrealized gains or losses on the Company’savailable-for-sale securities and foreign currency translation adjustments to be included in comprehensive income (loss).
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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 Company’s 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, | | | Fiscal Years Ended April 30, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Net loss | | $ | (254,808 | ) | | $ | (76,434 | ) | | $ | (45,399 | ) | |
Net income (loss) | | | $ | 14,131 | | | $ | (260,343 | ) | | $ | (79,013 | ) |
Foreign currency translation adjustment | | | (9,386 | ) | | | 5,976 | | | | 3,819 | | | | 13,108 | | | | (9,386 | ) | | | 5,976 | |
Change in unrealized gain (loss) on securities, net of reclassification adjustments for realized gain/(loss) | | | (925 | ) | | | (4,165 | ) | | | 5,645 | | | | 21 | | | | (925 | ) | | | (4,165 | ) |
| | | | | | | | | | | | | | |
Comprehensive loss | | $ | (265,119 | ) | | $ | (74,623 | ) | | $ | (35,935 | ) | |
Comprehensive income (loss) | | | $ | 27,260 | | | $ | (270,654 | ) | | $ | (77,202 | ) |
| | | | | | | | | | | | | | |
Included in the determination of net lossincome (loss) was a loss of $0.7$1.3 million, a loss of $700,000 and gainsa gain on foreign currencyexchange transactions of $0.1 million and $0.3 million$100,000 for the fiscal years ended April 30, 2010, 2009 April 30,and 2008, and 2007, respectively.
The components of accumulated other comprehensive loss, net of taxes, were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | April 30, | | | April 30, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Net unrealized gains/(losses) on available-for-sale securities | | $ | (21 | ) | | $ | 904 | | | $ | — | | | $ | (21 | ) |
Cumulative translation adjustment | | | 2,683 | | | | 12,069 | | | | 15,791 | | | | 2,683 | |
| | | | | | | | | | |
Accumulated other comprehensive income | | $ | 2,662 | | | $ | 12,973 | | | $ | 15,791 | | | $ | 2,662 | |
| | | | | | | | | | |
Income Taxes
The Company accountsuses the liability method to account for income taxes in accordance with SFAS No. 109,Accounting for Income Taxes(“SFAS 109”).taxes. 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 109This method 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 Company’s current effective tax rate assumes that United States income taxes are not provided for the undistributed earnings ofnon-United States subsidiaries. The Company intends to indefinitely reinvest the earnings of all foreign corporate subsidiaries accumulated in fiscal 20092010 and subsequent years.
Effective May 1, 2007,Recent Adoption of New Accounting Standards
In the first quarter of fiscal 2010, the Company adopted FIN 48. FIN 48 seeks to reduceauthoritative guidance issued by the diversity in practice associated with certain aspects of measurement and recognition inFASB for accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). The guidance specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. See Note 12 for a discussion of the impact of the adoption of this guidance on the Company’s financial position and results of operations.
In May 2009, the Company adopted authoritative guidance issued by the FASB regarding subsequent events that established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This guidance was subsequently amended in February 2010 to no longer
67
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
require disclosure of the date through which an entity has evaluated subsequent events. The Company’s adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and notes thereto.
In April 2009, the FASB issued revised guidance requiring interim disclosures about fair value of financial instruments. This guidance requires fair value disclosures in both interim and annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. The Company adopted these standards as of May 1, 2009. The adoption of this guidance had no impact on the Company’s financial condition, results of operations or cash flows. See Note 18 for further discussion and related disclosures.
In the first quarter of fiscal 2010, the Company adopted revised accounting guidance which addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent (“non-controlling interests”), the amount of consolidated net income taxes. FIN 48 prescribesattributable to the parent and to the noncontrolling interest, changes in a recognition thresholdparent’s ownership interest and measurement attributethe valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The adoption of this standard had no impact on the Company’s financial condition, results of operations or cash flows.
In the first quarter of fiscal 2010, the Company adopted the revised accounting guidance for business combinations, which established 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 determining what information to disclose to enable users of the financial statement recognitionto evaluate the nature and measurementfinancial effects of a taxthe business combination. The impact of this accounting guidance and its relevant updates on the Company’s results of operations or financial position that an entity takeswill vary depending on each specific business combination or expects to takeasset purchase consummated after May 1, 2009. No business combinations were consummated 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.”fiscal 2010 by the Company.
Pending Adoption of New Accounting Standards
In April 2010, the FASB issued revised guidance to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this guidance are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The revised guidance should be implemented by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The Company believes the adoption of this guidance will not have a material impact on its consolidated financial statements.
In January 2010, the FASB issued revised guidance intended to improve disclosures related to fair value measurements. New disclosures under this guidance require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosure are
68
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
effective for the Company beginning May 2010, except for the disclosure requirements related to the purchases, sales, issuances and settlements in the rollforward activity of Level 3 fair value measurements. Those disclosure requirements are effective for the Company beginning May 2011. The Company believes the adoption of this guidance will not have a material impact on its consolidated financial statements.
In October 2009, the FASB amended the accounting standards for revenue recognition to remove tangible products containing software components and nonsoftware components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:
(iv) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
(v) require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
(vi) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
The accounting changes summarized in this guidance are effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. The Company believes the adoption of this guidance will not have a material impact on its consolidated financial statements.
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 Board’s objective in issuing this Statement isrevised guidance 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 transferor’s continuing involvement, if any, in transferred financial assets. This Statementguidance must be applied as of the beginning of each reporting entity’s 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 StatementIt 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 166this guidance on its consolidated results of operations and financial condition.
| |
3. | Discontinued Operations |
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
During the first quarter of fiscal 2010, the Company completed the sale of substantially all of the assets of its Network Tools Division to JDSU. The Company received $40.6 million in cash and recorded a net gain on sale of the business of $35.9 million before income taxes, which is requiredincluded in income from discontinued operations, net of tax, in the Company’s consolidated statements of operations. The assets and liabilities and results of operation related to be applied prospectively.this business have been classified as discontinued operations in the consolidated financial statements for all periods presented. As a result, the prior period comparative financial statements have been restated. The impactCompany has elected not to separately disclose the cash flows associated with the discontinued operations in the condensed consolidated statements of SFAS 165 will depend upon the nature of subsequent events that occur after the effective date.cash flows.
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. FSPFAS 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. FSPFAS 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. FSPFAS 107-1 and APB28-1,Interim Disclosures about Fair Value of Financial Instruments(“FSP 107-1 and APB28-1”), 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 itsfollowing table summarizes results offrom discontinued operations financial position or its financial statement disclosures as applicable.(in thousands):
| | | | | | | | | | | | |
| | Fiscal Years Ended April 30, | |
| | 2010 | | | 2009 | | | 2008 | |
|
Net revenue | | $ | 6,753 | | | $ | 44,179 | | | $ | 38,555 | |
Gross profit | | | 4,963 | | | | 29,571 | | | | 26,331 | |
Income (loss) from discontinued operations(1) | | | 36,937 | | | | 2,149 | | | | (46,169 | ) |
7369
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In May 2008,
| | |
(1) | | Income form discontinued operations of $36.9 million in fiscal 2010 includes gain on sale of discontinued operations of $35.9 million. |
The following table summarizes assets and liabilities classified as discontinued operations (in thousands):
| | | | |
| | April 30, 2009 | |
|
ASSETS |
Current assets: | | | | |
Prepaid expenses | | $ | 327 | |
Inventories | | | 4,536 | |
| | | | |
Total current assets | | | 4,863 | |
Purchased technology, net | | | 204 | |
Other intangible assets, net | | | 889 | |
Property, plant and improvements, net | | | 2,434 | |
| | | | |
Total assets of discontinued operations | | $ | 8,390 | |
| | | | |
|
LIABILITIES |
Current liabilities: | | | | |
Warranty accrual | | | 200 | |
Deferred revenue | | | 2,960 | |
| | | | |
| | | 3,160 | |
Non-current liabilities associated with discontinued operations | | | | |
Deferred Revenue | | | 650 | |
| | | | |
Total liabilities of discontinued operations | | $ | 3,810 | |
| | | | |
The following table summarizes the FASB issued SFAS No. 162,The Hierarchygain on sale 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 ofdiscontinued operations and financial condition.(in thousands):
| | | | |
Gross proceeds from sale | | $ | 40,683 | |
Assets sold | | | | |
Inventory | | | (4,814 | ) |
Property and equipment | | | (2,460 | ) |
Intangibles | | | (845 | ) |
Liabilities transferred | | | | |
Deferred revenue | | | 3,102 | |
Other accruals | | | 312 | |
Other charges | | | (90 | ) |
| | | | |
| | $ | 35,888 | |
| | | | |
In May 2008,connection with the FASB issued FSP Accounting Principles Board (“APB”)14-1,Accountingsale of the assets of the Network Tools Division, the Company entered into a transition services agreement with the buyer under which the Company agreed to provide manufacturing services to the buyer during a transition period. The buyer will reimburse the Company for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)(“FSP APB 14-1”). FSP APB14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately accountmaterial costs plus 10% for the liability (debt)first six months, plus 12% for the first three months of any extension and equity (conversion option) componentsplus 15% for the second three months of any extension. The buyer will also pay the Company a fixed fee of $50,000 per month to cover manufacturing overhead and direct labor costs. Under the agreement, the buyer will also pay a fixed fee for leasing the Company’s facilities and a service fee for the use of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate.FSP APB 14-1 is effectiveCompany’s information technology, communication services and employee services. The duration for fiscal years beginning after December 15, 2008 on a retroactive basis andwhich these services will be adopted by the Company in the first quarter of fiscal 2010. The Companyprovided is currently evaluating the potential impact of the adoption of FSP APB14-1 on its consolidated results of operations and financial condition.
In April 2008, the FASB issuedFSP 142-3,Determination of the Useful Life of Intangible Assets(“FSP 142-3”).FSP 142-3 amends the factors that shouldnot expected to 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 ofFSP 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 othermore than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s 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.twelve months.
7470
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total operating expenses incurred in relation to the transition services agreement from July 15, 2009 through April 30, 2010 were $142,000, which included an adjustment of $165,000 recorded to the gain on sale of discontinued operations.
| |
3.4. | Business Combinations and Asset Acquisitions |
Acquisition of Optium
On August 29, 2008, the Company consummated thea combination with Optium Corporation, 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 Company’s management and board of directors believe that the combination of the two companies created the world’s largest supplier of optical components, modules and subsystems for the communications industry and will leverage the Company’s leadership position in the storage and data networking sectors of the industry and Optium’s leadership position in the telecommunications and CATV sectors to create a more competitive industry participant. In addition, as a result of the combination, management expectsbelieves that the Company should be able 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 internally manufactured components into product designs in place of components previously purchased by Optium in the open market by Optium.market. 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 Company’s 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 | | | $ | 242,821 | |
Fair value of vested Optium stock options and warrants assumed | | | 8,561 | | | | 8,561 | |
Direct transaction costs | | | 2,431 | | | | 2,431 | |
| | | | | | |
Total preliminary purchase price | | $ | 253,813 | | |
Total purchase price | | | $ | 253,813 | |
| | | | | | |
At the closing of the merger, the Company issued 160,808,65920,101,082 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 Company’s 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$12.08 per share. There were approximately 17,202,6002,150,325 shares of the Company’s common stock issuable upon the exercise of the outstanding options, warrants and restricted stock awards that the Companyit assumed in accordance with the terms of the merger agreement. The number of shares was calculated based on the fixed conversion ratio of 6.2620.7827 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.
The Company also expects to recognize approximately $5.1 million of non-cash stock-based compensation expense related to the unvested options assumed on the acquisition date. This expense will be recognized beginning from the acquisition date over the remaining service periods of the options. As of April 30, 2010, $1.3 million of this expense remained unrecognized and is expected to be recognized over the weighted average remaining recognition period of 6 months. The stock options and warrants were valued using the Black-Scholes option pricing model based on the following weighted average assumptions:
| | |
Interest rate | | 2.17 - 4.5% |
Volatility | | 47 - 136% |
Expected life | | 1 - 6 years |
Expected dividend yield | | 0% |
71
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 | | | $ | 31,825 | |
Other current assets | | | 64,234 | | | | 64,233 | |
Fixed assets | | | 19,129 | | | | 19,129 | |
Other non-current assets | | | 1,498 | | | | 889 | |
Accounts payable and accrued liabilities | | | (47,340 | ) | | | (47,005 | ) |
Other liabilities | | | (973 | ) | | | (973 | ) |
| | | | | | |
Net tangible assets | | | 68,373 | | | | 68,098 | |
Identifiable intangible assets | | | 25,100 | | | | 25,100 | |
In-process research and development | | | 10,500 | | | | 10,500 | |
Goodwill | | | 150,265 | | | | 150,115 | |
| | | | | | |
Total preliminary purchase price allocation | | $ | 254,238 | | |
Total purchase price allocation | | | $ | 253,813 | |
| | | | | | |
The Company’s 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 Company’s 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 Optium’s product lines. This proprietary know-how can be leveraged to develop new technology and products and improve our existing products. Customer relationships represent Optium’s underlying relationships with its customers. Trademarks represent the fair value of brand name recognition associated with the marketing of Optium’s 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 Company’s weighted average cost of capital and ranged from 15% to 30%. This discount rate was determined after consideration for the Company’s 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 amortizeamortizes developed technology, customer relationships, and trademarks on a straight-line basis over their weighted average expected useful liveslife 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
72
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s 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.projects as of the date of the merger.
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 and other non-recurring acquisition related costs (unaudited; in thousands, except per share information):
| | | | | | | | | | | | | | | | |
| | Fiscal Year Ended April 30, | | | Fiscal Year Ended April 30, | |
| | 2009 | | 2008 | | | 2009 | | 2008 | |
|
Net revenue | | $ | 593,229 | | | $ | 587,206 | | |
Revenues | | | $ | 549,050 | | | $ | 548,651 | |
Net loss | | $ | (264,607 | ) | | $ | (79,676 | ) | | $ | (259,579 | ) | | $ | (84,131 | ) |
Net loss per share — basic and diluted | | $ | (0.63 | ) | | $ | (0.19 | ) | | $ | (4.38 | ) | | $ | (1.43 | ) |
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 AZNA’s 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 Company’s 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. AZNA’s 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 Company’s 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 technology’s 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 Company’s 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 Company’s 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 withEITF 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 Company’s 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 Company’s 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)
| |
4.5. | 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 | | | $ | 88,843 | |
| | | | | | | | | | |
Reduction related to acquisition of subsidiary | | | (601 | ) | | | — | | | | (601 | ) | | | (601 | ) |
Impairment of goodwill | | | — | | | | (40,106 | ) | | | (40,106 | ) | | | — | |
| | | | | | | | | | |
Balance at April 30, 2008 | | $ | 88,242 | | | $ | — | | | $ | 88,242 | | | $ | 88,242 | |
| | | | | | | | | | |
Addition related to acquisition of subsidiary | | | 150,265 | | | | — | | | | 150,265 | | | | 150,265 | |
Impairment of goodwill | | | (238,507 | ) | | | — | | | | (238,507 | ) | | | (238,507 | ) |
| | | | | | | | | | |
Balance at April 30, 2009 | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | |
Addition related to acquisition of subsidiary | | | | — | |
| | | | |
Impairment of goodwill | | | | — | |
| | | | |
Balance at April 30, 2010 | | | | — | |
| | | | |
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 acquisition of Kodeos acquisition.Communication Inc. in April 2007. 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 Company’s 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 anNo goodwill 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 offor fiscal 2008. The Company completed its determination of the implied fair value of the affected goodwill during
73
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 Finisar’s common stock on May 16, 2008 was $1.53 while afive-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 ofrecorded an additional $150 million of goodwill related to the acquisition of Optium which, when combined with the $88 million in goodwill acquired prior to the merger,acquisition, 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 ofDuring 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 Company’s market capitalization as a result of a decrease in the trading price of its common stock to $0.61$4.88 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 Company’s 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 onForm 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 Company’s market capitalization as a result of a decrease in the trading price of its common stock to $0.51$4.08 at the end of the quarter and a further decrease in internal expectations for near term revenues. For purposes of this analysis, the Company’s 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 onForm 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$13.2 million was impaired and accordingly recognized an additional impairment charge of $13.8$13.2 million in the fourth quarter of fiscal 2009.
During fiscal 2009, wethe Company recorded $238.5 million in goodwill impairment charges. At April 30, 2010 and April 30, 2009 the carrying value of goodwill was zero.
74
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible Assets
The following table reflects intangible assets subject to amortization as of April 30, 20092010 and April 30, 20082009 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2009 | | | April 30, 2010 | |
| | Gross
| | | | Net
| | | Gross
| | | | Net
| |
| | Carrying
| | Accumulated
| | Carrying
| | | Carrying
| | Accumulated
| | Carrying
| |
| | Amount | | Amortization | | Amount | | | Amount | | Amortization | | Amount | |
|
Purchased technology | | $ | 121,866 | | | $ | (105,203 | ) | | $ | 16,663 | | | $ | 75,936 | | | $ | (64,247 | ) | | $ | 11,689 | |
Purchased trade name | | | 4,797 | | | | (4,187 | ) | | | 610 | | | | 1,172 | | | | (1,172 | ) | | | — | |
Purchased customer relationships | | | 18,864 | | | | (5,158 | ) | | | 13,706 | | | | 15,970 | | | | (4,569 | ) | | | 11,401 | |
Purchased patents | | | | 375 | | | | (63 | ) | | | 312 | |
| | | | | | | | | | | | | | |
Totals | | $ | 145,527 | | | $ | (114,548 | ) | | $ | 30,979 | | | $ | 93,453 | | | $ | (70,051 | ) | | $ | 23,402 | |
| | | | | | | | | | | | | | |
81
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2008 | | | April 30, 2009 | |
| | Gross
| | | | Net
| | | Gross
| | | | Net
| |
| | Carrying
| | Accumulated
| | Carrying
| | | Carrying
| | Accumulated
| | Carrying
| |
| | Amount | | Amortization | | Amount | | | Amount | | Amortization | | Amount | |
|
Purchased technology | | $ | 111,846 | | | $ | (99,996 | ) | | $ | 11,850 | | | $ | 75,936 | | | $ | (59,477 | ) | | $ | 16,459 | |
Purchased trade name | | | 3,697 | | | | (3,345 | ) | | | 352 | | | | 1,172 | | | | (806 | ) | | | 366 | |
Purchased customer relationships | | | 6,964 | | | | (3,417 | ) | | | 3,547 | | | | 15,970 | | | | (2,909 | ) | | | 13,061 | |
| | | | | | | | | | | | | | |
Totals | | $ | 122,507 | | | $ | (106,758 | ) | | $ | 15,749 | | | $ | 93,078 | | | $ | (63,192 | ) | | $ | 29,886 | |
| | | | | | | | | | | | | | |
The amortization expense on these intangible assets for fiscal 2009 was $8.7$6.9 million, compared to $8.3$7.1 million and $5.8 million for fiscal 2010, fiscal 2009 and 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.respectively.
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 | | | Amount | |
|
2010 | | $ | 7,371 | | |
2011 | | | 6,522 | | | $ | 6,227 | |
2012 | | | 5,448 | | | | 5,410 | |
2013 | | | 10,831 | | | | 3,998 | |
2014 and beyond | | | 807 | | |
2014 | | | | 2,346 | |
2015 and beyond | | | | 5,421 | |
| | | | | | |
total | | $ | 30,979 | | |
Total | | | $ | 23,402 | |
| | | | | | |
82
75
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Available-for-sale Securities
The following table presents a summary of the Company’savailable-for-sale investments measured at fair value on a recurring basis as of April 30, 2010 (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: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 140,014 | | | $ | — | | | $ | — | | | $ | 140,014 | |
| | | | | | | | | | | | | | | | |
Total cash equivalents | | $ | 140,014 | | | $ | — | | | $ | — | | | $ | 140,014 | |
| | | | | | | | | | | | | | | | |
Cash | | | | | | | | | | | | | | | 67,010 | |
| | | | | | | | | | | | | | | | |
Total cash and cash equivalents | | | | | | | | | | | | | | $ | 207,024 | |
| | | | | | | | | | | | | | | | |
Reported as: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | | | | | | | | | | | | $ | 207,024 | |
| | | | | | | | | | | | | | | | |
Total cash and cash equivalents | | | | | | | | | | | | | | $ | 207,024 | |
| | | | | | | | | | | | | | | | |
The following table presents the summary of the Company’savailable-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 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 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: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 25 | | | $ | — | | | | — | | | $ | 25 | |
| | | | | | | | | | | | | | | | |
Total cash equivalents | | $ | 25 | | | $ | — | | | $ | — | | | | 25 | |
| | | | | | | | | | | | | | | | |
Cash | | | | | | | | | | | | | | | 37,196 | |
| | | | | | | | | | | | | | | | |
Total cash and cash equivalents | | | | | | | | | | | | | | $ | 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 Company’s 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.basis. In order to determine whether a decline in value isother-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 Company’s financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in its industry; the Company’s relative competitive position within the industry; and the Company’s 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 abovebelow as “Gross Unrealized Losses,” is primarily related to changes in interest rates and is considered to be
76
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
temporary in nature. Gross Unrealized Losses are reported in other comprehensive income. 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 2009,2010 and 20082009 were immaterial. Realized gains and losses were calculated based on the specific identification method.
The following is a summary of the Company’s 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 SecuritySecurities
During fiscal 2007, the Company’s 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,available-for-sale securities, 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 InstrumentsFASB authoritative guidance relating to derivatives and Hedging Activities,hedging, 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 asavailable-for-sale securities in accordance with SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities. As securities. The Company determined that as of November 2, 2008, the Company determined that the full carrying value of these shares wasother-than-temporarily impaired and it recorded a loss of $1.2 million during the second quarter of fiscal 2009 in accordance withFSP 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.2009.
| |
6.7. | Minority Investments |
Cost Method Investments
Included in minority investments at April 30, 2009 is $14.3 million representing the carrying value of the Company’s minority investment in four privately held companies accounted for under the cost method. The Company concluded that there were sufficient indicators during the second quarter of fiscal 2010 to require an investment impairment analysis of its investment in one of these companies. Among these indicators was the completion of a new round of equity financing by the investee and the resultant conversion of the Company’s preferred stock holdings to common stock. The Company determined that the value of its minority equity investment was impaired and recorded a $2.0 million impairment loss as other expense during the second quarter of fiscal 2010. At April 30, 2008,2010 the carrying value of these minority investments was $13.3 million. The $1$12.3 million increaseand was duecomprised of the conversion of a convertible note of one of these companies, plus accrued interest, into preferred stock of that company which occurredCompany’s minority investment in the first quarter of fiscal 2009.three privately held companies.
During the first quarterhalf of fiscal 2009, the Company completed the sale of a product line related to its network test systems segment to a third party in exchange for an 11% equity interest in the acquiring company in the form of preferred stock and a note convertible into preferred stock. This product line was related to the Company’s Network Tools Division, the remaining assets of which were sold to JDSU in the first quarter of fiscal 2010 and accounted for as discontinued operations. For accounting purposes, no value has beenwas originally 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 and 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. In the first quarter of fiscal 2010, the Company sold the note and all of the preferred stock to the buyer of the product line for $1.2 million in cash and recorded the $1.2 million as income from discontinued operations.
During fiscal 2009 2008 and 2007,2008, the Company did not record any charges for impairments in the value of these minority investments.
77
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s investments in these early stage companies were primarily motivated by its desire to gain early access to new technology. The Company’s 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 Company’s 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 Company’s 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, | | | April 30, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Raw materials | | $ | 37,590 | | | $ | 19,540 | | | $ | 46,780 | | | $ | 36,678 | |
Work-in-process | | | 36,871 | | | | 30,424 | | | | 54,352 | | | | 36,065 | |
Finished goods | | | 37,839 | | | | 32,590 | | | | 38,393 | | | | 35,021 | |
| | | | | | | | | | |
Total inventory | | $ | 112,300 | | | $ | 82,554 | | |
Total inventories | | | $ | 139,525 | | | $ | 107,764 | |
| | | | | | | | | | |
In fiscal 2009,2010, the Company recorded charges of $15.4$23.0 million for excess and obsolete inventory and sold inventory components that were written-off in prior periods of $8.6$15.1 million, resulting in a net charge to cost of revenues of $6.8$7.9 million. In fiscal 2009, the Company recorded charges of $14.4 million for excess and obsolete inventory and sold inventory components that were written-off in prior periods of $8.1 million, resulting in a net charge to cost of revenues of $6.3 million. In fiscal 2008, the Company recorded charges of $14.1$12.1 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$6.1 million. In fiscal 2007,
The Company has expensed and recorded on the balance sheet as non-cancelable purchase obligations of $722,000 as of April 30, 2010. These purchase obligations are related to materials purchased and held by subcontractors on behalf of 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.fulfill the subcontractors’ obligations at their facilities under the Company’s purchase orders.
| |
8.9. | Property, Equipment and Improvements |
Property, equipment and improvements consist of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | April 30, | | | April 30, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Land | | $ | — | | | $ | 9,747 | | |
Building | | | 7,416 | | | | 12,019 | | |
Buildings | | | $ | 8,337 | | | $ | 7,416 | |
Computer equipment | | | 38,888 | | | | 40,255 | | | | 36,236 | | | | 33,232 | |
Office equipment, furniture and fixtures | | | 3,926 | | | | 3,383 | | | | 3,853 | | | | 3,739 | |
Machinery and equipment | | | 158,123 | | | | 158,983 | | | | 178,894 | | | | 154,505 | |
Leasehold improvements | | | 17,830 | | | | 14,302 | | | | 18,699 | | | | 17,246 | |
Construction-in-process | | | 445 | | | | 2,941 | | | | 4,190 | | | | 445 | |
| | | | | | | | | | |
Total | | | 226,628 | | | | 241,630 | | | | 250,209 | | | | 216,583 | |
Accumulated depreciation and amortization | | | (142,588 | ) | | | (151,783 | ) | | | (160,995 | ) | | | (134,977 | ) |
| | | | | | | | | | |
Property, equipment and improvements (net) | | $ | 84,040 | | | $ | 89,847 | | | $ | 89,214 | | | $ | 81,606 | |
| | | | | | | | | | |
78
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
9.10. | Sale-leaseback and Impairment of Tangible Assets |
During the quarter ended January 31,fiscal 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 Company’s 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. Asquarter of August 3, 2008, the carrying value of the property and the financing liability had been reduced to zero.fiscal 2009.
| |
10.11. | Other accrued liabilities |
Accrued liabilities consist of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | April 30, | | | April 30, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Warranty accrual (Note 23) | | $ | 6,613 | | | $ | 2,132 | | |
Warranty accrual (Note 24) | | | $ | 5,472 | | | $ | 6,413 | |
Other liabilities | | | 24,100 | | | | 21,265 | | | | 15,604 | | | | 24,100 | |
| | | | | | | | | | |
Total | | $ | 30,713 | | | $ | 23,397 | | | $ | 21,076 | | | $ | 30,513 | |
| | | | | | | | | | |
79
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s convertible subordinated and senior subordinated notes as of April 30, 20092010 and 20082009 are summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Interest
| | Due in
| | | Carrying
| | Interest
| | Due in
| |
Description | | Amount | | Rate | | Fiscal Year | | | Amount | | Rate | | Fiscal year | |
|
As of April 30, 2010 | | | | | | | | | | | | | |
Convertible senior notes due 2029 | | | $ | 100,000 | | | | 5.00 | % | | | 2030 | |
Convertible subordinated notes due 2010 | | | | 3,900 | | | | 2.50 | % | | | 2011 | |
Convertible senior subordinated notes due 2010 | | | | 25,681 | | | | 2.50 | % | | | 2011 | |
Unamortized debt discount | | | | (742 | ) | | | | | | | | |
| | | | |
Convertible senior subordinated notes, net | | | | 24,939 | | | | | | | | | |
| | | | |
Total | | | $ | 128,839 | | | | | | | | | |
| | | | |
As of April 30, 2009 | | | | | | | | | | | | | | | | | | | | | | | | |
Convertible subordinated notes due 2010 | | $ | 50,000 | | | | 2.50 | % | | | 2011 | | | $ | 50,000 | | | | 2.50 | % | | | 2011 | |
Convertible senior subordinated notes due 2010 | | | 92,000 | | | | 2.50 | % | | | 2011 | | | | 92,000 | | | | 2.50 | % | | | 2011 | |
Unamortized debt discount | | | | (7,745 | ) | | | | | | | | |
| | | | | | |
Convertible senior subordinated notes, net | | | | 84,255 | | | | | | | | | |
| | $ | 142,000 | | | | | | | | | | | | |
Total | | | $ | 134,255 | | | | | | | | | |
| | | | | | |
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 | | | | | | | | | | |
| | | | |
As5.0% Convertible Senior Notes Due 2029
On October 15, 2009, the Company sold $100 million aggregate principal amount of 5.0% Convertible Senior Notes due 2029. The notes will mature on October 15, 2029, unless earlier repurchased, redeemed or converted. Interest on the notes is payable semi-annually in arrears at a rate of 5.0% per annum on each April 30, 200915 and 2008,October 15, beginning on April 15, 2010. The notes are senior unsecured and unsubordinated obligations of the fairCompany, and rank equally in right of payment with the Company’s other unsecured and unsubordinated indebtedness, but are effectively subordinated to the Company’s secured indebtedness and liabilities to the extent of the value of the collateral securing those obligations, and structurally subordinated to the indebtedness and other liabilities of the Company’s convertible subordinatedsubsidiaries. Holders may convert the notes into shares of the Company’s common stock, at their option, at any time prior to the close of business on the trading day before the stated maturity date. The initial conversion rate is 93.6768 shares of Common Stock per $1,000 principal amount of the notes (equivalent to an initial conversion price of approximately $10.68 per share of common stock), subject to adjustment upon the occurrence of certain events. Upon conversion of the notes, holders will receive shares of common stock unless the Company obtains consent from a majority of the holders to deliver cash or a combination of cash and convertible senior subordinatedshares of common stock in satisfaction of its conversion obligation. If a holder elects to convert the notes basedin connection with a “fundamental change” (as defined in the indenture) that occurs prior to October 15, 2014, the conversion rate applicable to the notes will be increased as provided in the indenture.
Holders may require the Company to redeem, for cash, all or part of their notes upon a “fundamental change” at a redemption price equal to 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest up to, but excluding, the redemption date. Holders may also require the Company to redeem, for cash, any of their notes on quoted market pricesOctober 15, 2014, October 15, 2016, October 15, 2019 and October 15, 2024 at a redemption price equal to 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest up to, but excluding, the redemption date.
80
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has the right to redeem the notes in whole or in part at a redemption price equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, at any time on or after October 22, 2014 if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date on which the Company provides the notice of redemption.
The Company considered the embedded derivative in the notes, that is, the conversion feature, and concluded that it is indexed to the Company’s common stock and would be classified as equity, 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 Company’s call feature and the holders’ put feature in the event of a change in control under the provisions of FASB authoritative guidance, and concluded that they need not be accounted for separately from the debt.
Unamortized debt issuance costs associated with these notes at April 30, 2010 was approximately $78.1 million and $200.7 million, respectively.$1.7 million. 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 during fiscal 2010 was $212,000.
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 Company’s common stock at a conversion price of $5.52$44.16 per share, which is equal to a conversion rate of approximately 181.15922.644 shares per $1,000 principal amount of notes. The conversion price was subject to adjustment.
Because the market value of the Company’s 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 being amortized to interest expense over the life of the convertible notes, or sooner upon conversion. During fiscal 2009 2008 and 2007,2008, the Company recorded interest expense amortization of $1.8 million and $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.notes and recorded a loss on debt extinguishment of $231,000 in connection with these transactions.
Unamortized debt issuance costs associated with these notes were $0 and $225,000 at April 30, 2010 and 2009, and 2008, respectively.respectively, was $0. 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 and $566,000 for the year ended April 30, 2008 and $542,000 for the year ended April 30, 2007.2008.
Convertible Subordinated Notes dueDue 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
81
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shares of the Company’s common stock at a conversion price of $3.705$29.64 per share, which is equal to a conversion rate of approximately 269.905533.738 shares per $1,000 principal amount of notes. The conversion price is subject to adjustment.
At issuance of the notesIn separate, privately-negotiated transactions on October 6, 2006, the Company purchased and pledged toexchanged $100 million in principal amount of its outstanding 21/2% convertible subordinated notes due 2010 for a collateral agent, as security fornew series of notes described below. The exchange primarily resulted in the exclusive benefitelimination of asingle-day put option which would have allowed the holders of the original notes approximately $14.4to 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. 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 U.S. government securities, which was sufficient upon receipt of scheduled principal and interest payments thereon,unamortized debt issuance costs related to provide for the payment in full$100 million of the first eight scheduled interest payments due onnotes that were exchanged. The remaining $50 million in outstanding principal amount of the notes. Atoriginal 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. As of April 30, 2008 and 2007, approximately $0 and $625,000, respectively,2010, $3.9 million of cash and U.S. government securities remained pledged as security for the note holders.principal amount of these notes was outstanding.
The notes are subordinated to all of the Company’s 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 Company’s common stock exceeds $5.56$44.48 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 Company’s 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., DTC’s 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 thesingle-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,Debtor’s Accounting for a Modification or Exchange of Debt Instruments(“EITF 96-19”), andEITF 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$8,495 and $575,000$341,350 at April 30, 20092010 and 2008,2009, 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 $125,528 in fiscal 2010, $234,000 in fiscal 2009 and $234,000 in fiscal 20082008.
Repurchase of Convertible Subordinated Notes
During fiscal 2010, the Company repurchased $13.0 million principal amount of the 21/2% convertible subordinated notes due 2010 in privately negotiated transactions for a total purchase price of $12.7 million plus accrued interest of $11,000 and $468,000recorded a gain on debt extinguishment of $308,000 in fiscal 2007.connection with these transactions.
Exchange Offer
On August 11, 2009, the Company exchanged $33.1 million principal amount of the 21/2% convertible subordinated notes due 2010 pursuant to exchange offers which commenced on July 9, 2009. Additional information regarding settlement of the exchange offer is set forth in the paragraph entitled “Settlement of Exchange Offers” below.
82
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 Company’s common stock reaching $4.92$39.36 for a period of time at a conversion price of $3.28$26.24 per share, which is equal to a rate of approximately 304.905538.1132 shares of Finisar common stock per $1,000 principal amount of the New Notes. The conversion price is subject to adjustment. As noted above, thisThis exchange was treated as the issuance of new debt underEITF 96-19 and05-07.debt. As of April 30, 2010, $25.7 million of principal amount of these notes was outstanding.
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 Company’s 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 Company’s common stock exceeds $4.92$39.36 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 Company’s 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., DTC’s 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 doesdid 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. AsThe Company did not comply with these registration requirements and accrued liquidated damages of $830,822. None of the liquidated damages have been paid and as of April 30, 20092010 and April 30, 2008,2009, the Company had not complied with these registration requirements. Accordingly, it hadentire accrued a liabilitybalance of approximately $830,822, and $609,000 for liquidated damages, respectively.respectively, was outstanding.
The Company considered the embedded derivative in the New Notes, that is, the conversion feature, and concluded that it is indexed to the Company’s common stock and would be classified as equity, underEITF 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s 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 Company’s call feature and the holders’ put feature in the event of a change in control under the provisions ofEITF 00-19 and related FASB authoritative guidance, and concluded that they need not be accounted for separately from the debt.
83
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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$36,479 and $1.2 million$408,000 at April 30, 20092010 and 2008,2009, respectively. Amortization of prepaid loan costs are classified as other income (expense), net on the consolidated statement of operations. Debt issuance costs related to debt that is extinguished during the period is written off as loss on debt extinguishment. Amortization of prepaid loan costs were $481,000$163,000 in eachfiscal 2010, $331,000 in fiscal 2009 and $296,000 in fiscal 2008.
Repurchase of the years ended April 30, 2009 and 2008 and $240,000 in fiscal 2007.New Notes
In the third quarter of fiscal 2009, the Company purchased $8.0 million in principal amount of the New Notes, together with accrued interest, in privately negotiated transactions for approximately $3.9 million in cash. In connection with the purchase, the Company recorded a gain of approximately $3.1 million. During fiscal 2010, the Company repurchased an aggregate of $51.9 million principal amount of the New Notes in privately negotiated transactions for a total purchase price of $50.3 million plus accrued interest of $183,000 and recorded a loss on debt extinguishment of $1.3 million in connection with these transactions.
Convertible Note — Acquisition of AZNA LLCExchange Offer
On March 26, 2007,August 11, 2009, 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 AZNA’s equity interest. The promissory notes, as originally issued, had an aggregateexchanged approximately $14.4 million principal amount of approximately $17.0 millionthe New Notes pursuant to exchange offers which commenced on July 9, 2009. Additional information regarding settlement of the exchange offer is set forth in the paragraph entitled “Settlement of Exchange Offers” below.
As discussed in Note 1, in fiscal 2009 the Company adopted authoritative guidance issued by the FASB for accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) which 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 issuer’s non-convertible debt borrowing rate. The separation of the conversion option creates an original issue discount in the bond component which is to be accreted as interest expense over the term of the instrument using the interest method, resulting in an increase in interest expense and a decrease in net income and earnings per share. The provisions of this accounting guidance apply to the New Notes and the Company has accounted for the debt and equity components of the notes to reflect the estimated nonconvertible debt borrowing rate at the date of issuance of 8.59%. It requires retrospective application to all periods presented. Accordingly, prior period balances have been restated to effectively record a debt discount equal to the fair value of the equity component and an interest rate of 5.0% and were payable on March 26, 2008. The notes were payable, atincrease to paid-in capital for the Company’s option, in cash or shares of Finisar common stock, with thefair value of such sharesthe equity component as of the date of issuance of the underlying notes. Prior period balances have also been adjusted to provide for the amortization of the debt discount through interest expense (non-cash interest cost).
The guidance also requires the debt issuance costs to be allocated to the equity component based on the trading pricepercentage split between the liability and equity component of the stock atdebt. Accordingly, the timeCompany has allocated $700,000 of the shares were registered for re-sale pursuanttotal debt issuance costs of $1.9 million to the Securities Actequity component. The remaining $1.2 million of 1933, as amended. The exact number of shares of Finisar common stockdebt issuance cost will continue to be issued pursuant toamortized over the convertible promissory notes was dependent on the trading price of Finisar’s common stock on the dates of conversionexpected life of the notes, but could not exceed in the aggregate 9.99%debt on a straight line basis. Prior period amounts of either the total shares outstanding or voting power outstandingamortization of debt issuance costs have been adjusted accordingly.
9084
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reflects the Company’s previously reported amounts, along with the adjusted amounts reflecting the adoption of this accounting guidance:
Consolidated Statement of Operations (Unaudited)
| | | | | | | | | | | | |
| | As Reported | | As Adjusted | | Effect of Change |
| | (In thousands, except per share data) |
|
Fiscal Year Ended April 30, 2009 | | | | | | | | | | | | |
Interest expense | | $ | 9,687 | | | $ | 14,597 | | | $ | 4,910 | |
Loss from continuing operations | | | (256,957 | ) | | | (262,492 | ) | | | (5,535 | ) |
Net loss | | | (254,808 | ) | | | (260,343 | ) | | | (5,535 | ) |
Loss per share from continuing operations: | | | | | | | | | | | | |
Basic | | | (4.89 | ) | | | (4.99 | ) | | | (0.10 | ) |
Diluted | | | (4.89 | ) | | | (4.99 | ) | | | (0.10 | ) |
| | | | | | | | | | | | |
| | As Reported | | As Adjusted | | Effect of Change |
| | (In thousands, except per share data) |
|
Fiscal Year Ended April 30, 2008 | | | | | | | | | | | | |
Interest expense | | $ | 17,236 | | | $ | 21,876 | | | $ | 4,640 | |
Loss from continuing operations | | | (28,389 | ) | | | (32,844 | ) | | | (4,455 | ) |
Net loss | | | (74,558 | ) | | | (79,013 | ) | | | (4,455 | ) |
Loss per share from continuing operations: | | | | | | | | | | | | |
Basic | | | (0.74 | ) | | | (0.85 | ) | | | (0.11 | ) |
Diluted | | | (0.74 | ) | | | (0.85 | ) | | | (0.11 | ) |
Consolidated Balance Sheet (Unaudited)
| | | | | | | | | | | | |
| | As Reported | | | As Adjusted | | | Effect of Change | |
| | (In thousands) | |
|
As of April 30, 2009 | | | | | | | | | | | | |
Other assets | | $ | 2,897 | | | $ | 2,584 | | | $ | (313 | ) |
Convertible notes, net of current portion | | | 142,000 | | | | 134,255 | | | | (7,745 | ) |
Additional paid in capital | | | 1,811,715 | | | | *1,831,224 | | | | 19,509 | |
Accumulated deficit | | | (1,699,648 | ) | | | (1,711,725 | ) | | | (12,077 | ) |
| | |
* | | Includes adjustment of $417,000 due to reverse stock split effected on September 25, 2009. |
At April 30, 2010, the if-converted value of the Company asNew Notes did not exceed the principal balance. At April 30, 2010, the $742,000 unamortized debt discount had a remaining amortization period of approximately 5 months.
The following table provides additional information about the New Notes that may be settled for cash (in thousands):
| | | | | | | | |
| | April 30,
| | April 30,
|
| | 2010 | | 2009 |
|
Carrying amount of the equity component | | $ | 19,283 | | | $ | 19,509 | |
Effective interest rate on liability component | | | 8.59 | % | | | 8.59 | % |
85
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the associated interest expense related to the New Notes that may be settled in cash, which consists of both the contractual interest coupon (cash interest cost) and amortization of the datediscount on the liability (non-cash interest cost) (in thousands):
| | | | | | | | | | | | |
| | For Fiscal Years Ended April 30, | |
| | 2010 | | | 2009 | | | 2008 | |
|
Non-cash interest cost | | $ | 3,033 | | | $ | 4,910 | | | $ | 4,640 | |
Cash interest cost | | | 1,402 | | | | 2,433 | | | | 2,500 | |
| | | | | | | | | | | | |
| | $ | 4,435 | | | $ | 7,343 | | | $ | 7,140 | |
| | | | | | | | | | | | |
Settlement of Exchange Offers
On August 11, 2009, the Company exchanged approximately $47.5 million aggregate principal amount of its 21/2% convertible senior subordinated notes due 2010 and its 21/2% Convertible Subordinated Notes due 2010 pursuant to exchange offers which commenced on July 9, 2009 at a price of $870 for each $1,000 principal amount of notes. The consideration for the exchange consisted of (i) $525 in cash and (ii) 596 shares of the Company’s common stock per $1,000 principal amount of notes. The Company was obligated to repay the notesissued approximately 3.5 million shares of common stock and paid out approximately $24.9 million in cash ifto the registrationformer holders of notes validly tendered and not withdrawn in the exchange offers. The Company settled $33.1 million, or 66.2%, 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$50.0 million aggregate outstanding principal amount of $16.521/2% convertible subordinated notes due 2010; and $14.4 million, which includedor approximately 15.7%, of the original$92.0 million aggregate outstanding 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.21/2% convertible senior subordinated notes due 2010. The first installment of $4.5 million wastotal consideration paid in cash on March 26, 2008. The second installment of $6.2the exchange was approximately $4.7 million was paid in cash on May 22, 2008, andless than 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 carryingpar value of the notenotes retired. In accordance with the provisions ofASC 470-20, this exchange was considered to be an induced conversion and the retirement of the notes was accounted for as if they had been converted according to their original terms, with that value compared to the fair value of the consideration paid in the exchange offers. The original conversion price of the notes was $30.08 per share. Accordingly, the Company recorded loss on debt extinguishment of $23.7 million. The Company incurred $1.5 million of expenses in connection with the exchange offers which was recorded and the impact of the revised interest rate was recorded prospectively as incurred.
The second promissory note issueda loss on debt extinguishment in the AZNA transaction, in the principal amountconsolidated statement of $1.4 million, was paid in cash on March 26, 2008.operations.
| |
12.13. | Long-term debtDebt |
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 Company’s 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”.Malaysian Bank Loan
In July 2008, the Company’s Malaysian subsidiary entered into two separate loan agreements with a Malaysian bank. Under these agreements, the Company’s 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 Company’s Malaysian subsidiary, guaranteed by the Company and subject to certain covenants. The Company wasand its subsidiary were in compliance with all covenants associated with these loans as of April 30, 2009. At2010 and April 30, 2009,2009.
The following table provides information regarding the current and long-term portion of the remaining 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 Company’s assets except its intellectual property rights and bear interest, at the Company’s option, at either the bank’s 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 testednotes as of the last day of each month. The Company’s borrowing availability under this line currently is restrictedrespective dates (in thousands):
| | | | | | | | |
| | April 30,
| | | April 30,
| |
| | 2010 | | | 2009 | |
|
Current portion of long-term debt | | $ | 4,000 | | | $ | 4,000 | |
Long-term debt, net of current portion | | | 9,750 | | | | 13,750 | |
| | | | | | | | |
Total | | $ | 13,750 | | | $ | 17,750 | |
| | | | | | | | |
9186
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to $25Chinese Bank Loan
In January 2010, the Company’s Chinese subsidiary entered into a loan agreement with a bank in China. Under this agreement, the Company’s Chinese subsidiary borrowed a total of $4.5 million based uponat an initial interest rate of 2.6% per annum. In April 2010, 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 waiverChinese subsidiary borrowed an additional $1.0 million from the bank for such noncompliance.bank. The loan is payable on January 6, 2013. Interest is payable quarterly.
On October 2, 2009, the Company entered into an agreement with Wells Fargo Foothill, LLC to establish a new four-year $70 million senior secured revolving credit facility. Borrowings under the credit facility bear interest at rates based on the prime rate and LIBOR plus variable margins, under which applicable interest rates currently range from 5.75% to 7.00% per annum. Borrowings are guaranteed by the Company’s U.S. subsidiaries and secured by substantially all of the assets of the Company and its U.S. subsidiaries. The credit facility matures four years following the date of the agreement, subject to certain conditions. 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 line2010. As of April 30, 2010, the availability of credit at April 30, 2009.
| |
14. | Letter of Credit Reimbursement Agreement |
In April 2005,under the Company entered into a letter of credit reimbursement agreement with Silicon Valley Bank. Several amendments were made to the agreement subsequently. The last amendmentfacility 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 $4.0reduced by $3.4 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 bank’s 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. Outstandingfor 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.the agreement.
| |
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 Company’s 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 Bank’s 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 Company’s future commitments at April 30, 20092010 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| | | | Less Than
| | | | | | After
|
| | Total | | 1 Year | | 1-3 Years | | 4-5 Years | | 5 Years |
|
Operating leases(a) | | $ | 42,210 | | | $ | 6,665 | | | $ | 9,570 | | | $ | 7,312 | | | $ | 18,663 | |
| | |
(a) | | Includes operating lease obligations that have been accrued as restructuring charges. |
Rent expense under the non-cancelable operating leases was approximately $6.0$6.5 million, $4.0$5.7 million and $3.7$3.5 million for the years ended April 30, 2010, 2009 2008 and 2007,2008, 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$439,000, $727,000 and $0.3 million$542,000 for the years ended April 30, 2010, 2009 2008 and 2007,2008, 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 Company’s manufacturing subcontractors at their facilities on behalf of the Company to fulfill the
9287
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
16. | Fair Value of Financial Instruments |
subcontractors’ obligations under
The following disclosure of the estimated fair value of financial instruments presents amounts that have been determined using available market information and appropriate valuation methodologies. The estimated fair values of the Company’s purchase orders. The Company’s purchase obligations of $3.0 million have been expensed and recorded on the balance sheet as non-cancelable purchase obligationsfinancial instruments as of April 30, 2009.2010 and April 30, 2009 are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | April 30, 2010 | | | April 30, 2009 | |
| | Carrying
| | | | | | Carrying
| | | | |
| | Amount | | | Fair Value | | | Amount | | | Fair Value | |
|
Financial assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 207,024 | | | $ | 207,024 | | | $ | 37,221 | | | $ | 37,221 | |
| | | | | | | | | | | | | | | | |
Totals | | | 207,024 | | | | 207,024 | | | | 37,221 | | | | 37,221 | |
| | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Convertible notes | | | 128,839 | | | | 188,710 | | | | 134,255 | | | | 78,100 | |
Long-term debt | | | 19,250 | | | | 18,183 | | | | 21,412 | | | | 19,267 | |
| | | | | | | | | | | | | | | | |
Totals | | $ | 148,089 | | | $ | 206,893 | | | $ | 155,667 | | | $ | 97,367 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents — The fair value of cash and cash equivalents approximates its carrying value.
Convertible notes — The fair value of Convertible Notes is based on their market price in open market as on April 30, 2010.
Long-term debt — The fair value of long-term debt is determined by discounting the contractual cash flows at the current rates charged for similar debt instruments.
The Company has not estimated the fair value of its minority investments as it is not practicable to estimate the fair value of these investments because of the lack of a quoted market price and the inability to estimate fair value without incurring excessive costs. As of April 30, 2010 the carrying value of its minority investments is $12.3 million which management believes is not impaired as of April 30, 2010.
Common Stock and Preferred Stock
As of April 30, 2009,2010, 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 Company’s 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, 20092010 is as follows:
| | | | |
Conversion of convertible notes | | | 13,495,2779,494,875 | |
Exercise of outstanding options | | | 77,450,4738,482,809 | |
Vesting of restricted stock awards | | | 11,053,0921,219,152 | |
Available for grant under stock compensation plans | | | 28,292,066 | |
Reserved for issuance under the employee stock purchase plan | | | 7,039,7715,960,960 | |
| | | | |
Totals | | | 137,330,67925,157,796 | |
| | | | |
88
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Common Stock Offering
On March 23, 2010, the Company completed the sale of 9,787,093 shares of its common stock at a price to the public of $14.00 per share. Total gross proceeds of the offering were $137.0 million. Net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were $131.1 million.
Warrants
In connection with the acquisition of Shomiti Systems, Inc. (“Shomiti”)Optium in fiscal 2001,2009, 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 stockOptium as a part of the consideration paid to Genoa’sOptium’s equity holders. The assumed warrants entitled the holders to purchase an aggregate of 29,76637,961 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 Genoa’s equity holders entitled the holders to purchase an aggregate of 999,835 shares of Finisar common stock at an exercise price of $1.00$0.80 per share. During fiscal 2008, 2007 and 2006,2010 warrants to purchase 79,987, 2,011 and 471,627378 shares of Finisar common stock were exercised, respectively. The remaining warrants expired on April 3, 2008.exercised.
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 Company’s board of directors. In September 2002, the Company’s board of directors designated 500,000 shares of its preferred stock as Series RP Preferred Stock, which is reserved for issuance under the Company’s stockholder rights plan described below. As of April 30, 20092010 and 2008,2009, no shares of the Company’s preferred stock were issued and outstanding.
93
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stockholder Rights Plan
In September 2002, Finisar’s 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 Finisar’s 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$112.00 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$0.008 each by action of the board of directors.
The rights plan contains an exception to the 20% ownership threshold for Finisar’s 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 Finisar’s outstanding common stock, without prior board approval.
Employee Stock Purchase Plan
In fiscal 2010, the Company’s 1999 Employee Stock Purchase Plan (the “1999 Purchase Plan”) expired since all the shares available under the plan were issued. The 1999 Purchase Plan permitted eligible employees to purchase Finisar common stock through payroll deductions, which could not exceed 20% of the employee’s total compensation. Stock was 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 was lower. During fiscal 2010 and fiscal 2009, the Company has anissued 1,256,400 shares and 627,540 shares, respectively, under the 1999 Purchase Plan. No shares were issued under the plan in fiscal 2008.
89
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In September 2009, the Company’s board of directors adopted the 2009 Employee Stock Purchase Plan, which includes itssub-plan, the International Employee Stock Purchase Plan (together the “Purchase Plan”), under which 16,750,0002,500,000 shares of the Company’s common stock have been reserved for issuance. The Purchase Plan was approved by the Company’s stockholders in November 2009. The Purchase Plan permits eligible employees to purchase Finisar common stock through payroll deductions, which may not exceed 20% of the employee’s 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. NoDuring fiscal 2010 3,693 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, Finisar’s 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 21,000,0002,625,000 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 Finisar’s 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, 20092010 and 2008,2009, no shares were subject to repurchase.
9490
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of activity under the Company’s employee stock option plans is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Options Outstanding | | | Shares
| | Options Outstanding | |
| | | | | | Weighted-
| | Weighted-Average
| | | | | Available
| | | | Weighted-
| | Weighted-Average
| | | |
| | Shares
| | | | Average
| | Remaining
| | Aggregate
| | | for Grant | | | | Average
| | Remaining
| | Aggregate
| |
| | Available
| | Number of
| | Exercise
| | Contractual
| | Intrinsic
| | | Number of
| | Number of
| | Exercise
| | Contractual
| | Intrinsic
| |
Options for Common Stock | | for Grant | | Shares | | Price | | Term | | Value(1) | | |
| | | | | | | | (In years) | | ($000’s) | | | Shares | | Shares | | Price | | Term | | Value(1) | |
| | | | | | | | (In years) | | ($000’s) | |
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 | | | | | | | | | | | | 3,601,895 | | | | 5,764,889 | | | $ | 20.64 | | | | | | | | | |
| | | | | | | | | | |
Increase in authorized shares | | | 15,431,618 | | | | | | | | — | | | | | | | | | | | | 1,928,952 | | | | | | | | — | | | | | | | | | |
Options granted | | | (23,648,646 | ) | | | 23,648,646 | | | $ | 2.42 | | | | | | | | | | | | (2,956,081 | ) | | | 2,956,081 | | | $ | 19.36 | | | | | | | | | |
RSUs granted | | | 301,197 | | | | | | | | | | | | | | | | | | | | (37,650 | ) | | | — | | | | — | | | | | | | | | |
Options exercised | | | — | | | | (185,305 | ) | | $ | 1.06 | | | | | | | | | | | | | | | | (23,163 | ) | | $ | 8.48 | | | | | | | | | |
Options canceled | | | 16,725,592 | | | | (16,725,592 | ) | | $ | 2.13 | | | | | | | | | | | | 2,090,749 | | | | (2,090,699 | ) | | $ | 17.04 | | | | | | | | | |
| | | | | | | | | | |
Balance at April 30, 2008 | | | 37,022,529 | | | | 52,856,864 | | | $ | 2.65 | | | | | | | | | | | | 4,627,866 | | | | 6,607,108 | | | $ | 21.20 | | | | | | | | | |
| | | | | | | | | | |
Increase in authorized shares | | | 15,441,196 | | | | | | | | | | | | | | | | | | | | 1,930,150 | | | | — | | | | — | | | | | | | | | |
Options assumed on acquisition of Optium | | | | | | | 14,951,405 | | | $ | 1.37 | | | | | | | | | | | | — | | | | 1,868,926 | | | $ | 10.96 | | | | | | | | | |
Options granted | | | (23,353,768 | ) | | | 23,353,768 | | | $ | 0.52 | | | | | | | | | | | | (2,919,221 | ) | | | 2,919,221 | | | $ | 4.16 | | | | | | | | | |
RSUs granted | | | (12,589,690 | ) | | | | | | | | | | | | | | | | | | | (1,573,711 | ) | | | — | | | | — | | | | | | | | | |
Options exercised | | | | | | | (1,471,267 | ) | | $ | 0.76 | | | | | | | | | | | | — | | | | (183,908 | ) | | $ | 6.08 | | | | | | | | | |
RSUs canceled | | | (468,498 | ) | | | | | | | | | | | | | | | | | | | 58,562 | | | | — | | | | — | | | | | | | | | |
Options canceled | | | 12,240,297 | | | | (12,240,297 | ) | | $ | 2.42 | | | | | | | | | | | | 1,530,037 | | | | (1,530,037 | ) | | $ | 19.36 | | | | | | | | | |
| | | | | | | | | | |
Balance at April 30, 2009 | | | 28,292,066 | | | | 77,450,473 | | | $ | 1.83 | | | | 7.26 | | | $ | 7,265 | | | | 3,653,683 | | | | 9,681,309 | | | $ | 14.64 | | | | | | | | | |
| | | | | | | | | | |
Increase in authorized shares | | | | 2,984,325 | | | | — | | | | — | | | | | | | | | |
Options granted | | | | (1,290,344 | ) | | | 1,290,344 | | | $ | 8.36 | | | | | | | | | |
RSUs granted | | | | (1,087,410 | ) | | | — | | | | — | | | | | | | | | |
Options exercised | | | | | | | | (824,313 | ) | | $ | 5.90 | | | | | | | | | |
RSUs canceled | | | | 165,314 | | | | — | | | | — | | | | | | | | | |
Options canceled | | | | 1,535,392 | | | | (1,664,535 | ) | | $ | 19.21 | | | | | | | | | |
| | | | | | |
Balance at April 30, 2010 | | | | 5,960,960 | | | | 8,482,805 | | | $ | 13.67 | | | | 6.69 | | | $ | 43,448 | |
| | | | | | |
| | |
(1) | | Represents the difference between the exercise price and the value of Finisar common stock at April 30, 2009.2010. |
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 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
9591
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes significant ranges of outstanding and exercisable options as of April 30, 2010:
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | | Options Exercisable | |
| | | | | Weighted-
| | | Weighted-
| | | | | | Weighted-
| |
| | | | | Average
| | | Average
| | | | | | Average
| |
| | Number
| | | Remaining
| | | Exercise
| | | Number
| | | Exercise
| |
Range of Exercise Prices | | Outstanding | | | Contractual Life | | | Price | | | Exercisable | | | Price | |
| | (In years) | | | | | | | |
|
$ 0.16 — $ 2.72 | | | 584,497 | | | | 7.86 | | | $ | 1.21 | | | | 498,999 | | | $ | 0.95 | |
$ 3.04 — $ 3.36 | | | 1,629,408 | | | | 8.41 | | | $ | 3.36 | | | | 735,851 | | | $ | 3.36 | |
$ 3.92 — $ 8.08 | | | 360,371 | | | | 7.09 | | | $ | 6.90 | | | | 279,517 | | | $ | 6.95 | |
$ 8.29 — $ 8.29 | | | 1,123,773 | | | | 9.48 | | | $ | 8.29 | | | | — | | | $ | — | |
$ 8.32 — $ 11.84 | | | 927,769 | | | | 5.21 | | | $ | 10.33 | | | | 785,792 | | | $ | 10.44 | |
$11.92 — $ 14.88 | | | 1,522,630 | | | | 4.42 | | | $ | 13.77 | | | | 1,357,765 | | | $ | 13.79 | |
$15.36 — $ 17.36 | | | 228,329 | | | | 4.07 | | | $ | 15.64 | | | | 222,375 | | | $ | 15.60 | |
$17.52 — $ 24.80 | | | 1,120,274 | | | | 6.58 | | | $ | 22.04 | | | | 738,201 | | | $ | 22.02 | |
$25.12 — $ 37.12 | | | 853,493 | | | | 5.95 | | | $ | 29.57 | | | | 588,653 | | | $ | 29.52 | |
$37.52 — $839.68 | | | 132,261 | | | | 2.44 | | | $ | 105.53 | | | | 115,895 | | | $ | 114.97 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 8,482,805 | | | | 6.69 | | | | | | | | 5,323,048 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The Company’s vested andexpected-to-vest stock options and exercisable stock options as of April 30, 20092010 are summarized in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted-
| | | | | | | | | Weighted-
| | |
| | | | Weighted-
| | Average
| | | | | | | Weighted-
| | Average
| | |
| | | | Average
| | Remaining
| | | | | | | Average
| | Remaining
| | |
| | Number of
| | Exercise
| | Contractual
| | Aggregate
| | | Number of
| | Exercise
| | Contractual
| | Aggregate
|
| | Shares | | Price | | Term | | Intrinsic Value | | | Shares | | Price | | Term | | Intrinsic Value |
| | | | | | (In years) | | ($000’s) | | | | | | | (In years) | | ($000’s) |
|
Vested andexpected-to-vest options | | | 70,190,126 | | | $ | 1.87 | | | | 7.09 | | | $ | 6,364 | | | | 7,706,822 | | | $ | 14.01 | | | | 6.49 | | | $ | 38,518 | |
Exercisable options | | | 46,016,701 | | | $ | 2.05 | | | | 6.29 | | | $ | 3,582 | | | | 5,323,048 | | | $ | 15.45 | | | | 5.63 | | | $ | 22,912 | |
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.66$14.96 as of April 30, 2009,2010, which would have been received by the option holders had all option holders exercised their options as of that date. The total number ofin-the-money options exercisable as of April 30, 20092010 was approximately 9.53.7 million. The fair value of options vested during fiscal 2010 was $10.2 million.
Restricted Stock Units
During fiscal 2010, 2009 and fiscal 2008, the Company issued 12.61.1 million, 1.6 million and 301,19737,650 RSUs, respectively, under the 2005 Plan. Typically, vesting of RSUs occurs over one to four years and is subject to the employee’s continuing service to the Company. The compensation expense related tofair value of these awards of $9.1 million, $8.2 million and $0.5 million for fiscal 2010, fiscal 2009 and fiscal 2008, respectively, was determined using the fair market value of the Company’s common stock on the date of the grant and is recognized as compensation expense under a straight line method over the awards’ vesting period.
92
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the changes in RSUs outstanding under the Company’s employee stock plans during fiscal 2009is as follows:
| | | | | | | | | | | | | | | | |
| | | | Weighted-
| | | | | Weighted-
| |
| | | | Average Grant
| | | | | Average Grant
| |
| | Shares | | Date Fair Value | | | Shares | | Date Fair Value | |
|
Nonvested at April 30, 2008 | | | 301,197 | | | $ | 1.56 | | | | 37,650 | | | $ | 12.48 | |
Granted | | | 12,589,690 | | | $ | 0.65 | | | | 1,573,711 | | | $ | 5.20 | |
Vested | | | (1,369,297 | ) | | $ | 0.58 | | | | (171,162 | ) | | $ | 4.64 | |
Forfeited | | | (468,498 | ) | | $ | 1.04 | | | | (58,562 | ) | | $ | 8.32 | |
| | | | | | |
Nonvested at April 30, 2009 | | | 11,053,092 | | | $ | 0.67 | | | | 1,381,637 | | | $ | 5.36 | |
| | | | | | |
Granted | | | | 1,087,410 | | | $ | 8.33 | |
Vested | | | | (1,084,581 | ) | | $ | 3.83 | |
Forfeited | | | | (165,314 | ) | | $ | 5.05 | |
| | | | |
Nonvested at April 30, 2010 | | | | 1,219,152 | | | $ | 9.41 | |
| | | | |
The aggregate intrinsic value of RSUs outstanding at April 30, 20092010 was $7.3$18.2 million. The fair value of RSUs vested during fiscal 2010 was $4.5 million.
As of April 30, 2009,2010, the Company had $4.3$5.7 million of unrecognized compensation expense, net of estimated forfeitures, related to RSURSUs grants. These expenses are expected to be recognized over a weighted-average period of 1640 months. As of April 30, 2009, $2.62010, $7.2 million in compensation expense related to RSUs has been recognized to date.
Valuation and Expense Information Under SFAS 123R
On May 1, 2006, theThe Company adopted SFAS 123R, which requires the measurementmeasures and recognition ofrecognizes compensation expense for all stock-based payment awards made to the Company’s 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, 2010, 2009 2008 and 20072008 which was reflected in the Company’s operating results (in thousands):
| | | | | | | | | | | | | |
| | Fiscal Years Ended | | | | | | | | | | | | | |
| | April 30,
| | April 30,
| | April 30,
| | | Fiscal Years Ended April 30, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Cost of revenues | | $ | 3,387 | | | $ | 3,091 | | | $ | 3,518 | | | $ | 4,212 | | | $ | 3,267 | | | $ | 2,933 | |
Research and development | | | 6,337 | | | | 4,377 | | | | 4,015 | | | | 5,518 | | | | 5,576 | | | | 3,467 | |
Sales and marketing | | | 2,141 | | | | 2,048 | | | | 1,910 | | | | 1,858 | | | | 1,681 | | | | 1,325 | |
General and administrative | | | 3,113 | | | | 2,048 | | | | 2,380 | | | | 3,357 | | | | 2,917 | | | | 1,860 | |
| | | | | | | | | | | | | | |
Total | | $ | 14,978 | | | $ | 11,564 | | | $ | 11,823 | | | $ | 14,945 | | | $ | 13,441 | | | $ | 9,585 | |
| | | | | | | | | | | | | | |
The total stock-based compensation capitalized as part of inventory was $636,916$520,828 and $572,000$614,555 as of April 30, 20092010 and 2008,2009, respectively.
As of April 30, 2009,2010, total compensation cost, net of estimated forfeitures, related to unvested stock options not yet recognized was $23.0$17.8 million which is expected to be recognized over the next 3129 months on a weighted-average basis.
Compensation expense forexpected-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 forexpected-to-vest stock-based awards is valued under the single-option approach and amortized on a straight-line basis, net of estimated forfeitures.
93
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of options granted in fiscal 2010, 2009 2008 and 20072008 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 | | | Employee Stock Option Plans | | Employee Stock Purchase Plan | |
| | Year Ended April 30, | | Year Ended April 30, | | | Year Ended April 30, | | Year Ended April 30, | |
| | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 | |
|
Expected term (in years) | | | 5.26 | | | | 5.44 | | | | 5.25 | | | | 0.75 | | | | 0.75 | | | | 0.50 | | | | 5.22 | | | | 5.26 | | | | 5.44 | | | | 0.75 | | | | 0.75 | | | | 0.75 | |
Volatility | | | 79 | % | | | 86 | % | | | 98 | % | | | 102 | % | | | 57 | % | | | 69 | % | | | 83 | % | | | 79 | % | | | 86 | % | | | 93% - 109% | | | | 102 | % | | | 57 | % |
Risk-free interest rate | | | 1.96 | % | | | 4.03 | % | | | 4.73 | % | | | 0.45 | % | | | 3.34 | % | | | 4.45 | % | | | 2.36 | % | | | 1.96 | % | | | 4.03 | % | | | 0.2 - 0.5 | % | | | 0.45 | % | | | 3.34 | % |
Dividend yield | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company’s 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 Company’s 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 2010, 2009 2008 and 20072008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to beForfeitures are 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 2010, 2009 and 2008 was $5.70, $2.64 and 2007 was $0.33, $2.08 and $2.64,$16.64, respectively. The weighted-average estimated per share fair value of shares granted under the 1999 Purchase Plan in fiscal 2010, 2009 and 2008 was $1.53, $1.68 and 2007 was $0.21, $0.50 and $0.90,$4.00, 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 management’s 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 onForm 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 Company’s stock option investigation and the Company’s 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 tomark-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 option’s 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 Company’s 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
94
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1.78 million shares of its common stock and committed to issue 301,19737,650 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 21.22. 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. As of April 30, 2010, $353,000 of this income tax liability was unpaid.
| |
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 2009.2009 and calendar year 2010. 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 participant’s contribution. The Company suspended contributions to the plan beginning in the fourth quarter of fiscal 2009. The Company’s expenses related to this plan were $0, $1,591,000 $1,523,000 and $1,255,000$1,523,000 for the fiscal years ended April 30, 2010, 2009 2008 and 2007,2008, respectively.
The components of provision for (benefit from) income taxestax expense (benefit) consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended April 30, | | | Fiscal Years Ended April 30, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Current: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | $ | (225 | ) | | $ | — | | | $ | 157 | | | $ | (538 | ) | | $ | (225 | ) | | $ | — | |
State | | | 86 | | | | 157 | | | | 86 | | | | 402 | | | | 86 | | | | 157 | |
Foreign | | | 1,023 | | | | 320 | | | | 392 | | | | 495 | | | | 1,023 | | | | 320 | |
| | | | | | | | | | | | | | |
| | | 884 | | | | 477 | | | | 635 | | | | 359 | | | | 884 | | | | 477 | |
Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | (7,135 | ) | | | 1,491 | | | | 2,019 | | | | — | | | | (7,135 | ) | | | 1,491 | |
State | | | (711 | ) | | | 265 | | | | 156 | | | | — | | | | (711 | ) | | | 265 | |
Foreign | | | | (1,999 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | |
| | | (7,846 | ) | | | 1,756 | | | | 2,175 | | | | (1,999 | ) | | | (7,846 | ) | | | 1,756 | |
| | | | | | | | | | | | | | |
Provision for (benefit from) income taxes | | $ | (6,962 | ) | | $ | 2,233 | | | $ | 2,810 | | |
Provision (benefit) for income taxes | | | $ | (1,640 | ) | | $ | (6,962 | ) | | $ | 2,233 | |
| | | | | | | | | | | | | | |
9995
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
LossIncome (loss) from continuing operations before income taxes consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended April 30, | | | Fiscal Years Ended April 30, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
U.S. | | $ | (278,530 | ) | | $ | (82,149 | ) | | $ | (51,100 | ) | | $ | (49,076 | ) | | $ | (286,214 | ) | | $ | (40,435 | ) |
Foreign | | | 16,760 | | | | 9,824 | | | | 3,789 | | | | 24,630 | | | | 16,760 | | | | 9,824 | |
| | | | | | | | | | | | | | |
| | $ | (261,770 | ) | | $ | (72,325 | ) | | $ | (47,311 | ) | | $ | (24,446 | ) | | $ | (269,454 | ) | | $ | (30,611 | ) |
| | | | | | | | | | | | | | |
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, | | | Fiscal Years Ended April 30, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Expected income tax provision (benefit) at U.S. federal statutory rate | | | (35.00 | )% | | | (35.00 | )% | | | (35.00 | )% | | | (35.0 | )% | | | (35.0 | )% | | | (35.0 | )% |
Stock compensation expense | | | 1.40 | | | | 3.69 | | | | 3.61 | | | | 13.3 | | | | 1.3 | | | | 8.7 | |
Loss on debt extinguishment | | | 0.00 | | | | 0.00 | | | | 22.00 | | |
Goodwill impairment | | | 21.04 | | | | 16.32 | | | | 0.00 | | | | — | | | | 20.4 | | | | 38.6 | |
Debt conversion | | | | 28.0 | | | | — | | | | — | |
Tax gain convertible note | | | | 9.5 | | | | — | | | | — | |
Non-deductible interest | | | 0.57 | | | | 3.60 | | | | 4.56 | | | | 2.0 | | | | 0.6 | | | | 8.5 | |
Valuation allowance | | | 9.62 | | | | 18.70 | | | | 11.92 | | | | 18.6 | | | | 10.3 | | | | (3.5 | ) |
Foreign (income) taxed at different rates | | | (1.85 | ) | | | (4.31 | ) | | | (2.65 | ) | | | (41.4 | ) | | | (1.8 | ) | | | (10.2 | ) |
In-process R&D | | | 1.59 | | | | 0.00 | | | | 1.16 | | | | 0.0 | | | | 1.6 | | | | — | |
Other | | | (0.03 | ) | | | 0.09 | | | | 0.34 | | | | (1.7 | ) | | | — | | | | 0.2 | |
| | | | | | | | | | | | | | |
| | | (2.66 | )% | | | 3.09 | % | | | 5.94 | % | | | (6.7 | )% | | | (2.6 | )% | | | 7.3 | % |
| | | | | | | | | | | | | | |
10096
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of deferred taxes consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended April 30, | | | Fiscal Years Ended April 30, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Deferred tax assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Inventory reserve | | $ | 9,556 | | | $ | 9,228 | | | $ | 7,387 | | |
Inventory adjustments | | | $ | 9,779 | | | $ | 9,556 | | | $ | 9,228 | |
Accruals and reserves | | | 12,025 | | | | 12,524 | | | | 9,272 | | | | 10,366 | | | | 12,025 | | | | 12,524 | |
Tax credits | | | 12,014 | | | | 9,525 | | | | 16,633 | | | | 12,075 | | | | 12,014 | | | | 9,525 | |
Net operating loss carryforwards | | | 166,944 | | | | 147,447 | | | | 146,060 | | | | 160,710 | | | | 166,944 | | | | 147,447 | |
Gain/loss on investments under equity or cost method | | | 10,981 | | | | 10,587 | | | | 11,862 | | | | 11,654 | | | | 10,981 | | | | 10,587 | |
Depreciation and amortization | | | 3,944 | | | | 4,417 | | | | 4,699 | | | | (707 | ) | | | 3,944 | | | | 4,417 | |
Purchase accounting for intangible assets | | | 4,161 | | | | 14,263 | | | | 11,115 | | | | 3,476 | | | | 4,161 | | | | 14,263 | |
Capital loss carryforward | | | 709 | | | | 1,005 | | | | — | | | | — | | | | 709 | | | | 1,005 | |
Acquired intangibles | | | 22,524 | | | | — | | | | — | | | | 18,913 | | | | 22,524 | | | | — | |
Stock compensation | | | 5,753 | | | | 6,658 | | | | 10,741 | | | | 7,676 | | | | 5,753 | | | | 6,658 | |
| | | | | | | | | | | | | | |
Total deferred tax assets | | | 248,611 | | | | 215,654 | | | | 217,769 | | | | 233,943 | | | | 248,611 | | | | 215,654 | |
Valuation allowance | | | (240,616 | ) | | | (205,924 | ) | | | (207,073 | ) | | | (229,201 | ) | | | (237,456 | ) | | | (200,919 | ) |
| | | | | | | | | | | | | | |
Net deferred tax assets | | | 7,995 | | | | 9,730 | | | | 10,696 | | | | 4,742 | | | | 11,155 | | | | 14,735 | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill amortization for tax | | | — | | | | (7,846 | ) | | | (6,090 | ) | | | — | | | | — | | | | (7,846 | ) |
Tax basis difference on convertible debt | | | (7,995 | ) | | | (9,638 | ) | | | (10,696 | ) | | | (2,431 | ) | | | (7,995 | ) | | | (9,638 | ) |
Other comprehensive income | | | — | | | | (92 | ) | | | — | | | | — | | | | — | | | | (92 | ) |
Debt discount | | | | (313 | ) | | | (3,160 | ) | | | (5,005 | ) |
Depreciation and amortization | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Total deferred tax liabilities | | | (7,995 | ) | | | (17,576 | ) | | | (16,786 | ) | | | (2,744 | ) | | | (11,155 | ) | | | (22,581 | ) |
| | | | | | | | | | | | | | |
Total net deferred tax liabilities | | $ | 0 | | | $ | (7,846 | ) | | $ | (6,090 | ) | |
Total net deferred tax assets (liabilities) | | | $ | 1,999 | | | $ | — | | | $ | (7,846 | ) |
| | | | | | | | | | | | | | |
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 thathas established a valuation allowance for the portion of the deferred tax assets for which it is not more likely than not that the deferred tax assets will be realizable in future periods. At present, the Company’s management believes that it is more likely than not that approximately $2.0 million of net deferred tax assets, related to foreign jurisdiction, are expected to be realized within the next year; accordingly, a deferred tax asset is shown in the accompanying consolidated balance sheets and a valuation allowance has been established against the remaining deferred tax assets. The Company’s valuation allowance increased/(decreased) from the prior year by approximately $34.7($8.3) million, ($1.1)$34.7 million and ($2.2)1.1) million in fiscal years 2010, 2009 2008 and 2007,2008, respectively.
As of April 30, 2009,2010, approximately $16.8$18.3 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 provisionprovision.
At April 30, 2009,2010, the Company had federal, state and foreign net operating loss carryforwards of approximately $489.0$484.5 million, $159.8$160.5 million and $13.4$8.4 million, respectively, and federal and state tax credit carryforwards of approximately $14.4$14.7 million, and $10.1$10.5 million, respectively. The net operating loss and tax credit carryforwards will expire at various dates beginning in 2010, if not utilized. Utilization of the Company’s U.S. net operating loss
97
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 Company’s manufacturing operations in Malaysia operate under a tax holiday which expires in beginning of fiscal 2011.2012. This tax holiday has had no effect on the Company’s net loss and net loss per share in fiscal years 2007, 2008, 2009 and 20092010 due to a cumulative net operating lossesloss position within the tax holiday period.
As of April 30, 20092010, there was no provision for U.S. income taxes for undistributed earnings of the Company’s foreign subsidiaries as it is currently the Company’s intention to reinvest these earnings indefinitely in operations outside the United States. The Company believes it is not practicable to determine the Company’s 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, 2008April 30, 2009 and April 30, 20092010 was $11.7$12.5 million and $12.5$12.6 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 | |
| | | | | | | | |
| | | | | | | | |
Gross unrecognized tax benefits balance at April 30, 2009 | | | | | | $ | 12,474 | |
Additions based on tax positions related to the current year | | | 361 | | | | | |
Deductions for tax positions of prior years | | | (215 | ) | | | | |
| | | | | | | | |
Gross unrecognized tax benefits balance at April 30, 2010 | | | | | | $ | 12,620 | |
| | | | | | | | |
Excluding the effects of recorded valuation allowances for deferred tax assets, $10.5$10.6 million of the unrecognized tax benefits would favorably impact the effective tax rate in future periods if recognized.
It is the Company’s belief that no significant changes in the unrecognized tax benefit positions will occur within 12 months of April 30, 2009.2010.
The Company records interest and penalties related to unrecognized tax benefits in income tax expense. At April 30, 2009,2010, 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, 2009.2010.
The Company and its subsidiaries are subject to taxation in various state jurisdictions as well as the U.S. The Company’s U.S. federal and state income tax returns are generally not subject to examination by the tax authorities for tax years before 2003.2004. 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 Company’s Malaysia, Singapore and China income tax returns are generally not subject to examination by the tax authorities for tax years before 2004, 2002,2005, 2003 and 2004,2005, respectively. The Company’s Israel subsidiary is under audit byreceived a tax assessment from Israel Tax Authority (ITA) for tax years ended 2005 to 2007. The Company has filed an appeal and anticipates no material tax adjustments.
102
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)liability.
| |
20. | Segments and Geographic Information |
The Company designs, develops, manufacturesPrior to the first quarter of fiscal 2010, the Company’s Chief Executive Officer and markets optical subsystems, components and network performance test systems for high-speed data communications. The Company viewsChairman of the Board viewed 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 After 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-userssale of the equipment.
Bothassets of the Company’s operating segments and its corporate sales function reportNetwork Tools Division to JDSU in the Chairmanfirst quarter of the Board and the Chief Executive Officer. Where appropriate,fiscal 2010, the Company charges specific costs to these segments where they can be identifiedhas one reportable segment consisting of optical subsystems 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.components.
10398
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information about reportable segment revenuesOptical subsystems consist primarily of transceivers sold to manufacturers of storage and income is as follows (in thousands):networking equipment for SANs and LANs and MAN applications. Optical subsystems also include multiplexers, de-multiplexers and optical add/drop modules for use in MAN applications. Optical components consist primarily of packaged lasers and photo-detectors which are incorporated in transceivers, primarily for LAN and SAN applications.
| | | | | | | | | | | | |
| | 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)
| |
21. | Geographic Information |
The following is a summary of operations within geographic areas based on the location of the entity purchasing the Company’s products (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended April 30, | | | Fiscal Years Ended April 30, | |
| | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
|
Revenues from sales to unaffiliated customers: | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | $ | 181,829 | | | $ | 125,580 | | | $ | 149,097 | | | $ | 221,789 | | | $ | 147,352 | | | $ | 94,214 | |
Malaysia | | | 90,774 | | | | 108,260 | | | | 102,665 | | | | 117,991 | | | | 90,669 | | | | 108,166 | |
China | | | 76,454 | | | | 47,258 | | | | 32,969 | | | | 89,722 | | | | 75,860 | | | | 46,637 | |
Rest of the world | | | 192,180 | | | | 159,082 | | | | 133,817 | | | | 200,378 | | | | 183,177 | | | | 152,608 | |
| | | | | | | | | | | | | | |
Totals | | | $ | 629,880 | | | $ | 497,058 | | | $ | 401,625 | |
| | $ | 541,237 | | | $ | 440,180 | | | $ | 418,548 | | | | | | | | |
| | | | | | | | |
Revenues generated in the United States.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 | |
| | | | | | | | |
| | | | | | | | |
| | April 30,
| | | April 30,
| |
| | 2010 | | | 2009 | |
|
Long-lived assets | | | | | | | | |
United States | | $ | 70,975 | | | $ | 83,118 | |
Malaysia | | | 35,575 | | | | 28,067 | |
Rest of the world | | | 23,965 | | | | 17,180 | |
| | | | | | | | |
| | $ | 130,515 | | | $ | 128,365 | |
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21.22. | Pending Litigation |
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 Company’s 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 Company’s 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
resulted in delays in filing the Company’s quarterly reports onForm 10-Q for the quarters ended October 29, 2006,
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FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
January 28, 2007, and January 27, 2008, and the Company’s annual report onForm 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 Company’s announcement on November 30, 2006 that the Audit Committee of the board of directors had voluntarily commenced an investigation of the Company’s 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 Company’s current or former officers and directors caused the Company to grant stock options at less than fair market value, contrary to the Company’s 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 Company’s 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 Court’s ruling onCourt granted the motions remains pending.
‘505 Patent Litigation
DirecTV Litigation
On April 4, 2005, the Company filed an action for patent infringementto dismiss on September 22, 2009, and entered judgment 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 Company’s 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 Company’s 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 DirecTV’s willful infringement, those damages would be enhanced by an additional $25 million. Further, the Court awarded the Company pre-judgment interest on the jury’s verdict and court costs in the aggregate amount of approximately $13.5 million. The Court denied the Company’s 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 durationfavor of the patent, which expires in April 2012.
DirecTVdefendants. The plaintiffs have appealed the judgment to the United States Court of AppealsAppeal for the FederalNinth 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 Company’s motion for a permanent injunction, the trial court’s refusal to enhance future damages for willfulness and the trial court’s 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 court’s 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 DirecTV’s 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,
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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 DirecTV’s 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 Company’s ‘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 Company’s proposal to narrow the issues for trial and proceed only with the Company’s 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 Comcast’s 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 Company’s ‘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 Circuit’s 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 Company’s ‘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.
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Requests for Re-Examination of the ‘505 Patent
Four requests for re-examination of the Company’s ‘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 Company’s 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 Company’s 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, Corporate Development and Investor Relations and its former Senior Vice President and Chief Financial Officer, and an investment banking firm that served as an underwriter for the Company’s 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 Company’s stock sold in the offerings and (ii) the underwriter had entered into agreements with customers whereby the underwriter agreed to allocate shares of the Company’s stock sold in the offerings to those customers in exchange for which the customers agreed to purchase additional shares of the Company’s 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 wouldwill pay a total of $486 million, and the issuer defendants and their insurers wouldwill pay a total of $100 million to settle all of the cases. TheOn August 25, 2009, the Company would be responsible for afunded approximately $327,000 with respect to its 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,costs. This amount was accrued in 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.financial statements during
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the first quarter of fiscal 2010. On October 2, 2009, the Court granted approval of the settlement and on November 19, 2009 the Court entered final judgment. The judgment has been appealed by certain individual class members.
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 Company’s common stock, against two investment banking firms that served as underwriters for the initial public offering of the Company’s common stock in November 1999. None of the Company’s 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 Company’s principal shareholders constituted a “group” that owned in excess of 10% of the Company’s 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 Company’s 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 thosethe 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 Company’s acquisition of Optium Corporation. On September 11, 2006, JDSU and Emcore Corporation filed a complaint in the United States District Court for the Western District of Pennsylvania alleging that certain cable television transmission products acquired in connection with the Company’s acquisition of Optium Corporation, specifically the Company’s 1550 nm HFC externally modulated transmitter, used in cable television applications, in addition to possibly “products as yet unidentified,” infringes oninfringe two U.S. patents.patents, referred to as the ‘‘‘003 and ‘071 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 Company’s 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 forpatent, referred to as 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.‘‘‘374 Patent”. 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 Company’s HFC externally modulated transmitter are unenforceable due to inequitable conduct committed by the patent applicantsand/or the attorneys or agents during prosecution.
On February 18, 2009, the Court granted JDSU’s and Emcore’s motion for summary judgment dismissing the Company’s 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.
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FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A trial with respect to the remaining two actions was held in October 2009. On November 1, 2009, the jury delivered its verdict that the Company had infringed the ‘003 and the ‘071 Patents as well as the ‘374 Patent. In addition, the jury found that the Company’s infringement of the ‘003 and the ‘071 Patents was willful. The jury determined that, with respect to the ‘003 and the ‘071 Patents, Emcore was entitled to $974,364 in damages and JDSU was entitled to $622,440 in damages, and, with respect to the ‘374 Patent, Emcore was entitled to $1,800,000 in damages. The Court declined to enhance the damages award with respect to the ‘003 and ‘071 Patents as a result of the jury’s determination that the Company’s infringement was willful. In addition the Court declined to issue a permanent injunction against further manufacture or sale of the products found to have infringed thepatents-in-suit. The Company is appealing on several grounds.
Based on the Company’s review of the record in this case, including discussion with and analysis by counsel of the bases for the Company’s appeal, the Company has determined that it has a number of strong arguments available on appeal and, although there can be no assurance as to the ultimate outcome, the Company believes that the judgment against it will ultimately be reversed, or remanded for a new trial in which the Company believes it would prevail. As a result, the Company has concluded that it is not probable that Emcore and JDSU will ultimately prevail in this matter; therefore, the Company has not recorded any liability for this judgment.
Digital Diagnostics Patent Litigation
On January 5, 2010, the Company filed a complaint for patent infringement in the United States District Court for the Northern District of California. The complaint alleges that certain optoelectronic transceivers from Source Photonics, Inc., MRV Communications, Inc., Neophotonics Corp. and Oplink Communications, Inc. infringe eleven Finisar patents. As described in further detail below, this suit is no longer pending against MRV Communications, NeoPhotonics or Oplink. The complaint asks the Court to enter judgment (a) that the defendants have infringed, actively induced infringement of,and/or contributorily infringed thepatents-in-suit, (b) preliminarily and permanently enjoining the defendants from further infringement of thepatents-in-suit, or, to the extent not so enjoined, ordering the defendants to pay compulsory ongoing royalties for any continuing infringement of thepatents-in-suit, (c) ordering that the defendants account, and pay actual damages (but no less than a reasonable royalty), to the Company for the defendants’ infringement of thepatents-in-suit, (d) declaring that the defendants are willfully infringing one or more of thepatents-in-suit and ordering that the defendants pay treble damages to the Company, (e) ordering that the defendants pay the Company’s costs, expenses, and interest, including prejudgment interest, (f) declaring that this is an exceptional case and awarding the Company its attorneys’ fees and expenses, and (g) granting such other and further relief as the Court deems just and appropriate, or that the Company may be entitled to as a matter of law or equity.
On March 23, 2010, each defendant filed a first amended answer in which they denied the allegations of the complaint and asserted affirmative defenses including non-infringement, invalidity, statute of limitations, prosecution history estoppel, laches, estoppel and “other defenses.” Each defendant also asserted counterclaims against the Company seeking declaratory judgment of invalidity for each of the patents asserted in the complaint, declaratory judgment of unenforceability for certain of the patents asserted in the complaint, alleging monopolization of “the Digital Diagnostics Technology Market” in violation of Section 2 of the Sherman Act, attempted monopolization of “the Optical Transceiver Market” in violation of Section 2 of the Sherman Act, breach of contract, and unfair competition. Source Photonics, Inc. also asserted counterclaims alleging that certain of the Company’s optoelectronic transceivers infringe two of its patents. NeoPhotonics Corp. also asserted counterclaims alleging that certain of the Company’s wavelength selective switches infringe two of its patents. Each defendant asked the Court to enter judgment (a) denying the Company relief and dismissing the complaint with prejudice, (b) granting declaratory judgment that the Company’s asserted patents are invalid, (c) awarding attorneys’ fees and reasonable expenses, (d) awarding compensatory damages for the Company’s allegedly anticompetitive conduct, and trebling such damages, (e) permanently enjoining the Company from allegedly monopolizing or attempting to monopolize the United States markets for optical transceiver and digital diagnostics technology for such transceivers, (f) awarding attorneys’ fees and costs, (g) granting declaratory judgment that certain of the Company’s asserted patents are
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FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unenforceable, (h) for damages resulting from the Company’s alleged breach of contract, (i) permanently enjoining the Company from engaging in allegedly unfair competition, (j) restoring moneyand/or property that the Company has allegedly acquired by means of such unfair competition, (k) awarding all costs, expenses and interest, including prejudgment interest, and (l) for such additional relief as the Court may deem just and proper. Source Photonics, Inc. and NeoPhotonics Corp. each asked the Court in addition to enter judgment (m) finding that the Company has infringed, actively induced the infringement of,and/or contributed to the infringement of each of their respective asserted patents, (n) awarding damages not less than a reasonable royalty, and (o) permanently enjoining the Company from such alleged infringement. NeoPhotonics Corp. also asked the Court to enter judgment trebling damages for the Company’s allegedly willful infringement of one of its two asserted patents. The Company filed a motion to dismiss the defendants’ non-patent counterclaims or, in the alternative, to sever and stay those counterclaims and to strike certain of the defendants’ affirmative defenses on April 13, 2010. The defendants filed their opposition to the Company’s motion on April 29, 2010, and the Company filed its reply on May 6, 2010.
On May 5, 2010, the Court entered an order finding that the defendants had been improperly joined in a single suit and dismissed each of the defendants except Source Photonics, Inc. without prejudice to the Company’s re-filing its claims against the other dismissed defendants in separate suits. On May 18, 2010, Source Photonics, Inc. filed a second amended answer that restated certain of its affirmative defenses and counterclaims, omitted the affirmative defenses of prosecution history estoppel and “other defenses,” and omitted both patent counterclaims. The relief Source Photonics, Inc. asks from the Court was revised accordingly. Although Source Photonics did not include its patent counterclaims in its Second Amended Answer, Source Photonics’ trial counsel subsequently indicated that they would attempt to have these claims added back into the suit.
On May 19, 2010, the Court granted Source Photonics, Inc. leave to file the second amended answer, and bifurcated and stayed all discovery and proceedings related to Source Photonics, Inc.’s counterclaims for declaratory judgment of unenforceability for certain of the patents asserted in the complaint, alleged monopolization of “the Digital Diagnostics Technology Market” in violation of Section 2 of the Sherman Act, attempted monopolization of “the Optical Transceiver Market” in violation of Section 2 of the Sherman Act, breach of contract, and unfair competition pending resolution of the Company’s patent infringement claims. The Court allowed the Company to withdraw its motion to dismiss Source Photonics, Inc.’s non-patent counterclaims without prejudice to the Company refiling a motion to dismiss after the stay has been lifted.
A claim construction hearing is currently scheduled for October 6, 2010, and the case is currently scheduled for trial on July 25, 2011.
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 Company’s results of operations and cash flow. The Department of
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FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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22.23. | 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 Company’s optical subsystems and components segment and $1.2 million related to its network performance test systems segment.discontinued operations. During the first quarter of fiscal 2009, the Company recorded additional restructuring charges of $0.6 million$600,000 for lease payments for the remaining portion of the Scotts Valley facility that had been used for a product line of our network test systems segmentits discontinued operations which was sold in first quarter of fiscal 2009. See Note 6During the second quarter of fiscal 2010, the Company recorded restructuring charges of $4.2 million for additional details regarding the salenon-cancelable facility lease relating to the abandoned and unused portion of this product line.its facility in Allen, Texas.
The facilities consolidation charges were calculated using estimates and were based uponfollowing table summarizes the remaining future lease commitments for vacated facilities fromactivities of the date of facility consolidation, net of estimated future sublease
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FINISAR CORPORATION
restructuring accrual during fiscal 2010 (in thousands):
| | | | |
Balance as of April 30, 2009 | | $ | 850 | |
Charges | | | 4,173 | |
Adjustment to deferred rent | | | 296 | |
Cash payments | | | (655 | ) |
| | | | |
Balance as of April 30, 2010 | | $ | 4,664 | |
| | | | |
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, $900,0002010, $4.7 million of committed facilities payments related to restructuring activities remained accrued, andof which $581,000 is expected to be fully utilized byin the end ofnext twelve months and $4.1 million to be paid out from fiscal 2011.2011 through fiscal 2020.
.
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 Company’s 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.
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FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in the Company’s warranty liability during the period are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | April 30, | | | April 30, | |
| | 2009 | | 2008 | | | 2010 | | 2009 | |
|
Beginning balance | | $ | 2,132 | | | $ | 1,818 | | | $ | 6,413 | | | $ | 1,932 | |
Warranty liability acquired on merger with Optium | | $ | 2,884 | | | | — | | | | — | | | | 2,884 | |
Additions during the period based on product sold | | | 2,151 | | | | 2,547 | | | | 3,902 | | | | 2,151 | |
Settlements | | | (1,297 | ) | | | (398 | ) | | | (1,631 | ) | | | (1,297 | ) |
Changes in liability for pre-existing warranties, including expirations | | | 743 | | | | (1,835 | ) | | | (3,212 | ) | | | 743 | |
| | | | | | | | | | |
Ending balance | | $ | 6,613 | | | $ | 2,132 | | | $ | 5,472 | | | $ | 6,413 | |
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Frank H. Levinson, the Company’s former Chairman of the Board and Chief Technical Officer and a member of the Company’s 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 during the four months ending August 29, 2008 and Fabrinet purchased products from the Company totaling to $16.2 million during the four months ended August 29, 2008.million. During the fiscal yearsyear 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, 2008million.
During fiscal 2010, the Company owed Fabrinet approximately $7.1 millionpaid a sales and $7.0 million, respectively, and Fabrinet owedmarketing consultant, who is the Company $6.0 million and $5.7 million, respectively.
In connection with the acquisition by VantagePoint Venture Partnersbrother of the 34 million shares of common stockChief Executive Officer of the Company, held by Infineon Technologies AG that the Company had previously issued to Infineon as consideration for its acquisition of Infineon’s 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 Company’s board of directors, provided that the nominee was reasonably acceptable to the board’s 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$160,000 in VantagePoint’s holdings of the Company’s common stock following distributions by VantagePoint to its partners, the Company’s obligations
111
FINISAR CORPORATION
cash compensation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
regarding the electionAmounts paid to related parties represented values considered by management to be fair and reasonable, reflective of a nominee of VantagePoint to the Company’s 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.an arm’s length transaction.
| |
26. | Guarantees and Indemnifications |
In November 2002, the FASB issued Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(“FIN 45”). FIN 45 requires that uponUpon 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 Company’s 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 Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s 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 Company’s activities or the use of the Company’s 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.
105
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2009.2010. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.
During the first quarter of fiscal 2009, the Company’s Malaysian subsidiary entered into loan agreements with a Malaysian bank (See Note 13. Long-term Debt) for which the Company has provided corporate guarantees. The Company guaranteed loan payments of up to $23.1 million in the event of non-payment by its Malaysian subsidiary. These guarantees are effective during the term of these loans. The principal balance of this loan outstanding as of April 30, 2010 was $13.8 million.
| |
27. | Subsequent EventsFinancial Information by Quarter (Unaudited) |
Pending Sale of Network Tools DivisionSummarized quarterly data for fiscal 2010 and 2009 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | |
| | April 30,
| | | Jan 31,
| | | Nov 1,
| | | Aug 2,
| | | April 30,
| | | Feb 1,
| | | Nov 2,
| | | Aug 3,
| |
| | 2010 | | | 2010 | | | 2009 | | | 2009 | | | 2009(3) | | | 2009(2) | | | 2008(1) | | | 2008 | |
| | (In thousands, except per share data) | |
|
Revenues | | $ | 188,490 | | | $ | 166,935 | | | $ | 145,730 | | | $ | 128,725 | | | $ | 107,457 | | | $ | 126,081 | | | $ | 147,746 | | | $ | 115,774 | |
Gross profit | | $ | 58,851 | | | $ | 51,695 | | | $ | 39,793 | | | $ | 29,402 | | | $ | 23,223 | | | $ | 34,837 | | | $ | 39,957 | | | $ | 40,789 | |
Income (loss) from operations | | $ | 12,919 | | | $ | 9,126 | | | $ | (1,963 | ) | | $ | (8,786 | ) | | $ | (24,076 | ) | | $ | (49,673 | ) | | $ | (190,140 | ) | | $ | 7,860 | |
Income (loss) from continuing operations | | $ | 14,111 | | | $ | 5,616 | | | $ | (31,417 | ) | | $ | (11,116 | ) | | $ | (27,004 | ) | | $ | (49,295 | ) | | $ | (189,135 | ) | | $ | 2,942 | |
Income (loss) from discontinued operations | | $ | 56 | | | $ | (131 | ) | | $ | (67 | ) | | $ | 37,079 | | | $ | 1,246 | | | $ | (87 | ) | | $ | 1,115 | | | $ | (125 | ) |
Net income (loss) | | $ | 14,167 | | | $ | 5,485 | | | $ | (31,484 | ) | | $ | 25,963 | | | $ | (25,758 | ) | | $ | (49,382 | ) | | $ | (188,020 | ) | | $ | 2,817 | |
Basic: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) per share from continuing operations | | $ | 0.20 | | | $ | 0.09 | | | $ | (0.49 | ) | | $ | (0.18 | ) | | $ | (0.45 | ) | | $ | (0.83 | ) | | $ | (3.55 | ) | | $ | 0.08 | |
Income (loss) per share from discontinued operations | | $ | 0.00 | | | $ | (0.00 | ) | | $ | (0.00 | ) | | $ | 0.62 | | | $ | 0.02 | | | $ | (0.00 | ) | | $ | 0.02 | | | $ | (0.00 | ) |
Net income (loss) per share | | $ | 0.20 | | | $ | 0.09 | | | $ | (0.49 | ) | | $ | 0.44 | | | $ | (0.43 | ) | | $ | (0.83 | ) | | $ | (3.53 | ) | | $ | 0.08 | |
Diluted: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) per share from continuing operations | | $ | 0.19 | | | $ | 0.08 | | | $ | (0.49 | ) | | $ | (0.18 | ) | | $ | (0.45 | ) | | $ | (0.83 | ) | | $ | (3.55 | ) | | $ | 0.08 | |
Income (loss) per share from discontinued operations | | $ | 0.00 | | | $ | (0.00 | ) | | $ | (0.00 | ) | | $ | 0.62 | | | $ | 0.02 | | | $ | (0.00 | ) | | $ | 0.02 | | | $ | (0.00 | ) |
Net income (loss) per share | | $ | 0.19 | | | $ | 0.08 | | | $ | (0.49 | ) | | $ | 0.44 | | | $ | (0.43 | ) | | $ | (0.83 | ) | | $ | (3.53 | ) | | $ | 0.08 | |
Shares used in computing net income (loss) per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 70,596 | | | | 65,113 | | | | 64,198 | | | | 60,181 | | | | 59,622 | | | | 59,350 | | | | 53,325 | | | | 38,767 | |
Diluted | | | 82,351 | | | | 66,719 | | | | 64,198 | | | | 60,181 | | | | 59,622 | | | | 59,350 | | | | 53,325 | | | | 38,952 | |
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”):
| | |
(1) | • | 2.50% Convertible Subordinated Notes due 2010 (the “Subordinated Notes”);The net loss in the second quarter of fiscal 2009 includes a non-cash impairment charge of $178.8 million to reduce the carrying value of goodwill. It also includes $10.5 million of acquired in-process research and development expenses related to the Optium merger. |
|
| • | 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 a5-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 Company’s existing credit facilities, as described in Notes 13, 14 and 15, in order to facilitate the Exchange Offers. Principal modifications include:
(2) | | |
| • | A reductionThe net loss in the total sizethird quarter of the Company’s secured revolving linefiscal 2009 includes a non-cash impairment charge of credit from $45$46.5 million to $25 million; andreduce the carrying value of goodwill. |
|
(3) | • | Revised covenants that permitThe net loss in the usefourth quarter of borrowings underfiscal 2009 includes a non-cash impairment charge of $13.2 million to reduce the secured revolving linecarrying value 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.goodwill. |
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 | |
114106
| |
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 withRule 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 inRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended)Act) as of April 30, 2009,2010, 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 SEC’s rules.
Management’s 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(as defined inRuleRules 13a-15(f) and15d-15(f) under the Exchange Act as a process designed by, and under the supervision of, a company’s principal executive and principal financial officers, and effected by a company’s board of directors, management and other personnel,Act) to provide reasonable assurance regarding the reliability of our 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 company’s 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 this2010. Management based its assessment our management usedon the criteria set forth inInternal Control — Integrated Frameworkissued 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, 2009.2010.
115
The effectiveness of internal control over financial reporting as of April 30, 20092010 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
107
Changes in Internal ControlsControl
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. Additional improvements to our inventory systems and controls at our Ipoh facility and our other facilities were made during fiscal 2010. 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, 20092010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
116108
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 Corporation’s internal control over financial reporting as of April 30, 2009,2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Finisar Corporation’s 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 Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s 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 company’s 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 company’s 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 company’s 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, 2009,2010, 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, 20092010 and 2008,2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 20092010 and our report dated July 8, 20091, 2010 expressed an unqualified opinion thereon.
San Jose, CA
July 8, 20091, 2010
117109
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ITEM 9B. | Other Information |
None.
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 20092010 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”Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” to be contained in the Proxy Statement. The information under the heading “Executive Officers of the Registrant” in Part I of this report is also incorporated by reference in this section.
| |
Item 11. | Executive Compensation |
The information required by this item is incorporated by reference from the sectionsections captioned “Director Compensation” and “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 sectionsections captioned “Corporate Governance” and “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.Schedules |
(a) The following documents are filed as a part of this Annual Report:
(1) Financial Statements
: See “Finisar Corporation Consolidated Financial Statements: The following consolidated financial statements are includedStatements Index” 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
118110
Schedule II — Consolidated Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Additions
| | | | | | | | | | | Additions
| | | | | |
| | Balance at
| | | | Charged to
| | | | Balance at
| | | Balance at
| | | | Charged to
| | | | Balance at
| |
| | Beginning
| | Balance Acquired on
| | Costs and
| | Deductions
| | End of
| | | Beginning
| | Balance Acquired on
| | Cost and
| | | | End of
| |
| | of Period | | Merger with Optium | | Expenses | | Write-Offs | | Period | | | of Period | | Merger with Optium | | Expenses | | Write-Offs | | Period | |
|
Allowance for doubtful accounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year ended April 30, 2010 | | | $ | 1,069 | | | $ | — | | | $ | 1,016 | | | $ | — | | | $ | 2,085 | |
Year ended April 30, 2009 | | $ | 635 | | | $ | 210 | | | $ | 361 | | | $ | 137 | | | $ | 1,069 | | | $ | 635 | | | $ | 210 | | | $ | 361 | | | $ | (137 | ) | | $ | 1,069 | |
Year ended April 30, 2008 | | $ | 1,607 | | | | — | | | $ | 239 | | | $ | 1,211 | | | $ | 635 | | | $ | 1,607 | | | $ | — | | | $ | 239 | | | $ | (1,211 | ) | | $ | 635 | |
Year ended April 30, 2007 | | $ | 2,198 | | | | — | | | $ | (387 | ) | | $ | 204 | | | $ | 1,607 | | |
(3)(b) Exhibits
The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report (see page 112)report.
Certain of the agreements filed as exhibits to thisForm 10-K contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
| | |
| • | may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements; |
|
| • | may apply standards of materiality that differ from those of a reasonable investor; and |
|
| • | were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.
119111
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 8th1st day of July, 2009.2010.
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,Kurt Adzema, and each of them, as such person’s true and lawfulattorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this report onForm 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, 20091, 2010 |
| | | | |
/s/ Eitan Gertel Eitan Gertel | | Chief Executive Officer (Co-Principal Executive Officer) | | July 8, 20091, 2010 |
| | | | |
/s/ Stephen K. WorkmanKurt Adzema
Stephen K. WorkmanKurt Adzema | | Senior Vice President Finance,and Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) | | July 8, 20091, 2010 |
| | | | |
Michael C. Child | | Director | | |
| | | | |
/s/ Christopher J. Crespi Christopher J. Crespi | | Director | | July 1, 2010 |
| | | | |
/s/ Roger C. Ferguson Roger C. Ferguson | | Director | | July 8, 20091, 2010 |
| | | | |
/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, 20091, 2010 |
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| | | | | | |
Signature | | Title | | Date |
|
| | | | |
/s/ Robert N. StephensThomas E. Pardun Robert N. StephensThomas E. Pardun | | Director | | July 8, 20091, 2010 |
| | | | |
/s/ Morgan M. JonesRobert N. Stephens Morgan M. JonesRobert N. Stephens | | Director | | July 8 20091, 2010 |
| | | | |
/s/ Dominique Trempont Dominique Trempont | | Director | | July 8, 20091, 2010 |
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EXHIBIT INDEX
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Exhibit Title | 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) | 1 | .1 | | Underwriting Agreement, dated March 17, 2010, by and among Finisar Corporation, the selling stockholders named in Schedule I thereto, and Morgan Stanley & Co. Incorporated and Jeffries & Co., Inc., as representatives of the several underwriters named in Schedule II thereto(1) |
| 3 | .1 | | Amended and Restated Bylaws of Registrant(2) | 2 | .1 | | Agreement and Plan of Reorganization, dated as of May 15, 2008, by and among Registrant, Fig Combination Corporation and Optium Corporation(2) |
| 3 | .2 | | Restated Certificate of Incorporation of Registrant(3) | 3 | .1 | | Amended and Restated Bylaws 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 | .2 | | Restated Certificate of Incorporation of Registrant(4) |
| 3 | .4 | | Certificate of Elimination regarding the Registrant’s Series A Preferred Stock(5) | 3 | .3 | | Certificate of Amendment to Restated Certificate of Incorporation of Registrant, filed with the Delaware Secretary of State on June 19, 2001(5) |
| 3 | .5 | | Certificate of Designation(6) | 3 | .4 | | Certificate of Elimination regarding the Registrant’s Series A Preferred Stock(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 | .5 | | Certificate of Designation(7) |
| 3 | .7 | | Amended and Restated Certificate of Incorporation of Registrant(8) | 3 | .6 | | Certificate of Amendment to Restated Certificate of Incorporation of Registrant, filed with the Delaware Secretary of State on May 11, 2005(8) |
| 4 | .1 | | Specimen certificate representing the common stock(9) | 3 | .7 | | Certificate of Amendment of the Restated Certificate of Incorporation of Registrant(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) | 3 | .8 | | Amended and Restated Certificate of Incorporation of Registrant |
| 4 | .3 | | Indenture between the Registrant and U.S. Bank Trust National Association, a national banking association, dated October 15, 2003(11) | 4 | .1 | | Specimen certificate representing the common stock(10) |
| 4 | .4 | | Indenture between the Registrant and U.S. Bank Trust National Association, a national banking association, dated October 12, 2006(12) | 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)(11) |
| 10 | .1 | | Form of Indemnity Agreement between Registrant and Registrant’s directors and officers(13) | 4 | .3 | | Indenture between the Registrant and U.S. Bank Trust National Association, a national banking association, dated October 15, 2003(12) |
| 10 | .2* | | 1989 Stock Option Plan(14) | 4 | .4 | | Indenture between the Registrant and U.S. Bank Trust National Association, a national banking association, dated October 12, 2006(13) |
| 10 | .3* | | 1999 Stock Option Plan(15) | 4 | .5 | | Indenture dated as of October 15, 2009, by and between Finisar Corporation and Wells Fargo Bank, National Association(14) |
| 10 | .4* | | 1999 Employee Stock Purchase Plan, as amended and restated effective March 2, 2005(16) | 10 | .1 | | Form of Indemnity Agreement between Registrant and Registrant’s directors and officers(15) |
| 10 | .5 | | Purchase Agreement by and between FSI International, Inc. and Finisar Corporation, dated February 4, 2005(17) | 10 | .2* | | 1989 Stock Option Plan(16) |
| 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 | .3* | | 1999 Stock Option Plan(17) |
| 10 | .7 | | Lease Agreement by and between Finistar (CA-TX) Limited Partnership and Finisar Corporation, dated February 4, 2005(19) | 10 | .4* | | 1999 Employee Stock Purchase Plan, as amended(18) |
| 10 | .8* | | Finisar Corporation 2005 Stock Incentive Plan(20) | 10 | .5 | | Purchase Agreement by and between FSI International, Inc. and Finisar Corporation, dated February 4, 2005(19) |
| 10 | .9* | | Form of Stock Option Agreement for options granted under the 2005 Stock Incentive Plan(21) | 10 | .6 | | Assignment and Assumption of Purchase and Sale Agreement between Finisar Corporation and Finisar (CA-TX) Limited Partnership, dated February 4, 2005(20) |
| 10 | .10* | | International Employee Stock Purchase Plan(22) | 10 | .7 | | Lease Agreement by and between Finisar (CA-TX) Limited Partnership and Finisar Corporation, dated February 4, 2005(21) |
| 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 | .8* | | Finisar Corporation 2005 Stock Incentive Plan, as amended(22) |
| 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 | .9* | | Form of Stock Option Agreement for options granted under the 2005 Stock Incentive Plan(23) |
| 10 | .13 | | Loan and Security Agreement dated as of March 14, 2008 by and between Silicon Valley Bank and Finisar Corporation(25) | 10 | .10* | | International Employee Stock Purchase Plan(24) |
| 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 | .11* | | Optium Corporation 2000 Stock Incentive Plan(25) |
| 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 | .12* | | Optium Corporation 2006 Stock Option and Incentive Plan and Israeli Addendum to 2006 Stock Option and Incentive Plan(26) |
| 10 | .16* | | Optium Corporation 2000 Stock Incentive Plan(28) | 10 | .13* | | Form of Amended and Restated Warrant to Purchase Common Stock(27) |
| 10 | .17* | | Optium Corporation 2006 Stock Option and Incentive Plan and Israeli Addendum to 2006 Stock Option and Incentive Plan(29) | 10 | .14* | | Deferred Stock Award Agreement, dated March 11, 2008, by and between Optium Corporation and Eitan Gertel(28) |
122114
| | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Exhibit Title | Number | | Exhibit Title |
|
| 10 | .18* | | Form of Amended and Restated Warrant to Purchase Common Stock(30) | 10 | .15* | | Deferred Stock Award Agreement, dated March 11, 2008, by and between Optium Corporation and Christopher Brown(29) |
| 10 | .19* | | Deferred Stock Award Agreement, dated March 11, 2008, by and between Optium Corporation and Eitan Gertel(31) | 10 | .16* | | Deferred Stock Award Agreement, dated March 11, 2008, by and between Optium Corporation and Mark Colyar(30) |
| 10 | .20* | | Deferred Stock Award Agreement, dated March 11, 2008, by and between Optium Corporation and Christopher Brown(32) | 10 | .17 | | 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(31) |
| 10 | .21* | | Deferred Stock Award Agreement, dated March 11, 2008, by and between Optium Corporation and Mark Colyar(33) | 10 | .18* | | Form of Deferred Stock Award for Israeli grantees under Optium Corporation 2006 Stock Option and Incentive Plan(32) |
| 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 | .19* | | Form of Deferred Stock Award for directors under Optium Corporation 2006 Stock Option and Incentive Plan(33) |
| 10 | .23* | | Form of Deferred Stock Award for Israeli grantees under Optium Corporation 2006 Stock Option and Incentive Plan(35) | 10 | .20* | | Form of Stock Option Grant Notice under the Optium Corporation 2006 Stock Option and Incentive Plan(34) |
| 10 | .24* | | Form of Deferred Stock Award for directors under Optium Corporation 2006 Stock Option and Incentive Plan(36) | 10 | .21* | | Form of Stock Option Grant Notice for Australian Employees under the Optium Corporation 2006 Stock Option and Incentive Plan(35) |
| 10 | .25* | | Form of Stock Option Grant Notice under the Optium Corporation 2006 Stock Option and Incentive Plan(37) | 10 | .22* | | Form of Employee Incentive Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(36) |
| 10 | .26* | | Form of Stock Option Grant Notice for Australian Employees under the Optium Corporation 2006 Stock Option and Incentive Plan(38) | 10 | .23* | | Form of Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(37) |
| 10 | .27* | | Form of Employee Incentive Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(39) | 10 | .24* | | Form of Non-Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(38) |
| 10 | .28* | | Form of Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(40) | 10 | .25* | | Form of Australian Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(39) |
| 10 | .29* | | Form of Non-Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(41) | 10 | .26* | | Form of Deferred Stock Award under Optium Corporation 2006 Stock Option and Incentive Plan(40) |
| 10 | .30* | | Form of Australian Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(42) | 10 | .27 | | 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(41) |
| 10 | .31* | | Form of Deferred Stock Award under Optium Corporation 2006 Stock Option and Incentive Plan(43) | 10 | .28 | | 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(42) |
| 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 | .29 | | 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(43) |
| 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 | .30* | | Employment Agreement between Optium Corporation and Eitan Gertel, dated as of April 14, 2006(44) |
| 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 | .31* | | Employment Agreement between Optium Corporation and Mark Colyar, dated as of April 14, 2006(45) |
| 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 | .32* | | Employment Agreement between Optium Corporation and Christopher Brown, dated as of August 28, 2006(46) |
| 10 | .36* | | Employment Agreement between Optium Corporation and Eitan Gertel, dated as of April 14, 2006(48) | 10 | .33* | | Stock Option and Grant Notice, dated March 3, 2007, for Eitan Gertel(47) |
| 10 | .37* | | Employment Agreement between Optium Corporation and Mark Colyar, dated as of April 14, 2006(49) | 10 | .34* | | Stock Option and Grant Notice, dated March 3, 2007, for Mark Colyar(48) |
| 10 | .38* | | Employment Agreement between Optium Corporation and Christopher Brown, dated as of August 28, 2006(50) | 10 | .35* | | Stock Option and Grant Notice, dated March 3, 2007, for Christopher Brown(49) |
| 10 | .39* | | Stock Option and Grant Notice, dated March 3, 2007, for Eitan Gertel(51) | 10 | .36* | | Stock Option and Grant Notices, dated March 14, 2006, February 14, 2006, June 23, 2005 and May 1, 2003, for Eitan Gertel(50) |
| 10 | .40* | | Stock Option and Grant Notice, dated March 3, 2007, for Mark Colyar(52) | 10 | .37* | | Stock Option and Grant Notices, dated April 14, 2006, April 5, 2005, March 1, 2004 and May 1, 2003, for Mark Colyar(51) |
| 10 | .41* | | Stock Option and Grant Notice, dated March 3, 2007, for Christopher Brown(53) | 10 | .38* | | Stock Option and Grant Notices, dated August 28, 2006, for Christopher Brown(52) |
| 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 | .39* | | Deferred Stock Award Agreement, dated September 25, 2007, for Eitan Gertel(53) |
| 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 | .40* | | Deferred Stock Award Agreement, dated September 25, 2007, for Mark Colyar(54) |
| 10 | .44* | | Stock Option and Grant Notices, dated August 28, 2006, for Christopher Brown(56) | 10 | .41* | | Deferred Stock Award Agreement, dated September 25, 2007, for Christopher Brown(55) |
| 10 | .45* | | Deferred Stock Award Agreement, dated September 25, 2007, for Eitan Gertel(57) | 10 | .42* | | Deferred Stock Award Agreement, dated August 25, 2008, for Eitan Gertel(56) |
| | 10 | .43* | | Deferred Stock Award Agreement, dated August 25, 2008, for Mark Colyar(57) |
| | 10 | .44* | | Deferred Stock Award Agreement, dated August 25, 2008, for Christopher Brown(58) |
123115