Finisar Corporation
FINISAR CORP (Form: 10-Q, Received: 12/06/2012 15:07:18)
Table of Contents


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 28, 2012
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to

Commission file number 000-27999
 
Finisar Corporation
(Exact name of Registrant as specified in its charter)

Delaware
 
94-3038428  
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
1389 Moffett Park Drive
 
 
Sunnyvale, California
 
94089
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code:
408-548-1000

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   x   No   o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company  o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o   No   x

     At November 30, 2012, there were 92,849,837 shares of the registrant's common stock, $.001 par value, issued and outstanding.



Table of Contents


INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended October 28, 2012
 
 
 
Page
 
 
Condensed Consolidated Balance Sheets as of  October 28, 2012 and April 30, 2012
Condensed Consolidated Statements of Operations for the three and six month periods ended October 28, 2012 and October 30, 2011
Condensed Consolidated Statements of Cash Flows for the  six month periods ended October 28, 2012 and October 30, 2011
 
 
 
 
 
 




2

Table of Contents

FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use words like “anticipates,” “believes,” “plans,” “expects,” “future,” “intends” and similar expressions to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events; however, our business and operations are subject to a variety of risks and uncertainties, and, consequently, actual results may materially differ from those projected by any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements since they may not occur.
Certain factors that could cause actual results to differ from those projected are discussed in “Part II. Other Information, Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.


3

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
October 28, 2012
 
April 30, 2012
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
262,432

 
$
234,544

Accounts receivable, net of allowance for doubtful accounts of $1,220 at October 28, 2012 and $1,311 at April 30, 2012
155,949

 
167,760

Accounts receivable, other
15,240

 
21,004

Inventories
203,554

 
218,432

Prepaid expenses and other
25,183

 
25,482

Total current assets
662,358

 
667,222

Property, equipment and improvements, net
173,284

 
163,817

Purchased intangible assets, net
53,300

 
45,177

Goodwill
91,098

 
81,431

Minority investments
884

 
884

Other assets
7,263

 
10,896

Total assets
$
988,187

 
$
969,427

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
72,844

 
$
72,339

Accrued compensation
27,901

 
27,090

Other accrued liabilities
22,774

 
20,871

Deferred revenue
7,868

 
8,970

Short-term debt

 
3,150

Total current liabilities
131,387

 
132,420

Long-term liabilities:
 
 
 
Convertible debt
40,015

 
40,015

Other non-current liabilities
21,171

 
15,175

Deferred tax liabilities
2,459

 
1,972

Total liabilities
195,032

 
189,582

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at October 28, 2012 and April 30, 2012

 

Common stock, $0.001 par value, 750,000,000 shares authorized, 92,846,766 shares issued and outstanding at October 28, 2012 and 91,451,615 shares issued and outstanding at April 30, 2012
93

 
91

Additional paid-in capital
2,330,683

 
2,309,219

Accumulated other comprehensive income
26,346

 
28,720

Accumulated deficit
(1,572,432
)
 
(1,566,506
)
Finisar Corporation stockholders' equity
784,690

 
771,524

Non-controlling interest
8,465

 
8,321

Total stockholders' equity
793,155

 
779,845

Total liabilities and stockholders' equity
$
988,187

 
$
969,427


See accompanying notes.

4

Table of Contents

FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
 
Three Months Ended
 
Six Months Ended
 
 
October 28,
2012
 
October 30,
2011
 
October 28,
2012
 
October 30,
2011
 
 
 
 
 
 
 
 
 
Revenues
 
$
232,041

 
$
241,489

 
$
452,567

 
$
469,715

Cost of revenues
 
166,167

 
169,571

 
327,624

 
329,794

Amortization of acquired developed technology
 
2,000

 
1,637

 
3,272

 
3,159

Gross profit
 
63,874

 
70,281

 
121,671

 
136,762

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
39,620

 
36,707

 
77,789

 
72,103

Sales and marketing
 
10,219

 
10,125

 
20,893

 
19,711

General and administrative
 
12,919

 
13,773

 
26,261

 
27,725

Restructuring recoveries
 

 

 

 
(322
)
Amortization of purchased intangibles
 
1,062

 
859

 
1,871

 
1,638

Total operating expenses
 
63,820

 
61,464

 
126,814

 
120,855

Income (loss) from operations
 
54

 
8,817

 
(5,143
)
 
15,907

Interest income
 
162

 
100

 
358

 
260

Interest expense
 
(750
)
 
(1,138
)
 
(1,397
)
 
(2,049
)
Loss on debt extinguishment
 

 

 

 
(419
)
Other income (expense), net
 
(101
)
 
(140
)
 
(20
)
 
4,523

Income (loss) before income taxes and non-controlling interest
 
(635
)
 
7,639

 
(6,202
)
 
18,222

Provision (benefit) for income taxes
 
(1,062
)
 
1,369

 
(420
)
 
1,917

Consolidated net income (loss)
 
427

 
6,270

 
(5,782
)
 
16,305

Adjust for net income attributable to non-controlling interest
 
(156
)
 
(343
)
 
(144
)
 
(236
)
Net income (loss) attributable to Finisar Corporation
 
$
271

 
$
5,927

 
$
(5,926
)
 
$
16,069

Net income (loss) per share attributable to Finisar Corporation common stockholders:
 
 
 
 
 
 
 
 
Basic
 
$

 
$
0.07

 
$
(0.06
)
 
$
0.18

Diluted
 
$

 
$
0.06

 
$
(0.06
)
 
$
0.17

 
 
 
 
 
 
 
 
 
Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
92,780

 
90,715

 
92,386

 
90,470

Diluted
 
94,734

 
93,599

 
92,386

 
93,712


See accompanying notes.

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Table of Contents

FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)


 
 
Three Months Ended
 
Six Months Ended
 
 
October 28,
2012
 
October 30,
2011
 
October 28,
2012
 
October 30,
2011
Consolidated net income (loss)
 
$
427

 
$
6,270

 
$
(5,782
)
 
$
16,305

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in net foreign currency translation adjustment
 
3,990

 
(4,081
)
 
(2,374
)
 
(3,643
)
Total other comprehensive income (loss), net of tax
 
3,990

 
(4,081
)
 
(2,374
)
 
(3,643
)
Total comprehensive income (loss)
 
$
4,417

 
$
2,189

 
$
(8,156
)
 
$
12,662

Adjust for comprehensive income attributable to non-controlling interest, net of tax
 
(156
)
 
(343
)
 
(144
)
 
(236
)
Comprehensive income (loss) attributable to Finisar Corporation
 
$
4,261

 
$
1,846

 
$
(8,300
)

$
12,426


See accompanying notes.


6

Table of Contents

FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six Months Ended
 
October 28, 2012
 
October 30, 2011
Operating activities
 
 
 
Consolidated net income (loss)
$
(5,782
)
 
$
16,305

Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities:

 

Depreciation
25,819

 
21,590

Amortization
5,616

 
5,211

Stock-based compensation expense
18,204

 
13,764

(Gain) Loss on sale or retirement of assets
(4
)
 
220

Equity in losses of equity method investment

 
619

Gain on fair value measurement of minority equity-based investment

 
(5,429
)
Loss on debt extinguishment

 
419

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
15,114

 
3,159

Inventories
17,110

 
(16,617
)
Other assets
284

 
(21,840
)
Deferred income taxes
(536
)
 
542

Accounts payable
(2,265
)
 
6,705

Accrued compensation
(882
)
 
458

Other accrued liabilities
408

 
2,665

Deferred revenue
(2,088
)
 
(1,001
)
Net cash provided by operating activities
70,998

 
26,770

Investing activities
 
 
 
Additions to property, equipment and improvements
(33,331
)
 
(33,464
)
Sale of minority investment
10,495

 

Proceeds from sale of property and equipment
194

 
32

Acquisitions, net of cash acquired
(20,580
)
 
(71,125
)
Net cash used in investing activities
(43,222
)
 
(104,557
)
Financing activities
 
 
 
Proceeds from term loan

 
1,800

Repayments of debt
(3,150
)
 
(14,445
)
Proceeds from the issuance of shares under equity plans and employee stock purchase plan, net of tax withholdings
3,262

 
3,707

Net cash provided by (used in) financing activities
112

 
(8,938
)
Net increase (decrease) in cash and cash equivalents
27,888

 
(86,725
)
Cash and cash equivalents at beginning of period
234,544

 
314,765

Cash and cash equivalents at end of period
$
262,432

 
$
228,040

Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
1,011

 
$
1,408

Cash paid for taxes
1,315

 
5,015



See accompanying notes.

7

Table of Contents

FINISAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements as of October 28, 2012 and for the three and six month periods ended October 28, 2012 and October 30, 2011 have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and include the accounts of Finisar Corporation and its controlled subsidiaries (collectively, “Finisar” or the “Company”). Non-controlling interest represents the minority shareholders' proportionate share of the net assets and results of operations of the Company's majority-owned subsidiary. Intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position as of October 28, 2012 , its operating results for the three and six month periods ended October 28, 2012 and October 30, 2011 , and its cash flows for the six month periods ended October 28, 2012 and October 30, 2011 . Operating results for the three and six month periods ended October 28, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2013 . The condensed consolidated balance sheet as of April 30, 2012 has been derived from the audited consolidated financial statements as of that date but does not include all the footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2012 .

Fiscal Periods

     The Company maintains its financial records on the basis of a fiscal year ending on April 30, with fiscal quarters ending on the Sunday closest to the end of the period (thirteen-week periods).

Use of Estimates

     The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

2. Summary of Significant Accounting Policies

     For a description of significant accounting policies, see Note 2, Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's annual report on Form 10-K for the fiscal year ended April 30, 2012 . There have been no material changes to the Company's significant accounting policies since the filing of the annual report on Form 10-K, except as noted below.

Recent Adoption of New Accounting Standards

     In May 2011, the Financial Accounting Standards Board ("FASB") issued guidance under which an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this guidance did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments should be applied retrospectively. The Company adopted this guidance during the first quarter of fiscal 2013. Adoption of this guidance did not have an impact on the Company's consolidated financial statements.


8


  Pending Adoption of New Accounting Standards

In October 2012, the FASB issued amendments to clarify its authoritative guidance, the FASB Accounting Standards Codification (the "Codification"), correct the unintended application of guidance, and make minor improvements to the Codification. The amendments that are not subject to transition guidance are effective upon issuance and the amendments that are subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of the amendments did not have and are not anticipated to have any impact on the Company's consolidated financial statements and disclosures.

From time to time, new accounting pronouncements are issued by FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.

3. Acquisitions

Acquisition of Red-C Optical Networks, Inc.

On July 16, 2012, the Company acquired all outstanding equity interests in Red-C Optical Networks, Inc., ("Red-C"), a Delaware corporation, with subsidiary operations in Tel Aviv, Israel, engaged in research, development and marketing of optical amplifiers and sub-systems for the wavelength division multiplexing, or WDM, optical communication sector. The results of Red-C's operations have been included in the consolidated financial statements since that date. The acquisition will allow the Company to broaden its product lines primarily for telecom applications by adding key amplification technologies, including erbium doped fiber amplification, or EDFA, Raman amplification and dynamic hybrid amplification. These technologies are considered critical for reconfigurable optical add-drop multiplexer, or ROADM, line cards and are increasingly important in cost-effectively extending the reach of transceivers and transponders especially for 100 Gbps and 40 Gbps coherent transmission, ultra-long repeaterless links, and low latency networks.

The provisional acquisition-date fair value of the consideration transferred totaled $30.6 million , consisting of a $23.7 million upfront cash payment and $6.9 million of contingent consideration. The contingent consideration arrangement requires the Company to pay up to $15 million , payable in cash or shares of the Company's common stock at the Company's option, subject to Red-C achieving a specified level of gross profit during calendar year 2013. The provisional acquisition-date fair value of the contingent consideration arrangement was $6.9 million , which the Company estimated using a probability-weighted discounted cash flow model. The fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The key assumptions in applying the income approach were as follows: 5% discount rate and 100% probability of achieving an expected level of gross profit. In addition, the Company may be required to pay certain former Red-C shareholders additional cash compensation of up to an aggregate of $5 million contingent upon their continuing employment with the Company for 12-, 24- and 36-month periods subsequent to the acquisition date. Such amounts, as deemed probable of payment, are being recorded as compensation expense and recognized ratably over the related respective service periods.


9


The following table summarizes the provisional estimated acquisition-date fair values of the assets acquired and liabilities assumed (in thousands):
Cash and cash equivalents
$
3,120

Accounts receivable
3,303

Inventory
5,571

Other current assets
751

Property, equipment and improvements
1,229

Intangible assets
13,360

Other assets
662

Total identifiable assets acquired
27,996

 
 
Current liabilities
(6,089
)
Deferred tax liabilities
(1,023
)
Total liabilities assumed
(7,112
)
Net identifiable assets acquired
20,884

Goodwill
9,667

Net assets acquired
$
30,551


The Company is in the process of obtaining third-party valuation of acquired intangible assets; thus, provisional measurements of intangible assets, goodwill and deferred taxes are subject to change.

The $13.4 million of acquired intangibles are subject to a weighted-average useful life of approximately 4 years. The definite-lived intangible assets include developed technology of $10.3 million ( 4 -year weighted average useful life), customer relationships of $1.8 million ( 7 -year weighted average useful life), internal use software of $1.0 million ( 5 -year weighted average useful life), and order backlog of $240,000 ( 1 -year useful life). As noted above, the fair value of the acquired identifiable intangible assets is provisional pending receipt of final valuation of these assets.

The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Red-C. None of the goodwill is expected to be deductible for income tax purposes.

The acquisition-date fair value of acquired accounts receivable was the same as their contractual amount.

The Company recognized $420,000 of acquisition related costs that were expensed in the six months ended October 28, 2012 . These costs are included in general and administrative operating expenses in the consolidated statement of operations.

Unaudited pro forma and other supplemental financial statement disclosures otherwise required by ASC 805 for material business combinations have not been presented herein because management does not believe the acquisition of Red-C is significant to the Company's consolidated financial statements.

Acquisition of Ignis ASA

During the first quarter of fiscal 2012, the Company completed the acquisition of Ignis ASA ("Ignis"), a provider of optical components and network solutions for fiber optic communications. Ignis' product and services portfolio comprises passive optical components including optical chips, splitters and multiplexers, active optical components such as tunable lasers and modulators, and WDM-based solutions enabling the building of simple and cost effective high-capacity optical networks. For additional information regarding this acquisition, see Note 5, Acquisition of Ignis ASA, to the consolidated financial statements included in the Company's annual report on Form 10-K for the fiscal year ended April 30, 2012.

Historically, Ignis and its subsidiaries have maintained their financial records on the basis of a fiscal year ending on December 31, with fiscal quarters ending on March 31, June 30 and September 30, which are changing to conform to the Company's basis of a fiscal year ending on April 30, with fiscal quarters ending on the Sunday closest to the end of the three-month period. The financial records of Ignis and its subsidiaries are being integrated with the Company's consolidated financial reporting system. This change did not have material impact on the Company's consolidated financial statements during the six months ended October 28, 2012 .

10



For the six months ended October 28, 2012 , the results of operations of Ignis' subsidiaries that are not yet integrated in the Company's consolidated financial reporting system have been included in the consolidated financial statements through September 30, 2012. There were no intervening events in the operating results of such Ignis' subsidiaries for the month ended October 28, 2012 that materially affected the Company's consolidated financial position or results of operations.

4. Net Income (Loss) per Share

     Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from options, restricted stock units and warrants (under the treasury stock method) and convertible notes (on an as-if-converted basis) outstanding during the period.
     
The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
 
 
Three Months Ended
 
Six Months Ended
 
 
October 28,
2012
 
October 30,
2011
 
October 28,
2012
 
October 30,
2011
Numerator:
 
 
 
 
 
 
 
 
Net income (loss) attributable to Finisar Corporation
 
$
271

 
$
5,927

 
$
(5,926
)
 
$
16,069

Numerator for basic and diluted net income (loss) per share
 
$
271

 
$
5,927

 
$
(5,926
)
 
$
16,069

Denominator:
 
 
 
 
 
 
 
 
Denominator for basic net income (loss) per share - weighted average shares
 
92,780


90,715


92,386


90,470

Effect of dilutive securities:
 

 
 
 
 
 
 
Employee stock options and restricted stock units
 
1,919

 
2,848

 

 
3,206

Warrants
 
35

 
36

 

 
36

Dilutive potential common shares
 
1,954

 
2,884

 

 
3,242

Denominator for diluted net income (loss) per share
 
94,734

 
93,599

 
92,386

 
93,712

Net income (loss) per share attributable to Finisar Corporation common stockholders:
 
 
 
 
 
 
 
 
Basic
 
$

 
$
0.07

 
$
(0.06
)
 
$
0.18

Diluted
 
$

 
$
0.06

 
$
(0.06
)
 
$
0.17

     
     
The following table presents potentially dilutive securities excluded from the calculation of diluted net income per share because their effect would have been anti-dilutive (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
October 28,
2012
 
October 30,
2011
 
October 28,
2012
 
October 30,
2011
Common shares issuable upon:
 
 
 
 
 
 
 
 
Exercise of employee stock options and restricted stock units
 
2,083

 
1,263

 
4,449

 
1,273

Conversion of convertible subordinated notes
 
3,748

 
3,748

 
3,748

 
3,748

Exercise of warrants
 

 

 
35

 

 
 
5,831

 
5,011

 
8,232

 
5,021



11


5. Inventories

     Inventories consist of the following (in thousands):
 
October 28,
2012
 
April 30,
2012
Raw materials
$
46,533

 
$
64,047

Work-in-process
99,139

 
92,173

Finished goods
57,882

 
62,212

Total inventories
$
203,554

 
$
218,432

     
During the three and six months ended October 28, 2012 , the Company recorded charges of $7.8 million and $17.3 million , respectively, for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $5.5 million and $10.1 million , respectively. This resulted in a net charge for excess and obsolete inventory of $2.3 million and $7.2 million , respectively, during the three and six months ended October 28, 2012 .

During the three and six months ended October 30, 2011 , the Company recorded charges of $5.7 million and $11.4 million , respectively for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $3.0 million and $7.0 million , respectively. This resulted in a net charge for excess and obsolete inventory of $2.7 million and $4.4 million , respectively, during the three and six months ended October 30, 2011 .

     The Company enters into agreements with subcontractors that allow them to procure inventory on behalf of the Company to fulfill subcontractor obligations. The Company records a liability for noncancelable purchase commitments with these subcontractors for quantities in excess of its future demand forecasts. As of October 28, 2012 and April 30, 2012 , the liability for these purchase commitments was $1.5 million and $2.0 million , respectively, and was recorded on the balance sheet as other accrued liabilities.

6. Property, Equipment and Improvements

     Property, equipment and improvements consist of the following (in thousands):
 
October 28,
2012
 
April 30,
2012
Land and buildings
$
14,585

 
$
10,600

Computer equipment
51,404

 
49,215

Office equipment, furniture and fixtures
5,248

 
4,833

Machinery and equipment
324,516

 
301,084

Leasehold property and improvements
31,594

 
30,809

Total
427,347

 
396,541

Accumulated depreciation and amortization
(254,063
)
 
(232,724
)
Property, equipment and improvements (net)
$
173,284

 
$
163,817


7. Intangible Assets Including Goodwill

The following table reflects intangible assets subject to amortization as of October 28, 2012 and April 30, 2012 (in thousands):
 
October 28, 2012
 
Gross Carrying
 
Accumulated
 
Net Carrying
 
Amount
 
Amortization
 
Amount
Purchased technology
$
102,884

 
$
(78,514
)
 
$
24,370

Purchased trade name
2,072

 
(1,259
)
 
813

Purchased customer relationships
34,774

 
(9,971
)
 
24,803

Purchased internal use software, backlog and in-process research and development
3,396

 
(1,407
)
 
1,989

Purchased patents
1,651

 
(326
)
 
1,325

Total
$
144,777

 
$
(91,477
)
 
$
53,300


12



 
April 30, 2012
 
Gross Carrying
 
Accumulated
 
Net Carrying
 
Amount
 
Amortization
 
Amount
Purchased technology
$
92,564

 
$
(75,242
)
 
$
17,322

Purchased trade name
2,072

 
(1,229
)
 
843

Purchased customer relationships
32,974

 
(8,407
)
 
24,567

Purchased internal use software, backlog and in-process research and development
2,156

 
(1,130
)
 
1,026

Purchased patents
1,651

 
(232
)
 
1,419

Total
$
131,417

 
$
(86,240
)
 
$
45,177


    The amortization expense on intangible assets for the three and six months ended October 28, 2012 was $3.1 million and $5.2 million , respectively. The amortization expense on intangible assets for the three and six months ended October 30, 2011 , was $2.5 million and $4.8 million , respectively.

Estimated remaining amortization expense for each of the next five fiscal years ending April 30, is as follows (in thousands):
Year
 
Amount
2013 (remainder of year)
 
$
5,786

2014
 
9,665

2015
 
8,728

2016
 
8,463

2017
 
6,816

2018 and beyond
 
13,842

Total
 
$
53,300


The following table reflects the changes to the carrying amount of goodwill (in thousands):
 
Total
Balance as of April 30, 2012
$
81,431

Addition related to acquisition of Red-C (Note 3)
16,563

Balance at July 29, 2012
$
97,994

Acquisition consideration allocation adjustment
(6,896
)
Balance at October 28, 2012
91,098



13


8. Investments

     The following table presents a summary of the Company's investments measured at fair value on a recurring basis as of October 28, 2012 (in thousands):
 
 
 
 
Significant
 
 
 
 
 
 
Quoted Prices
 
Other
 
 
 
 
 
 
in Active
 
Observable
 
Significant
 
 
 
 
Markets For
 
Remaining
 
Unobservable
 
 
Assets Measured at Fair Value on a Recurring Basis
 
Identical Assets
 
Inputs
 
Inputs
 
Total
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
Assets
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
157

 
$

 
$

 
$
157

Cash
 

 

 

 
262,275

Total cash and cash equivalents
 
 
 
 
 
 
 
$
262,432


     The following table presents a summary of the Company's investments measured at fair value on a recurring basis as of April 30, 2012 (in thousands):
 
 
 
 
Significant
 
 
 
 
 
 
Quoted Prices
 
Other
 
 
 
 
 
 
in Active
 
Observable
 
Significant
 
 
 
 
Markets For
 
Remaining
 
Unobservable
 
 
Assets Measured at Fair Value on a Recurring Basis
 
Identical Assets
 
Inputs
 
Inputs
 
Total
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
Assets
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
15,156

 
$

 
$

 
$
15,156

Cash
 

 

 

 
219,388

Total cash and cash equivalents
 
 
 
 
 
 
 
$
234,544

   
The gross realized gains and losses for the three and six months ended October 28, 2012 and October 30, 2011 were immaterial . Realized gains and losses are calculated using the specific identification method.

9. Minority Investments

     The carrying value of minority investments at both October 28, 2012 and April 30, 2012 was $884,000 and was comprised of the Company's minority investment in one privately held company accounted for under the cost method. The Company's investment in this company was primarily motivated by its desire to gain access to new technology. The Company's investments are passive in nature in that the Company generally does not obtain representation on the board of directors of the companies in which it invests.


14


10. Convertible Debt

     The Company's convertible debt balances as of October 28, 2012 and April 30, 2012 were as follows (in thousands):

 
 
Carrying
 
Interest
 
Due in
Description
 
Amount
 
Rate
 
Fiscal year
As of October 28, 2012
 
 
 
 
 
 
Convertible senior notes due October 2029
 
$
40,015

 
5.00
%
 
2030
 
 
 
 
 
 
 
Total
 
$
40,015

 
 

 
 
As of April 30, 2012
 
 
 
 
 
 
Convertible senior notes due October 2029
 
$
40,015

 
5.00
%
 
2030
 
 
 
 
 
 
 
Total
 
$
40,015

 
 
 
 

11. Debt

As a result of the acquisition of Ignis in fiscal 2012, the Company's consolidated liabilities included certain loan obligations of Ignis' Korean subsidiary, Fi-ra, to three Korean banks under which an acquisition-date aggregate principal balance of approximately $2.5 million was outstanding, with interest rates ranging from 4.5% to 6.7% per annum. In addition, during the first quarter of fiscal 2012, Fi-ra entered into a $1.8 million loan agreement with a Korean bank. Borrowings under this loan bore interest at variable rates based on the 4-month KORIBOR plus 0.33% . These loans required monthly interest payments with all principal payable at maturity. The remaining principal balance outstanding under these loans as of April 30, 2012 was $3.2 million . These loans were fully repaid in May 2012 and June 2012.

12. Revolving Credit Facility

     On October 2, 2009, the Company entered into an agreement with Wells Fargo Foothill, LLC to establish a four-year $70 million senior secured revolving credit facility. Borrowings under the credit facility bear interest at rates based on the prime rate and LIBOR plus variable margins, under which applicable interest rates currently range from 2.75% to 5.00% per annum. Borrowings are guaranteed by the Company's U.S. subsidiaries and secured by substantially all of the assets of the Company and its U.S. subsidiaries. The credit facility matures four years following the date of the agreement, subject to certain conditions. As of October 28, 2012 , the availability of credit under the facility was reduced by $3.4 million for outstanding letters of credit secured under the agreement. Borrowing availability as of October 28, 2012 was $66.6 million , and there were no borrowings outstanding against the facility as of that date.

The credit facility is subject to certain financial covenants. The Company was in compliance with all financial covenants associated with this facility as of October 28, 2012 .

On October 17, 2012, the Company gave notice of its voluntary early termination of this facility to be effective October 31, 2012.

13. Warranty

     The Company generally offers a one-year limited warranty for its products. The specific terms and conditions of these warranties vary depending upon the product sold. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability for the amount of such costs based at the time revenue is recognized. Factors that affect the Company's warranty liability include the historical and anticipated rates of warranty claims. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
     
     

15


Changes in the Company's warranty liability during the following period were as follows (in thousands):
 
Six Months Ended
 
October 28, 2012
Beginning balance at April 30, 2012
$
3,926

Additions during the period based on product sold
2,223

Additions during the period due to Red-C acquisition (Note 3)
166

Settlements and expirations
(1,340
)
Ending balance at October 28, 2012
$
4,975


14. Fair Value of Financial Instruments

     The following disclosure of the estimated fair value of financial instruments presents amounts that have been determined using available market information and appropriate valuation methodologies. The estimated fair values of the Company's financial instruments as of October 28, 2012 and April 30, 2012 were as follows (in thousands):

 
October 28, 2012
 
April 30, 2012
 
Carrying
 
 
 
 
 
Fair
 
Carrying
 
 
 
 
 
Fair
 
Amount
 
Level 1
Level 2
Level 3
 
Value
 
Amount
 
Level 1
Level 2
Level 3
 
Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
262,432

 
$
262,432

$

$

 
$
262,432

 
$
234,544

 
$
234,544

$

$

 
$
234,544

Total
$
262,432

 
$
262,432

$

$

 
$
262,432

 
$
234,544

 
$
234,544

$

$

 
$
234,544

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible debt
$
40,015

 
$
55,381

$

$

 
$
55,381

 
$
40,015

 
$
73,688

$

$

 
$
73,688

Debt

 



 

 
3,150

 
3,150



 
3,150

Contingent consideration
6,851

 


6,851

 
6,851

 

 


0

 
0

Total
$
46,866

 
$
55,381

$

$
6,851

 
$
62,232

 
$
43,165

 
$
76,838

$

$

 
$
76,838


Cash and cash equivalents - The fair value of cash and cash equivalents approximates its carrying value.

Convertible debt - The fair value of the 5% Convertible Notes is based on the market price in the open market as of or close to the respective dates. The difference between the carrying value and the fair value is primarily due to the spread between the conversion price and the market value of the shares underlying the conversion.

Debt - The fair value of the debt is determined by discounting the contractual cash flows at the current rates charged for similar debt instruments.

Contingent consideration - The fair value of the contingent consideration is estimated using a probability-weighted discounted cash flow model. (See "Note 3. Acquisitions").

     The Company has not estimated the fair value of its minority investment in one privately held company as it is not practicable to estimate the fair value of this investment because of the lack of a quoted market price and the inability to estimate fair value without incurring excessive costs. As of October 28, 2012 , the carrying value of the Company's minority investment in this privately held company was $884,000 , which management believes is not impaired.
     

16


The following table presents a reconciliation of the beginning and ending balances of the Company's liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended October 28, 2012 (in thousands), consisting of contingent consideration recorded in connection with the acquisition of Red-C:

 
 
Six Months Ended
 
 
October 28, 2012
Balance at April 30, 2012
 
$

Additions due to acquisition of Red-C (See Note 3)
 
6,851

Accretion
 
103

Balance at October 28, 2012
 
$
6,954


15. Stockholders' Equity

The following table summarizes share-based compensation expense related to employee stock options and employee stock purchases for the three and six months ended October 28, 2012 and October 30, 2011 which was reflected in the Company's operating results (in thousands):

 
 
Three Months Ended
 
Six Months Ended
 
 
October 28,
2012
 
October 30,
2011
 
October 28,
2012
 
October 30,
2011
Cost of revenues
 
$
1,747

 
$
1,569

 
$
3,066

 
$
3,280

Research and development
 
3,169

 
2,109

 
5,922

 
4,238

Sales and marketing
 
948

 
729

 
1,956

 
1,524

General and administrative
 
2,911

 
1,897

 
5,647

 
3,826

Total
 
$
8,775

 
$
6,304

 
$
16,591

 
$
12,868

  
The total share-based compensation capitalized as part of inventory as of October 28, 2012 was $1.8 million .

During the three months ended October 28, 2012 , no stock was issued under the Company's Employee Stock Purchase Plan and options to purchase 57,370 shares of common stock were exercised. During the six months ended October 28, 2012 , 339,304 shares of common stock were issued under the Company's Employee Stock Purchase Plan and options to purchase 112,544 shares of common stock were exercised under the Company's Stock Incentive Plan. The number of restricted stock units issued during the three and six months ended October 28, 2012 was 108,503 and 1,033,431 , respectively.

As of October 28, 2012 , total compensation expense, net of estimated forfeitures, related to unvested stock options and restricted stock units not yet recognized was approximately $69.6 million , which is expected to be recognized in the Company's operating results over a weighted average period of 30  months.

16. Income Taxes

      The Company recorded a benefit and a provision for income taxes of $1.1 million and $1.4 million , respectively, for the three months ended October 28, 2012 and October 30, 2011 , and a benefit and a provision for income taxes of $420,000 and $1.9 million , respectively for the six months ended October 28, 2012 and October 30, 2011 . The income tax benefits recognized in the three and six months ended October 28, 2012 were primarily a result of the valuation allowance release in one of the foreign jurisdictions in which the Company conducts business. The income tax provisions for the three and six months ended October 30, 2011 include state taxes and foreign income taxes arising in certain foreign jurisdictions in which the Company conducts business.

     The Company records a valuation allowance against its deferred tax assets for each period in which management concludes that it is more likely than not that the deferred tax assets will not be realized. Realization of the Company's net deferred tax assets is dependent upon future taxable income, the amount and timing of which are uncertain. Due to U.S. operating losses in previous years and continuing U.S. earnings volatility, management has established and maintained a full valuation allowance for the U.S. deferred tax assets, which comprise approximately 92% of total deferred tax assets as of October 28, 2012 , which management does not believe are more likely than not to be realized in future periods.


17


     Utilization of the Company's net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth by Internal Revenue Code Sections 382 and 383 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before full utilization.

     The Company's total gross unrecognized tax benefit as of April 30, 2012 and October 28, 2012 was $14.6 million . Excluding the effects of recorded valuation allowances for deferred tax assets, $12.2 million of the unrecognized tax benefits would favorably impact the effective tax rate in future periods if recognized.

     Due to the Company's taxable loss position in previous years, all tax years since inception are subject to examination in the U.S. federal and state jurisdictions. The Company is also subject to examinations in various foreign jurisdictions, none of which were individually material. It is the Company's belief that no significant changes in the unrecognized tax benefit positions will occur through April 30, 2013 .

     The Company records interest and penalties related to unrecognized tax benefits in income tax expense. At October 28, 2012 , there were no accrued interest or penalties related to uncertain tax positions.

17. Segment and Geographic Information

     The Company has one reportable segment consisting of optical subsystems and components.

The following is a summary of operations within geographic areas based on the location of the entity purchasing the Company's products (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
 
October 28,
2012
 
October 30,
2011
 
October 28,
2012
 
October 30,
2011
Revenues from sales to unaffiliated customers:
 
 
 
 
 
 
 
 
United States
 
$
61,202

 
$
56,830

 
$
123,227

 
$
114,780

Malaysia
 
42,171

 
45,217

 
94,758

 
98,399

China
 
43,946

 
48,656

 
83,796

 
93,659

Rest of the world
 
84,722

 
90,786

 
150,786

 
162,877

 
 
$
232,041

 
$
241,489

 
$
452,567

 
$
469,715

   
Revenues generated in the United States are all from sales to customers located in the United States.

Two customers each represented more than 10% of total revenues in the three months ended October 28, 2012 and October 30, 2011 . One customer and three customers each represented more than 10% of total revenues in the six months ended October 28, 2012 and October 30, 2011 , respectively.

The following is a summary of long-lived assets within geographic areas based on the location of the assets (in thousands):
 
 
October 28,
2012
 
April 30,
2012
Long-lived assets:
 
 
 
United States
$
98,477

 
$
92,635

Malaysia
36,954

 
38,668

China
68,525

 
57,664

Rest of the world
30,775

 
31,807

 
$
234,731

 
$
220,774


The increase in long-lived assets was primarily due to the Company's acquisition of Red-C (see "Note 3. Acquisitions") as well as additions of property and improvements to the Company's manufacturing facilities in China.


18


18. Restructuring Charges
During fiscal 2010, the Company recorded restructuring charges of $4.2 million representing non-cancelable payment obligations under the facility lease relating to the abandoned and unused portion of its facility in Allen, Texas.

The following table summarizes the activities of the restructuring accrual during the first six months of fiscal 2013 (in thousands):
Balance as of April 30, 2012
$
3,505

Cash payments, net of sublease income
(137
)
Balance as of October 28, 2012
$
3,368


Of the $3.4 million remaining accrual, $296,000 is expected to be paid in the next twelve months and $3.1 million is expected to be paid from fiscal 2014 through fiscal 2020.

19. Pending Litigation

The Company is a party to several pending legal proceedings described below. In each of these proceedings in which the Company is a defendant, the Company believes that it has strong defenses and intends to vigorously defend the action. As of the date of this report, the Company does not believe it is reasonably possible that losses related to any of these cases have been incurred in excess of the amounts, if any, that have been accrued as of October 28, 2012 . However, the litigation process is inherently uncertain, and accordingly, the Company cannot predict the outcome of any of these matters with certainty. Future developments in one or more of these matters may cause the Company to revise its estimates and related accruals in future periods.

Class Action and Shareholder Derivative Litigation

March 8, 2011 Earnings Announcement Cases
Several securities class action lawsuits related to the Company's March 8, 2011 earnings announcement alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 have been filed in the United States District Court for the Northern District of California on behalf of a purported class of persons who purchased stock between December 1 or 2, 2010 through March 8, 2011. The named defendants are the Company and its Chairman of the Board, Chief Executive Officer and Chief Financial Officer. To date, no specific amount of damages have been alleged. The cases have been consolidated, lead plaintiffs have been appointed and a consolidated complaint has been filed. The Company has filed a motion to dismiss the case and this motion is pending.
In addition, two purported shareholder derivative lawsuits related to the Company's March 8, 2011 earnings announcement have been filed in the California Superior Court for the County of Santa Clara, and a third derivative lawsuit has been filed in the United States District Court for the Northern District of California. The complaints assert claims for alleged breach of fiduciary duty, unjust enrichment, and waste on behalf of the Company. Named as defendants are the members of the Company's board of directors, including the Company's Chairman of the Board and Chief Executive Officer, and its Chief Financial Officer. No specific amount of damages has been alleged and, by the derivative nature of the lawsuits, no damages will be alleged, against the Company. The state court cases have been consolidated and a lead plaintiff has been appointed to file a consolidated complaint.
Stock Option Cases

     On November 30, 2006, the Company announced that it had undertaken a voluntary review of its historical stock option
grant practices subsequent to its initial public offering in November 1999. The review was initiated by senior management, and preliminary results of the review were discussed with the Audit Committee of the Company's board of directors. Based on the preliminary results of the review, senior management concluded, and the Audit Committee agreed, that it was likely that the measurement dates for certain stock option grants differed from the recorded grant dates for such awards and that the Company would likely need to restate its historical financial statements to record non-cash charges for compensation expense relating to some past stock option grants. The Audit Committee thereafter conducted a further investigation and engaged independent legal counsel and financial advisors to assist in that investigation. The Audit Committee concluded that measurement dates for certain option grants differed from the recorded grant dates for such awards. The Company's management, in conjunction with the Audit Committee, conducted a further review to finalize revised measurement dates and determine the appropriate accounting adjustments to its historical financial statements. The announcement of the investigation resulted in delays in filing

19


the Company's quarterly reports on Form 10-Q for the quarters ended October 29, 2006, January 28, 2007, and January 27, 2008, and the Company's annual report on Form 10-K for the fiscal year ended April 30, 2007. On December 4, 2007, the Company filed all four of these reports which included revised financial statements.

     Following the Company's announcement on November 30, 2006 that the Audit Committee of the board of directors had voluntarily commenced an investigation of the Company's historical stock option grant practices, the Company was named as a nominal defendant in several shareholder derivative cases. These cases have been consolidated into two proceedings pending in federal and state courts in California. The federal court cases have been consolidated in the United States District Court for the Northern District of California. The state court cases have been consolidated in the Superior Court of California for the County of Santa Clara. The plaintiffs in all cases have alleged that certain of the Company's current or former officers and directors caused the Company to grant stock options at less than fair market value, contrary to the Company's public statements (including its financial statements), and that, as a result, those officers and directors are liable to the Company. No specific amount of damages has been alleged, and by the nature of the lawsuits, no damages will be alleged against the Company. The state court action has been stayed pending resolution of the consolidated federal court action. On June 12, 2007, the plaintiffs in the federal court case filed an amended complaint to reflect the results of the stock option investigation announced by the Audit Committee in June 2007. On August 28, 2007, the Company and the individual defendants filed motions to dismiss the complaint. On January 11, 2008, the Court granted the motions to dismiss, with leave to amend. On May 12, 2008, the plaintiffs filed an amended complaint. The Company and the individual defendants filed motions to dismiss the amended complaint on July 1, 2008. The Court granted the motions to dismiss on September 22, 2009, and entered judgment in favor of the defendants. The plaintiffs appealed the judgment to the United States Court of Appeals for the Ninth Circuit. On April 26, 2011, a panel of the Ninth Circuit reversed the District Court ruling and remanded the case to the District Court for further proceedings. The individual defendants filed additional motions to dismiss the case in the District Court. On July 12, 2012, the District Court issued an order granting the motion as to certain claims and individual defendants, with leave to amend except as to certain defendants, and denying the motion as to other claims and individual defendants.

Cheetah Omni Litigation

Customer Texas Litigation

On July 29, 2011, Cheetah Omni LLC filed a complaint for patent infringement in the United States District Court for the Eastern District of Texas against Alcatel-Lucent USA Inc., Alcatel-Lucent Holdings, Inc., Ciena Corporation, Ciena Communications, Inc., Fujitsu Network Communications, Inc., Tellabs, Inc., Tellabs Operations, Inc., Tellabs North America, Inc., Nokia Siemens Networks US LLC, Huawei Technologies USA, Inc. and Huawei Device USA, Inc. Finisar was not named as a defendant in the lawsuit. However, the named defendants or entities affiliated with them are Finisar customers. The complaint alleges that certain reconfigurable optical add/drop multiplexers, or ROADM products of the named defendants infringe one or more of seven Cheetah Omni patents. With respect to two of the seven patents, the Company understands Cheetah Omni to be asserting infringement by the customer defendants' making, using, offering for sale, selling, and/or importing into the United States certain ROADM products that include a Finisar wavelength selective switch (WSS). Finisar has no specific information regarding whether the claims of infringement with respect to the remaining five asserted Cheetah Omni patents implicate any Finisar products.

Finisar has received a request for indemnification from all six customer defendants with respect to the two patents mentioned above. The Company is currently evaluating the requests for indemnification. On November 19, 2012, the United States District Court in the Finisar Michigan litigation described below issued an order enjoining Cheetah Omni from continuing to pursue its claims against Finisar customers in the Texas litigation with respect to the two patents asserted against products containing a Finisar WSS. As a result, the Company anticipates that these Texas claims will be stayed pending the outcome of the Michigan litigation. If such a stay is issued and later lifted, the Company expects that the defendant customers will defend the lawsuit vigorously at least with respect to the claims that implicate any Finisar products. However, there can be no assurance that they will be successful in their defense and, if they are not successful with respect to the two patents mentioned above, Finisar may be liable to indemnify the accused customers for significant costs and damages. Even if the defense is successful, the Company may incur substantial legal fees and other costs in defending and/or aiding in the defense of the lawsuit with respect to the two patents mentioned above. Further, the lawsuit could divert the efforts and attention of the Company's management and technical personnel, which could harm its business.

Finisar Michigan Litigation

On December 23, 2011, the Company filed a declaratory judgment action in the United States District Court for the Eastern District of Michigan seeking a declaration of invalidity and non-infringement by Finisar and its customers of four Cheetah Omni patents, including the two patents implicating the Company's WSS that are asserted against Finisar customers in the case

20


described above that is currently pending in the Eastern District of Texas. On February 27, 2012, Cheetah Omni filed its answer to the complaint in which it denied the allegations of invalidity with respect to the four patents at issue.  However, Cheetah Omni did not deny any of the allegations of non-infringement in the Company's complaint.  Cheetah Omni also did not include any counterclaims.  Before Cheetah Omni's answer was filed, on February 24, 2012, the Company filed a motion seeking to enjoin Cheetah Omni's pending claims implicating the Company's WSS asserted against the Company's customers in the Eastern District of Texas case described above and for leave to file a motion for summary judgment of non-infringement. This motion with respect to the requested injunction was granted on November 19, 2012 as described above with respect to the customer Michigan litigation. After Cheetah Omni's answer was filed, the Company filed a motion for judgment on the pleadings in favor of the Company, and Cheetah Omni filed a motion requesting permission to add counterclaims of infringement by the Company's WSS devices. The motion for judgment on the pleadings remains pending. The motion for permission to add counterclaims of infringement was granted and Cheetah Omni added claims accusing the Company's WSS devices of infringement of the two Cheetah Omni patents. The Company intends to defend the counterclaims vigorously. However, there can be no assurance that the defense will be successful and, if the defense is not successful, Finisar may be liable for substantial damages. Even if the defense is successful, the Company may incur substantial legal fees and other costs in defending the counterclaims. Further, the lawsuit could divert the efforts and attention of the Company's management and technical personnel, which could harm its business.

Other

     In the ordinary course of business, the Company is a party to litigation, claims and assessments in addition to those described above. Based on information currently available, management does not believe the impact of these other matters will have a material adverse effect on its business, financial condition, results of operations or cash flows of the Company.

20. Guarantees and Indemnifications

Upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee. As permitted under Delaware law and in accordance with the Company's Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company's request in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The Company may terminate the indemnification agreements with its officers and directors upon 90 days written notice, but termination will not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer liability insurance policy that may enable it to recover a portion of any future amounts paid.

     The Company enters into indemnification obligations under its agreements with other companies in its ordinary course of business, including agreements with customers, business partners, and insurers. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or the use of the Company's products. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.

     Historically, the Company has not made any significant indemnification payments under such arrangements. The Company believes the fair value of these indemnification agreements is immaterial. Accordingly, the Company has not recorded any liabilities for these agreements as of October 28, 2012 .

21. Related Party Transaction

During the three and six months ended October 28, 2012 , the Company paid $51,649 and $102,224 , respectively, in cash compensation to a company owned by Guy Gertel, the brother of the Chief Executive Officer of the Company, for sales and marketing services. In addition, during the first quarter of fiscal 2013, the Company granted to Mr. Gertel, for no additional consideration, 3,814 restricted stock units with a fair market value of $49,086 , which vest as follows: 25% on June 14, 2013 and an additional 25% on each of the next three annual anniversaries thereafter, to be fully vested on June 14, 2016, subject to him continuing to provide services to the Company.

During the three and six months ended October 30, 2011 , the Company paid Mr. Gertel's company $47,102 and $130,302 , respectively, in cash compensation. In addition, during the first quarter of fiscal 2012 , the Company granted to Mr. Gertel, for no additional consideration, 2,000 restricted stock units with a fair market value of $29,300 , which vest as follows: 25% on June 20, 2012 and an additional 25% on each of the next three anniversaries thereafter, to be fully vested on June 20, 2015 , subject to him continuing to provide services to Finisar.

21



The amounts paid to Mr. Gertel represented values considered by management to be fair and reasonable, reflective of an arm's length transaction.


22


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use words like “anticipates,” “believes,” “plans,” “expects,” “future,” “intends” and similar expressions to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events; however, our business and operations are subject to a variety of risks and uncertainties, and, consequently, actual results may materially differ from those projected by any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements since they may not occur.
  
Certain factors that could cause actual results to differ from those projected are discussed in “Part II. Other Information, Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.

The following discussion should be read together with our condensed consolidated financial statements and related notes thereto included elsewhere in this report.

Business Overview
  
We are a leading provider of optical subsystems and components that are used in data communication and telecommunication applications. Our optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables, which provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in building these networks, including the switches, routers and servers used in wireline networks as well as antennas and base stations for wireless networks. These products rely on the use of semiconductor lasers and photodetectors in conjunction with integrated circuits and novel optoelectronic packaging to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable at speeds ranging from less than 1 gigabit per second, or Gbps, to more than 100 Gbps, over distances of less than 10 meters to more than 2,000 kilometers using a wide range of network protocols and physical configurations. We supply optical transceivers and transponders that allow point-to-point communications on a fiber using a single specified wavelength or, bundled with multiplexing technologies, can be used to supply multi-Gbps bandwidth over several wavelengths on the same fiber.

We also provide products known as wavelength selective switches, or WSS. In long-haul and metro networks, each fiber may carry 50 to 100 different high-speed optical wavelengths. WSS are switches that are used to dynamically switch network traffic from one optical fiber to multiple other fibers without first converting to an electronic signal. The wavelength selective feature means that WSS enable any wavelength or combination of wavelengths to be switched from the input fiber to the output fibers. WSS products are sometimes combined with other components and sold as linecards that plug into a system chassis referred to as reconfigurable optical add/drop multiplexers, or ROADMs.

Our line of optical components consists primarily of packaged lasers and photodetectors for data communication and telecommunication applications.

Demand for our products is largely driven by the continually growing need for additional bandwidth created by the ongoing proliferation of data and video traffic driven by video downloads, Internet protocol TV, social networking, on-line gaming, file sharing, enterprise IP/Internet traffic, cloud computing, and data center virtualization that must be handled by both wire line and wireless networks. Mobile traffic is increasing as the result of proliferation of smart phones, tablet computers, and other mobile devices.

     Our manufacturing operations are vertically integrated and we produce many of the key components used in making our products including lasers, photo-detectors and integrated circuits, or ICs, designed by our internal IC engineering teams. We also have internal assembly and test capabilities that make use of internally designed equipment for the automated testing of our optical subsystems and components.

     We sell our optical products to manufacturers of storage systems, networking equipment and telecommunication equipment such as Alcatel-Lucent, Brocade, Ciena, Cisco Systems, EMC, Emulex, Ericsson, Fujitsu, Hewlett-Packard Company, Huawei, IBM, Juniper, Nokia-Siemens, Qlogic and Tellabs, and to their contract manufacturers. These customers, in turn, sell their systems to businesses and to wireline and wireless telecommunications service providers and CATV operators, collectively referred to as carriers.


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Recent Developments

Acquisition of Red-C

On July 16, 2012, we acquired all outstanding equity interests in Red-C Optical Networks, Inc., ("Red-C"), a Delaware Corporation, with subsidiary operations in Tel Aviv, Israel, engaged in research, development and marketing of optical amplifiers and sub-systems for the wavelength division multiplexing, or WDM, optical communication sector. The acquisition will enable the Company to broaden its product lines primarily for telecom applications by adding key amplification technologies, including erbium doped fiber amplification, or EDFA, Raman amplification and dynamic hybrid amplification. These technologies are considered critical for reconfigurable optical add-drop multiplexer, or ROADM, line cards and are increasingly important in cost-effectively extending the reach of transceivers and transponders especially for 100 Gbps and 40 Gbps coherent transmission, ultra-long repeaterless links, and low latency networks. For additional information regarding this acquisition, see "Part I, Item 1, Financial Statements - Note 3. Acquisitions."

Critical Accounting Policies

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. We believe there have been no significant changes in our critical accounting policies from those described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012 .

Results of Operations

     The following table sets forth certain statement of operations data as a percentage of revenues for the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
 
October 28,
2012
 
October 30,
2011
 
October 28,
2012
 
October 30,
2011
Revenues
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues
 
71.6

 
70.2

 
72.4

 
70.2

Amortization of acquired developed technology
 
0.9

 
0.7

 
0.7

 
0.7

Gross profit
 
27.5

 
29.1

 
26.9

 
29.1

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
17.1

 
15.2

 
17.2

 
15.4

Sales and marketing
 
4.4

 
4.2

 
4.6

 
4.2

General and administrative
 
5.6

 
5.7

 
5.8

 
5.9

Restructuring recoveries
 

 

 

 
(0.1
)
Amortization of purchased intangibles
 
0.5

 
0.4

 
0.4

 
0.3

Total operating expenses
 
27.6

 
25.5

 
28.0

 
25.7

Income (loss) from operations
 
(0.1
)
 
3.7

 
(1.1
)
 
3.4

Interest income
 
0.1

 

 
0.1

 
0.1

Interest expense
 
(0.3
)
 
(0.5
)
 
(0.3
)
 
(0.4
)
Loss on debt extinguishment
 

 

 

 
(0.1
)
Other income, net
 

 
(0.1
)
 

 
1.0

Income (loss) before income taxes and non-controlling interest
 
(0.3
)
 
3.2

 
(1.3
)
 
3.9

Provision for (benefit from) income taxes
 
(0.5
)
 
0.6

 
(0.1
)
 
0.4

Consolidated net income (loss)
 
0.2

 
2.6

 
(1.2
)
 
3.5

Adjust for net income attributable to non-controlling interest
 
(0.1
)
 
(0.1
)
 

 
(0.1
)
Net income (loss) attributable to Finisar Corporation
 
0.1
 %
 
2.5
 %
 
(1.2
)%
 
3.4
 %


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Revenues. Revenues decreased $9.4 million , or 3.9% , to $232.0 million in the quarter ended October 28, 2012 compared to $241.5 million in the quarter ended October 30, 2011 . Revenues decreased $17.1 million , or 3.7% , to $452.6 million in the six months ended October 28, 2012 compared to $469.7 million in the six months ended October 30, 2011 .
    
The following table sets forth the changes in revenues by market application (in thousands):
 
Three Months Ended
 
October 28,
2012
 
October 30,
2011
 
Change
 
% Change
Datacom revenue
$
139,842

 
$
128,521

 
$
11,321

 
8.8
 %
Telecom revenue
92,199

 
112,968

 
(20,769
)
 
(18.4
)%
Total revenues
$
232,041

 
$
241,489

 
$
(9,448
)
 
(3.9
)%

 
Six Months Ended
 
October 28,
2012
 
October 30,
2011
 
Change
 
% Change
Datacom revenue
$
279,306

 
$
257,593

 
$
21,713

 
8.4
 %
Telecom revenue
173,261

 
212,122

 
(38,861
)
 
(18.3
)%
Total revenues
$
452,567

 
$
469,715

 
$
(17,148
)
 
(3.7
)%
   
Datacom revenue for the three and six months ended October 28, 2012 increased compared to the three and six months ended October 30, 2011 primarily due to an increase in market demand as enterprises upgraded their technology infrastructure driving demand for the products of our OEM system customers and thus higher demand for our datacom module products. Telecom revenue decreased for the three and six months ended October 28, 2012 , primarily due to a decline in market demand for our telecom products due to sluggish spending by telecom service providers worldwide.

Amortization of Acquired Developed Technology. Amortization of acquired developed technology, a component of cost of revenues, increased $363,000 , or 22.2% , to $2.0 million in the quarter ended October 28, 2012 compared to $1.6 million in the quarter ended October 30, 2011 . The increase was due to the amortization of the acquired developed technology related to the Red-C acquisition. Amortization of acquired developed technology increased $113,000 , or 3.6% , to $3.3 million in the six months ended October 28, 2012 compared to $3.2 million for the six months ended October 30, 2011 . The increase was due to the amortization of the acquired developed technology related to the Red-C acquisition partially offset by the roll-off of amortization of certain intangible assets related to one of our prior acquisitions.

Gross Profit. Gross profit decreased $6.4 million , or 9.1% , to $63.9 million in the quarter ended October 28, 2012 compared to $70.3 million in the quarter ended October 30, 2011 . Gross profit as a percentage of revenues decreased by 1.6% , from 29.1% in the quarter ended October 30, 2011 to 27.4% in the quarter ended October 28, 2012 . We recorded charges of $7.8 million for obsolete and excess inventory in the quarter ended October 28, 2012 compared to $5.7 million in the quarter ended October 30, 2011 . We sold inventory that was written-off in previous periods resulting in a benefit of $5.5 million in the quarter ended October 28, 2012 and $3.0 million in the quarter ended October 30, 2011 . As a result, we recognized a net charge of $2.3 million in the quarter ended October 28, 2012 compared to a net charge of $2.7 million in the quarter ended October 30, 2011 . Cost of revenues included stock-based compensation charges of $1.7 million in the quarter ended October 28, 2012 and $1.6 million in the quarter ended October 30, 2011 . The decrease in gross margin primarily reflects a decline in average selling prices, partially offset by reduced material costs.

Gross profit decreased $15.1 million , or 11.0% , to $121.7 million in the six months ended October 28, 2012 compared to $136.8 million in the six months ended October 30, 2011 . Gross profit as a percentage of revenues decreased by 2.2% , from 29.1% in the six months ended October 30, 2011 to 26.9% in the six months ended October 28, 2012 . We recorded charges of $17.3 million for obsolete and excess inventory in the six months ended October 28, 2012 compared to $11.4 million in the six months ended October 30, 2011 . We sold inventory that was written-off in previous periods resulting in a benefit of $10.1 million in the six months ended October 28, 2012 and $7.0 million in the six months ended October 30, 2011 . As a result, we recognized a net charge of $7.2 million in the six months ended October 28, 2012 compared to a net charge of $4.4 million in the six months ended October 30, 2011 . Cost of revenues included stock-based compensation charges of $3.1 million in the six months ended October 28, 2012 and $3.3 million in the six months ended October 30, 2011 . The decrease in gross margin primarily reflects a decline in average selling prices, partially offset by reduced material costs, and higher net charges for excess and obsolete inventory.

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Research and Development Expenses. Research and development expenses increased $2.9 million , or 7.9% , to $39.6 million in the quarter ended October 28, 2012 compared to $36.7 million in the quarter ended October 30, 2011 . The increase was due primarily to increases in employee related expenses. Included in research and development expenses were stock-based compensation charges of $3.2 million in the quarter ended October 28, 2012 and $2.1 million in the quarter ended October 30, 2011 . Research and development expenses as a percent of revenues increased to 17.1% in the quarter ended October 28, 2012 compared to 15.2% in the quarter ended October 30, 2011 .

Research and development expenses increased $5.7 million , or 7.9% , to $77.8 million in the six months ended October 28, 2012 compared to $72.1 million in the six months ended October 30, 2011 . The increase was due primarily to increases in employee related expenses. Included in research and development expenses were stock-based compensation charges of $5.9 million in the six months ended October 28, 2012 and $4.2 million in the six months ended October 30, 2011 . Research and development expenses as a percent of revenues increased to 17.2% in the six months ended October 28, 2012 compared to 15.4% in the six months ended October 30, 2011 .
  
Sales and Marketing Expenses. Sales and marketing expenses increased $94,000 , or 0.9% , to $10.2 million in the quarter ended October 28, 2012 compared to $10.1 million in the quarter ended October 30, 2011 . The increase was primarily due to increases in stock-based compensation expense. Included in sales and marketing expenses were stock-based compensation charges of $948,000 in the quarter ended October 28, 2012 and $729,000 in the quarter ended October 30, 2011 . Sales and marketing expenses as a percent of revenues increased to 4.4% in the quarter ended October 28, 2012 compared to 4.2% in the quarter ended October 30, 2011 .

Sales and marketing expenses increased $1.2 million , or 6.0% , to $20.9 million in the six months ended October 28, 2012 compared to $19.7 million in the six months ended October 30, 2011 . The increase was primarily due to increases in employee related expenses. Included in sales and marketing expenses were stock-based compensation charges of $2.0 million in the six months ended October 28, 2012 and $1.5 million in the six months ended October 30, 2011 . Sales and marketing expenses as a percent of revenues increased to 4.6% in the six months ended October 28, 2012 compared to 4.2% in the six months ended October 30, 2011 .

General and Administrative Expenses. General and administrative expenses decreased $854,000 , or 6.2% , to $12.9 million in the quarter ended October 28, 2012 compared to $13.8 million in the quarter ended October 30, 2011 . The decrease was due to a $680,000 reduction in transaction-related expenses, as we incurred $420,000 in transaction costs in connection with the acquisition of Red-C in the quarter ended October 28, 2012 compared to $1.1 million incurred in connection with the acquisition of Ignis in the quarter ended October 30, 2011 . This reduction, as well as a reduction in legal costs, was partially offset by higher stock-based compensation expense. Included in general and administrative expenses were stock-based compensation charges of $2.9 million in the quarter ended October 28, 2012 and $1.9 million in the quarter ended October 30, 2011 . General and administrative expenses as a percent of revenues decreased to 5.6% in the quarter ended October 28, 2012 compared to 5.7% in the quarter ended October 30, 2011 .

General and administrative expenses decreased $1.5 million , or 5.3% , to $26.3 million in the six months ended October 28, 2012 compared to $27.7 million in the six months ended October 30, 2011 . The decrease was due to a $680,000 reduction in transaction-related expenses, as we incurred $420,000 in transaction costs in connection with the acquisition of Red-C in the six months ended October 28, 2012 compared to $1.1 million incurred in connection with the acquisition of Ignis in the six months ended October 30, 2011 . This reduction, as well as a reduction in legal costs was partially offset by higher stock-based compensation expense. Included in general and administrative expenses were stock-based compensation charges of $5.6 million in the six months ended October 28, 2012 and $3.8 million in the six months ended October 30, 2011 . General and administrative expenses as a percent of revenues decreased to 5.8% in the six months ended October 28, 2012 compared to 5.9% in the six months ended October 30, 2011 .

Restructuring Recoveries. During the first quarter of fiscal 2012, we entered into a sublease agreement with a third party for a portion of our abandoned and unused facility in Allen, Texas. As a result of this sublease agreement, we recorded a recovery of $322,000 to reflect an adjustment to our future net liability related to the abandoned and subleased portion of this facility.

Amortization of Purchased Intangibles. Amortization of purchased intangibles increased $203,000 , or 23.6% , to $1.1 million in the quarter ended October 28, 2012 compared to $859,000 in the quarter ended October 30, 2011 . The increase was due to the amortization of intangibles related to the acquisition of Red-C.


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Amortization of purchased intangibles increased $233,000 , or 14.2% , to $1.9 million in the six months ended October 28, 2012 compared to $1.6 million in the six months ended October 30, 2011 . The increase was due to the amortization of intangibles related to the acquisition of Red-C.

Interest Income. Interest income increased $62,000 to $162,000 in the quarter ended October 28, 2012 compared to $100,000 in the quarter ended October 30, 2011 . Interest income increased due to higher cash balances in the quarter ended October 28, 2012 compared to the quarter ended October 30, 2011 .

Interest income increased $98,000 to $358,000 in the six months ended October 28, 2012 compared to $260,000 in the six months ended October 30, 2011 . Interest income increased due to higher cash balances in the six months ended October 28, 2012 compared to the six months ended October 30, 2011 .
     
Interest Expense. Interest expense decreased $388,000 , or 34.1% , to $750,000 in the quarter ended October 28, 2012 compared to $1.1 million in the quarter ended October 30, 2011 . The decrease was primarily due to repayments of Ignis loans during fiscal 2012 and the first quarter of fiscal 2013.

Interest expense decreased $652,000 , or 31.8% , to $1.4 million in the six months ended October 28, 2012 compared to $2.0 million in the six months ended October 30, 2011 . The decrease was primarily due to repayments of Ignis loans during fiscal 2012 and the first quarter of fiscal 2013.

Loss on Debt Extinguishment. During the first quarter of fiscal 2012, we repaid certain bank loans that we assumed as part of the Ignis acquisition. The repayment of these loans resulted in a loss of $419,000 which we recognized in our condensed consolidated statement of operations for the six months ended October 30, 2011 .

Other Income (Expense), Net. Other expense, net was $101,000 in the quarter ended October 28, 2012 compared to $140,000 in the quarter ended October 30, 2011 . Other expense, net in the quarter ended October 28, 2012 primarily consisted of foreign exchange gains offset by the acceleration of amortization of debt issuance costs related to the revolving credit facility which we terminated. Other expense, net in the quarter ended October 30, 2011 primarily consisted of amortization of debt issuance costs.

Other expense, net was $20,000 in the six months ended October 28, 2012 compared to other income, net of $4.5 million in the six months ended October 30, 2011 . Other expense, net in the six months ended October 28, 2012 primarily consisted of foreign exchange gains partially offset by the acceleration of debt issuance costs related to the revolving credit facility which we terminated. Other income, net in the six months ended October 30, 2011 primarily consisted of a gain of $5.4 million related to the fair-value measurement of our equity interest in Ignis upon obtaining a controlling interest in May 2011, partially offset by $619,000 representing our portion of the net losses of Ignis during the period prior to our acquisition of a controlling interest, during which period we accounted for our investment in Ignis using the equity method of accounting.

Non-controlling Interest. Non-controlling interest for the three and six months ended October 28, 2012 and October 30, 2011 represents minority shareholders' proportionate share of the net income of Fi-ra (Korean subsidiary of Ignis).

Provision (benefit) for Income Taxes. We recorded an income tax benefit of $1.1 million and an income tax provision of $1.4 million , respectively, for the quarters ended October 28, 2012 and October 30, 2011 and an income tax benefit of $420,000 and an income tax provision of $1.9 million , respectively, for the six months ended October 28, 2012 and October 30, 2011 . The income tax benefits recognized in the three and six months ended October 28, 2012 were primarily a result of the valuation allowance release in one of the foreign jurisdictions in which we conduct business. The income tax provisions for the three and six months ended October 30, 2011 primarily represent current state and foreign income taxes arising in certain jurisdictions in which we conduct business. Due to the uncertainty regarding the timing and extent of our future profitability, we have recorded a valuation allowance to offset our U.S. deferred tax assets which represent future income tax benefits associated with our operating losses because we do not currently believe it is more likely than not these assets will be realized.

Liquidity and Capital Resources

Cash Flows from Operating Activities

Net cash provided by operating activities was $71.0 million in the six months ended October 28, 2012 , compared to $26.8 million in the six months ended October 30, 2011 . Cash provided by operating activities in the six months ended October 28, 2012 consisted of our net loss, as adjusted to exclude depreciation, amortization and other non-cash items totaling $49.6 million , less cash used for working capital requirements primarily related to decrease in accounts payable and deferred revenue

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offset by decreases in accounts receivable and inventory. Accounts receivable decreased by $15.1 million primarily due to strong collections near the end of the second quarter. Inventory decreased by $17.1 million due to usage in the manufacturing process. Cash used in operating activities in the six months ended October 30, 2011 consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling to $36.4 million and cash used for working capital, primarily related to increases in accounts receivable, inventory and accounts payable. Accounts receivable decreased by $3.2 million primarily due to strong collections near the end of the second quarter. Inventory increased by $16.6 million and accounts payable increased $6.7 million due to increased purchases to support projected levels of sales.

Cash Flows from Investing Activities

Net cash used in investing activities totaled $43.2 million in the six months ended October 28, 2012 compared to $104.6 million in the six months ended October 30, 2011 . Net cash used in investing activities in the six months ended October 28, 2012 primarily consisted of $20.6 million related to the acquisition of Red-C and $33.3 million of expenditures for capital equipment. Net cash used in investing activities in the six months ended October 30, 2011 consisted of $71.1 million related to the acquisition of Ignis and $33.5 million of expenditures for capital equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities totaled $112,000 in the six months ended October 28, 2012 compared to net cash used in financing activities of $8.9 million in the six months ended October 30, 2011 . Cash provided by financing activities for the six months ended October 28, 2012 primarily reflected proceeds from the issuance of shares under employee stock option and stock purchase plans totaling $3.3 million offset by repayments of borrowings related to the Ignis acquisition totaling $3.2 million . Net cash used in financing activities for the six months ended October 30, 2011 reflected repayments of borrowings related to the Ignis acquisition totaling $14.4 million , partially offset by proceeds from the exercise of stock options and purchases under our stock purchase plan totaling $3.7 million and the additional borrowings of $1.8 million by Fi-ra.

Contractual Obligations and Commercial Commitments

     At October 28, 2012 , we had contractual obligations of $194.7 million as shown in the following table (in thousands):

 
 
 
Payments Due by Period
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than
 
 
 
 
 
After
Contractual Obligations
Total
 
1 Year
 
1-3 Years
 
4-5 Years
 
5 Years
Convertible debt
$
40,015

 
$

 
$
40,015

 
$

 
$

Interest on debt (a)
4,002

 
2,001

 
2,001

 

 

Operating leases (b)
57,186

 
14,075

 
15,984

 
12,647

 
14,480

Facility construction
9,116

 
9,116

 

 

 

Purchase obligations (c)
84,410

 
84,410

 

 

 

Total contractual obligations
$
194,729

 
$
109,602

 
$
58,000

 
$
12,647

 
$
14,480

_________________
(a)
Includes interest to October 2014 on our 5% Convertible Senior Notes due October 2029 as we have the right to redeem the notes in whole or in part at any time on or after October 22, 2014.
(b)
Includes operating lease obligations that have been accrued as restructuring charges.
(c)
Includes open purchase orders with terms that generally allow us the option to cancel or reschedule the order.


 Convertible debt consists of a series of convertible senior notes in the aggregate principal amount of $40.0 million due October 15, 2029. The notes are convertible by the holders at any time prior to maturity into shares of our common stock at specified conversion prices. The notes are redeemable by us, in whole or in part at any time on or after October 22, 2014 if the last reported sale price per share of our common stock exceeds 130% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date on which we provide the notice of redemption. These notes are also subject to redemption by the holders in October 2014, 2016, 2019 and 2024.

Interest on debt consists of the scheduled interest payments on our convertible debt.

Operating lease obligations consist primarily of base rents for facilities we occupy at various locations.

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Facility construction obligations consist primarily of our ongoing commitments to build a manufacturing operations facility in Wuxi, China.

Purchase obligations represent all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services. Although open purchase orders are considered enforceable and legally binding, their terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. Our policy with respect to all non-cancelable purchase obligations is to record losses, if any, when they are probable and reasonably estimable.
Our subcontractors purchase materials based on forecasts provided by us. We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities held by subcontractors on our behalf to fulfill the subcontractors' purchase order obligations at their facilities which are in excess of our future demand forecasts. As of October 28, 2012 , the liability for these purchase commitments of $1.5 million has been expensed and recorded on the condensed consolidated balance sheet as other accrued liabilities and is not included in the preceding table.
We believe we have made adequate provisions for potential exposure related to inventory purchases for orders that may not be utilized.

Sources of Liquidity and Capital Resource Requirements

At October 28, 2012 , our principal sources of liquidity consisted of $262.4 million of cash and cash equivalents and an aggregate of $66.6 million available for borrowing under our credit facility with Wells Fargo Foothill, LLC, subject to certain restrictions and limitations. On October 17, 2012, we gave notice for voluntary early termination of the facility with Wells Fargo Foothill, LLC which became effective October 31, 2012. Cash and cash equivalents totaling $33.0 million was held by our foreign subsidiaries as of October 28, 2012 .
   
We believe that our existing balances of cash and cash equivalents, together with the cash expected to be generated from future operations, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future, to finance future acquisitions that we may propose to undertake or to repay or otherwise retire our outstanding 5% Convertible Senior Notes due 2029, in the aggregate principal amount of $40.0 million, which are subject to redemption by the holders at their option in October 2014, 2016, 2019 and 2024. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operations will be adversely affected.

Off-Balance-Sheet Arrangements

At October 28, 2012 and April 30, 2012 , we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     For quantitative and qualitative disclosures about market risk affecting Finisar, see Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2012 . Our exposure related to market risk has not changed materially since April 30, 2012 .

Item 4. Controls and Procedures

Evaluation of Effectiveness of Disclosure Controls and Procedures

     Under the supervision and with the participation of our management, including our Chairman of the Board, our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chairman of the Board, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.


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Changes in Internal Control Over Financial Reporting