INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization
Infinera Corporation (the Company) was founded in December 2000 and has developed a digital optical communications system called the
Infinera DTN System (DTN System). The Company began commercial shipment of its DTN System in November 2004.
Initial Public Offering
In June 2007, the Company completed its initial public offering (IPO) of common stock in which it sold and issued 16.1 million shares of its common
stock, including 2.1 million shares sold pursuant to the underwriters full exercise of their over-allotment option, at an issue price of $13.00 per share. The Company raised a total of $209.3 million in gross proceeds from its IPO, or
$190.1 million in net proceeds after deducting underwriting discounts and commissions of $14.7 million and other offering costs of $4.5 million. Upon the closing of the IPO, all shares of convertible preferred stock outstanding automatically
converted into 59.4 million shares of common stock.
Follow-on Offering
In November 2007, the Company completed its follow-on offering of common stock in which it sold and issued 5.0 million shares of its common stock, at
an issue price of $22.00 per share. The Company raised a total of $110.0 million in gross proceeds, or approximately $104.0 million in net proceeds after deducting underwriting discounts of $5.2 million and other offering costs of approximately $0.8
million. Additionally, 5.0 million shares were sold by existing stockholders of the Company at a price of $22.00 per share. The Company did not receive any of the proceeds from the sale of the shares sold by the selling stockholders.
Significant Accounting Policies
Basis of
Financial Statements
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
All intercompany balances and transactions have been eliminated.
Fiscal Calendar
Commencing in 2007, the Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the last Saturday of December in each
year. Accordingly, fiscal year 2007 was a 52-week year that ended on December 29, 2007. In previous years, the Company operated and reported financial results on a calendar year basis.
Use of Estimates
The consolidated financial
statements are prepared in accordance with United States generally accepted accounting principles (GAAP). These accounting principles require the Company to make certain estimates, assumptions and judgments that can affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates,
assumptions and judgments made by management include the determination of the fair value of stock awards and warrants issued prior to its IPO, revenue recognition, warranty reserve, cash, cash equivalents and short and long-term investments,
77
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
inventory valuation and accounting for income taxes. Management believes that the estimates and judgments upon which they rely are reasonable based upon
information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Companys consolidated financial statements will be affected.
Revenue Recognition
The
Companys networking products are generally integrated with software that is more than incidental to the functionality of the equipment. Accordingly, the Company accounts for revenue in accordance with Statement of Position No. 97-2,
Software Revenue Recognition
, as amended by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions
. The Company recognizes product revenue when all of the
following have occurred: (1) it has entered into a legally binding arrangement with a customer; (2) delivery has occurred, which is when product title and risk of loss have transferred to the customer; (3) customer payment is deemed
fixed or determinable; and (4) collectibility is reasonably assured. Revenue is recognized net of cash discounts.
Substantially all
of the Companys product sales have been sold in combination with training and product support services, which consist of software warranty, updates and product support.
Software updates provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term
of the support period. Product support services consist of software warranty, updates and upgrades including general product support. Training services include the right to a specified number of training classes over the term of the arrangement.
Installation and deployment services may include customer site assessment, equipment installation and testing.
Vendor specific objective
evidence (VSOE) of fair value for training, installation and deployment services, and product support services is determined by reference to the price the customer will be required to pay when training and product support services are sold
separately. As of December 29, 2007, the Company has not established VSOE of fair value for training, installation and deployment services, and product support services. Assuming all other revenue recognition criteria have been met and the only
undelivered element is training, installation and deployment services, or product support services, revenue is deferred and recognized ratably over the longest undelivered service period. The undelivered service periods range from one to five years.
Revenue related to these arrangements is included in ratable product and related support and services revenue in the accompanying consolidated statements of operations.
Occasionally, the Company sells its networking products to customers who do not purchase training, or installation and deployment services, or product support services as part of the arrangement. Revenue related to
these arrangements is generally recognized as product revenue when delivery of the product has occurred, assuming all other revenue recognition criteria have been met. Once product delivery has taken place, there are no remaining undelivered
elements in these arrangements.
Contracts and customer purchase orders are generally used to determine the existence of an arrangement.
Shipping documents and customer acceptance, when applicable, are used to verify delivery and transfer of title. Revenue is recognized only when title and risk of loss pass to customers. In instances where acceptance of the product is specified by
the customer, revenue is deferred until all acceptance criteria have been met. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. Payment terms to customers generally range from
net 30 to 120 days from product acceptance. In the event payment terms are provided that differ from the Companys standard business practices, the fees are deemed to not be fixed or determinable and, therefore, revenue is deferred until the
fees become fixed or
78
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
determinable which the Company believes is when they are legally due and payable. The Company assesses the ability to collect from its customers based
primarily on the creditworthiness of the customer and past payment history of the customer.
Revenue for products that do not require
significant customization, and with respect to which any software is considered incidental, is recognized under Staff Accounting Bulletin No. 104,
Revenue Recognition
(SAB 104). Under SAB 104, revenue is recognized
only when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectibility is reasonably assured. Revenue related to these arrangements is included in product
revenue in the accompanying consolidated statements of operations.
Shipping charges billed to customers are included in product revenue
and in ratable product and related support and services revenue.
Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for employee stock options using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25,
Accounting for Stock Issued to Employees
, (APB No. 25) and Financial Accounting Standards Board (FASB) Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB No. 25
. The intrinsic value represents the difference between the per share market price of the stock on the date of grant and the per share exercise price of the related stock option. The
Company grants stock options to employees for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. Under APB Opinion No. 25, no compensation expense is recorded for employee stock options
granted at an exercise price equal to the market price of the underlying stock on the date of grant. The Company recognizes compensation expense for any stock options granted with an exercise price that is less than the fair value of the underlying
stock on the date of grant on a straight-line basis over the vesting period.
On January 1, 2006, the Company adopted the provisions
of the Statement of Accounting Standards (SFAS) No. 123(R)
Share-Based Payments
(SFAS 123(R)). Under SFAS 123(R), stock-based compensation costs for employees is measured at the grant date, based on the estimated fair value
of the award at that date, and is recognized as expense over the employees requisite service period, which is generally over the vesting period, on a straight-line basis. The Company adopted the provisions of SFAS 123(R) using the prospective
transition method. Under this transition method, non-vested option awards outstanding at January 1, 2006 continue to be accounted for under the minimum value method under SFAS No. 123,
Accounting for Stock-Based
Compensation
. All awards granted, modified or settled after the date of adoption are accounted for using the measurement, recognition and attribution provisions of SFAS 123(R).
Under SFAS 123(R), the Company estimated the fair value of the stock options granted and rights to acquire stock using the Black-Scholes option pricing
formula and a single option award approach. For new-hire grants, options typically vest with respect to 25% of the shares one year after the options vesting commencement date and the remainder ratably on a monthly basis over three years,
commencing one year after the vesting commencement date. For annual refresh grants, options typically vest ratably on a monthly basis over five years after the vesting commencement date. The Company makes a number of estimates and assumptions
related to SFAS 123(R) including forfeiture rate, expected life and volatility. The Company utilized its historical data as an estimate of the expected forfeiture rate and it recognized compensation costs only for those equity awards expected to
vest. The effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The estimation of stock awards that will ultimately vest requires
79
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
judgment, and to the extent actual results differ from the Companys estimates, such amounts will be recorded as an adjustment in the period estimates
are revised. Actual results may differ substantially from these estimates.
The expected term of options granted represents the period of
time that options granted are expected to be outstanding, which incorporates the contractual terms, grant vesting schedules and terms and expected employee and director behaviors. Commencing in June 2007, the Company elected to use the simplified
method to estimate the expected term as permitted by SEC Staff Accounting Bulletin 107 (SAB 107) due to increased liquidity of the underlying options in the post IPO era as compared to the Companys historical grants. Expected volatility of the
stock is based on the Companys peer group in the industry in which the Company does business because the Company does not have sufficient historical volatility data for its own common stock. In the future, as the Company gains historical data
for volatility in its own stock and more data on the actual term employees hold their options, the expected volatility and expected term may change, which could substantially change the grant-date fair value of future awards of stock options and
ultimately the expense the Company records.
During 2007, the Company granted options to employees and directors to purchase an aggregate
of 5.1 million shares of common stock at weighted average exercise price of $11.88 per share. These options have exercise prices equal to the deemed market value of the Companys common stock on the dates these options were granted. At
December 29, 2007, the total compensation cost related to stock-based options granted under SFAS 123(R) to employees and directors but not yet amortized was $38.9 million, net of estimated forfeitures of $3.4 million. These costs will be
amortized on a straight-line basis over a weighted average period of approximately 1.2 years. Amortization of stock-based compensation in 2007 was approximately $7.2 million, net of estimated forfeitures. Total fair value of stock options to
employees that vested during 2007 was approximately $5.6 million based on the grant date fair value.
During 2006, the Company granted
options to employees to purchase a total of 4.7 million shares of common stock at exercise prices ranging from $1.32 to $2.00 per share at a weighted average price of $1.96. These options have exercise prices equal to the deemed market value of
the Companys common stock on the dates these options were granted. Total fair value of stock options to employees that vested during 2006 was approximately $0.5 million based on the grant date fair value.
The weighted average estimated values of employee stock option grants and rights granted under the 2000 Stock Plan and the 2007 Equity Incentive Plan, as
well as the weighted average assumptions used in calculating these values during 2007, 2006 and 2005, were based on estimates as follows:
|
|
|
|
|
|
|
|
|
Years Ended
|
Employee and Director Stock Options
|
|
December 29,
2007
|
|
December 31,
2006
|
|
December 31,
2005 (1)
|
Volatility
|
|
62% - 84%
|
|
72% - 83%
|
|
0%
|
Risk-free interest rate
|
|
4.2% - 4.9%
|
|
4.57% - 5.08%
|
|
4.05%
|
Expected life
|
|
4.3 - 6.3 years
|
|
4.2 - 5.4 years
|
|
4 years
|
Estimated fair value
|
|
$2.12 - $17.04
|
|
$0.81 - $1.35
|
|
$0.15
|
(1)
|
The estimated values and assumptions that the Company used in calculating fair value prior to the adoption of SFAS 123(R).
|
80
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Concurrent with the IPO in June 2007, the Company established the 2007 Employee Stock Purchase Plan
(ESPP). This plan provides for consecutive six-month offering periods, except for the first such offering period which commenced on June 7, 2007 and will end on the first trading day on or after February 15, 2008. The Black-Scholes option
pricing model is used to estimate the fair value of rights to acquire stock granted under the ESPP. Compensation cost related to the ESPP under FAS123 (R) were approximately $1.7 million for 2007 and the fair value of the ESPP shares were
estimated at the date of grant using the following assumptions:
|
|
|
Employee Stock Purchase Plan
|
|
Year Ended
December 29,
2007
|
Volatility
|
|
49%
|
Risk-free interest rate
|
|
4.97%
|
Expected life
|
|
0.7 years
|
Estimated fair value
|
|
$4.17
|
The Company began issuing Restricted Stock Units (RSUs) in the second quarter of 2007 pursuant to
the Companys 2007 Equity Incentive Plan. An RSU is a right to receive a share of the Companys common stock when the unit vests. During 2007, the Company granted RSUs to employees to purchase an aggregate of 0.6 million shares of
common stock at no cost, vesting annually over four or five years. The Company accounted for the fair value of the RSUs using the closing market price of the Companys common stock on the date of grant. As of December 29, 2007, total
compensation cost related to restricted stock based awards to employees but not yet amortized was approximately $9.9 million, net of estimated forfeitures of $1.5 million. Amortization of RSU stock-based compensation in 2007 was approximately $1.2
million.
The Company had previously issued non-recourse notes to non-executive officers to finance the purchase of a total of
0.3 million shares of common stock of the Company. Because these employee notes were deemed to be non-recourse, the equity awards are subject to variable accounting. Accordingly, stock compensation expense of $2.2 million calculated based on
the change in intrinsic value, was recorded for the year ended December 29, 2007. All previously issued non-recourse notes where repaid in 2007.
The Company accounts for stock options granted to non-employees in accordance with Emerging Issues Task Force (EITF) No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction With Selling, Goods or Services
(EITF No. 96-18) and related interpretations. The Company grants stock options to certain consultants and non-employee advisory board members for a fixed number of
shares with an exercise price equal to the fair value of the Companys common stock at the date of grant. Under EITF No. 96-18, compensation expense on non-employee stock options is subject to variable accounting and is calculated using
the Black Scholes option-pricing model and is recorded using the straight-line method over the vesting period, which approximates the service period. Total compensation expenses related to options granted to consultants were immaterial for 2007,
2006 and 2005, respectively.
81
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the effects of stock-based compensation related to employee awards,
employee non-recourse notes and non-employees on the Companys consolidated balance sheets and statements of operations for 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 29,
2007
|
|
|
Years Ended
December 31,
|
|
|
2006
|
|
|
2005 (1)
|
(In thousands)
|
|
|
|
|
|
|
|
|
Stock-based compensation effects in inventory
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
82
|
|
|
$
|
|
|
|
$
|
|
Stock-based compensation expense added to inventory
|
|
|
3,384
|
|
|
|
112
|
|
|
|
|
Stock-based compensation expenses recognized as cost of revenue
|
|
|
(38
|
)
|
|
|
(2
|
)
|
|
|
|
Stock-based compensation expense released from inventory to deferred inventory costs
|
|
|
(1,213
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
2,215
|
|
|
$
|
82
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effects in deferred inventory cost
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
23
|
|
|
$
|
|
|
|
$
|
|
Stock-based compensation expense added from inventory
|
|
|
1,213
|
|
|
|
28
|
|
|
|
|
Stock-based compensation expense recognized as cost of revenue
|
|
|
(289
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
$
|
947
|
|
|
$
|
23
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effects in loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
410
|
|
|
$
|
41
|
|
|
$
|
|
Research and development
|
|
|
3,751
|
|
|
|
411
|
|
|
|
36
|
Sales and marketing
|
|
|
1,854
|
|
|
|
198
|
|
|
|
99
|
General and administration
|
|
|
3,314
|
|
|
|
335
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,329
|
|
|
|
985
|
|
|
|
142
|
Cost of revenueamortization from balance sheet*
|
|
|
327
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
9,656
|
|
|
$
|
992
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The estimated values and assumptions that the Company used in calculating fair
value prior to the adoption of SFAS 123(R).
|
*
|
Represents stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.
|
Inventory Valuation
Inventories consist of
raw materials, work-in-process and finished goods and are stated at standard cost adjusted to approximate the lower of actual cost (first-in, first-out method) or market. Market value is based upon an estimated selling price reduced by the estimated
cost of disposal. The determination of market value involves numerous judgments including estimated average selling prices based upon recent sales volumes, industry trends, existing customer orders, current contract price, future demand and pricing
for its products and technological obsolescence of the Companys products.
Inventory that is obsolete or in excess of the
Companys forecasted demand or is anticipated to be sold at a loss is written down to its estimated net realizable value based on historical usage and expected demand.
The Company recorded total inventory write-downs for lower of cost or market (LCM) adjustments in 2007, 2006 and 2005 of $12.3 million, $21.7 million and
$9.7 million, respectively. These adjustments related to the
82
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Companys inventory and firm purchase commitments with suppliers and included the impact of expected losses on common equipment. In addition, the
Company recorded inventory write-downs for excess and obsolete inventory in 2007, 2006 and 2005 of $5.0 million, $1.7 million and $(0.7) million, respectively. These write-downs for excess and obsolete inventory were reflected as cost of ratable
product and related support and services and cost of product.
In valuing its deferred inventory costs, the Company considered the
valuation of inventory using the guidance of Accounting Research Bulletin 43
Restatement and Revision of Accounting Research Bulletins
(ARB 43). In particular, the Company considered ARB 43, Chapter 4, Statement 5 and whether the
utility of the products delivered or expected to be delivered at less than cost, primarily comprised of common equipment, had declined. The Company concluded that, in the instances where the utility of the products delivered or expected to be
delivered were less than cost, it was appropriate to value the deferred inventory costs and inventory costs at cost or market, whichever is lower, thereby recognizing the cost of the reduction in utility in the period in which the reduction occurred
or can be reasonably estimated. The Company has, therefore, recorded inventory write-downs as necessary in each period in order to reflect common equipment inventory at the lower of cost or market. In addition, the Company considered the guidance
provided in ARB 43, Chapter 4, Statement 10 relating to losses on firm purchase commitments related to inventory items. Given that the expected selling price of common equipment in the future remains below cost, the Company has also recorded losses
on these firm purchase commitments in the period in which the commitment is made. When the inventory parts related to these firm purchase commitments are received, that inventory is recorded at the purchase price less the accrual for the loss on the
purchase commitment.
If actual market conditions are less favorable than those projected by management, additional inventory write-downs
may be required.
Allowances for Doubtful Accounts
Management makes judgments as to its ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review
of all significant outstanding invoices. At December 29, 2007 and December 31, 2006, management has not reserved any of the Companys accounts receivable as they were deemed fully collectible.
Allowances for Sales Returns
Customer product
returns are approved on a case by case basis. Specific reserve provisions are made based upon a specific review of all the approved product returns, where the customer has yet to return the products to generate the related sales return credit at the
end of a period. Estimated sales returns are provided for as a reduction to deferred revenue and were not material for any period presented on the Companys consolidated financial statements as the majority of the Companys revenue is
recognized on a ratable basis. At December 29, 2007 and December 31, 2006, management has reserved $0.3 million and $0.1 million, respectively.
Warranty Reserve
The Company warrants that its products will operate substantially in conformity with product
specifications. Upon delivery of the Companys products, the Company provides for the estimated cost to repair or replace products or the related components that may be returned under warranty. In general, the Companys hardware warranty
periods range from 2 to 5 years from date of acceptance for hardware and 90 days to 60 months for software warranty. The hardware warranty reserve is based on actual historical returns experience and the impact of the returns rate on future
estimated returns. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
83
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Cash, Cash Equivalents and Short and Long-term Investments
The Company considers all liquid instruments with an original maturity at the date of purchase of 90 days or less to be cash equivalents. The Company
maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
The Company considers all debt instruments with remaining time to maturity of one year or less to be short-term investments. At December 29, 2007 and December 31, 2006, cash equivalents, short and long-term
investments consisted primarily of money market funds, commercial paper, corporate bonds, U.S. agency notes and adjustable rate notes. The Companys cash equivalents, short and long-term investments are classified as available-for-sale in
accordance with the provisions of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities
.
All cash, cash equivalents and short and long-term investments are stated at fair market value based on quoted market prices with unrealized gains and losses reported in accumulated comprehensive loss as a separate component of
stockholders equity (deficit). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. Gains are recognized when realized in the
Companys consolidated statements of operations. Losses are recognized as realized or when the Company has determined that an other-than-temporary decline in fair value has occurred. Gains and losses are determined using the specific
identification method.
In accordance with SFAS No. 115, it is the Companys policy to review its marketable debt securities
classified as short or long-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. The Companys policy includes, but is not limited to, reviewing the length of
time and extent to which the market value has been less than amortized cost, the financial condition and near-term prospects of the issuer, and its intent and ability to retain its investment in the issuer for a sufficient period of time to allow
for recovery in market value. If the Company believes that an other-than-temporary decline exists in one of its marketable debt securities, its policy is to write down these debt investments to the market value and record the related write-down as
an investment loss on its consolidated statements of operations. No impairment charges were recorded for 2007, 2006 or 2005.
Fair Values of
Financial Instruments
The carrying value of cash and cash equivalents approximates fair value due to the short amount of time to
maturity. Fair values of short and long-term investments are based on quoted market prices. All securities in the portfolio are based on quoted prices at year end. The fair values of the Companys obligations under lines of credit and term
loans are based on current rates offered to the Company for similar debt instruments of the same remaining maturities. There were no lines of credit and term loans outstanding at December 29, 2007. The carrying value of the Companys lines
of credit and term loans approximated fair value at December 31, 2006. The fair value of the convertible preferred stock warrant liabilities was estimated using a combination of both the Black-Scholes and Lattice option pricing models.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets. Depreciation expense was $9.3 million, $7.0 million and $6.2 million for
2007, 2006 and 2005, respectively. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. An assumption of lease renewal where a renewal option exists is used
only when the renewal has been determined to be reasonably
84
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
assured. Repair and maintenance costs are expensed as incurred. The estimated useful life for each asset category is as follows:
|
|
|
|
|
Estimated Useful lives
|
Laboratory and manufacturing equipment
|
|
1.5 to 10 years
|
Furniture and fixtures
|
|
5 years
|
Computer hardware and software
|
|
1.5 to 3 years
|
Leasehold improvements
|
|
1 to 7 years
|
The Company regularly reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be recoverable or that the useful life is shorter than originally estimated. If impairment indicators are present and the projected future undiscounted cash flows are less than
the carrying value of the assets, the carrying values are reduced to the estimated fair value. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the carrying value of the assets is depreciated
over the newly determined remaining useful lives. Impairment losses have been immaterial through December 29, 2007.
Valuation of Intangibles
The Company tests for asset impairment of amortizing intangible assets using the guidance of SFAS No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets
, where recoverability of these assets is assessed only when events have occurred that may give rise to impairment. When events or circumstances indicate that a potential impairment may
have occurred, future undiscounted net cash flows associated with the related asset or group of assets over their remaining lives are compared to the current carrying amounts of such assets. When projected cash flows are less than the carrying
amounts of the intangibles, an impairment loss would be recognized by comparing the discounted present value of future cash flows to carrying amounts and writing down the excess of the carrying amounts to their respective fair values. No impairment
losses have been recognized through December 29, 2007.
Deferred Inventory Costs
When the Companys products have been delivered, but the product revenue associated with the arrangement has been deferred as a result of not meeting
the revenue recognition criteria in SOP 97-2 or the costs are related to product sales bundled with training, software warranty or product support services where the revenue is deferred and recognized ratably, the Company also defers the related
inventory costs for the delivered items in accordance with ARB 43.
Accounting for Income Taxes
As part of the process of preparing the Companys consolidated financial statements, the Company is required to estimate its taxes in each of the
jurisdictions in which it operates. The Company estimates actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax
purposes. These differences result in deferred tax assets and liabilities, which are included in the Companys consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses
previously recognized in the Companys consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carry-forwards are utilized. Accordingly, realization of the Companys deferred tax
assets is dependent on future taxable income within the respective jurisdictions against which these deductions, losses and credits can be utilized within the applicable future periods.
85
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company must assess the likelihood that some portion or all of its deferred tax assets will be
recovered from future taxable income within the respective jurisdictions, and to the extent the Company believes that recovery does not meet the more-likely-than-not standard, it must establish a valuation allowance. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management judgment is required in determining the Companys provision for
income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. At December 29, 2007 and December 31, 2006, the Companys deferred tax assets were fully reserved with a
valuation allowance because, based on the available evidence, the Company believed at that time it was more likely than not that it would not be able to utilize those deferred tax assets in the future. The Company intends to maintain the full
valuation allowances until sufficient evidence exists to support the reversal of the valuation allowances. The Company makes estimates and judgments about its future taxable income, by jurisdiction, based on assumptions that are consistent with its
plans and estimates. Should the actual amounts differ from the Companys estimates, the amount of its valuation allowance could be materially impacted.
Concentration of Credit Risk
Financial instruments that are potentially
subject to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments, long-term investments and trade receivables. Investment policies have been implemented that limit investments to investment grade
securities. Credit risk with respect to trade receivables is mitigated by credit evaluations the Company performs on its customers and by the financial strength of the Companys customer base. Collateral is generally not required for trade
receivables. Level 3 Communications (Level 3) and Broadwing, which Level 3 acquired in January 2007, together accounted for approximately 47%, 75% and 28% of the Companys revenue in 2007, 2006 and 2005, respectively. In 2007, the Company had
one other customer that represented over 10% of the Companys revenue. In 2006, the Company had no other customer that represented over 10% of the Companys revenue. In 2005, the Company had four other customers that each represented over
10% of the Companys revenue. At December 29, 2007, the Company had amounts due from one other customer that represented over 10% of the Companys accounts receivables balance.
The Company depends on a single or limited number of suppliers for components and raw materials. The Company generally purchases these single or limited
source components and materials through standard purchase orders and has no long-term guarantee supply agreements with its suppliers. While the Company seeks to maintain sufficient reserve stock of such products, the Companys business and
results of operations could be adversely affected by a stoppage or delay in receiving such components and materials, the receipt of defective parts, an increase in price of such components and materials or the Companys inability to obtain
reduced pricing from its suppliers in response to competitive pressures.
Foreign Currency Translation and Transactions
The Company considers the functional currencies of its foreign subsidiaries to be the local currency. Assets and liabilities recorded in foreign
currencies are translated at the exchange rate as of the balance sheet date, and costs and expenses are translated at average exchange rates in effect during the year. Equity transactions are translated using historical exchange rates. The effects
of foreign currency translation adjustments are recorded as a separate component of stockholders equity (deficit) in the accompanying consolidated balance sheet. Foreign denominated monetary accounts have been remeasured to the U.S. dollar.
Aggregate foreign currency transaction gains (losses) recorded were not material in 2007, 2006 and 2005.
86
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Accumulated Comprehensive Income (Loss)
Accumulated comprehensive income (loss) consists of other comprehensive income (loss) and net loss. Other comprehensive income (loss) includes certain
changes in equity that are excluded from net loss. Specifically, cumulative foreign currency translation adjustments and unrealized holding gains (losses) on available-for-sale investments are included in accumulated other comprehensive loss in the
consolidated balance sheets.
The components of other accumulated comprehensive income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
December 31,
2006
|
|
Accumulated net unrealized gain (loss) on foreign currency translation adjustment
|
|
$
|
55
|
|
$
|
(153
|
)
|
Net unrealized holding gain (loss) on available-for-sale investments
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Other accumulated comprehensive income (loss)
|
|
$
|
78
|
|
$
|
(153
|
)
|
|
|
|
|
|
|
|
|
Advertising
All advertising costs are expensed as incurred. Advertising expenses were approximately $0.4 million, $0.2 million and $56,000 in 2007, 2006 and 2005, respectively.
Research and Development
All costs to develop
the Companys hardware products are expensed as incurred. Software development costs are capitalized beginning when a products technological feasibility has been established and ending when a product is available for general release to
customers. Generally, the Companys software products are released soon after technological feasibility has been established. As a result, costs subsequent to achieving technological feasibility have not been significant and all software
development costs have been expensed as incurred.
Freestanding Convertible Preferred Stock Warrants
Upon the closing of the Companys IPO in June 2007, warrants to purchase shares of the Companys convertible preferred stock became warrants to
purchase shares of the Companys common stock and, as a result, are no longer subject to Financial Accounting Standards Board Staff Position (FSP) No. 150-5,
Issuers Accounting under Statement No. 150 for Freestanding
Warrants and Other Similar Instruments on Shares that are Redeemable
(FSP 150-5). The then-current aggregate fair value of these warrants of $25.2 million was reclassified from current liabilities to additional paid-in capital, a component
of stockholders equity (deficit), and the Company has ceased to record any further periodic fair value adjustments.
In 2007 (through
the completion of its IPO) and 2006, the Company recorded $19.8 million and $2.4 million, respectively, of expense reflected in other gain (loss), net to reflect the increase in fair value during the period.
2. Cumulative Effect of Change in Accounting Principle
On June 29, 2005, the FASB issued FSP 150-5. This Staff Position affirms that such warrants are subject to the requirements in FSP 150-1, regardless of the timing of the redemption feature or the redemption price. Therefore, under FSP
150-5, the freestanding warrants that were related to the Companys convertible preferred
87
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
stock and common stock are liabilities that should be recorded at fair value. The Company previously accounted for freestanding warrants for the purchase of
the Companys convertible preferred stock under EITF No. 96-18.
Effective July 1, 2005, the Company adopted FSP 150-5 and
reclassified the fair value of the warrants from equity to liability and recorded a cumulative effect of $1.1 million. In addition, the Company recorded charges of $0.2 million to reflect the increase in fair value between July 1, 2005 and
December 31, 2005. In 2006, the Company recorded $2.4 million of charges in other loss, net to reflect the increase in fair value between January 1, 2006 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
Exercise
Price
|
|
Per
Share
Value
|
|
June 12, 2007
|
|
|
|
Change of Control Scenario
|
|
IPO Scenario
|
|
|
|
Probability
|
|
|
Expected
Term
(yrs)
|
|
Interest
Rate
|
|
|
Volatility
|
|
|
Per
Share
|
|
Probability
|
|
|
Remaining
Contractual
Term (yrs)
|
|
Interest
Rate
|
|
|
Volatility
|
|
|
Per
Share
|
Series A
|
|
$
|
9.68
|
|
$
|
14.78
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
55
|
%
|
|
$
|
14.38
|
|
100
|
%
|
|
1.1
|
|
5.07
|
%
|
|
60
|
%
|
|
$
|
14.78
|
Series B
|
|
|
12.45
|
|
|
12.78
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
55
|
%
|
|
|
11.61
|
|
100
|
%
|
|
1.8
|
|
5.06
|
%
|
|
65
|
%
|
|
|
12.78
|
Series E
|
|
|
2.40
|
|
|
21.72
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
55
|
%
|
|
|
21.66
|
|
100
|
%
|
|
4.6
|
|
5.12
|
%
|
|
70
|
%
|
|
|
21.72
|
Series F
|
|
|
3.78
|
|
|
20.37
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
55
|
%
|
|
|
20.28
|
|
100
|
%
|
|
5.0
|
|
5.09
|
%
|
|
70
|
%
|
|
|
20.37
|
Series G
|
|
|
5.40
|
|
|
18.81
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
50
|
%
|
|
|
18.66
|
|
100
|
%
|
|
3.4
|
|
5.09
|
%
|
|
65
|
%
|
|
|
18.81
|
Series G
|
|
|
5.40
|
|
|
18.81
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
50
|
%
|
|
|
18.66
|
|
100
|
%
|
|
3.6
|
|
5.09
|
%
|
|
65
|
%
|
|
|
18.81
|
Series G
|
|
|
5.40
|
|
|
18.81
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
50
|
%
|
|
|
18.66
|
|
100
|
%
|
|
3.7
|
|
5.09
|
%
|
|
65
|
%
|
|
|
18.81
|
Series G
|
|
|
5.40
|
|
|
18.81
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
50
|
%
|
|
|
18.66
|
|
100
|
%
|
|
3.9
|
|
5.12
|
%
|
|
65
|
%
|
|
|
18.81
|
Series G
|
|
|
5.40
|
|
|
18.81
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
50
|
%
|
|
|
18.66
|
|
100
|
%
|
|
4.1
|
|
5.12
|
%
|
|
65
|
%
|
|
|
18.81
|
Series G
|
|
|
5.40
|
|
|
18.81
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
50
|
%
|
|
|
18.66
|
|
100
|
%
|
|
4.2
|
|
5.12
|
%
|
|
65
|
%
|
|
|
18.81
|
Common Stock
|
|
|
8.96
|
|
|
15.87
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
60
|
%
|
|
|
15.10
|
|
100
|
%
|
|
6.1
|
|
5.18
|
%
|
|
80
|
%
|
|
|
15.87
|
Common Stock
|
|
|
8.96
|
|
|
15.85
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
60
|
%
|
|
|
15.10
|
|
100
|
%
|
|
7.1
|
|
5.21
|
%
|
|
80
|
%
|
|
|
15.85
|
Common Stock
|
|
|
8.96
|
|
|
15.99
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
60
|
%
|
|
|
15.10
|
|
100
|
%
|
|
8.1
|
|
5.21
|
%
|
|
80
|
%
|
|
|
15.99
|
Common Stock
|
|
|
8.96
|
|
|
16.04
|
|
0
|
%
|
|
0.0
|
|
4.95
|
%
|
|
60
|
%
|
|
|
15.10
|
|
100
|
%
|
|
8.9
|
|
5.23
|
%
|
|
80
|
%
|
|
|
16.04
|
|
|
|
|
Warrants
|
|
Exercise
Price
|
|
Per
Share
Value
|
|
December 31, 2006
|
|
|
|
Change of Control Scenario
|
|
IPO Scenario
|
|
|
|
Probability
|
|
|
Expected
Term
(yrs)
|
|
Interest
Rate
|
|
|
Volatility
|
|
|
Per
Share
Value
|
|
Probability
|
|
|
Remaining
Contractual
Term (yrs)
|
|
Interest
Rate
|
|
|
Volatility
|
|
|
Per
Share
Value
|
Series A
|
|
$
|
10.00
|
|
$
|
3.28
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
60
|
%
|
|
$
|
2.85
|
|
60
|
%
|
|
1.5
|
|
4.91
|
%
|
|
65
|
%
|
|
$
|
3.60
|
Series B
|
|
|
13.96
|
|
|
3.72
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
60
|
%
|
|
|
2.68
|
|
60
|
%
|
|
2.2
|
|
4.81
|
%
|
|
70
|
%
|
|
|
4.43
|
Series E
|
|
|
2.40
|
|
|
5.36
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
60
|
%
|
|
|
5.28
|
|
60
|
%
|
|
5.0
|
|
4.70
|
%
|
|
75
|
%
|
|
|
5.44
|
Series F
|
|
|
3.80
|
|
|
4.72
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
60
|
%
|
|
|
4.40
|
|
60
|
%
|
|
5.5
|
|
4.70
|
%
|
|
75
|
%
|
|
|
4.91
|
Series G
|
|
|
5.40
|
|
|
3.88
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
55
|
%
|
|
|
3.41
|
|
60
|
%
|
|
3.9
|
|
4.71
|
%
|
|
70
|
%
|
|
|
4.20
|
Series G
|
|
|
5.40
|
|
|
3.88
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
55
|
%
|
|
|
3.41
|
|
60
|
%
|
|
4.0
|
|
4.71
|
%
|
|
70
|
%
|
|
|
4.19
|
Series G
|
|
|
5.40
|
|
|
3.88
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
55
|
%
|
|
|
3.41
|
|
60
|
%
|
|
4.4
|
|
4.71
|
%
|
|
70
|
%
|
|
|
4.22
|
Series G
|
|
|
5.40
|
|
|
3.88
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
55
|
%
|
|
|
3.41
|
|
60
|
%
|
|
4.5
|
|
4.71
|
%
|
|
70
|
%
|
|
|
4.21
|
Series G
|
|
|
5.40
|
|
|
3.88
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
55
|
%
|
|
|
3.41
|
|
60
|
%
|
|
4.6
|
|
4.71
|
%
|
|
70
|
%
|
|
|
4.23
|
Common Stock
|
|
|
8.96
|
|
|
0.92
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
65
|
%
|
|
|
0.19
|
|
60
|
%
|
|
6.5
|
|
4.70
|
%
|
|
85
|
%
|
|
|
1.44
|
Common Stock
|
|
|
8.96
|
|
|
0.88
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
65
|
%
|
|
|
0.19
|
|
60
|
%
|
|
7.5
|
|
4.70
|
%
|
|
85
|
%
|
|
|
1.36
|
Common Stock
|
|
|
8.96
|
|
|
1.00
|
|
40
|
%
|
|
0.9
|
|
5.01
|
%
|
|
65
|
%
|
|
|
0.19
|
|
60
|
%
|
|
8.5
|
|
4.71
|
%
|
|
85
|
%
|
|
|
1.53
|
|
|
|
|
Warrants
|
|
Exercise
Price
|
|
Per
Share
Value
|
|
December 31, 2005
|
|
|
|
Change of Control Scenario
|
|
IPO Scenario
|
|
|
|
Probability
|
|
|
Expected
Term
(yrs)
|
|
Interest
Rate
|
|
|
Volatility
|
|
|
Per
Share
Value
|
|
Probability
|
|
|
Remaining
Contractual
Term (yrs)
|
|
Interest
Rate
|
|
|
Volatility
|
|
|
Per
Share
Value
|
Series A
|
|
$
|
10.00
|
|
$
|
0.56
|
|
100
|
%
|
|
0.3
|
|
4.08
|
%
|
|
60
|
%
|
|
|
0.57
|
|
0
|
%
|
|
0.3
|
|
4.08
|
%
|
|
60
|
%
|
|
$
|
0.57
|
Series A
|
|
|
10.00
|
|
|
0.88
|
|
100
|
%
|
|
0.5
|
|
4.14
|
%
|
|
60
|
%
|
|
|
0.89
|
|
0
|
%
|
|
0.5
|
|
4.14
|
%
|
|
60
|
%
|
|
|
0.89
|
Series A
|
|
|
10.00
|
|
|
2.88
|
|
90
|
%
|
|
1.9
|
|
4.40
|
%
|
|
70
|
%
|
|
|
2.82
|
|
10
|
%
|
|
2.5
|
|
4.39
|
%
|
|
75
|
%
|
|
|
3.40
|
Series B
|
|
|
13.96
|
|
|
3.60
|
|
90
|
%
|
|
1.9
|
|
4.40
|
%
|
|
70
|
%
|
|
|
3.47
|
|
10
|
%
|
|
3.2
|
|
4.38
|
%
|
|
80
|
%
|
|
|
4.90
|
Series E
|
|
|
2.40
|
|
|
2.24
|
|
90
|
%
|
|
1.9
|
|
4.40
|
%
|
|
70
|
%
|
|
|
2.20
|
|
10
|
%
|
|
6.0
|
|
4.36
|
%
|
|
85
|
%
|
|
|
2.63
|
Series F
|
|
|
3.80
|
|
|
2.20
|
|
90
|
%
|
|
1.9
|
|
4.40
|
%
|
|
70
|
%
|
|
|
2.11
|
|
10
|
%
|
|
6.5
|
|
4.36
|
%
|
|
85
|
%
|
|
|
2.79
|
Series G
|
|
|
5.40
|
|
|
2.48
|
|
90
|
%
|
|
1.9
|
|
4.40
|
%
|
|
65
|
%
|
|
|
2.39
|
|
10
|
%
|
|
4.9
|
|
4.36
|
%
|
|
80
|
%
|
|
|
3.26
|
Series G
|
|
|
5.40
|
|
|
2.48
|
|
90
|
%
|
|
1.9
|
|
4.40
|
%
|
|
65
|
%
|
|
|
2.39
|
|
10
|
%
|
|
5.0
|
|
4.36
|
%
|
|
80
|
%
|
|
|
3.27
|
Common Stock
|
|
|
8.96
|
|
|
0.08
|
|
90
|
%
|
|
1.9
|
|
4.40
|
%
|
|
75
|
%
|
|
|
0.05
|
|
10
|
%
|
|
7.5
|
|
4.37
|
%
|
|
95
|
%
|
|
|
0.44
|
Common Stock
|
|
|
8.96
|
|
|
0.08
|
|
90
|
%
|
|
1.9
|
|
4.40
|
%
|
|
75
|
%
|
|
|
0.05
|
|
10
|
%
|
|
8.5
|
|
4.38
|
%
|
|
95
|
%
|
|
|
0.44
|
88
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company estimated the fair value of these warrants using the Black-Scholes model for change of
control scenario and the Lattice model for a successful initial public offering scenario. The Company then used a probability weighted average of per-share values under the different scenarios to determine the fair value of these warrants at the
respective balance sheet dates.
Both models require the Company to make highly subjective assumptions, and a change in the Companys
assumptions could materially affect the fair value estimates.
The impact of the cumulative effect of change in accounting principle on net
loss per common share was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
|
December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
Net loss per common share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
$
|
(1.09
|
)
|
|
$
|
(14.90
|
)
|
|
$
|
(14.33
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1.09
|
)
|
|
$
|
(14.90
|
)
|
|
$
|
(14.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common share
|
|
|
50,732
|
|
|
|
6,036
|
|
|
|
4,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the pro forma effect of the adoption of FSP 150-5 on results of
operations for 2005, if applied retroactively, assuming FSP 150-5 had been adopted in that year.
|
|
|
|
|
(In thousands, except per share data)
|
|
December 31,
2005
|
|
Net loss, as reported
|
|
$
|
(64,826
|
)
|
Add: Cumulative effect of change in accounting principle included in net loss
|
|
|
(1,137
|
)
|
Change in fair value of warrants
|
|
|
(229
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
|
(66,192
|
)
|
|
|
|
|
|
Pro forma loss per common share, basic and diluted
|
|
$
|
(14.37
|
)
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common share
|
|
|
4,605
|
|
|
|
|
|
|
3. Balance Sheet Components
Available-for-Sale Investments
Available-for-sale investments were as follows for the fiscal
years ended December 29, 2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
Money market
|
|
$
|
35,857
|
|
$
|
|
|
$
|
|
|
|
$
|
35,857
|
Commercial paper
|
|
|
74,352
|
|
|
12
|
|
|
(8
|
)
|
|
|
74,356
|
Corporate bonds
|
|
|
49,796
|
|
|
47
|
|
|
(29
|
)
|
|
|
49,814
|
U.S. agency notes
|
|
|
21,945
|
|
|
6
|
|
|
(5
|
)
|
|
|
21,946
|
Adjustable rate notes
|
|
|
96,150
|
|
|
|
|
|
|
|
|
|
96,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
278,100
|
|
$
|
65
|
|
$
|
(42
|
)
|
|
$
|
278,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
Money market
|
|
$
|
16
|
|
$
|
|
|
$
|
|
|
|
$
|
16
|
Commercial paper
|
|
|
15,075
|
|
|
2
|
|
|
|
|
|
|
15,077
|
Corporate bonds
|
|
|
690
|
|
|
|
|
|
(2
|
)
|
|
|
688
|
U.S. agency notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable rate notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale investments
|
|
$
|
15,781
|
|
$
|
2
|
|
$
|
(2
|
)
|
|
$
|
15,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the carrying values and balance sheet classification was as follows for the fiscal
years ended December 29, 2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
December 31,
2006
|
Available-for-sale investments
|
|
$
|
278,123
|
|
$
|
15,781
|
Cash in banks
|
|
|
24,370
|
|
|
13,791
|
Restricted cash
|
|
|
3,337
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
305,830
|
|
$
|
29,572
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
91,209
|
|
$
|
28,884
|
Short-term investments
|
|
|
181,168
|
|
|
688
|
Short-term restricted cash
|
|
|
743
|
|
|
|
Long-term investments
|
|
|
30,116
|
|
|
|
Long-term restricted cash
|
|
|
2,594
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
305,830
|
|
$
|
29,572
|
|
|
|
|
|
|
|
Commercial paper and corporate bond investments have a contractual maturity term of
less than one year. Realized gains (losses) on short and long-term investments were not material for 2007, 2006 and 2005.
Restricted
Cash
At December 29, 2007, the Company had short-term restricted cash of $0.7 million and long-term restricted cash of
$2.6 million. The Companys restricted cash balances are comprised of certificates of deposit, of which the majority are not FDIC insured. These amounts primarily collateralize the Companys issuances of stand-by and commercial
letters of credit. At December 31, 2006, the Companys restricted cash balance was zero.
Inventory
Inventory is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
December 31,
2006
|
|
|
Raw materials
|
|
$
|
10,475
|
|
$
|
6,700
|
Work in process
|
|
|
35,110
|
|
|
38,104
|
Finished goods
|
|
|
12,994
|
|
|
13,465
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
58,579
|
|
$
|
58,269
|
|
|
|
|
|
|
|
90
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Included in finished goods inventory at December 29, 2007 and December 31, 2006 were $1.5
million and $6.8 million, respectively, of inventory at customer locations for which product acceptance had not occurred.
Property, Plant and
Equipment, Net
Property, plant and equipment, net is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
|
December 31,
2006
|
|
Computer hardware
|
|
$
|
4,267
|
|
|
$
|
2,148
|
|
Computer software
|
|
|
3,111
|
|
|
|
2,892
|
|
Laboratory and manufacturing equipment
|
|
|
50,897
|
|
|
|
36,262
|
|
Furniture and fixtures
|
|
|
805
|
|
|
|
559
|
|
Leasehold improvements
|
|
|
12,438
|
|
|
|
10,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,518
|
|
|
|
52,779
|
|
Less accumulated depreciation and amortization
|
|
|
(34,545
|
)
|
|
|
(26,114
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
36,973
|
|
|
$
|
26,665
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net includes approximately $0.8 million in asset retirement
obligations recorded as of December 29, 2007 and December 31, 2006. These asset retirement obligations are related to various office leases in California and Maryland.
Intangible Assets
Purchased and other intangible assets are carried at cost less accumulated
amortization. Amortization expenses are recorded to the appropriate cost and expense categories. The Company expects amortization expense on purchased intangible assets to be approximately $0.3 million for 2008 and 2009, approximately $0.2 million
for each year from 2010 through 2012, approximately $55,000 for each year from 2013 through 2020, and approximately $34,000 in 2021, at which time purchased intangible assets will be fully amortized. The weighted average amortization period as of
December 29, 2007 and December 31, 2006 was approximately 10 years. Amortization of intangible assets was $0.3 million, $0.2 million and $19,000 for 2007, 2006 and 2005, respectively.
Other intangible assets, net are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007
|
|
December 31, 2006
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net
|
Patents & developed technology
|
|
$
|
1,628
|
|
$
|
(317
|
)
|
|
$
|
1,311
|
|
$
|
1,628
|
|
$
|
(156
|
)
|
|
$
|
1,472
|
Assembled workforce and other
|
|
|
370
|
|
|
(140
|
)
|
|
|
230
|
|
|
370
|
|
|
(36
|
)
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,998
|
|
$
|
(457
|
)
|
|
$
|
1,541
|
|
$
|
1,998
|
|
$
|
(192
|
)
|
|
$
|
1,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Accrued Expenses
Accrued expenses are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
December 31,
2006
|
Loss contingency related to purchase commitments
|
|
$
|
1,880
|
|
$
|
3,518
|
Customer prepay liability
|
|
|
1,109
|
|
|
2,855
|
Professional and other consulting fees
|
|
|
392
|
|
|
2,063
|
Other accrued expenses
|
|
|
6,116
|
|
|
8,138
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
9,497
|
|
$
|
16,574
|
|
|
|
|
|
|
|
4. Significant Agreements
On November 9, 2005, the Company purchased certain assets of Big Bear Networks, Inc. (BBN) for a net consideration of $1.1 million. The purchase
price consisted of $2.0 million in an assumed note payable, $0.6 million in cash and $0.1 million in transaction fees. An additional $25,000 was retained in an escrow account, which is payable to BBNs former shareholders and subject to any
indemnification claims at the end of the applicable escrow period. This was offset by net proceeds of $1.7 million from the sale of certain non-strategic assets acquired from BBN to a third party purchaser and a $50,000 write-off of an accounts
payable balance due to BBN. The purchase of these assets was accounted for under the guidance of SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142), for intangible assets acquired with a group of other assets not part
of a business combination.
Based on the assessment of fair value of the acquired assets acquired from BBN, performed by an independent
third party valuation firm, the Company allocated $60,000 to tangible equipment, $0.2 million to inventory and the remaining $0.8 million to intangible assets. The intangible assets represent purchased technologies and are amortized on a
straight-line basis over an estimated useful life of seven years. The amortization is recorded in cost of ratable product and related support and services. The accumulated amortization for intangible assets as of December 29, 2007 and
December 31, 2006 was $0.3 million and $0.1 million, respectively. The carrying value of these intangibles at December 29, 2007 and December 31, 2006 was $0.6 million and $0.7 million, respectively. Based on identified intangible
assets recorded at December 29, 2007, the annual amortization expense for each period is expected to be approximately $0.1 million for each year beginning 2008 through 2012, at which time the intangible assets will be fully amortized.
On July 13, 2006, the Company entered into a supply and services agreement with Broadwing Corporation (Broadwing) whereby the Company
agreed to sell certain customized products and provide manufacturing and support for one of Broadwings product divisions. The manufacturing is based on Broadwings specifications using its technology, former manufacturing facility and
equipment, and certain intellectual property utilized in the manufacture of such products that is owned or licensed by Broadwing. In connection with the agreement, the Company issued a warrant to Broadwing to purchase the equivalent of 92,592 shares
of Series G convertible preferred stock at a price of $5.40 per share (after giving effect to the 4:1 reverse stock split in May 2007). Subsequent to the IPO, this preferred warrant was converted to a warrant to purchase the same number of shares of
common stock and the exercise price remained the same. The fair value of the warrants of $189,000 was recorded as a reduction to product revenue. In addition, the Company hired certain Broadwing employees in connection with this supply and service
agreement. The Companys obligations under this agreement ended on June 30, 2007. Accordingly, the Company recorded an asset impairment charge of $0.4 million in the second quarter of 2007.
92
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On August 16, 2006, the Company purchased certain assets of Little Optics, Inc. for net
consideration of $9.5 million. The purchase price consisted of $4.7 million in cash, $4.5 million in an assumed note payable, $251,000 in fair value of a warrant to purchase 0.1 million shares of Series G convertible preferred stock, and
$90,000 in net liabilities assumed. Upon the closing of the IPO, this preferred stock warrant became a warrant to purchase the same number of shares of common stock and the exercise price remained the same. The purchase of these assets was accounted
for under the guidance of SFAS 142 for intangible assets acquired with a group of assets not part of a business combination.
Based on the
assessment of fair value of the acquired assets performed by an independent third party valuation firm, the Company allocated $4.5 million to in-process research and development, $3.8 million to tangible equipment and the remaining $1.2 million to
intangible assets. The in-process research and development was written off on the acquisition date because technological feasibility had not been established and no alternative future uses existed. The intangible assets represent patents, assembled
workforce and customer contracts. The fair values of the intangibles on the date of acquisition are amortized on a straight-line basis over their estimated useful lives ranging from three to fifteen years. The amortization is recorded in
amortization of intangible assets on the statement of operations. The accumulated amortization for these intangible assets was approximately $0.2 million and $0.1 million as of December 29, 2007 and December 31, 2006, respectively. The
carrying value of these intangibles at December 29, 2007 and December 31, 2006 was $1.0 million and $1.1 million, respectively. Based on identified intangible assets recorded at December 29, 2007, the annual amortization expense for
each period is expected to be approximately $0.1 million for each year beginning 2008 through 2012, $55,000 in 2013 through 2020 and $34,000 in 2021, at which time the intangible assets will be fully amortized. The in-process research and
development charge of $4.5 million was recorded in research and development expense in 2006.
On January 23, 2007, the Company entered
into an asset purchase agreement with Broadwing, a division of Level 3, pursuant to which the Company agreed to purchase various assets associated with the former supply of Broadwing products, consisting primarily of test and manufacturing equipment
for $1.2 million. Based on an assessment by management of the fair value of the assets, $0.7 million of the acquisition cost was allocated to equipment retained by the Company for internal use and $0.5 million was allocated to assets held for sale.
In 2007, the Company had generated proceeds of $3.1 million from the sale of a portion of the assets held for sale and resulted in a gain of $2.7 million reflected as a component of other income (expense), net. The balance of the assets held for
sale was immaterial at December 29, 2007. The equipment retained for internal use was redeployed and depreciation commenced in accordance with the Companys depreciation policy.
5. Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the period. Diluted net loss per common share is computed by giving effect to
all potential dilutive common shares, including options, RSUs, right to acquire stock under the ESPP, common stock subject to repurchase, warrants to purchase common and convertible preferred stock and convertible preferred stock before conversion.
93
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table sets forth the computation of net loss per common share (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 29,
2007
|
|
|
Years Ended
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
Net loss
|
|
$
|
(55,342
|
)
|
|
$
|
(89,935
|
)
|
|
$
|
(64,826
|
)
|
Weighted average common shares outstanding net of weighted-average common shares subject to repurchase
|
|
|
50,732
|
|
|
|
6,036
|
|
|
|
4,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(1.09
|
)
|
|
$
|
(14.90
|
)
|
|
$
|
(14.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding options, common stock subject to repurchase, convertible preferred
stock, right to acquire stock under the ESPP, RSUs and warrants to purchase convertible preferred stock and common stock were excluded from the computation of diluted net loss per common share for the periods presented because including them would
have had an antidilutive effect. The shares of common stock issuable upon conversion or exercise of such outstanding securities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
Year Ended
December 29,
2007
|
|
Years Ended
December 31,
|
|
|
|
2006
|
|
2005
|
Options to purchase common stock
|
|
11,125
|
|
7,872
|
|
6,696
|
Common stock subject to repurchase
|
|
1,086
|
|
1,513
|
|
739
|
Options outstanding related to non-recourse notes
|
|
|
|
114
|
|
331
|
Employee stock purchase plan
|
|
500
|
|
|
|
|
Restricted stock units
|
|
616
|
|
|
|
|
Convertible preferred stock (as converted basis)
|
|
|
|
59,428
|
|
45,297
|
Convertible preferred and common stock warrants (as converted basis)
|
|
768
|
|
1,333
|
|
867
|
6. Deferred Revenue and Deferred Inventory Costs
Deferred revenue and deferred inventory costs consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
December 31,
2006
|
Deferred ratable product and related support and services, current
|
|
$
|
167,031
|
|
$
|
101,080
|
Deferred ratable product and related support and services, non-current
|
|
|
7,406
|
|
|
9,873
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
174,437
|
|
$
|
110,953
|
|
|
|
|
|
|
|
Deferred inventory costs, current
|
|
$
|
78,362
|
|
$
|
62,936
|
Deferred inventory costs, non-current
|
|
|
3,260
|
|
|
4,317
|
|
|
|
|
|
|
|
Total deferred inventory costs
|
|
$
|
81,622
|
|
$
|
67,253
|
|
|
|
|
|
|
|
Deferred ratable product and related support and services revenue consists of revenue on
transactions where VSOE of fair value of support and other services has not been established and therefore, the entire arrangement is being recognized ratably over the longest bundled support or service period. In the fourth quarter of 2006, the
Company amended several of its significant sales contracts to shorten the contractual software warranty periods to between 90 days and one year, which management believes is more typical in the industry. This contractual change in the software
warranty period resulted in the reduction of the average recognition period for ratable
94
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
revenue from 3.7 years in the third quarter of 2006 to 1.3 years in the fourth quarter of 2006. This reduction in the amortization period was primarily due
to the contractual changes in the software warranty period as discussed above and the Companys standard practice of negotiating shorter contractual software warranty periods in new contracts.
7. Commitment and Contingencies
Leases
The Company leases facilities under non-cancelable operating lease agreements. The Company had five primary lease agreements at
December 29, 2007: two covering its headquarters, research and development (R&D) and manufacturing facility in Sunnyvale, California, one covering its R&D and manufacturing facility in Allentown, Pennsylvania, one covering its R&D
facility in Annapolis Junction, Maryland, and one covering its software development facility in Bangalore, India. Terms of the leases are from one to seven years. Additionally, the Company leases sales office space in China, Germany, Hong Kong,
Korea and the United Kingdom, which leases expire between 2007 and 2009.
Included as part of the five primary lease agreements, on
August 31, 2005, the Company entered into a 15-month lease for office space adjacent to its manufacturing facility in Sunnyvale, California, expiring on December 31, 2006. On July 24, 2006, this lease was extended for an additional
year and expires on December 31, 2007. In June 2007, the Company exercised its option to extend the lease for an additional three years effective January 1, 2008.
Additionally, on July 17, 2006, the Company entered into a five year lease expiring on August 31, 2011 for additional office space adjacent to
its existing Sunnyvale, California facility. This new space serves as the Companys administrative headquarters. On May 29, 2007, this lease was amended to include warehouse space in an adjacent building.
On July 13, 2006, the Company entered into a supply and services agreement with Broadwing, whereby the Company agreed to manufacture, sell and
provide support for certain of its division products. In connection with the agreement, the Company assumed a sublease for a manufacturing facility in Maryland, where the manufacture of the products would continue. The sublease expired on
October 31, 2007 and the Company vacated the premises at that time. Total expense for this lease was $0.4 million and $0.3 million for 2007 and 2006, respectively.
The Company recognizes rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred but not paid. Rent expense for all leases was $3.6 million, $1.7 million and $1.4 million
for 2007, 2006 and 2005, respectively.
Purchase Commitments
The Company has service agreements with its major production suppliers, where the Company is committed to purchase certain parts. As of December 29, 2007 and December 31, 2006, these non-cancelable purchase
commitments were $33.7 million and $39.2 million, respectively.
95
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following is a summary of the Companys contractual obligations as of December 29,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Payments Due by Period
|
|
|
Less than
1 year
|
|
1 - 3 years
|
|
3 - 5 years
|
|
More than
5 years
|
|
|
(In thousands)
|
Purchase obligations
|
|
$
|
33,652
|
|
$
|
33,652
|
|
$
|
|
|
$
|
|
|
$
|
|
Operating leases
|
|
|
13,653
|
|
|
3,566
|
|
|
6,723
|
|
|
3,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
47,305
|
|
$
|
37,218
|
|
$
|
6,723
|
|
$
|
3,364
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification Obligations
From time to time, the Company enters into certain types of contracts that contingently require it to indemnify parties against third-party claims. These
contracts primarily relate to: (i) certain real estate leases under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Companys use of the applicable
premises; (ii) certain agreements with the Companys officers, directors and certain key employees, under which the Company may be required to indemnify such persons for liabilities; and (iii) certain provisions in the Companys
customer agreements that may require the Company to indemnify their customers and their affiliated parties against certain liabilities, including if the Companys products infringe a third partys intellectual property rights.
The terms of such indemnification obligations vary. Because the maximum obligated amounts under these agreements generally are not explicitly stated,
the maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally unlimited.
To date, the Company has not incurred any material costs as a result of the indemnification obligations and has not accrued any liabilities related to such obligations in the Companys consolidated financial
statements. The Company has agreed to indemnify Level 3 in connection with the lawsuit filed by Cheetah Omni LLC on May 9, 2006 (see Note 15 of Notes to Consolidated Financial Statements for Legal Matters). The Company is contractually
obligated to indemnify Level 3 for damages suffered by Level 3 to the extent the Companys product is found to infringe the two Cheetah Omni LLC patents at issue (patent No. 6,795,605 and 7,142,347), and the Company has assumed the defense
of this matter.
As permitted under Delaware law and the Companys charter and bylaws, the Company has agreements whereby it
indemnifies certain of its officers and each of its directors for certain events or occurrences while the officer or director is, or was, serving at the Companys request in such capacity. The term of the indemnification period is for the
officers or directors lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy
that may reduce its exposure and enable it to recover all or a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The
Company has no liabilities recorded for these agreements as of December 29, 2007, as this liability is not reasonably estimable even though liability under these agreements is not remote.
96
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
8. Debt Obligations
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
December 31,
2006
|
|
|
(In thousands)
|
Bank loans due 2007-2009
|
|
$
|
|
|
$
|
23,481
|
Assumed debt from acquisition of assets due 2007
|
|
|
|
|
|
4,500
|
Other debt due 2007-2013
|
|
|
|
|
|
401
|
|
|
|
|
|
|
|
Total debt
|
|
|
|
|
|
28,382
|
Less current maturities
|
|
|
|
|
|
20,025
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
|
|
$
|
8,357
|
|
|
|
|
|
|
|
The Company completed its IPO in June 2007 and generated net proceeds of $190.1 million.
Subsequent to the IPO, the Company used $29.3 million to pay off all of its outstanding debt except a $4.5 million promissory note related to an asset acquisition. In September 2007, the Company fully repaid this promissory note and had no debt
outstanding as of December 29, 2007.
On August 16, 2006, the Company purchased certain assets of Little Optics, Inc. The
purchase price was paid in part with a $4.5 million promissory note which bears simple interest of 4% per annum. The principal amount together with accrued and unpaid interest of $0.2 million was due on October 2007. In September 2007, the
Company repaid this promissory note in full.
On July 31, 2003, the Company entered into a loan agreement with a financial institution
that allows for borrowings of up to $0.1 million. The agreement was amended in 2004 to allow for an additional borrowing amount of $0.2 million and subsequently, $0.2 million was borrowed under the same arrangement. The weighted average interest
rate under this credit facility as of June 30, 2007 was 6.0%. Under the agreements, warrants to purchase 5,049 shares of common stock at $8.96 per share were issued. The fair value of these warrants on the date of grant was estimated to be
$5,854. The amounts recorded as interest expense were not material for 2007, 2006 and 2005. The principal balance outstanding and classified as non-current was $0.3 million at December 31, 2006. This loan was repaid in June 2007, and no
additional borrowings are allowed under this credit facility.
On December 29, 2004, the Company entered into a growth capital loan
agreement with two co-lender financial institutions. The agreement allowed for borrowings of up to $10.0 million. The loan was secured by, among other things, a lien on the Companys intellectual property. The interest rate for the arrangement
was 12% for $7.0 million and 11.5% for the remaining $3.0 million through June 30, 2005, and then the higher of 11% or prime plus 6.25% for $10.0 million thereafter over three years. In January 2005, the Company borrowed $3.0 million under this
line. Under this agreement, warrants to purchase 0.1 million shares of Series E convertible preferred stock at $2.40 per share were issued. The fair value of these warrants at the date of grant was estimated to be $0.2 million. In March 2005,
the Company issued additional warrants to purchase 0.1 million shares of Series E convertible preferred stock at $2.40 per share when the Company borrowed the remaining $7.0 million under this line. The fair value of these warrants on the date
of grant was estimated to be $0.1 million. The weighted average interest rate under this credit facility as of June 30, 2007 was 18.3%. The amounts recorded as interest expense for both warrant issuances were $155,682, $111,634 and $99,875 for
2007, 2006 and 2005, respectively. The principal balance outstanding was $6.2 million, of which $3.5 million and $2.7 million were classified as current and non-current, respectively, at December 31, 2006. This loan was repaid in June 2007, and
no additional borrowings are allowed under this credit facility.
97
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On December 29, 2004, the Company entered into a borrowing arrangement with a financial
institution. This arrangement provided for two facilities, an operating line of credit and a revolving line of credit. The operating line of credit allowed for borrowings secured by approved accounts receivable and purchase orders. The revolving
line allowed for borrowing subject to the Company maintaining certain minimum cash balances. Total borrowings under the arrangement could not exceed $20.0 million and bore interest at various rates of interest depending on the facility. The total
available credit under the agreement was reduced by, among other things, any stand-by letters of credit outstanding. Under this agreement, warrants to purchase 62,500 shares of Series E convertible preferred stock at $2.40 per share and 9,259 shares
of Series G convertible preferred stock at $5.40 per share were issued. The fair value of these warrants on the date of grant was estimated to be $0.1 million. The amounts recorded as interest expense were $20,712, $36,507 and $74,460 for 2007, 2006
and 2005, respectively. The arrangement was scheduled to expire on June 28, 2006 but was amended a number of times in 2006 by mutual consent to, among other things, extend the maturity date, extend the deadline for providing audited financial
statements and waive the deadline for certain other management reports. On October 6, 2006, the arrangement was amended to allow the Company to borrow against its accounts receivable, to increase the facility amount to $25.0 million, to reduce
the interest rate on the revolving line to the greater of prime or 6.25% and to extend the maturity date to September 27, 2007. The weighted average interest rate under all sub-facilities as of June 30, 2007 was 8.3%. As of
December 31, 2006, there were no outstanding balances on the operating line of credit. As of December 31, 2006, the principal balance outstanding under the revolving loan was $9.5 million, which was classified as current. This loan was
repaid in June 2007.
On June 21, 2005, the Company entered into a loan arrangement with a financial institution. This arrangement
provided for two separate sub-facilities, a term loan and a revolving facility. Under the arrangement, the maximum term advance shall not exceed $5.5 million and the maximum revolving advance shall not exceed $6.0 million; provided, however, that at
no time may the total outstanding loan obligations under the arrangement exceed $10.0 million. Under the arrangement, the Company maintained on deposit with the bank an unrestricted compensating balance of $4.0 million. The arrangement was secured
by, among other things, the Companys equipment and certain intellectual property. The term facility was repayable over a three-year period and the revolving facility was repayable over a period of twelve months. The interest rate for the
arrangement was at a variable rate of 0.50% above the prime interest rate. In connection with the loan arrangement, the Company granted warrants to purchase 19,824 shares of Series F convertible preferred stock at an exercise price of $3.78 per
share. The fair value of these warrants on the date of grant was estimated at $35,599. For 2006 and 2005, the amounts recorded as interest expense were not material and at December 31, 2006, the value of the warrant was fully amortized. During
2006, the loan arrangement was amended at various times by mutual consent to extend the maturity date, amend certain definitions in the agreement, permit the acquisition of the assets of Little Optics, Inc. and waive specified management reports. On
October 31, 2006, the arrangement was amended and restated to terminate the term loan and revolving facility, replace them with a new three-year variable rate term facility and the amount borrowed previously under the term loan and revolving
facility was repaid from the proceeds of this new facility. Total borrowings under this new facility may not exceed $15.0 million. In February and March 2007, the Company borrowed approximately $7.0 million under this facility. As a result,
borrowings under the facility were fully utilized. The interest rate on this new facility was set at the banks prime rate and the Company was required to comply with certain information reporting requirements. The weighted average borrowing
rate under this facility was 8.25% at June 30, 2007. The principal balance outstanding under this facility was $7.8 million, of which $2.5 million and $5.3 million were classified as current and non-current, respectively, at December 31,
2006. This loan was repaid in June 2007, and no additional borrowings are allowed under this credit facility.
On June 26, 2006, the
Company entered into a premium financing agreement with a financial institution for $0.2 million. The loan was repayable over ten months and bears interest at a rate of 6.0% per annum. The principal balance outstanding under this loan was
approximately $86,000 at December 31, 2006, which was classified as current. This loan was repaid in April 2007, and no additional borrowings are allowed under this credit facility.
98
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 29, 2007, the Company had no access to additional funds under any credit
facilities.
9. Founders Stock, Restricted Stock, Convertible Preferred Stock and Stockholders Equity (Deficit)
Founders Stock
In December 2000, the Company
issued 1.4 million shares of common stock at $0.004 per share to a founder of the Company for cash proceeds of $5,500. In March 2001, the Company repurchased 0.4 million of these shares at the original issuance price of $0.004 per share
for a total of $1,500. In March 2001, the Company issued 2.0 million shares, at $0.10 per share, to the other founders of the Company for cash proceeds of $0.2 million. The founders shares are subject to adjustment for certain events,
including mergers, stock dividends, stock splits, and other events. The founders shares vested over four years: 20% immediately, and 1.667% per month for 48 months thereafter. At December 31, 2006, all of the shares of the
founders common stock were fully vested.
One of the founders who received a grant of 1.0 million shares of common stock in
March 2001 was an advisor to the Company from March 2001 to May 2001. Accordingly, the Company recorded a compensation charge of $9,000, which was calculated using the Black-Scholes option-pricing model. This founder became an employee of the
Company in May 2001, whereupon his stock grant was remeasured due to a change in employment status. The intrinsic value of the unvested shares of common stock as of the change of employment status was $0.7 million. This amount was recognized over
the remaining vesting period. For 2005, the Company recorded a compensation charge of $45,000. At December 31, 2006, the common stock was fully vested.
Restricted Stock
In March 2001, the Company issued 0.2 million and 0.1 million shares of restricted common stock
at $0.10 per share to a member of the Board of Directors and an employee of the Company, respectively, for total cash proceeds of $30,000. The 0.1 million shares of restricted common stock issued to the employee are under the Companys
2000 Stock Option Plan. In November 2001, the Company issued 42,500 shares of restricted common stock at $1.40 per share to another member of the Board of Directors of the Company for cash proceeds totaling $59,500. These restricted shares are
subject to adjustment for certain events, including mergers, stock dividends, stock splits and other events. These restricted shares vest over four years. In connection with a software license agreement in June 2004, the Company issued 7,500 shares
of restricted common stock at $1.84 per share for cash proceeds of $13,800. These restricted shares vested over one year. At December 31, 2006, 0.3 million shares of restricted common stock were fully vested.
Convertible Preferred Stock
The following is a
schedule of authorized, issued and outstanding shares of each series of convertible preferred stock as of December 31, 2006 (in thousands):
|
|
|
|
|
|
|
Authorized
Shares
|
|
Shares Issued and
Outstanding
December 31, 2006
|
Series A
|
|
3,919
|
|
3,691
|
Series B
|
|
2,128
|
|
2,112
|
Series C
|
|
1,335
|
|
1,335
|
Series D
|
|
7,143
|
|
6,920
|
Series E
|
|
22,975
|
|
21,590
|
Series F
|
|
3,000
|
|
2,723
|
Series G
|
|
21,500
|
|
20,435
|
|
|
|
|
|
Total convertible preferred stock
|
|
62,000
|
|
58,806
|
|
|
|
|
|
99
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In June 2005, the Company issued 2.7 million shares of Series F convertible preferred stock at
$3.78 per share for net proceeds of $10.3 million, net of issuance costs, to fund its current operations. Of the shares of Series F convertible preferred stock sold in June 2005, 2.6 million were sold to a customer of the Company and the
remaining 0.1 million shares were sold to an employee of the Company, each on substantially the same terms and conditions. The Company determined that the Series F convertible preferred stock was issued at fair value and, therefore, no contra
revenue charges or employee compensation charges were recorded as part of these sales of Series F convertible preferred stock.
During the
fourth quarter of 2005, the Company issued 6.3 million shares of Series G convertible preferred stock at $5.40 per share for $31.1 million, net of issuance costs, to various investors. In January, March, May, July and October of 2006, the
Company issued a total of 14.1 million shares of Series G convertible preferred stock for $73.4 million, net of issuance costs. The purchase price for these issuances was $5.40 per share, with the exception of a board members purchase of
67,934 shares at $7.36 per share in October 2006. These issuances completed the sale of Series G convertible preferred stock which began in October of 2005. Total Series G convertible preferred stock issued was 20.4 million shares for $105.1
million, net of issuance costs.
In connection with the Companys IPO, the Companys outstanding convertible preferred stock was
converted into common stock of the Company.
Convertible Preferred and Common Stock Warrant Liabilities
The following convertible preferred stock warrants were converted into common stock warrants upon the completion of the IPO (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Expiration Date
|
|
Convertible Preferred Stock Warrants
|
|
Commons stock warrants
|
|
|
Shares as of
|
|
Fair value (1)
|
|
Shares as of
June 12,
2007
|
|
Exercise
Price per
Share
|
|
|
Exercise Price
per Share
|
|
June 12,
2007
|
|
December 31,
2006
|
|
June 12,
2007
|
|
December 31,
2006
|
|
|
Series A convertible preferred
|
|
Apr 2006 to July 2008
|
|
$
|
10.00
|
|
135
|
|
135
|
|
$
|
2,061
|
|
$
|
445
|
|
139
|
|
$
|
9.68
|
Series B convertible preferred
|
|
Mar 2009
|
|
$
|
13.96
|
|
16
|
|
16
|
|
|
227
|
|
|
59
|
|
18
|
|
$
|
12.44
|
Series E convertible preferred
|
|
Dec 2011
|
|
$
|
2.40
|
|
292
|
|
292
|
|
|
6,336
|
|
|
1,568
|
|
292
|
|
$
|
2.40
|
Series F convertible preferred
|
|
Jun 2012
|
|
$
|
3.78
|
|
20
|
|
20
|
|
|
404
|
|
|
93
|
|
20
|
|
$
|
3.78
|
Series G convertible preferred
|
|
Nov 2010 to Aug 2011
|
|
$
|
5.40
|
|
828
|
|
828
|
|
|
15,566
|
|
|
3,212
|
|
828
|
|
$
|
5.40
|
Common Stock
|
|
July 2013 to May 2016
|
|
$
|
8.96
|
|
36
|
|
36
|
|
|
576
|
|
|
32
|
|
36
|
|
$
|
8.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
1,327
|
|
1,327
|
|
$
|
25,170
|
|
$
|
5,409
|
|
1,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of June 12, 2007, immediately before the conversion of convertible preferred stock warrants to common stock warrants.
|
The fair value of these warrants was estimated at the date of grant using a probability weighted average of per-share values using the Black-Scholes and
Lattice option pricing models.
During 2007, warrants to purchase 0.6 million shares of common stock were exercised with cash and by
net exercise. The aggregate consideration for such exercises was equal to $3.2 million of which approximately $45,000 was in cash and the remainder was by way of net exercise as permitted by the terms of the warrants. As of
December 29, 2007, there were warrants to purchase 0.8 million shares of common stock outstanding with exercise prices ranging from $2.40 to $8.96 per share and a weighted average price of $5.19 per share. These warrants expire between
2010 and 2013.
100
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
10. Common Stock
In December 2000, the Company adopted the 2000 Stock Plan (2000 Plan). Under the 2000 Plan, as amended, the Company has reserved an aggregate of 15.8 million shares of its common stock for issuance. As of
December 29, 2007, options to purchase 7.3 million shares of the Companys common stock were outstanding. The Companys Board of Directors has decided not to grant any additional options or other awards under the plan following
the IPO. However, the plan will continue to govern the terms and conditions of the outstanding awards previously granted under the plan.
In February 2007, the Companys Board of Directors adopted the 2007 Equity Incentive Plan (2007 Plan) and the Companys stockholders approved the plan in May 2007. The 2007 Plan provides for the grant of incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, to the Companys employees and any parent and subsidiary corporations employees, and for the grant of non-statutory stock options, restricted stock,
restricted stock units, stock appreciation rights, performance units and performance shares to employees, directors and consultants and the Companys parent and subsidiary corporations employees and consultants.
The Company reserved a total of 13.6 million shares of common stock for issuance pursuant to the 2007 Plan. In addition, the 2007 Plan provides for
annual increases in the number of shares available for issuance thereunder on the first day of each fiscal year, beginning with the Companys 2008 fiscal year, equal to the least of:
|
|
|
5% of the outstanding shares of the Companys common stock on the last day of the immediately preceding fiscal year;
|
|
|
|
such other amount as the Board of Directors, or an authorized committee thereof, may determine.
|
Additionally, in February 2007, the Companys Board of Directors established, and in May 2007, its stockholders approved the Companys ESPP.
The ESPP has a twenty-year term and originally authorized the issuance of approximately 1.8 million shares of common stock. The ESPP provides for annual increases in the number of shares available for issuance thereunder on the first day of
each fiscal year, beginning with the Companys 2008 fiscal year, equal to the least of:
|
|
|
1% of the outstanding shares of the Companys common stock on the first day of the fiscal year;
|
|
|
|
such other amount as the Companys Board of Directors, or an authorized committee thereof may determine.
|
Under the ESPP, eligible employees may enroll in the ESPP during certain open enrollment periods for participation during an offering period. New
offering periods begin February 15 and August 15 of each year and typically last for a six month period, except for the first offering period which began on June 7, 2007 and will end on the first trading day on or after
February 15, 2008. During each offering period, participating employees payroll deductions are accumulated and used to purchase shares of common stock; and the purchase price of the shares is 85% of the fair market value of the
Companys common stock on the first day of the offering period or on the exercise date (i.e., the last day of an offering period), whichever is lower. A participant may purchase a maximum of 3,000 shares of common stock during an offering
period and may not accumulate contributions to the ESPP in excess of $25,000 worth of the Companys stock for each calendar year.
The
ESPP is intended to qualify under Section 423 of the Internal Revenue Code. The Black-Scholes option pricing model is used to estimate the fair value of rights to acquire stock granted under the ESPP.
101
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the Companys stock award activity and related information for
2005, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Available for
Grant (1)
|
|
|
Awards and
Options
Outstanding
|
|
|
Weighted-
Average Exercise
Price Per Share
|
|
Aggregate
Intrinsic
Value (2)
|
|
|
(In thousands, except per share amounts)
|
Balance at December 31, 2004
|
|
730
|
|
|
5,190
|
|
|
$
|
1.47
|
|
|
|
Additional options authorized
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
(2,767
|
)
|
|
2,767
|
|
|
$
|
1.16
|
|
|
|
Exercised
|
|
|
|
|
(1,162
|
)
|
|
$
|
0.86
|
|
|
|
Canceled
|
|
99
|
|
|
(99
|
)
|
|
$
|
1.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
562
|
|
|
6,696
|
|
|
$
|
1.44
|
|
|
|
Additional options authorized
|
|
5,750
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
(4,670
|
)
|
|
4,670
|
|
|
$
|
1.96
|
|
|
|
Exercised
|
|
|
|
|
(3,066
|
)
|
|
$
|
1.43
|
|
$
|
759
|
Canceled
|
|
428
|
|
|
(428
|
)
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
2,070
|
|
|
7,872
|
|
|
$
|
1.77
|
|
$
|
1,927
|
Additional options and RSUs authorized
|
|
13,600
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
(5,148
|
)
|
|
5,148
|
|
|
$
|
11.88
|
|
|
|
RSUs granted
|
|
(630
|
)
|
|
630
|
|
|
$
|
|
|
|
|
Options exercised
|
|
|
|
|
(1,602
|
)
|
|
$
|
2.19
|
|
$
|
17,605
|
RSUs canceled
|
|
14
|
|
|
(14
|
)
|
|
$
|
|
|
|
|
Options canceled
|
|
292
|
|
|
(292
|
)
|
|
$
|
4.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007
|
|
10,198
|
|
|
11,742
|
(3)
|
|
$
|
5.98
|
|
$
|
97,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Shares available for grant under the 2000 Plan and 2007 Plan, as applicable. The Company does not intend to grant any additional options or other awards under the 2000 Plan.
|
(2)
|
The aggregate intrinsic value of unexercised options and unvested RSUs is calculated as the difference between the exercise price of the underlying equity awards and the closing
price of the Companys common stock at year end. The aggregate intrinsic value of options which have been exercised is calculated as the difference between the fair market value of the common stock at the date of exercise and the exercise price
of the underlying stock option awards.
|
(3)
|
Balance includes 616,417 shares of RSUs granted, net of cancellations and non-vested, as of December 29, 2007. Balance includes 11,125,488 shares subject to options, net of
cancellations, at December 29, 2007 at a weighted average price of $6.31 per share.
|
Options outstanding that have
vested and are expected to vest as of December 29, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
Weighted-
Average Exercise
Price Per Share
|
|
Weighted-
Average remaining
contractual term
|
|
Aggregate
Intrinsic
Value (1)
|
|
|
(In thousands)
|
|
|
|
(In years)
|
|
(In thousands)
|
Vested
|
|
3,658
|
|
$
|
3.04
|
|
7.46
|
|
$
|
40,341
|
Expected to vest (2)
|
|
7,227
|
|
|
7.91
|
|
8.97
|
|
|
47,348
|
|
|
|
|
|
|
|
|
|
|
|
Total vested and expected to vest
|
|
10,885
|
|
$
|
6.31
|
|
8.47
|
|
$
|
87,689
|
|
|
|
|
|
|
|
|
|
|
|
Not expected to vest
|
|
240
|
|
|
|
|
|
|
|
|
|
|
11,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These amounts represent the difference between the exercise price and the Companys closing stock price as of December 29, 2007.
|
(2)
|
Options outstanding that are expected to vest are net of estimated future option forfeitures in accordance with the provisions of SFAS No. 123(R).
|
102
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes information about options outstanding at December 29, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Vested and Exercisable Options (1)
|
Exercise Price
|
|
Number of
Shares
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Weighted-
Average
Exercise
Price
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
(In thousands)
|
|
(In Years)
|
|
|
|
(In thousands)
|
|
|
$0.76 - $1.84
|
|
2,351
|
|
6.73
|
|
$
|
1.39
|
|
1,615
|
|
$
|
1.48
|
$2.00 - $4.04
|
|
4,666
|
|
8.49
|
|
$
|
2.35
|
|
1,662
|
|
$
|
2.26
|
$7.68 - $19.14
|
|
3,725
|
|
9.42
|
|
$
|
12.79
|
|
375
|
|
$
|
12.86
|
$20.30 - $23.86
|
|
383
|
|
9.76
|
|
$
|
21.63
|
|
6
|
|
$
|
20.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,125
|
|
8.47
|
|
$
|
6.31
|
|
3,658
|
|
$
|
3.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All options under the 2000 Plan may be exercised prior to vesting but are subject to repurchase at the original issuance price in the event the optionees employment is
terminated prior to vesting in its entirety.
|
Information with respect to restricted stock units as of December 29, 2007
is as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands, Except Per Share Amounts)
|
|
Number
of
Shares
|
|
|
Weighted
Average
Grant- Date
Fair Value
|
|
Aggregate
Fair
Value (1)
|
Outstanding at December 31, 2006
|
|
|
|
|
$
|
|
|
|
|
Granted
|
|
630
|
|
|
$
|
20.07
|
|
|
|
Vested
|
|
|
|
|
$
|
|
|
$
|
|
Canceled
|
|
(14
|
)
|
|
$
|
19.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2007
|
|
616
|
|
|
$
|
20.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the value of Infinera stock on the date that the restricted stock units vest.
|
11. Shares Reserved for Future Issuances
Common stock reserved for future issuance was
as follows (in thousands):
|
|
|
|
|
|
December 29,
2007
|
|
|
|
(In thousands)
|
|
Outstanding stock options and awards
|
|
11,742
|
|
Reserved for future grants
|
|
10,198
|
(1)
|
|
|
|
|
Total common stock reserved for stock options
|
|
21,940
|
|
Warrants to purchase common stock
|
|
768
|
|
|
|
|
|
Total common stock reserved for future issuances
|
|
22,708
|
|
|
|
|
|
(1)
|
Shares available for grant under the 2000 Plan and 2007 Plan, as applicable. The Company does not intend to grant any additional options or other awards from the remaining
1.1 million shares available under the 2000 Plan.
|
103
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. Income Taxes
The following is a geographic breakdown of the current provision for income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 29,
2007
|
|
Years Ended
December 31,
|
|
|
|
2006
|
|
2005
|
Domestic
|
|
$
|
3
|
|
$
|
5
|
|
$
|
7
|
Foreign
|
|
|
265
|
|
|
67
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
268
|
|
$
|
72
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
Total worldwide pretax loss is comprised of a U.S. loss of $56.6 million and foreign income of
$1.5 million.
The provisions for income taxes differ from the amount computed by applying the statutory federal income tax rates as
follows, for the years ended December 29, 2007, December 31, 2006 and December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
|
December 31,
2006
|
|
|
December 31,
2005
|
|
(Benefit)/Provision at federal statutory rate
|
|
-35.00
|
%
|
|
-35.00
|
%
|
|
-35.00
|
%
|
State, net of federal benefit
|
|
-4.66
|
%
|
|
-5.01
|
%
|
|
-5.45
|
%
|
Creditscurrent year
|
|
-2.84
|
%
|
|
-0.10
|
%
|
|
-1.27
|
%
|
Warrant interest
|
|
12.56
|
%
|
|
1.06
|
%
|
|
0.00
|
%
|
Stock-based compensation
|
|
5.87
|
%
|
|
0.39
|
%
|
|
0.03
|
%
|
Foreign tax rate differential
|
|
-0.50
|
%
|
|
-0.27
|
%
|
|
-0.15
|
%
|
Other
|
|
|
|
|
0.67
|
%
|
|
0.16
|
%
|
Change in valuation allowance
|
|
24.39
|
%
|
|
38.85
|
%
|
|
41.76
|
%
|
|
|
|
|
|
|
|
|
|
|
(Benefit)/Provision for income taxes
|
|
0.49
|
%
|
|
0.08
|
%
|
|
0.02
|
%
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
|
December 31,
2006
|
|
|
December 31,
2006
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
95,761
|
|
|
$
|
82,550
|
|
|
$
|
61,755
|
|
Research credits
|
|
|
10,599
|
|
|
|
8,070
|
|
|
|
7,901
|
|
Nondeductible
|
|
|
12,332
|
|
|
|
8,321
|
|
|
|
4,205
|
|
Capitalized software
|
|
|
2,265
|
|
|
|
1,979
|
|
|
|
564
|
|
Intangibles
|
|
|
24,082
|
|
|
|
27,635
|
|
|
|
19,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
145,039
|
|
|
|
128,555
|
|
|
|
94,196
|
|
Valuation allowance
|
|
|
(145,039
|
)
|
|
|
(128,555
|
)
|
|
|
(94,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since inception, the Company has incurred net operating losses and, accordingly, has not recorded
a U.S. Federal or State provision for income taxes for any periods presented. As of December 29, 2007, the Company had net operating loss carry-forwards available to offset future taxable income for federal income tax purposes of
104
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
approximately $239.4 million, which expire beginning in the year 2021 if not utilized. As of December 29, 2007, the Company also has state net operating
loss carry-forwards of approximately $225.3 million, which expire beginning in the year 2013 if not utilized. The Company has federal and California research and development credits available to reduce future tax expense of approximately $7.3
million and $5.0 million, respectively. The federal research credits will begin to expire in the year 2021 if not utilized, while the California research credits have no expiration date. The amount of net operating loss carry-forwards related to
excess stock option deductions is approximately $13.5 million for which a full valuation allowance has been recorded on the related gross deferred tax assets. When the excess stock option deductions are utilized in the form of a net operating loss
deduction, these amounts will result in a credit to shareholders equity.
As of December 29, 2007, the Company recorded a full
valuation allowance against its net deferred tax assets due to operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the
net deferred tax assets were fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carry-forwards will expire between 2013 and 2026. Utilization of these net operating losses and credit
carry-forwards may be subject to an annual limitation due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable if the Company experiences an ownership change that may occur, for example, by a change in
significant shareholder allocation or equity structure. In 2007, the Company performed an analysis of the potential changes in ownership and determined that changes in ownership have occurred that would limit tax attribute carry-forwards. However,
based on the work performed, the Company believes the limitations are not significant enough to impact future utilization of tax attributes.
In determining future taxable income, the Company makes assumptions to forecast federal, state and international operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning
strategies. The assumptions require significant judgment regarding the forecasts of future taxable income, and are consistent with the Companys forecasts used to manage its business. The Company intends to maintain the remaining valuation
allowance until sufficient further positive evidence exists to support a reversal of, or decrease, in the valuation allowance.
The Company
adopted FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), at the beginning of 2007. At the adoption date of January 1, 2007, the cumulative unrecognized tax benefit was $6.4 million which was netted
against deferred tax assets with a full valuation allowance or other fully reserved amounts, and if recognized there would be no effect on the Companys effective tax rate. Upon adoption of FIN 48, the Company recognized an adjustment in the
liability for unrecognized income tax benefits of approximately $36,000.
At December 29, 2007, the cumulative unrecognized tax
benefit was $6.7 million that was substantially netted against deferred tax assets with a full valuation allowance. Included in the $6.7 million of cumulative unrecognized tax benefit, approximately $71,000 impacted the Companys effective tax
rate during 2007. At December 29, 2007, the Company had $107,000 of unrecognized tax benefits related to uncertain tax positions. There are no penalties or interest associated with these tax positions. Tax returns for all years after 2002 are
subject to future examination by the major taxing jurisdictions to which the Company is subject.
The Company is currently open to audit
under the statute of limitations by the Internal Revenue Service and the appropriate state income taxing authorities from 2000 to 2006 due to the net loss carryovers from those years.
For FIN 48 purposes, the Company recognizes interest and penalties related to uncertain tax positions as part of its provision for federal, state and
foreign income taxes.
105
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following is a roll-forward of the total gross unrecognized tax benefits liabilities for 2007 (in
thousands):
|
|
|
|
Balance as of January 1, 2007
|
|
$
|
6,400
|
Tax positions related to current year:
|
|
|
|
Additions
|
|
|
237
|
Reductions
|
|
|
|
Tax positions related to prior years:
|
|
|
|
Additions
|
|
|
112
|
Reductions
|
|
|
|
Settlements
|
|
|
|
Lapses in statutes of limitations
|
|
|
|
|
|
|
|
Balance as of December 29, 2007
|
|
$
|
6,749
|
|
|
|
|
Over the next twelve months, the Companys existing tax positions will continue to generate
an increase in liabilities for unrecognized tax benefits.
The Companys policy with respect to its undistributed foreign subsidiary
earnings is to consider those earnings to be indefinitely reinvested and, accordingly, no related provision for U.S. federal and state income taxes has been provided. Upon distribution of those earnings in the form of dividends or otherwise, the
Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes in the various foreign countries. At December 29, 2007 the undistributed earnings approximated $2.7 million.
13. Segment Information
SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information
, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Companys chief operating decision maker is
the Companys chief executive officer. The Companys chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating
resources and evaluating financial performance. The Company has one business activity, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level.
Accordingly, the Company is considered to be in a single reporting segment and operating unit structure.
Revenue by geographic region is
based on the shipping address of the customer. The following table sets forth revenue and long-lived assets by geographic region:
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 29,
2007
|
|
Years Ended
December 31,
|
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
North America
|
|
|
199,893
|
|
|
49,901
|
|
|
2,660
|
Europe, Middle East and Africa
|
|
|
43,368
|
|
|
7,565
|
|
|
776
|
Asia Pacific
|
|
|
2,591
|
|
|
770
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
245,852
|
|
$
|
58,236
|
|
$
|
4,127
|
|
|
|
|
|
|
|
|
|
|
106
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
December 31,
2006
|
|
|
(In thousands)
|
North America
|
|
$
|
36,270
|
|
$
|
26,030
|
Europe, Middle East and Africa
|
|
|
|
|
|
3
|
Asia Pacific
|
|
|
703
|
|
|
632
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
36,973
|
|
$
|
26,665
|
|
|
|
|
|
|
|
14. Employee Benefit Plan
In July 2001, the Companys Board of Directors approved the adoption of a savings plan under Section 401(k) of the Internal Revenue Code. Expenses related to the Companys 401(k) plan were immaterial
for 2007, 2006 and 2005.
15. Legal Matters
On April 11, 2007, the Company, Level 3 and Cheetah filed a joint motion with the court, agreeing to the following: (1) to stay all proceedings in the lawsuit pending a determination by the U.S. Patent and Trademark Office as to
whether it will reexamine U.S. Patent Nos. 6,795,605 and 7,142,347; and (2) if the U.S. Patent and Trademark Office decides to reexamine either U.S. Patent No. 6,795,605 or 7,142,347, to stay all proceedings in the lawsuit pending final
resolution of the reexamination(s) by the U.S. Patent and Trademark Office. On April 12, 2007, the court granted the motion staying all proceedings in the lawsuit. On June 26, 2007, the U.S. Patent and Trademark Office ordered
reexamination of U.S. Patent No. 6,795,605. On August 1, 2007, the U.S. Patent and Trademark Office ordered reexamination of U.S. Patent No. 7,142,347. As a result, all proceedings in this lawsuit are stayed until the final resolution
of these reexaminations. The Company believes the suit is without merit and intends to defend itself vigorously, but it is unable to predict the likelihood of an unfavorable outcome.
On March 14, 2007, the Company submitted requests to the U.S. Patent and Trademark Office for inter partes reexamination of U.S. Patent Nos.
6,795,605 and 7,142,347 asking the U.S. Patent and Trademark Office to reexamine the patents based on prior art in order to invalidate the patents or limit the scope of each patents claims. On March 21, 2007, the Company and Level 3 filed
a motion with the court to stay all proceedings in the lawsuit pending the reexamination of U.S. Patent Nos. 6,795,605 and 7,142,347.
On
January 30, 2007, Cheetah filed a third amended complaint adding additional assertions of infringement for the two patents in suit. On February 16, 2007, the Company and Level 3 filed responses to Cheetahs third amended complaint
denying all infringement claims, and the Company and Level 3 asserted counterclaims against Cheetah asserting that the claims of the patents are invalid and that the DTN System does not infringe the patents.
On May 9, 2006, the Company and Level 3 were sued by Cheetah Omni LLC (Cheetah) in the U.S. District Court for the Eastern District of Texas for
alleged infringement of patent No. 6,795,605, and a continuation thereof. On May 16, 2006, Cheetah filed an amended complaint, which requested an order to enjoin the sale of the Companys DTN System and to recover all damages caused
by the alleged willful infringement including any and all compensatory damages available by law, such as actual and punitive damages, attorneys fees, associated interest and Cheetahs costs incurred in the lawsuit. Cheetahs
complaint does not request a specific dollar amount for these compensatory damages. The Company is contractually obligated to indemnify Level 3 for
107
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
damages suffered by Level 3 to the extent its product is found to infringe, and it has assumed the defense of this matter. On July 20, 2006, the Company
and Level 3 filed an amended response denying all infringement claims under patent No. 6,795,605 and asserting that the claims of the patent are invalid and that the DTN System does not infringe the patent. On November 28, 2006, Cheetah
filed a second amended complaint and added patent No. 7,142,347 to the lawsuit. On December 18, 2006, the Company and Level 3 filed responses to Cheetahs second amended complaint denying all infringement claims under patent
No. 7,142,347 and the Company and Level 3 asserted counterclaims against Cheetah asserting that the claims are invalid and that the DTN System does not infringe the patents.
In addition to the matters described above, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of
business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material effect on its results of operations, financial position or cash flows.
16. Guarantees
Product Warranties
Upon delivery of products, the Company provides for the estimated cost to repair or replace products or the related components that
may be returned under the hardware warranty. In general, hardware warranty periods range from two to five years. Hardware product warranties provide the purchaser with protection in the event that the product does not perform to product
specifications. During the warranty period, the purchasers sole and exclusive remedy in the event of such defect or failure to perform is expressly limited to the correction of the defect or failure by repair, refurbishment or replacement, at
the Companys sole option and expense. The Company estimates the fair value of the Companys hardware warranty obligations based on the Companys historical experience of known product failure rates, use of materials to repair or
replace defective products, and service delivery costs incurred in correcting product failures. In addition, from time to time, specific hardware warranty accruals may be made if unforeseen technical problems arise with specific products. Management
periodically assesses the adequacy of the Companys recorded warranty liabilities and adjusts the amounts as necessary. Changes in product warranty liability in the 2007 and 2006 are summarized below.
|
|
|
|
|
|
|
|
|
|
|
December 29,
2007
|
|
|
December 31,
2006
|
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
|
$
|
2,717
|
|
|
$
|
1,692
|
|
Charges to operations
|
|
|
10,258
|
|
|
|
4,166
|
|
Utilization
|
|
|
(4,873
|
)
|
|
|
(2,090
|
)
|
Change in estimate
|
|
|
1,890
|
(1)
|
|
|
(1,051
|
)(2)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
9,992
|
|
|
$
|
2,717
|
|
|
|
|
|
|
|
|
|
|
(1)
|
This unfavorable change in estimate primarily represented higher than expected costs of replacing defective products due to reduced usage of lower cost repaired products in the
repair process.
|
(2)
|
This favorable change in estimate was primarily due to continued improvements in overall actual failure rates and the impact of these improvements on the Companys estimate of
expected future returns.
|
The Companys agreements with customers, as well as its reseller agreements, generally include
certain provisions for indemnifying customers and resellers and their affiliated parties against liabilities if the Companys products infringe a third partys intellectual property rights. To date, the Company has not incurred any
material costs as a result of such indemnification obligations and has not accrued any liabilities related to such obligations in the Companys consolidated financial statements.
108
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Letters of Credit
The Company had $2.7 million of standby letters of credit outstanding as of December 29, 2007. These consisted of $0.8 million related to property leases, $1.2 million related to a value added tax license for
Europe, $0.3 million related to customs clearing and $0.4 million related to a customer proposal guarantee. The Company had $3.2 million of stand-by letters of credit outstanding as of December 31, 2006, of which $1.0 million related to
property leases, $1.2 million related to a vendor credit line and $1.0 million related to a value added tax license for Europe.
17. Recent Accounting
Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS No. 141R),
Business
Combinations
and SFAS No. 160 (SFAS No. 160),
Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51.
SFAS 141R will change how business
acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. SFAS No. 141R and SFAS No. 160 are effective for the Company beginning in the first quarter of fiscal 2009. The adoption of SFAS No. 141(R) will change the
Companys accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2009 and the adoption of SFAS No. 160 will not impact the Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities
(SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the
fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of 2008, although earlier adoption is permitted. The Company is currently evaluating the impact that SFAS
No. 159 will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value
Measurements
(SFAS No. 157). The purpose of SFAS No. 157 is to define fair value, establish a framework for measuring fair value and enhance disclosures about fair value measurements. The measurement and disclosure requirements
are effective for the Company beginning in the first quarter of 2008. The Company is currently evaluating the impact that SFAS No. 157 will have on its consolidated financial statements.
109
INFINERA CORPORATION
FINANCIAL INFORMATION BY QUARTER (UNAUDITED)
The following table sets forth the Companys unaudited quarterly consolidated statements of operations data for each of the eight quarters ended
December 29, 2007. The data has been prepared on the same basis as the audited consolidated financial statements and related notes included in this report and you should read the following table in conjunction with such financial statements.
The table includes all necessary adjustments, consisting only of normal recurring adjustments that the Company considers necessary for a fair presentation of this data. The results of historical periods are not necessarily indicative of the results
of operations for a full year or any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
2006
|
|
|
2007
|
|
|
|
Mar. 31
|
|
|
Jun. 30
|
|
|
Sep. 30
|
|
|
Dec. 31
|
|
|
Mar. 31
|
|
|
Jun. 30
|
|
|
Sep. 29
|
|
|
Dec. 29
|
|
|
|
(In thousands, except per share data)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratable product and related support and services
|
|
$
|
2,653
|
|
|
$
|
4,054
|
|
|
$
|
6,118
|
|
|
$
|
40,153
|
|
|
$
|
45,947
|
|
|
$
|
54,411
|
|
|
$
|
62,130
|
|
|
$
|
75,257
|
|
Product
|
|
|
|
|
|
|
|
|
|
|
1,578
|
|
|
|
3,680
|
|
|
|
3,245
|
|
|
|
4,005
|
|
|
|
25
|
|
|
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,653
|
|
|
|
4,054
|
|
|
|
7,696
|
|
|
|
43,833
|
|
|
|
49,192
|
|
|
|
58,416
|
|
|
|
62,155
|
|
|
|
76,089
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of ratable product and related support and services
|
|
|
5,485
|
|
|
|
4,488
|
|
|
|
7,967
|
|
|
|
30,132
|
|
|
|
34,843
|
|
|
|
37,529
|
|
|
|
37,620
|
|
|
|
42,867
|
|
Lower of cost or market adjustment
|
|
|
4,325
|
|
|
|
3,657
|
|
|
|
4,172
|
|
|
|
9,539
|
|
|
|
1,067
|
|
|
|
2,219
|
|
|
|
3,184
|
|
|
|
5,843
|
|
Cost of product
|
|
|
|
|
|
|
|
|
|
|
311
|
|
|
|
1,349
|
|
|
|
1,363
|
|
|
|
2,488
|
|
|
|
18
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
9,810
|
|
|
|
8,145
|
|
|
|
12,450
|
|
|
|
41,020
|
|
|
|
37,273
|
|
|
|
42,236
|
|
|
|
40,822
|
|
|
|
48,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(7,157
|
)
|
|
|
(4,091
|
)
|
|
|
(4,754
|
)
|
|
|
2,813
|
|
|
|
11,919
|
|
|
|
16,180
|
|
|
|
21,333
|
|
|
|
27,157
|
|
Operating expenses
|
|
|
10,525
|
|
|
|
13,720
|
|
|
|
22,927
|
|
|
|
25,183
|
|
|
|
29,288
|
|
|
|
25,875
|
|
|
|
29,722
|
|
|
|
34,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,682
|
)
|
|
|
(17,811
|
)
|
|
|
(27,681
|
)
|
|
|
(22,370
|
)
|
|
|
(17,369
|
)
|
|
|
(9,695
|
)
|
|
|
(8,389
|
)
|
|
|
(7,643
|
)
|
Other income (expense), net
|
|
|
(496
|
)
|
|
|
(370
|
)
|
|
|
(892
|
)
|
|
|
(2,561
|
)
|
|
|
(2,415
|
)
|
|
|
(16,368
|
)
|
|
|
2,925
|
|
|
|
3,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(18,178
|
)
|
|
|
(18,181
|
)
|
|
|
(28,573
|
)
|
|
|
(24,931
|
)
|
|
|
(19,784
|
)
|
|
|
(26,063
|
)
|
|
|
(5,464
|
)
|
|
|
(3,763
|
)
|
Provision for income taxes
|
|
|
15
|
|
|
|
15
|
|
|
|
23
|
|
|
|
19
|
|
|
|
29
|
|
|
|
33
|
|
|
|
62
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(18,193
|
)
|
|
|
(18,196
|
)
|
|
|
(28,596
|
)
|
|
|
(24,950
|
)
|
|
|
(19,813
|
)
|
|
|
(26,096
|
)
|
|
|
(5,526
|
)
|
|
|
(3,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(3.63
|
)
|
|
$
|
(3.23
|
)
|
|
$
|
(4.42
|
)
|
|
$
|
(3.55
|
)
|
|
$
|
(2.62
|
)
|
|
$
|
(1.10
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys operating results may fluctuate due to a variety of factors, many of which are
outside of the Companys control. As a result, comparing the Companys operating results on a period-to-period basis may not be meaningful. You should not rely on the Companys past results as an indication of its future performance.
Revenue has increased sequentially in each of the quarters presented due to increases in the number of products sold to new and existing
customers and the shortening of the Companys ratable revenue recognition period to 1.3 years in the fourth quarter of 2006. In the fourth quarter of 2006, the Company amended several of its significant sales contracts to shorten its
contractual software warranty period. This shortening of the ratable revenue recognition period was responsible for $28.2 million of the $36.1 million increase in revenue and $20.0 million of the $28.6 million increase in cost of revenue from the
third quarter of 2006 to the fourth quarter of 2006. The remainder of the increase in revenue of $7.9 million and cost of revenue of $8.6 million reflects the impact of increased levels of invoiced shipments throughout 2006.
110
Upon the closing of the Companys IPO in June 2007, warrants to purchase shares of the
Companys convertible preferred stock became warrants to purchase shares of the Companys common stock and, as a result, are no longer subject to FSP 150-5. In 2007, (through the completion of the Companys IPO in June 2007), the
Company recorded $19.8 million of expense reflected in other income (expense), net to reflect the increase in fair value during the period.
In January 2007, the Company entered into an asset purchase agreement with Broadwing, a division of Level 3, pursuant to which the Company agreed to purchase various assets associated with the former supply of Broadwing products. In
2007, the Company had generated proceeds of $3.1 million from the sale of a portion of the assets held for sale and resulted in a gain of $2.7 million reflected in other income (expense), net.