FINISAR CORP - 10-Q Quarterly Report

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

At December 5, 2003, there were 220,891,946 shares of the registrant’s common stock, $.001 par value, issued and outstanding.


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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
	Condensed Consolidated Balance Sheets as of October 31, 2003 and April 30, 2003		3
	Condensed Consolidated Statements of Operations for the three and six month periods ended October 31, 2003 and 2002		4
	Condensed Consolidated Statements of Cash Flows for the six month periods ended October 31, 2003 and 2002		5
	Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosure About Market Risk			39
Item 4. Controls and Procedures			39
PART II OTHER INFORMATION
Item 1. Legal Proceedings			40
Item 2. Changes in Securities and Use of Proceeds			40
Item 4. Submission of Matters to a Vote of Security Holders			41
Item 6. Exhibits and Reports on Form 8-K			41
Signatures			42


				October 31, 2003			April 30, 2003

				(In thousands, except share
				and per share data)
			ASSETS
Current assets:
	Cash and cash equivalents			$	163,534		$	40,918
	Short-term investments				73,259			78,520
	Restricted investments				10,190			6,737
	Accounts receivable, trade (net)				24,317			23,390
	Accounts receivable, other				6,767			5,362
	Inventories				21,719			36,470
	Prepaid expenses				1,762			2,341
	Deferred income taxes				3,068			3,324

Total current assets					304,616			197,062
Property, plant, equipment and improvements, net					96,725			112,125
Restricted investments, long-term					10,669			3,307
Purchased intangibles, net					43,312			52,910
Goodwill, net					19,985			19,838
Minority investments					25,056			28,844
Other assets					13,392			9,520

Total assets				$	513,755		$	423,606

		LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	17,418		$	22,872
	Accrued compensation				5,358			4,449
	Other accrued liabilities				9,797			8,474
	Non-cancelable purchase obligations				7,549			9,380
	Income tax payable				665			536
	Current portion of other long-term liabilities				2,000			1,384

Total current liabilities					42,787			47,095
Long-term liabilities:
	Deferred income taxes				3,070			3,324
	Convertible notes, net of unamortized portion of beneficial conversion feature of $22,889 and $30,977 at October 31, 2003 and April 30, 2003, respectively				227,361			94,023
	Other long-term liabilities				2,200			4,184

Total long-term liabilities					232,631			101,531
Stockholders’ equity
	Common stock, $0.001 par value, 219,270,618 shares issued and outstanding at October 31, 2003 and 207,295,693 shares issued and outstanding at April 30, 2003				219			207
	Additional paid-in capital				1,255,368			1,219,424
	Notes receivable from stockholders				(753	)		(1,077	)
	Deferred stock compensation				(447	)		(1,045	)
	Accumulated other comprehensive income				1,118			841
	Accumulated deficit				(1,017,168	)		(943,370	)

Total stockholders’ equity					238,337			274,980

Total liabilities and stockholders’ equity				$	513,755		$	423,606


		Three Months Ended						Six Months Ended
		October 31,						October 31,

		2003			2002			2003			2002

		(Unaudited, in thousands,						(Unaudited, in thousands,
		except per share data)						except per share data)
Revenues		$	42,776		$	40,903		$	82,207		$	87,950
Cost of revenues			32,041			32,655			68,503			69,578
Amortization of acquired developed technology			4,656			5,441			9,312			12,836

Gross profit			6,079			2,807			4,392			5,536
Operating expenses:
	Research and development		13,695			15,994			34,610			31,510
	Sales and marketing		4,557			5,570			8,857			11,726
	General and administrative		4,356			4,333			8,309			8,183
	Amortization of deferred stock compensation		(49	)		(1,933	)		(353	)		(552	)
	Amortization of purchased intangibles		143			143			286			472
	Impairment of goodwill and intangible assets		—			—			—			485
	Restructuring costs		187			1,174			2,372			1,174
	Other acquisition costs		149			(166	)		194			31

Total operating expenses			23,038			25,115			54,275			53,029

Loss from operations			(16,959	)		(22,308	)		(49,883	)		(47,493	)
Interest income			656			1,226			1,525			2,630
Interest expense			(15,682	)		(2,809	)		(22,059	)		(5,554	)
Other expense, net			(555	)		(39,316	)		(3,135	)		(49,654	)

Loss before income taxes and cumulative effect of an accounting change			(32,540	)		(63,207	)		(73,552	)		(100,071	)
Provision for income taxes			33			30			246			91

Loss before cumulative effect of an accounting change			(32,573	)		(63,237	)		(73,798	)		(100,162	)
Cumulative effect of an accounting change to adopt SFAS 142			—			—			—			(460,580	)

Net loss		$	(32,573	)	$	(63,237	)	$	(73,798	)	$	(560,742	)

Loss per share before cumulative effect of an accounting change		$	(0.15	)	$	(0.33	)	$	(0.35	)	$	(0.52	)
Cumulative per share effect of an accounting change to adopt SFAS 142			—			—			—			(2.40	)

Loss per share — basic and diluted		$	(0.15	)	$	(0.33	)	$	(0.35	)	$	(2.92	)

Shares used in loss per share calculation — basic and diluted			215,826			194,341			211,357			191,905


			Six Months Ended
			October 31,

			2003			2002

			(Unaudited, in thousands)
Operating Activities:
Net loss			$	(73,798	)	$	(560,742	)
Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization		18,248			10,567
		Amortization of deferred stock compensation		(353	)		(522	)
		Amortization of purchased intangibles		286			472
		Amortization of acquired developed technology		9,312			12,836
		Amortization of beneficial conversion feature		8,088			2,302
		Loss on conversion of convertible notes		10,763			—
		Pro-rata share of losses in a minority investment (equity method)		473			319
		Cumulative effect of an accounting change		—			460,580
		Amortization of premium discount on restricted securities		(115	)		(328	)
		Other than temporary decline in market value of marketable security		528			—
		Loss on disposal of subsidiary assets		—			36,839
		Loss on retirement of assets		42			—
		Impairment of minority investment		1,631			12,000
		Impairment of goodwill and intangible assets		—			485
		Loss on retirement of assets		(86	)		—
		Non-employee option expense		891			—
		Other non-cash charges		823			—

		Total non-cash adjustment in operating activities		50,531			535,550

Changes in operating assets and liabilities:
		Accounts receivable		(927	)		2,147
		Inventories		14,751			10,281
		Other assets		(991	)		4,542
		Accounts payable		(5,454	)		(16,674	)
		Accrued compensation		909			(1,853	)
		Current income taxes		2			30
		Other accrued liabilities		(1,317	)		412

		Total change in operating assets and liabilities		6,973			(1,115	)

	Net cash used in operating activities			(16,294	)		(26,307	)
Investing activities:
Purchases of property, plant, equipment and improvements				(3,551	)		(12,756	)
Sale/(purchase) of short-term investments				8,422			(255	)
Purchase of minority investments, net of loan repayments				1,684			(155	)
Acquisition of product line assets				—			(243	)
Proceeds from disposal of subsidiary assets, net of cash transferred				—			5,407

Net cash provided by (used in) investing activities				6,555			(8,002	)
Financing activities:
Payments on capital lease obligations				—			(180	)
Payment received on stockholder note receivable				279			303
Proceeds from convertible debt offering net of issuance costs				130,903			—
Repurchase of convertible notes				(1,860	)		—
Proceeds from exercise of stock options and stock purchase plan net of repurchase of unvested shares				3,033			1,542

Net cash provided by financing activities				132,355			1,665

Net change in cash and cash equivalents				122,616			(32,664	)


Cash and cash equivalents at beginning of period			40,918		75,889

Cash and cash equivalents at end of period		$	163,534	$	43,245

Supplemental disclosure of cash flow information:
	Cash paid for interest	$	2,762	$	3,281
	Cash paid for taxes	$	239	$	91
Supplemental schedule of non-cash investing and financing Activities:
	Issuance of other long term liabilities in connection with acquisition of product line	$	—	$	5,384
	Issuance of common stock in connection with acquisitions	$	—	$	485
	Issuance of common stock upon conversion of convertible Notes	$	33,513	$	6,750
	Issuance of common stock on achievement of milestones	$	147	$	1,637

Finisar Corporation was incorporated in the state of California on April 17, 1987. In November 1999, Finisar Corporation reincorporated in the state of Delaware.

Finisar Corporation designs, manufactures, and markets fiber optic subsystems and components and network test and monitoring systems for high-speed data communications.

The accompanying unaudited condensed consolidated financial statements as of October 31, 2003, and for the three and six month periods ended October 31, 2003 and 2002, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission, and include the accounts of Finisar Corporation and its wholly-owned subsidiaries (collectively, “Finisar” or the “Company”). Intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position at October 31, 2003, its operating results for the three and six month periods ended October 31, 2003 and 2002 and its cash flows for the six month periods ended October 31, 2003 and 2002. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes for the fiscal year ended April 30, 2003.

The balance sheet at April 30, 2003 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The Company maintains its financial records on the basis of a fiscal year ending on April 30, with fiscal quarters ending on the Sunday closest to the end of the period (thirteen-week periods). For ease of reference, all references to period end dates have been presented as though the period ended on the last day of the calendar month. The first three quarters of fiscal 2003 end on July 28, 2002, October 27, 2002 and January 26, 2003, respectively, and the first three quarters of fiscal 2004 end on July 27, 2003, October 26, 2003 and January 25, 2004, respectively.

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.

The Company follows SEC Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements.” Specifically, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurr


Delaware		94-3038428
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1308 Moffett Park Drive		94089
Sunnyvale, California		(Zip Code)
(Address of principal executive offices)


PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.
	Item 4. Controls And Procedures.
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 4. Submission of Matters to a Vote of Security Holders.
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 4.4
EXHIBIT 10.18
EXHIBIT 10.19
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended October 31, 2003 or


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to