Finisar Corporation
FINISAR CORP (Form: 10-Q, Received: 03/10/2016 17:23:36)
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 January 31, 2016
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 March 4, 2016 , there were 107,530,122 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 January 31, 2016
 
 
 
Page
 
 
 
 




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)
 
January 31, 2016
 
May 3, 2015
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
268,330

 
$
197,443

Short-term investments
262,726

 
292,748

Accounts receivable, net of allowance for doubtful accounts of $790 at January 31, 2016 and $1,136 at May 3, 2015
241,384

 
213,234

Accounts receivable, other
41,933

 
40,650

Inventories
262,591

 
283,670

Prepaid expenses and other current assets
25,316

 
36,518

Total current assets
1,102,280

 
1,064,263

Property, equipment and improvements, net
342,818

 
315,777

Purchased intangible assets, net
20,686

 
27,188

Goodwill
106,736

 
106,736

Minority investments
3,692

 
2,847

Other assets
21,516

 
35,071

Total assets
$
1,597,728

 
$
1,551,882

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
131,240

 
$
131,510

Accrued compensation
32,908

 
24,918

Other accrued liabilities
45,492

 
39,239

Deferred revenue
11,933

 
9,850

Total current liabilities
221,573

 
205,517

Long-term liabilities:
 
 
 
Convertible debt, net of current portion
228,561

 
221,406

Other non-current liabilities
21,765

 
21,166

Total liabilities
471,899

 
448,089

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at January 31, 2016 and May 3, 2015

 

Common stock, $0.001 par value, 750,000,000 shares authorized, 107,521,255 shares and 104,131,817 shares issued and outstanding at January 31, 2016 and May 3, 2015, respectively
108

 
104

Additional paid-in capital
2,593,587

 
2,551,114

Accumulated other comprehensive (loss) income
(41,701
)
 
861

Accumulated deficit
(1,426,165
)
 
(1,448,286
)
Total stockholders' equity
1,125,829

 
1,103,793

Total liabilities and stockholders' equity
$
1,597,728

 
$
1,551,882

See accompanying notes.

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Table of Contents

FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
 
January 31, 2016
 
January 25, 2015
 
January 31, 2016
 
January 25, 2015
 
 
 
 
 
 
 
 
 
Revenues
 
$
309,206

 
$
306,283

 
$
944,372

 
$
930,902

Cost of revenues
 
219,836

 
221,173

 
674,593

 
659,183

Amortization of acquired developed technology
 
1,630

 
1,435

 
4,500

 
4,305

Impairment of long-lived assets
 

 
5,722

 
1,071

 
5,722

Gross profit
 
87,740

 
77,953

 
264,208

 
261,692

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
49,840

 
48,782

 
153,220

 
150,973

Sales and marketing
 
11,899

 
10,925

 
34,997

 
34,377

General and administrative
 
14,875

 
14,062

 
46,269

 
57,553

Amortization of purchased intangibles
 
668

 
737

 
2,004

 
2,235

Impairment of long-lived assets
 

 
45

 
830

 
45

Total operating expenses
 
77,282

 
74,551

 
237,320

 
245,183

Income from operations
 
10,458

 
3,402

 
26,888

 
16,509

Interest income
 
709

 
321

 
1,543

 
1,275

Interest expense
 
(2,933
)
 
(2,685
)
 
(8,733
)
 
(8,685
)
Other income (expense), net
 
1,968

 
2,050

 
3,294

 
57

Income before income taxes
 
10,202

 
3,088

 
22,992

 
9,156

Provision for (benefit from) income taxes
 
(1,882
)
 
1,409

 
871

 
4,596

Net income
 
$
12,084

 
$
1,679

 
$
22,121

 
$
4,560

Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.11

 
$
0.02

 
$
0.21

 
$
0.05

Diluted
 
$
0.11

 
$
0.02

 
$
0.20

 
$
0.04

Shares used in computing net income per share:
 
 
 
 
 
 
 
 
Basic
 
107,180

 
103,563

 
106,367

 
100,475

Diluted
 
108,128

 
105,990

 
108,488

 
103,825


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
 
Nine Months Ended
 
 
January 31, 2016
 
January 25, 2015
 
January 31, 2016
 
January 25, 2015
Net income
 
$
12,084

 
$
1,679

 
$
22,121

 
$
4,560

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in cumulative foreign currency translation adjustment
 
(9,866
)
 
(18,700
)
 
(42,562
)
 
(21,443
)
Total other comprehensive income (loss), net of tax
 
(9,866
)
 
(18,700
)
 
(42,562
)
 
(21,443
)
Total comprehensive income (loss)
 
$
2,218

 
$
(17,021
)
 
$
(20,441
)
 
$
(16,883
)

See accompanying notes.


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Table of Contents

FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended
 
January 31, 2016
 
January 25, 2015
Operating activities
 
 
 
Net income
$
22,121

 
$
4,560

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation
63,829

 
61,934

Amortization of intangible assets
6,503

 
6,539

Amortization of debt issuance costs
462

 
534

Stock-based compensation expense
35,677


34,194

Loss (gain) on sale or retirement of assets and asset disposal group
(496
)
 
704

Impairment of long-lived assets
1,901

 
5,767

Equity in earnings of equity method investment
(950
)
 
(530
)
Amortization of discount on 0.50% Convertible Senior Notes due 2033
7,156

 
6,819

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(28,150
)
 
15,356

Inventories
(1,786
)
 
(31,452
)
Other assets
10,507

 
(18,432
)
Accounts payable
(270
)
 
4,409

Accrued compensation
3,453

 
(11,748
)
Other accrued liabilities
4,996

 
920

Deferred revenue
4,044

 
(5,081
)
Net cash provided by operating activities
128,997

 
74,493

Investing activities

 
 
Additions to property, equipment and improvements
(99,514
)
 
(106,189
)
Net proceeds from sale of property and equipment and asset disposal group
799

 
42

Purchases of short-term investments
(185,821
)
 
(320,453
)
Maturities of short-term investments
215,542

 
240,000

Acquisition, net of cash acquired

 
(2,728
)
Net cash used in investing activities
(68,994
)
 
(189,328
)
Financing activities

 
 
Repayments of term loans
(216
)
 
(306
)
Proceeds from the issuance of shares under equity plans and employee stock purchase plan
11,100

 
10,384

Net cash provided by financing activities
10,884

 
10,078

Net increase (decrease) in cash and cash equivalents
70,887

 
(104,757
)
Cash and cash equivalents at beginning of period
197,443

 
303,101

Cash and cash equivalents at end of period
$
268,330

 
$
198,344

Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
1,314

 
$
2,330

Cash paid for taxes
$
7,127

 
$
4,304

Supplemental disclosure of non-cash transactions
 
 
 
Issuance of common stock upon conversion of 5.0% Convertible Senior Notes due 2029
$

 
$
40,015


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 January 31, 2016 and for the three and nine month periods ended January 31, 2016 and January 25, 2015 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”). 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 January 31, 2016 , its operating results for the three and nine month periods ended January 31, 2016 and January 25, 2015 , and its cash flows for the nine month periods ended January 31, 2016 and January 25, 2015 . Operating results for the three and nine month periods ended January 31, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending May 1, 2016 . The condensed consolidated balance sheet as of May 3, 2015 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 May 3, 2015 .
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.
The Company has one reportable segment consisting of optical subsystems and components.
During the first quarter of fiscal 2016, the Company recorded a $1.9 million charge for the impairment of long-lived assets (primarily machinery and equipment) due to the projected cash flows associated with these assets not supporting the carrying values of these assets. In accordance with the guidance for the impairment of long-lived assets, these assets were written down to their estimated fair value of zero , which was determined based on an income approach using the discounted cash flow method.

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 May 3, 2015 . There have been no material changes to the Company's significant accounting policies since the filing of the annual report on Form 10-K.

Pending Adoption of New Accounting Standards
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standards setting bodies that are adopted by the Company as of the specified effective date. 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. Net Income per Share
Basic net income per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from stock options and restricted stock units (under the treasury stock method), 5.0% Convertible Senior Notes due 2029 (on an as-if-converted basis), and 0.50% Convertible Senior Notes due 2033 (under the treasury stock method) outstanding during the period.

8



The following table presents the calculation of basic and diluted net income per share:
 
Three Months Ended
 
Nine Months Ended
(in thousands, except per share amounts)
January 31, 2016
 
January 25, 2015
 
January 31, 2016
 
January 25, 2015
Numerator:
 
 
 
 
 
 
 
Net income
$
12,084

 
$
1,679

 
$
22,121

 
$
4,560

Numerator for basic net income per share
12,084

 
1,679

 
22,121

 
4,560

Numerator for diluted net income per share
$
12,084

 
$
1,679

 
$
22,121

 
$
4,560

Denominator:
 
 
 
 
 
 
 
Denominator for basic net income per share - weighted average shares
107,180


103,563

 
106,367

 
100,475

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options and restricted stock units
948

 
2,427

 
2,121

 
3,350

Dilutive potential common shares
948

 
2,427

 
2,121

 
3,350

Denominator for diluted net income per share
108,128

 
105,990

 
108,488

 
103,825

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.02

 
$
0.21

 
$
0.05

Diluted
$
0.11

 
$
0.02

 
$
0.20

 
$
0.04

The following table presents common shares related to potentially dilutive securities excluded from the calculation of diluted net income per share as their effect would have been anti-dilutive:
 
Three Months Ended
 
Nine Months Ended
(in thousands)
January 31, 2016
 
January 25, 2015
 
January 31, 2016
 
January 25, 2015
Stock options and restricted stock units
5,287

 
1,170

 
3,124

 
1,062

5.0% Convertible Senior Notes due 2029

 

 

 
2,513

0.50% Convertible Senior Notes due 2033  (1)

 

 

 

 
5,287

 
1,170

 
3,124

 
3,575

_______________
(1) 0.50% Convertible Senior Notes due 2033 were excluded from the calculation of diluted earnings per share under the treasury stock method since the conversion price exceeded the average market price for the Company's common stock.


4. Inventories
Inventories consist of the following:
As of
(in thousands)
January 31, 2016
 
May 3, 2015
Raw materials
$
54,977

 
$
57,757

Work-in-process
133,324

 
146,773

Finished goods
74,290

 
79,140

Total inventories
$
262,591

 
$
283,670


5. Investments
The Company's portfolio of fixed income securities consists of term bank certificates of deposit. All of the Company's investments in fixed income securities have original maturity (maturity at the purchase date) of less than 12 months. Investments with original maturities of three months or less are classified as cash equivalents. All of the Company's investments in fixed income securities are classified as held-to-maturity since the Company has the positive intent and ability to hold these investments until maturity. These investments are carried at amortized cost.

9



The Company's investments in fixed income securities as of January 31, 2016 and May 3, 2015 were as follows:
 
January 31, 2016
 
May 3, 2015
 
 
Gross Unrealized
 
 
 
Gross Unrealized
 
(in thousands)
Amortized Cost
Gains
Losses
Fair Value
 
Amortized Cost
Gains
Losses
Fair Value
Certificates of deposit
$
262,726

$

$

$
262,726

 
$
292,748

$

$

$
292,748

Total
$
262,726

$

$

$
262,726

 
$
292,748

$

$

$
292,748

Reported as:
 
 
 
 
 
 
 
 
 
Short-term investments
$
262,726

$

$

$
262,726

 
$
292,748

$

$

$
292,748

Total
$
262,726

$

$

$
262,726


$
292,748

$

$

$
292,748


The Company monitors its investment portfolio for impairment on a periodic basis. In order to determine whether a decline in fair value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the Company's financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in its industry; and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. A decline in the fair value of the security below amortized cost that is deemed other-than-temporary is charged to earnings, resulting in the establishment of a new cost basis for the affected securities. During the three and nine month periods ended January 31, 2016 and January 25, 2015 , there were no realized gains or losses, and the Company did not recognize any other-than-temporary impairments.

6. Debt

0.50% Convertible Senior Notes Due 2033
In December 2013 , the Company issued and sold $258.8 million in aggregate principal amount of 0.50% Convertible Senior Notes due 2033 (the "2033 Notes") at par. The terms of the notes are governed by an indenture by and between the Company and Wells Fargo Bank, National Association, as Trustee. The notes will mature on December 15, 2033 , unless earlier repurchased, redeemed or converted. The notes are senior unsecured and unsubordinated obligations of the Company, and are effectively subordinated to the Company's secured indebtedness and the indebtedness and other liabilities of the Company's subsidiaries. The notes bear interest at a rate of 0.5% per year, payable semi-annually in arrears on June 15 and December 15 each year .

Holders of the notes may convert their notes at their option prior to the close of business on the business day immediately preceding June 15, 2033 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 26, 2014 (and only during such fiscal quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period ("measurement period"), in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2033 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of whether any of the foregoing circumstances have occurred. The conversion rate will initially equal 33.1301 shares of common stock per $1,000 principal amount of notes (which is equivalent to an initial conversion price of approximately $30.18 per share of common stock), subject to adjustment. Upon conversion of a note, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election, as provided in the indenture. If holders elect to convert their notes in connection with a "fundamental change" (as defined in the indenture) that occurs on or before December 22, 2018, the Company will, to the extent provided in the indenture, increase the conversion rate applicable to such notes ("make-whole feature").

Holders will have the option to require the Company to redeem for cash any notes held by them in the event of a fundamental change at a purchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest to, but excluding, the redemption date. Holders also have the option to require the Company to redeem for cash any notes held by them on December 15, 2018, December 15, 2023 and December 15, 2028 at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest to, but excluding, the redemption date. The Company may redeem the

10


notes in whole or in part at any time on or after December 22, 2018 at 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.

The Company considered the features embedded in the notes, that is, the conversion feature, the holders' put feature, the Company's call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.

Because of its option to settle conversion of the notes in cash, the Company separated the liability and equity components of the notes. The carrying amount of the liability component at issuance date of $209.1 million was calculated by estimating the fair value of similar liabilities without a conversion feature. The residual principal amount of the notes of $49.6 million was allocated to the equity component. The resulting debt discount is amortized as interest expense. As of January 31, 2016 , the remaining debt discount amortization period was 34 months .

As of January 31, 2016 , the notes consisted of the following (in thousands):
Liability component:
 
Principal
$
258,750

Unamortized debt discount
(30,189
)
Net carrying amount of the liability component
$
228,561

Carrying amount of the equity component
$
49,648


The Company incurred approximately $3.8 million in transaction costs in connection with the issuance of the notes. These costs were allocated to the liability and equity components in proportion to the allocation of proceeds. Transaction costs of $3.1 million , allocated to the liability component, were recognized as a non-current asset and are amortized. Transaction costs of $725,000 , allocated to the equity component, were recognized as a reduction of additional paid-in capital.

The following table sets forth interest expense information related to the 2033 Notes:
 
Three Months Ended
 
Nine Months Ended
(in thousands, except percentages)
January 31, 2016
 
January 31, 2016
Contractual interest expense
$
324

 
$
972

Amortization of the debt discount
2,411

 
7,156

Amortization of issuance costs
154

 
462

Total interest cost
$
2,889

 
$
8,590

Effective interest rate on the liability component
4.87
%
 
4.87
%
The Company applies the treasury stock method to determine the potential dilutive effect of the 2033 Notes on net income per share as a result of the Company's intent and stated policy to settle the principal amount of the 2033 Notes in cash.

7. 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 at the time revenue is recognized. Factors that affect the Company's warranty liability include the historical and anticipated rates of warranty claims and cost to repair. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company's warranty liability during the following period were as follows:
 
Nine Months Ended
(in thousands)
January 31, 2016
Beginning balance at May 3, 2015
$
6,451

Additions during the period based on product sold
7,431

Change in estimates
(752
)
Settlements and expirations
(2,528
)
Ending balance at January 31, 2016
$
10,602


11




8. Fair Value of Financial Instruments
The Company's financial instruments measured at fair value on a recurring basis as of January 31, 2016 and May 3, 2015 were as follows:
 
January 31, 2016
 
May 3, 2015
 
Carrying
 
Fair Value
 
Carrying
 
Fair Value
(in thousands)
Amount
 
Level 1
Level 2
Level 3
Total
 
Amount
 
Level 1
Level 2
Level 3
Total
Money market funds
$

 
$

$

$

$

 
$
196

 
$
196

$

$

$
196

Certificates of deposit
262,726

 

262,726


262,726

 
292,748

 

292,748


292,748

Total
$
262,726

 
$

$
262,726

$

$
262,726

 
$
292,944

 
$
196

$
292,748

$

$
292,944


The Company's Level 2 financial instruments in the table above are valued using quoted market prices for similar instruments or non-binding market prices that are corroborated by observable market data.

The Company has not estimated the fair value of its minority investments in three privately held companies as it is not practicable to estimate the fair value of these investments because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. As of January 31, 2016 , the carrying value of the Company's minority investments in these privately held companies was $3.7 million , which management believes is not impaired.

The Company's financial instruments not measured at fair value on a recurring basis as of January 31, 2016 and May 3, 2015 were as follows:
 
January 31, 2016
 
May 3, 2015
 
Carrying
 
Fair Value
 
Carrying
 
Fair Value
(in thousands)
Amount
 
Level 1
Level 2
Level 3
Total
 
Amount
 
Level 1
Level 2
Level 3
Total
2033 Notes
228,561

 
237,403



237,403

 
221,406

 
264,364



264,364


The fair value of the 2033 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 as of each respective balance sheet date.

9. Legal Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss; however, if a reasonable estimate cannot be made, the Company will provide disclosure to that effect.
Due to the nature of the Company's business, it is subject to claims alleging infringement by various Company products and services. The Company believes that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is unable currently to determine the ultimate outcome of these or similar matters. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company believes that it is not reasonably possible that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows.
Class Action and Shareholder Derivative Litigation
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, as amended, 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

12


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 has been alleged. The cases were consolidated, lead plaintiffs were appointed and a consolidated complaint was filed. The Company filed a motion to dismiss the case. On January 16, 2013, the District Court granted the Company's motion to dismiss and granted the lead plaintiffs leave to amend the consolidated complaint. An amended consolidated complaint was filed on February 6, 2013. Thereafter, the Company filed a renewed motion to dismiss the case. On September 30, 2013, the District Court granted the Company's motion and dismissed the case with prejudice, and plaintiff appealed. On January 8, 2016, the Ninth Circuit Court of Appeals reversed the judgment in part for further proceedings in the District Court. On January 22, 2016, Finisar filed a petition for panel rehearing in part. The panel has not yet ruled on the petition, and hence the case remains in the Ninth Circuit.
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. The derivative cases were stayed pending a ruling in the federal class action case. Following the September 30, 2013 ruling dismissing the class action case, the derivative cases remain stayed, subject to the right of the parties to reinstate them.
Mears Technologies Litigation
On May 6, 2013, Mears Technologies, Inc. filed a complaint for patent infringement in the United States District Court for the Eastern District of Texas against the Company. The complaint alleges that Finisar's WSS products, ROADM line cards containing a Finisar WSS, and Waveshaper products infringe U.S. Patent No. 6,141,361. The Company has performed a review of the asserted patent and believes that the patent claims are not infringed and/or are invalid. On June 17, 2014, the district court issued a claim construction order favorable to the Company.  On October 6, 2014, the court denied a motion of the plaintiff to amend its infringement contentions in light of the court’s claim construction ruling.  As a result, the plaintiff has conceded that it is unable to pursue its infringement claims against the Company.  On December 30, 2014, the court granted the Company’s motion for summary judgment of non-infringement.  The plaintiff has indicated that it intends to appeal the court’s claim construction ruling and the court’s denial of the plaintiff’s motion to amend its infringement contentions in light of the court’s claim construction ruling. The Company intends to oppose any such appeal vigorously.  However, if the plaintiff’s appeal is wholly or partially successful, the case would be revived in the district court.  If the appeal succeeds and the case resumes, the Company may be liable for substantial damages.  Even if the defense of any resumed case is successful, the Company may incur substantial legal fees and other costs in defending the lawsuit. Further, the lawsuit could divert the efforts and attention of the Company's management and technical personnel, which could harm its business.

10. 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.
The Company believes the fair value of these indemnification obligations is immaterial. Accordingly, the Company has not recorded any liabilities for these agreements as of January 31, 2016 . To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.



13




11. Related Parties
During the three month period ended August 2, 2015 , the Company paid $29,293 in cash compensation to a company owned by Guy Gertel, the brother of the Chief Executive Officer of the Company during the first quarter of fiscal 2016, for sales and marketing services. In addition, during the first quarter of fiscal 2016, the Company granted to Mr. Guy Gertel, for no additional consideration, 2,091 restricted stock units with a fair market value of $41,360 , which vest as follows: 25% on June 21, 2016 and an additional 25% on each of the next three anniversaries thereafter, to be fully vested on June 21, 2019, subject to Mr. Guy Gertel continuing to provide services to Finisar.
During the three and nine month periods ended January 25, 2015 , the Company paid $27,702 and $112,519 , respectively, in cash compensation to Mr. Guy Gertel's company. In addition, during the first quarter of fiscal 2015, the Company granted to Mr. Guy Gertel, for no additional consideration, 2,305 restricted stock units with a fair market value of $45,132 , which vest as follows: 25% on June 23, 2015 and an additional 25% on each of the next three anniversaries thereafter, to be fully vested on June 23, 2018, subject to Mr. Guy Gertel continuing to provide services to Finisar.
Amounts paid to Mr. Guy Gertel represented values considered by management to be fair and reasonable, reflective of an arm's length transaction.

14


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 these networks, including the switches, routers, and servers used in wireline networks as well as the antennas and base stations used in 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-terabit per second, or Tbps, bandwidths using up to 100 or more 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 more than 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 a reconfigurable optical add/drop multiplexers, or ROADM.

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 network 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 wireline and wireless networks. Mobile traffic is increasing as the result of proliferation of smartphones, 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 products primarily to manufacturers of storage systems, networking equipment and telecommunication equipment such as Alcatel-Lucent, Brocade, Ciena, Cisco Systems, EMC, Ericsson, Fujitsu, Hewlett-Packard Company, Huawei, IBM, Juniper, Nokia, and QLogic, and to their contract manufacturers. These customers, in turn, sell their systems to businesses and to wireline and wireless telecommunication service providers and cable TV operators, collectively referred to as carriers. We also sell products to end-users.


15

Table of Contents

Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, inventory adjustments for obsolete and excess inventory and the amortization of acquired developed technology associated with acquisitions that we have made. As a result of building a vertically integrated business model, our manufacturing cost structure has become more fixed. While this can be beneficial during periods when demand is strong, it can be more difficult to reduce costs during periods when demand for our products is weak, product mix is unfavorable or selling prices are generally lower. While we have undertaken measures to reduce our operating costs there can be no assurance that we will be able to reduce our cost of revenues sufficiently to achieve or sustain profitability.

Since October 2000, we have completed the acquisition of two publicly-held companies. We have also completed the acquisition of 13 privately-held companies and certain businesses and assets from seven other companies in order to broaden our product offerings and provide new sources of revenue, production capabilities and access to advanced technologies that we believe will enable us to reduce our product costs and develop innovative and more highly integrated product platforms while accelerating the timeframe required to develop such products.

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 May 3, 2015 .

Results of Operations

Revenues (by market application)
Three Months Ended
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Datacom revenue
$
219,277

 
$
234,361

 
$
(15,084
)
 
(6
)%
Telecom revenue
89,929

 
71,922

 
18,007

 
25
 %
Total revenues
$
309,206

 
$
306,283

 
$
2,923

 
1
 %

Revenues (by market application)
Nine Months Ended
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Datacom revenue
$
686,328

 
$
691,498

 
$
(5,170
)
 
(1
)%
Telecom revenue
258,044

 
239,404

 
18,640

 
8
 %
Total revenues
$
944,372

 
$
930,902

 
$
13,470

 
1
 %

The decreases in datacom revenue primarily reflect a decline in average selling prices of datacom products. The increases in telecom revenue were primarily due to an increase in market demand for our 10 Gbps tunable transceivers and WSS products.

Amortization of Acquired Developed Technology
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
1,630

 
$
1,435

 
$
195

 
14
%
Nine months ended
$
4,500

 
$
4,305

 
$
195

 
5
%

The increases were due to start of amortization for certain in-process R&D intangible assets related to our u 2 t acquisition as a result of completing related development projects.

Impairment of Long-Lived Assets
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$

 
$
5,767

 
$
(5,767
)
 
(100
)%
Nine months ended
$
1,901

 
$
5,767

 
$
(3,866
)
 
(67
)%


16

Table of Contents

During the first quarter of fiscal 2016 and the third quarter of fiscal 2015, we recorded charges of $1.9 million and $5.8 million, respectively, for the impairment of certain long-lived assets due to the projected cash flows associated with these assets not supporting the carrying values of these assets.

Gross Profit
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
87,740

 
$
77,953

 
$
9,787

 
13
%
As a percentage of revenues
28
%
 
25
%
 
 
 
 
Nine months ended
$
264,208

 
$
261,692

 
$
2,516

 
1
%
As a percentage of revenues
28
%
 
28
%
 
 
 
 

The increase in gross margin for the three month periods is primarily due to long-lived impairment charge described above.

Research and Development Expenses
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
49,840

 
$
48,782

 
$
1,058

 
2
%
Nine months ended
$
153,220

 
$
150,973

 
$
2,247

 
1
%

The increases were primarily due to increases in employee compensation related expenses.

Sales and Marketing Expenses
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
11,899

 
$
10,925

 
$
974

 
9
%
Nine months ended
$
34,997

 
$
34,377

 
$
620

 
2
%

The increases were primarily due to an increase in marketing product samples as we expand our product offering and customer base.

General and Administrative Expenses
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
14,875

 
$
14,062

 
$
813

 
6
 %
Nine months ended
$
46,269

 
$
57,553

 
$
(11,284
)
 
(20
)%

The increase for the three month periods was primarily due to an increase in employee compensation related expenses. The decrease for the nine month periods was primarily due to a $11.0 million charge related to the settlement of a patent litigation during the second quarter of fiscal 2015.

Amortization of Purchased Intangibles
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
668

 
$
737

 
$
(69
)
 
(9
)%
Nine months ended
$
2,004

 
$
2,235

 
$
(231
)
 
(10
)%

The decreases were due to the roll-off of amortization of certain intangible assets related to our prior acquisition.

Interest Income
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
709

 
$
321

 
$
388

 
121
%
Nine months ended
$
1,543

 
$
1,275

 
$
268

 
21
%


17

Table of Contents

The increases were primarily due to fluctuations in interest rates.

Interest Expense
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
2,933

 
$
2,685

 
$
248

 
9
%
Nine months ended
$
8,733

 
$
8,685

 
$
48

 
1
%

The increases were primarily due to amortization of the debt discount on our 2033 Notes.

Other Income (Expense), Net
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
1,968

 
$
2,050

 
$
(82
)
 
(4
)%
Nine months ended
$
3,294

 
$
57

 
$
3,237

 
5,679
 %

The increase for the nine month periods was primarily due to foreign currency exchange gains.

Provision for (Benefit from) Income Taxes
 
 
 
 
 
 
 
(in thousands, except percentages)
January 31, 2016
 
January 25, 2015
 
Change
 
% Change
Three months ended
$
(1,882
)
 
$
1,409

 
$
(3,291
)
 
(234
)%
Nine months ended
$
871

 
$
4,596

 
$
(3,725
)
 
(81
)%

The decreases were primarily due to a change in the mix of pre-tax income into jurisdictions with lower effective tax rate.


Liquidity and Capital Resources
 
Nine Months Ended
(in millions)
January 31, 2016
 
January 25, 2015
Net cash provided by operating activities
$
129.0

 
$
74.5

Net cash used in investing activities
$
(69.0
)
 
$
(189.3
)
Net cash provided by financing activities
$
10.9

 
$
10.1


Operating Cash Flows
Net cash provided by operating activities in the nine months ended January 31, 2016 primarily consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $114.1 million . Net cash provided by operating activities in the nine months ended January 25, 2015 primarily consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $116.0 million , and a $46.0 million increase in working capital primarily related to increases in inventory. Inventory increased by $31.5 million due to an increase in purchases to support the increased sales level.

Investing Cash Flows
Net cash used in investing activities in the nine month period ended January 31, 2016 primarily consisted of expenditures for capital assets. Net cash used in investing activities in the nine month period ended January 25, 2015 primarily consisted of net purchases of short-term investments and expenditures for capital assets.

Financing Cash Flows
Net cash provided by financing activities in the nine month periods ended January 31, 2016 and January 25, 2015 primarily consisted of proceeds from the issuance of shares under our employee stock option and stock purchase plans.





18

Table of Contents

Sources of Liquidity and Capital Resource Requirements

At January 31, 2016 , our principal sources of liquidity consisted of approximately $531 million of cash and cash equivalents and short-term investments, of which approximately $123 million was held by our foreign subsidiaries.

We believe that our existing balances of cash, cash equivalents and short-term investments, together with the cash expected to be generated from future operations, 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 all of our outstanding 2033 Notes, in the aggregate principal amount of $258.8 million, which are subject to redemption by the holders in December 2018, 2023 and 2028. 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 January 31, 2016 and May 3, 2015 , 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 May 3, 2015 . Our exposure related to market risk has not changed materially since May 3, 2015 .

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.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended January 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

19

Table of Contents


PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to “Part I, Item 1, Financial Statements - Note 9. Legal Matters” for a description of pending legal proceedings, including material developments in certain of those proceedings during the quarter ended January 31, 2016 .

Item 1A. Risk Factors

OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS, INCLUDING THOSE DESCRIBED BELOW. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT, INCLUDING OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES. THE RISK FACTORS DESCRIBED BELOW DO NOT CONTAIN ANY MATERIAL CHANGES FROM THOSE PREVIOUSLY DISCLOSED IN ITEM 1A OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MAY 3, 2015 .

Our quarterly revenues and operating results fluctuate due to a variety of factors, which may result in volatility or a decline in the price of our stock.

Our quarterly operating results have varied significantly due to a number of factors, including:

fluctuation in demand for our products;
the timing of new product introductions or enhancements by us and our competitors;
the level of market acceptance of new and enhanced versions of our products;
the timing of acquisitions that we have undertaken;
the timing or cancellation of large customer orders;
the length and variability of the sales cycle for our products;
pricing policy changes by us and our competitors and suppliers;
the availability of development funding and the timing of development revenue;
changes in the mix of products sold;
increased competition in product lines, and competitive pricing pressures; and
the evolving and unpredictable nature of the markets for products incorporating our optical components and subsystems.

We expect that our operating results will continue to fluctuate in the future as a result of these factors and a variety of other factors, including:

fluctuations in manufacturing yields;
the emergence of new industry standards;
failure to anticipate changing customer product requirements;
the loss or gain of important customers;
product obsolescence; and
the amount of research and development expenses associated with new product introductions.

Our operating results could also be harmed by:

adverse changes in economic conditions in various geographic areas where we or our customers do business;
acts of terrorism and international conflicts or domestic crises;
other conditions affecting the timing of customer orders or our ability to fill orders of customers subject to export control or U.S. economic sanctions; or
a downturn in the markets for our customers' products, particularly the data storage and networking and telecommunication components markets.

We may experience a delay in generating or recognizing revenues for a number of reasons. Open orders at the beginning of each quarter are typically lower than expected revenues for that quarter and are generally cancelable with minimal notice. Accordingly, we depend on obtaining orders during each quarter for shipment in that quarter to achieve our revenue objectives. Failure to ship these products by the end of a quarter may adversely affect our operating results. Furthermore, our customer

20

Table of Contents

agreements typically provide that the customer may delay scheduled delivery dates and cancel orders within specified timeframes without significant penalty. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our business. It is likely that in some future quarters our operating results will again decrease from the previous quarter or fall below the expectations of securities analysts and investors.

As a result of these factors, our operating results may vary significantly from quarter to quarter. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as indications of future performance. Any shortfall in revenues or net income from the previous quarter or from levels expected by the investment community could cause a decline in the trading price of our stock.

We may lose sales if our suppliers or independent contract manufacturers fail to meet our needs or go out of business.

We currently purchase a number of key components used in the manufacture of our products from single or limited sources, and we rely on several independent contract manufacturers to supply us with certain key components and subassemblies, including lasers, modulators, and printed circuit boards. We depend on these sources to meet our production needs. Moreover, we depend on the quality of the components and subassemblies that they supply to us, over which we have limited control. Several of our suppliers are or may become financially unstable as the result of current global market conditions. In addition, from time to time we have encountered shortages and delays in obtaining components, and we may encounter additional shortages and delays in the future. If we cannot supply products due to a lack of components, or are unable to redesign products with other components in a timely manner, our business will be significantly harmed. We generally have no long-term contracts with any of our component suppliers or contract manufacturers. As a result, a supplier or contract manufacturer can discontinue supplying components or subassemblies to us without penalty. If a supplier were to discontinue supplying a key component or cease operations, the resulting product manufacturing and delivery delays could be lengthy, and our business could be substantially harmed. We are also subject to potential delays in the development by our suppliers of key components which may affect our ability to introduce new products. Similarly, disruptions in the operations of our key suppliers or in the services provided by our contract manufacturers, including disruptions due to natural disasters, or the transition to other suppliers of these key components or services could lead to supply chain problems or delays in the delivery of our products. These problems or delays could damage our relationships with our customers and adversely affect our business.

We use rolling forecasts based on anticipated product orders to determine our component and subassembly requirements. Lead times for materials and components that we order vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand for particular components. If we overestimate our component requirements, we may have excess inventory, which would increase our costs. If we underestimate our component requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences could significantly harm our business.

If we are unable to realize anticipated cost savings from the transfer of certain manufacturing operations to our overseas locations and increased use of internally-manufactured components our results of operations could be harmed.

As part of our ongoing initiatives to reduce the cost of revenues, we expect to realize significant cost savings through (i) the transfer of certain product manufacturing operations to lower cost off-shore locations and (ii) product engineering changes to enable the broader use of internally-manufactured components. The transfer of production to overseas locations may be more difficult and costly than we currently anticipate which could result in increased transfer costs and time delays. Further, following transfer, we may experience lower manufacturing yields than those historically achieved in our U.S. manufacturing locations. In addition, the engineering changes required for the use of internally-manufactured components may be more technically-challenging than we anticipate and customer acceptance of such changes could be delayed. Adverse changes in currency exchange rates between the U.S. dollar and the applicable local currency and/or unanticipated increases in labor costs at our lower cost manufacturing locations could limit the anticipated benefits of the transfer of certain product manufacturing operations to such lower cost locations. If we fail to achieve the planned product manufacturing transfer and increase in internally-manufactured component use within our currently anticipated timeframe, or if our manufacturing yields decrease as a result, we may be unsuccessful in achieving cost savings or such savings will be less than anticipated, and our results of operations could be harmed.

Continued competition in our markets may lead to an accelerated reduction in our prices, revenues and market share.

The end markets for optical products have experienced significant industry consolidation during the past few years while the industry that supplies these customers has experienced less consolidation. As a result, the markets for optical subsystems and components are highly competitive. Our current competitors include a number of domestic and international companies, many

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of which have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. Increased consolidation in our industry, should it occur, will reduce the number of our competitors but would be likely to further strengthen surviving industry participants. We may not be able to compete successfully against either current or future competitors. Companies competing with us may introduce products that are competitively priced, have increased performance or functionality, or incorporate technological advances and may be able to react quicker to changing customer requirements and expectations. There is also the risk that network systems vendors may re-enter the subsystem market and begin to manufacture the optical subsystems incorporated in their network systems. Increased competition could result in significant price erosion, reduced revenue, lower margins or loss of market share, any of which would significantly harm our business. Our principal competitors for data communication applications include Avago Technologies, Lumentum and Oclaro. Our principal competitors for telecommunication applications include Lumentum, Oclaro and Sumitomo. Our competitors continue to introduce improved products and we will have to do the same to remain competitive.

Decreases in average selling prices of our products may reduce our gross margins.

The market for optical subsystems is characterized by declining average selling prices resulting from factors such as increased competition, overcapacity, the introduction of new products and increased unit volumes as manufacturers continue to deploy network and storage systems. We have in the past experienced, and in the future may experience, substantial period-to-period fluctuations in operating results due to declining average selling prices. We anticipate that average selling prices will decrease in the future in response to product introductions by competitors or us, or by other factors, including pricing pressures from significant customers. In particular, we typically conduct pricing negotiations for our existing products with some of our largest telecommunication OEM customers in the last several months of the calendar year. Decreases in our average selling prices resulting from these negotiations typically become effective at the beginning of the next calendar year and generally have an adverse impact on our gross margins in future quarters. This impact is typically most pronounced in our fourth fiscal quarter ending in April, when the impact of the new pricing is first felt over a full quarter. In order to sustain profitable operations, we must continue to develop and introduce on a timely basis new products that incorporate features that can be sold at higher average selling prices. Failure to do so could cause our revenues and gross margins to decline, which would result in additional operating losses and significantly harm our business.

We may be unable to reduce the cost of our products sufficiently to enable us to compete with others. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures and could adversely affect our margins. In order to remain competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products or delivering our products to market in a timely manner. We cannot assure you that any redesign will result in sufficient cost reductions to allow us to reduce the price of our products to remain competitive or improve our gross margins.

Shifts in our product mix may result in declines in gross margins.

Gross margins on individual products fluctuate over the product's life cycle. Our overall gross margins have fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices for older products and our ability to reduce product costs, and these fluctuations are expected to continue in the future.

Failure to accurately forecast our revenues could result in additional charges for obsolete or excess inventories or non-cancelable purchase commitments.

We base many of our operating decisions, and enter into purchase commitments, on the basis of anticipated revenue trends which are highly unpredictable. Some of our purchase commitments are not cancelable, and in some cases we are required to recognize a charge representing the amount of material or capital equipment purchased or ordered which exceeds our actual requirements. In the past, we have periodically experienced significant growth followed by a significant decrease in customer demand such as occurred in fiscal 2001, when revenues increased by 181% followed by a decrease of 22% in fiscal 2002. Based on projected revenue trends during these periods, we acquired inventories and entered into purchase commitments in order to meet anticipated increases in demand for our products which did not materialize. As a result, we recorded significant charges for obsolete and excess inventories and non-cancelable purchase commitments which contributed to substantial operating losses in fiscal 2002. Should revenues in future periods again fall substantially below our expectations, or should we fail again to accurately forecast changes in demand mix, we could again be required to record substantial charges for obsolete or excess inventories or non-cancelable purchase commitments.

If we encounter sustained yield problems or other delays in the production or delivery of our internally-manufactured components or in the final assembly and test of our products, we may lose sales and damage our customer relationships.


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Our manufacturing operations are highly vertically integrated. In order to reduce our manufacturing costs, we have acquired a number of companies, and business units of other companies that manufacture optical components incorporated in our optical subsystem products and have developed our own facilities for the final assembly and testing of our products. For example, we design and manufacture many critical components incorporated in transceivers used for data communication and telecommunication applications, including all of the short wavelength VCSEL lasers, at our wafer fabrication facility in Allen, Texas and manufacture a portion of our internal requirements for longer wavelength lasers at our wafer fabrication facility in Fremont, California. We assemble and test most of our transceiver products at our facilities in Ipoh, Malaysia and Wuxi, China. As a result of this vertical integration, we have become increasingly dependent on our internal production capabilities. The manufacture of critical components, including the fabrication of wafers, and the assembly and testing of our products, involve highly complex processes. For example, minute levels of contaminants in the manufacturing environment, difficulties in the fabrication process or other factors can cause a substantial portion of the components on a wafer to be nonfunctional. These problems may be difficult to detect at an early stage of the manufacturing process and often are time-consuming and expensive to correct. From time to time, we have experienced problems achieving acceptable yields at our wafer fabrication facilities, resulting in delays in the availability of components. Moreover, an increase in the rejection rate of products during the quality control process before, during or after manufacture, results in lower yields and margins. In addition, changes in manufacturing processes required as a result of changes in product specifications, changing customer needs and the introduction of new product lines have historically significantly reduced our manufacturing yields, resulting in low or negative margins on those products. Poor manufacturing yields over a prolonged period of time could adversely affect our ability to deliver our subsystem products to our customers and could also affect our sale of components to customers in the merchant market. Our inability to supply components to meet our internal needs could harm our relationships with customers and have an adverse effect on our business.

The markets for our products are subject to rapid technological change, and to compete effectively we must continually introduce new products that achieve market acceptance.

The markets for our products are characterized by rapid technological change, frequent new product introductions, substantial capital investment, changes in customer requirements and evolving industry standards with respect to the protocols used in data communication and telecommunication networks. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. For example, the market for optical subsystems is currently characterized by a trend toward the adoption of “pluggable” modules and subsystems that do not require customized interconnections and by the development of more complex and integrated optical subsystems. We expect that new technologies will emerge as competition and the need for higher and more cost-effective bandwidth increases. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. In addition, a slowdown in demand for existing products ahead of a new product introduction could result in a write-down in the value of inventory on hand related to existing products and/or a charge for the impairment of long-lived assets related to such products. We have in the past experienced a slowdown in demand for existing products and delays in new product development and such slowdown in demand and delays may occur in the future. To the extent customers defer or cancel orders for existing products due to a slowdown in demand or in the expectation of a new product release or if there is any delay in development or introduction of our new products or enhancements of our products, our operating results would be adversely affected. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including:

changing product specifications and customer requirements;
unanticipated engineering complexities;
expense reduction measures we have implemented, and others we may implement, to conserve our cash and attempt to achieve and sustain profitability;
difficulties in hiring and retaining necessary technical personnel;
difficulties in reallocating engineering resources and overcoming resource limitations; and
changing market or competitive product requirements.

The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate prediction of technological and market trends. The introduction of new products also requires significant investment to ramp up production capacity, for which benefit will not be realized if customer demand does not develop as expected. Ramping of production capacity also entails risks of delays which can limit our ability to realize the full benefit of the new product introduction. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond

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effectively to product announcements by competitors, technological changes or emerging industry standards. Any failure to respond to technological change would significantly harm our business.

Our future success ultimately depends on the continued growth of the communications industry and, in particular, the continued expansion of global information networks, particularly those directly or indirectly dependent upon a fiber optics infrastructure.

We are relying on increasing demand for voice, video and other data delivered over high-bandwidth network systems as well as commitments by network systems vendors to invest in the expansion of the global information network. As network usage and bandwidth demand increase, so does the need for advanced optical networks to provide the required bandwidth. Without network and bandwidth growth, the need for optical subsystems and components, and hence our future growth as a manufacturer of these products, will be jeopardized, and our business would be significantly harmed.

Many of these factors are beyond our control. In addition, in order to achieve widespread market acceptance, we must differentiate ourselves from our competition through product offerings and brand name recognition. We cannot assure you that we will be successful in making this differentiation or achieving widespread acceptance of our products. Failure of our existing or future products to maintain and achieve widespread levels of market acceptance will significantly impair our revenue growth.

We depend on large purchases from a few significant customers, and any loss, cancellation, reduction or delay in purchases by these customers could harm our business.

A small number of customers have consistently accounted for a significant portion of our revenues. Our success will depend on our continued ability to develop and manage relationships with our major customers. Although we are attempting to expand our customer base, we expect that significant customer concentration will continue for the foreseeable future. We may not be able to offset any decline in revenues from our existing major customers with revenues from new customers, and our quarterly results may be volatile because we are dependent on large orders from these customers that may be reduced, delayed, or cancelled.

The markets in which we have historically sold our optical subsystems and components products are dominated by a relatively small number of systems manufacturers, thereby limiting the number of our potential customers. Recent consolidation of portions of our customer base, including telecommunication systems manufacturers, and potential future consolidation, may have a material adverse impact on our business. Our dependence on large orders from a relatively small number of customers makes our relationship with each customer critically important to our business. We cannot assure you that we will be able to retain our major customers, attract additional customers, or that our customers will be successful in selling their products that incorporate our products. We have in the past experienced delays and reductions in orders from some of our major customers. In addition, our customers have in the past sought price concessions from us, and we expect that they will continue to do so in the future. Expense reduction measures that we have implemented over the past several years, and additional action we are taking to reduce costs, may adversely affect our ability to introduce new and improved products which may, in turn, adversely affect our relationships with some of our key customers. Further, some of our customers may in the future shift their purchases of products from us to our competitors or to joint ventures between these customers and our competitors. The loss of one or more of our major customers, any reduction or delay in sales to these customers, our inability to successfully develop relationships with additional customers, or future price concessions that we may make could significantly harm our business.

Because we do not have long-term contracts with our customers, our customers may cease purchasing our products at any time if we fail to meet our customers' needs.

Typically, we do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurance of future sales. Accordingly:

our customers can stop purchasing our products at any time without penalty;
our customers are free to purchase products from our competitors; and
our customers are not required to make minimum purchases.

Sales are typically made pursuant to inventory hub arrangements under which customers may draw down inventory to satisfy their demand as needed or pursuant to individual purchase orders, often with extremely short lead times. If we are unable to fulfill these orders in a timely manner, it is likely that we will lose sales and customers. If our major customers stop purchasing our products for any reason, our business, financial condition, and results of operations would be harmed.

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Our customers often evaluate our products for long and variable periods, which causes the timing of our revenues and results of operations to be unpredictable.

The period of time between our initial contact with a customer and the receipt of an actual purchase order typically spans over a year. During this time, customers may perform, or require us to perform, extensive and lengthy evaluation and testing of our products before purchasing and using the products in their equipment. These products often take substantial time to develop because of their complexity and because customer specifications sometimes change during the development cycle. Our customers do not typically share information on the duration or magnitude of these qualification procedures. The length of these qualification processes also may vary substantially by product and customer, and, thus, cause our results of operations to be unpredictable. While our potential customers are qualifying our products and before they place an order with us, we may incur substantial research and development and sales and marketing expenses and expend significant management effort. Even after incurring such costs we ultimately may not be able to sell any products to such potential customers. In addition, these qualification processes often make it difficult to obtain new customers, as customers are reluctant to expend the resources necessary to qualify a new supplier if they have one or more existing qualified sources. Once our products have been qualified, the agreements that we enter into with our customers typically contain no minimum purchase commitments. Failure of our customers to incorporate our products into their systems would significantly harm our business.

We may not be able to obtain additional capital in the future, and failure to do so may harm our business.

We believe that our existing balances of cash 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 2033 Notes, in the aggregate principal amount of $258.8 million, which are subject to redemption by the holders in December 2018, 2023 and 2028. Due to the unpredictable nature of the capital markets, particularly in the technology sector, we cannot assure you that we will be able to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, we could be required to significantly reduce or restructure our business operations. If we do raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders.

Our international business and operations expose us to additional risks.

Products shipped to customers located outside the United States account for a majority of our revenues. In addition, we have significant tangible assets located outside the United States. Our principal manufacturing facilities are located in Malaysia and China. We currently operate smaller facilities in Australia, Israel, Korea, Sweden and Germany, and we are further expanding one of our manufacturing facilities in China. We also rely on several contract manufacturers located in Asia for our supply of key subassemblies. Conducting business outside the United States subjects us to a number of additional risks and challenges, including:

periodic changes in a specific country's or region's economic conditions, such as recession;
compliance with a wide variety of domestic and foreign laws and regulations (including those of municipalities or provinces where we have operations) and unexpected changes in those laws and regulatory requirements, including uncertainties regarding taxes, social insurance contributions and other payroll taxes and fees to governmental entities, tariffs, quotas, export controls, export licenses and other trade barriers;
unanticipated restrictions on our ability to sell to foreign customers where sales of products and the provision of services may require export licenses;
certification requirements;
environmental regulations;
fluctuations in foreign currency exchange rates;
inadequate protection of intellectual property rights in some countries;
potential political, legal and economic instability, foreign conflicts, and the impact of regional and global infectious illnesses in the countries in which we and our customers, suppliers and contract manufacturers are located;
preferences of certain customers for locally produced products;
difficulties and costs of staffing and managing international operations across different geographic areas and cultures, including assuring compliance with the U.S. Foreign Corrupt Practices Act and other U. S. and foreign anticorruption laws;
seasonal reductions in business activities in certain countries or regions; and

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fluctuations in freight rates and transportation disruptions.

These factors, individually or in combination, could impair our ability to effectively operate one or more of our foreign facilities or deliver our products, result in unexpected and material expenses, or cause an unexpected decline in the demand for our products in certain countries or regions. Our failure to manage the risks and challenges associated with our international business and operations could have a material adverse effect on our business.
Our future operating results may be subject to volatility as a result of exposure to foreign exchange risks.

We are exposed to foreign exchange risks. Foreign currency fluctuations may affect both our revenues and our costs and expenses and significantly affect our operating results. Prices for our products are currently denominated in U.S. dollars for sales to our customers throughout the world. If there is a significant devaluation of the currency in a specific country relative to the dollar, the prices of our products will increase relative to that country's currency, our products may be less competitive in that country and our revenues may be adversely affected.

Although we price our products in U.S. dollars, portions of both our cost of revenues and operating expenses are incurred in foreign currencies, principally the Malaysian ringgit, the Chinese yuan, the Australian dollar, the Israeli shekel, the Swedish krona, and the Euro. As a result, we bear the risk that the rate of inflation in one or more countries will exceed the rate of the devaluation of that country's currency in relation to the U.S. dollar, which would increase our costs as expressed in U.S. dollars. To date, we have not engaged in currency hedging transactions to decrease the risk of financial exposure from fluctuations in foreign exchange rates.

Our failure to protect our intellectual property may significantly harm our business.

Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements to establish and protect our proprietary rights. We license certain of our proprietary technology, including our digital diagnostics technology, to customers who include current and potential competitors, and we rely largely on provisions of our licensing agreements to protect our intellectual property rights in this technology. We have obtained a number of issued patents, acquired certain other patents as a result of our acquisitions, and we have filed applications for additional patents; however, we cannot assure you that any pending patent applications will result in issued patents, any issued patents will include claims that are sufficiently broad to cover our products and technologies or to provide sufficient protection from our competitors, or that our issued patents will be upheld. Additionally, significant technology used in our product lines is not the subject of any patent protection, and we may be unable to obtain patent protection on such technology in the future. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, which could result in loss of competitive advantages and decreased revenues to us.

Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult and expensive. We are currently engaged in pending litigation to enforce certain of our patents, and additional litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. In connection with the pending litigation, substantial management time has been, and will continue to be, expended. In addition, we have incurred, and we expect to continue to incur, substantial legal expenses in connection with these pending lawsuits. These costs and this diversion of resources could significantly harm our business.

Claims that we or any user of our products infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products.

Our industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We are currently involved as a defendant in patent infringement litigation and have been involved in the past as a defendant in such lawsuits. From time to time, we have also been accused of patent infringement that is not subject to current lawsuit, some of which accusations are unresolved. In the future we may be subject to additional litigation alleging infringement of patent, copyright, trademark and other intellectual property rights to technologies and in various jurisdictions that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could significantly harm our business. Further, claims against a customer and/or end user of our products that the re-sale or use of our products, either alone or in combination with other products, infringes proprietary

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rights of third parties could cause customer or users to choose to not or be required to not utilize our products alone or in such combination, which could harm our sales of such products. Any claims, against us or any customer or user of our products, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could significantly harm our business. In addition, our agreements with our customers typically require us to indemnify our customers from any expense or liability resulting from claimed infringement of third party intellectual property rights. In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed.

Numerous patents in our industry are held by others, including academic institutions, competitors and non-practicing entities. Optical subsystem suppliers may seek to gain a competitive advantage or other third parties may seek an economic return on their intellectual property portfolios by making infringement claims against us. In the future, we may need to obtain license rights to patents or other intellectual property held by others to the extent necessary for our business. Unless we are able to obtain those licenses on commercially reasonable terms, patents or other intellectual property held by others could inhibit our development of new products. Licenses granting us the right to use third party technology may not be available on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have a significant adverse impact on our operating results.

Our products may contain defects that may cause us to incur significant costs, divert our attention from product development efforts and result in a loss of customers.

Our products are complex and defects may be found from time to time. Networking products frequently contain undetected software or hardware defects when first introduced or as new versions are released. In addition, our products are often embedded in or deployed in conjunction with our customers' products which incorporate a variety of components produced by third parties. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relation problems or loss of customers, all of which would harm our business.

If we are unable to retain our key management and technical personnel and attract and retain additional key personnel as required, our business could be significantly harmed.

Our future success is substantially dependent upon the continued contributions of the members of our senior management team, many of whom have years of management, engineering, sales, marketing and manufacturing experience that would be difficult to replace. We also believe our future success will depend in large part upon our ability to attract and retain additional highly skilled managerial, technical, sales and marketing, finance and manufacturing personnel. In particular, we will need to increase the number of our technical staff members with experience in high-speed networking applications as we further develop our product lines. Competition for these highly skilled employees in our industry is intense. In making employment decisions, particularly in the high-technology industries, job candidates often consider the value of the equity they are to receive in connection with their employment. Therefore, significant volatility in the price of our common stock may adversely affect our ability to attract or retain key management and technical personnel. The loss of service of any our key management or technical employees, our inability to attract or retain qualified personnel in the future or delays in hiring key personnel, as required, could significantly harm our business. In addition, employees may leave our company and subsequently compete against us. Moreover, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We have been subject to claims of this type and may be subject to such claims in the future as we seek to hire qualified personnel. Some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits.

Our business and future operating results are subject to a wide range of uncertainties arising out of the continuing threat of terrorist attacks and ongoing military actions in the Middle East.

Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the continuing threat of terrorist attacks on United States' interests, including U.S. companies, in locations worldwide and ongoing military actions in the Middle East, including the economic consequences of the war in Afghanistan or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:

increased risks related to the operations of our manufacturing facilities in Malaysia;

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greater risks of disruption in the operations of our China, Singapore and Israeli facilities and our Asian contract manufacturers, including contract manufacturers located in Thailand, and more frequent instances of shipping delays; and
the risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities.

Future acquisitions could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results.

In addition to our combination with Optium in August 2008 and our acquisitions of Ignis in May 2011, Red-C in July 2012 and u 2 t in January 2014, we have completed the acquisition of 11 privately-held companies and certain businesses and assets from seven other companies since October 2000. We continue to review opportunities to acquire other businesses, product lines or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities, and we from time to time make proposals and offers, and take other steps, to acquire businesses, products and technologies.

The Optium merger and several of our other past acquisitions have been material, and acquisitions that we may complete in the future may be material. In 13 of our 22 acquisitions, we issued common stock or notes convertible into common stock as all or a portion of the consideration. The issuance of common stock or other equity securities by us in connection with any future acquisition would dilute our stockholders' percentage ownership.

Other risks associated with acquiring the operations of other companies include:

problems assimilating the purchased operations, technologies or products;
unanticipated costs associated with the acquisition;
diversion of management's attention from our core business;
adverse effects on existing business relationships with suppliers and customers;
risks associated with entering markets in which we have no or limited prior experience; and
potential loss of key employees of purchased organizations.

Not all of our past acquisitions have been successful. In the past, we have subsequently sold some of the assets acquired in prior acquisitions, discontinued product lines and closed acquired facilities. As a result of these activities, we incurred significant restructuring charges and charges for the write-down of assets associated with those acquisitions. Through fiscal 2015, we have written off all of the goodwill associated with our past acquisitions with the exception of the recently completed acquisitions of Ignis, Red-C and u 2 t. We cannot assure you that we will be successful in overcoming problems encountered in connection with the recent Ignis acquisition or potential future acquisitions, and our inability to do so could significantly harm our business. In addition, to the extent that the economic benefits associated with the Ignis acquisition or any of our future acquisitions diminish in the future, we may be required to record additional write downs of goodwill, intangible assets or other assets associated with such acquisitions, which would adversely affect our operating results.

We have made and may continue to make strategic investments which may not be successful, may result in the loss of all or part of our invested capital and may adversely affect our operating results.

Since inception we have made minority equity investments in a number of early-stage technology companies, totaling approximately $61.9 million. Our investments in these early stage companies were primarily motivated by our desire to gain early access to new technology. We intend to review additional opportunities to make strategic equity investments in pre-public companies where we believe such investments will provide us with opportunities to gain access to important technologies or otherwise enhance important commercial relationships. We have little or no influence over the early-stage companies in which we have made or may make these strategic, minority equity investments. Each of these investments in pre-public companies involves a high degree of risk. We may not be successful in achieving the financial, technological or commercial advantage upon which any given investment is premised, and failure by the early-stage company to achieve its own business objectives or to raise capital needed on acceptable economic terms could result in a loss of all or part of our invested capital. Between fiscal 2003 and 2015, we wrote off an aggregate of $26.2 million in seven investments which became impaired and reclassified $4.2 million of another investment to goodwill as the investment was deemed to have no value. We may be required to write off all or a portion of the $3.7 million of such equity investments remaining on our balance sheet as of January 31, 2016 in future periods.


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Our ability to utilize certain net operating loss carryforwards and tax credit carryforwards may be limited under Sections 382 and 383 of the Internal Revenue Code.

As of May 3, 2015, we had net operating loss, or NOL, carryforward amounts of approximately $375.3 million, $50.1 million and $40.3 million for U.S. federal, state and foreign income tax purposes, respectively, and tax credit carryforward amounts of approximately $27.0 million and $20.5 million for U.S. federal and state income tax purposes, respectively. The federal and state tax credit carryforwards will expire at various dates beginning in 2016 through 2034, and $446,000 of such carryforwards will expire in the next five years. The federal and state NOL carryforwards will expire at various dates beginning in 2016 through 2034, and $37.4 million of such carryforwards will expire in the next five years. Utilization of these NOL and tax credit carryforward amounts may be subject to a substantial annual limitation if the ownership change limitations under Sections 382 and 383 of the Internal Revenue Code and similar state provisions are triggered by changes in the ownership of our capital stock. Such an annual limitation could result in the expiration of the NOL and tax credit carryforward amounts before utilization. Due to uncertainty regarding the timing and extent of our future profitability, we continue to record a valuation allowance to offset our U.S. deferred tax assets (representing 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.

Changes in the application of tax policies may harm our results of operations.

A number of factors may negatively impact the manner in which our existing NOLs are applied as well as our future effective tax rates including, but not limited to:

the jurisdictions in which profits are determined to be earned and taxed;
changes in valuation of our deferred tax assets and liabilities;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in stock-based compensation; and
changes in tax laws or the interpretation of such tax laws, including by authorities in municipalities where we are subject to social insurance and other payroll taxes and fees, and changes in generally accepted accounting principles in the United States or other countries in which we operate.

An adverse change that impacts our tax position could negatively impact our operating results. In addition, we are the recipient of tax incentives that provide that certain income earned by our subsidiary in Malaysia is subject to a tax holiday for a limited period of time under the laws of that country. This Malaysian tax holiday subject to expiration in August 2021. Our ability to realize benefits from tax initiatives could be materially affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction. In addition, although we have successfully received tax holiday extensions in the past, there can be no assurance that future extensions will be granted. If we are not able to extend a tax holiday, our total tax paid on a consolidated would be materially increased.

We will lose sales if we are unable to obtain government authorization to export certain of our products, and we would be subject to legal and regulatory consequences if we do not comply with applicable export control laws and regulations.

Exports of certain of our products are subject to export controls imposed by the U.S. Government and administered by the United States Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering department. For products subject to the Export Administration Regulations, or EAR, administered by the Department of Commerce's Bureau of Industry and Security, the requirement for a license is dependent on the type and end use of the product, the final destination, the identity of the end user and whether a license exception might apply. Virtually all exports of products subject to the International Traffic in Arms Regulations, or ITAR, administered by the Department of State's Directorate of Defense Trade Controls, require a license. Certain of our fiber optics products are subject to EAR and certain of our RF-over-fiber products, as well as certain products developed with government funding, are currently subject to ITAR. Products developed and manufactured in our foreign locations are subject to export controls of the applicable foreign nation.

Given the current global political climate, obtaining export licenses can be difficult and time-consuming. Failure to obtain export licenses for these shipments could significantly reduce our revenue and materially adversely affect our business, financial condition and results of operations. Compliance with U.S. Government regulations also subjects us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position.


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We have previously been the subject of inquiries from the Department of State and the Department of Justice regarding compliance with ITAR. Although these inquiries were closed with no action being taken, we expended significant time and resources to resolve them, and future inquiries of this type could also be costly to resolve.

We are subject to pending securities class action and shareholder derivative legal proceedings.

Several securities class action lawsuits were filed against us and our Chairman of the Board, Chief Executive Officer and Chief Financial Officer following our March 8, 2011 announcement of unaudited financial results for the third quarter of fiscal 2011 and our financial outlook for the fourth quarter of fiscal 2011. We also have been named as a nominal defendant in several shareholder derivative lawsuits filed in 2011 concerning our March 8, 2011 earnings announcement. No specific amounts of damages have been alleged in the class action lawsuits and, by the nature of the lawsuits, no damages will be alleged against Finisar in the derivative lawsuits.

We will continue to incur legal fees in connection with these pending cases, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations. The expense of continuing to defend such litigation may be significant. We intend to defend these lawsuits vigorously, however there can be no assurance that we will be successful in any defense. If any of the lawsuits related to our earnings announcement are adversely decided, we may be liable for significant damages directly or under our indemnification obligations, which could adversely affect our business, results of operations and cash flows. Further, the amount of time that will be required to resolve these lawsuits is unpredictable and these actions may divert management's attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.

Our business and future operating results may be adversely affected by events outside our control.

     Our business and operating results are vulnerable to events outside of our control, such as earthquakes, floods, fire, power loss, telecommunication failures and uncertainties arising out of terrorist attacks in the United States and overseas. Our corporate headquarters and a portion of our manufacturing operations are located in California, and our principal manufacturing operations and those of most of our key suppliers and contract manufacturers are located in Asia. These areas have been vulnerable to natural disasters, such as earthquakes, floods and fires, and other risks which at times have disrupted the local economy and posed physical risks to our property. We are also dependent on communications links with our overseas manufacturing locations and would be significantly harmed if these links were interrupted for any significant length of time. We presently do not have adequate redundant, multiple site capacity if any of these events were to occur, nor can we be certain that the insurance we maintain against these events would be adequate.

The conversion of our outstanding convertible subordinated notes would result in substantial dilution to our current stockholders.

     As of January 31, 2016 , we had outstanding an aggregate principal amount of $258.8 million of our 2033 Notes. The 2033 Notes are convertible at the option of the holder, under certain circumstances, into shares of our common stock at an initial conversion price of $30.18 per share, subject to adjustments. An aggregate of approximately 8,572,413 shares of common stock would be issued upon the conversion of all outstanding 2033 Notes at these conversion prices, which would dilute the voting power and ownership percentage of our existing stockholders. We have previously entered into privately negotiated transactions with certain holders of our convertible notes for the repurchase of notes in exchange for a greater number of shares of our common stock than would have been issued had the principal amount of the notes been converted at the original conversion rate specified in the notes, thus resulting in more dilution. We may enter into similar transactions in the future and, if we do so, there will be additional dilution to the voting power and percentage ownership of our existing stockholders.

Delaware law, our charter documents and our stockholder rights plan contain provisions that could discourage or prevent a potential takeover, even if such a transaction would be beneficial to our stockholders.

Some provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These include provisions:

authorizing the board of directors to issue additional preferred stock;
prohibiting cumulative voting in the election of directors;
limiting the persons who may call special meetings of stockholders;
prohibiting stockholder actions by written consent;
creating a classified board of directors pursuant to which our directors are elected for staggered three-year terms;
permitting the board of directors to increase the size of the board and to fill vacancies;

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requiring a super-majority vote of our stockholders to amend our bylaws and certain provisions of our certificate of incorporation; and
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

We are subject to the provisions of Section 203 of the Delaware General Corporation Law which limit the right of a corporation to engage in a business combination with a holder of 15% or more of the corporation's outstanding voting securities, or certain affiliated persons.

Although we believe that these charter and bylaw provisions and provisions of Delaware law provide an opportunity for the board to assure that our stockholders realize full value for their investment, they could have the effect of delaying or preventing a change of control, even under circumstances that some stockholders may consider beneficial.

We do not currently intend to pay dividends on Finisar common stock and, consequently, a stockholder's ability to achieve a return on such stockholder's investment will depend on appreciation in the price of the common stock.

We have never declared or paid any cash dividends on Finisar common stock and we do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, a stockholder is not likely to receive any dividends on such stockholder's common stock for the foreseeable future.

Our stock price has been and is likely to continue to be volatile.

The trading price of our common stock has been and is likely to continue to be subject to large fluctuations. Our stock price may increase or decrease in response to a number of events and factors, including:

trends in our industry and the markets in which we operate;
changes in the market price of the products we sell;
changes in financial estimates and recommendations by securities analysts;
acquisitions and financings;
quarterly variations in our operating results;
the operating and stock price performance of other companies that investors in our common stock may deem comparable; and
purchases or sales of blocks of our common stock.

Part of this volatility is attributable to the current state of the stock market, in which wide price swings are common. This volatility may adversely affect the prices of our common stock regardless of our operating performance. If any of the foregoing occurs, our stock price could fall and we may be exposed to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.


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Item 6. Exhibits
Exhibit Number
 
Exhibit Description
 
 
 
10.1
 
Tenth Amendment to lease agreement by and between Registrant (as successor in interest to GenOA Corporation) and Northern California Industrial Portfolio, Inc. (as successor in interest to RREEF America REIT II Corp. DDD, successor in interest to Speiker Properties, L.P.) dated January 10, 2000
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
FINISAR CORPORATION
 
 
By:  
/s/ JERRY S. RAWLS  
 
 
Jerry S. Rawls 
 
 
Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer)
 
 
 
By:  
/s/ KURT ADZEMA  
 
 
Kurt Adzema 
 
 
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 

Dated: March 10, 2016


33


TENTH AMENDMENT
THIS TENTH AMENDMENT (the " Amendment ") is made and entered into as of the 18 th day of December, 2015, by and between PSB NORTHERN CALIFORNIA INDUSTRIAL PORTFOLIO LLC, a Delaware limited liability company (" Landlord ”), and FINISAR CORPORATION, a Delaware corporation (" Tenant ").
RECITALS
A.
Landlord (as successor in interest to Northern California Industrial Portfolio, Inc., a Maryland corporation, successor in interest to RREEF America REIT II Corp. DDD, a Maryland corporation, successor in interest to Spieker Properties, L.P., a California limited partnership) and Tenant (as successor in interest to GeNOA Corporation, a California corporation) are parties to that certain Lease (the “ Original Lease ”) dated January 10, 2000, which Original Lease has been previously amended by that certain Expansion Agreement dated February 28, 2000, that certain Amendment Number Two to Lease and Expansion Agreement dated October 27, 2000, that certain Third Amendment dated as of October 13, 2005, that certain Fourth Amendment dated as of November 7, 2006, that certain Fifth Amendment dated as of October 15, 2007, that certain Sixth Amendment dated January 29, 2009, that certain Seventh Amendment dated as of August 24, 2011 (the “ Seventh Amendment ”), that certain Eighth Amendment dated as of August 13, 2013 (the “ Eighth Amendment ”) and that certain Ninth Amendment dated as of October 1, 2014 (collectively, the “ Lease ”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 67,764 rentable square feet (the “ Original Premises ”) comprised of (i) approximately 16,501 rentable square feet of space described as 41778 Christy Street (the “ 41778 Christy Street Premises ”) in the building located at 41762-41786, Fremont, California (the “ 41762-41786 Building ”), (ii) approximately 19,575 rentable square feet of space described as 41762-41772 Christy Street (the “ 41762-41772 Christy Street Premises ”) in the 41762-41786 Building, (iii) approximately 7,680 rentable square feet of space described as 41644 Christy Street (the “ 41644 Christy Street Premises ”) in the building located at 41638-41758 Christy Street, Fremont, California (the “ 41638-41758 Building ”), (iv) approximately 12,400 rentable square feet of space described as 41752 Christy Street (the “ 41752 Christy Street Premises ”) located in the 41638-41758 Building, and (v) approximately 11,608 rentable square feet described as 41688 Christy Street (the “ 41688 Christy Street Premises ”) in the 41638-41758 Building, in Fremont, California. The 41762-41786 Building and the 41638-41758 Building are collectively referred to herein as the “ Building ”. The Building is a part of the project commonly known as Fremont Commerce Center (the “ Project ”).
B.
Tenant desires to surrender a portion of the Premises to Landlord containing approximately 11,608 rentable square feet described as the 41688 Christy Street Premises of the 41638-41758 Building as shown on Exhibit A hereto (the " Reduction Space ") (the Original Premises, less the Reduction Space, is referred to herein as the “ Remaining Premises ”) and that the Lease be appropriately amended, and Landlord is willing to accept such surrender on the following terms and conditions.
C.
The Lease by its terms shall expire on March 31, 2017 (" Prior Termination Date "), and the parties desire to extend the Term of the Lease solely with respect to the 41778 Christy Street Premises and the 41762-41772 Christy Street Premises comprising approximately 36,076 rentable square feet (the 41778 Christy Street Premises and the 41762-41772 Christy Street Premises are collectively referred to herein as the “ Extension Premises ”), all on the following terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:
I.
Extension. The Term of the Lease solely with respect to the Extension Premises is hereby extended for a period of 60 months and shall expire on March 31, 2022 (" Sixth Extended Termination Date "), unless sooner terminated in accordance with the terms of the Lease. That portion of the Term commencing the day immediately following the Prior Termination Date (" Sixth Extension Date ") and ending on the Sixth Extended Termination Date shall be referred to herein as the " Sixth Extended Term ".
II.
Reduction.
A.
Tenant shall vacate the Reduction Space in accordance with the terms of the Lease on or prior to December 31, 2015, which is the date immediately preceding the Reduction Effective Date (defined in II.B. below) and Tenant shall fully comply with all obligations under the Lease respecting the Reduction Space up to the Reduction Effective Date, including those provisions relating to the condition of the Reduction Space and removal of Tenant's personal property therefrom.
B.
Effective as of January 1, 2016 (the " Reduction Effective Date "), the Premises is decreased from 67,764 rentable square to 56,156 rentable square feet by the elimination of the Reduction Space. As of the Reduction Effective Date, the Reduction Space shall be deemed surrendered by Tenant to

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Landlord, the Lease shall be deemed terminated with respect to the Reduction Space, and the “Premises”, as defined in the Lease, shall be deemed to mean the Original Premises, less the Reduction Space; provided, if Tenant shall violate any provision hereof or if Tenant's representations herein shall be false or materially misleading, Landlord shall have the right to declare this Amendment null and void and to reinstate the Lease with respect to the Reduction Space in addition to, and not in lieu of, any other rights or remedies available to Landlord.
C.
If Tenant shall holdover in the Reduction Space beyond the day immediately preceding the Reduction Effective Date, Tenant shall be liable for Base Rent, Tenant’s Proportionate Share of Operating Expenses and other charges respecting the Reduction Space equal to twice the amount in effect under the Lease prorated on a per diem basis and on a per square foot basis for the Reduction Space. Such holdover amount shall not be in limitation of Tenant's liability for consequential or other damages arising from Tenant's holding over nor shall it be deemed permission for Tenant to holdover in the Reduction Space. If Landlord shall install a wall separating the Reduction Space from the balance of the Premises or otherwise incur expense in installing separate utility meters or effecting similar separations, Tenant, upon demand, shall reimburse Landlord's costs in connection therewith.
III.
Base Rent.
A.
41644 Christy Street Premises and 41752 Christy Street Premises. Base Rent shall continue to be payable as provided in the Lease with respect to the 41644 Christy Street Premises and 41752 Christy Street Premises through and including the Prior Termination Date.
B.
Extension Premises. Notwithstanding anything to the contrary contained in the Lease, effective as of December 15, 2015, the schedule of Base Rent payable solely with respect to the Extension Premises during the balance of the current Term and the Sixth Extended Term is the following:

Period
Monthly
Base Rent
12/15/15 - 3/31/17
$26,335.48
4/1/17 - 3/31/18
$27,125.54
4/1/18 - 3/31/19
$27,939.31
4/1/19 - 3/31/20
$28,777.49
4/1/20 - 3/31/21
$29,640.81
4/1/21 - 3/31/22
$30,530.04

All such Base Rent shall be payable by Tenant in accordance with the terms of the Lease.
IV.
Additional Security Deposit. No additional security deposit shall be required in connection with this Amendment.
V.
Additional Consideration. As additional consideration for this Amendment, Tenant agrees to pay Landlord upon Tenant's execution hereof the amount of $140,601.75.
VI.
Tenant's Proportionate Share.
A.
For the period commencing on the Reduction Effective Date and ending on the Fifth Extended Termination Date: (a) Tenant's Proportionate Share of the 41638-41758 Building is decreased from 32.36% of the 41638-41758 Building to 20.51% of the 41638-41758 Building, (b) Tenant’s Proportionate Share of the 41762-41786 Building shall continue to be 52.63%, and (c) Tenant’s Proportionate Share of the Project for the Remaining Premises is decreased from 20.29% of the Project to 16.81% of the Project. Notwithstanding anything in this Amendment to the contrary, Tenant shall remain liable for all year-end adjustments with respect to Tenant's Proportionate Share of Operating Expenses applicable to the Reduction Space for that portion of the calendar year preceding the Reduction Effective Date. Such adjustments shall be paid at the time, in the manner and otherwise in accordance with the terms of the Lease, unless otherwise specified herein.
B.
For the period commencing on the Sixth Extension Date and ending on the Extended Termination Date, Tenant’s Proportionate Share solely with respect to the Extension Premises shall be 52.63% of the 41762-41786 Building and 10.08% of the Project.
VII.
Operating Expenses.
A.
For the period commencing on the Reduction Effective Date and ending on the Fifth Extended Termination Date, Tenant shall pay for Tenant’s Proportionate Share of Operating Expenses with respect to the Remaining Premises in accordance with the terms of the Lease, as amended hereby.

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As of the date hereof, Tenant’s Proportionate Share of Operating Expenses for the Remaining Premises for calendar year 2015 is estimated to be $11,792.76 per month, subject to adjustment pursuant to Article 7 of the Original Lease.
B.
For the period commencing on the Sixth Extension Date and ending on the Sixth Extended Termination Date, Tenant shall pay for Tenant’s Proportionate Share of Operating Expenses with respect to the Extension Premises in accordance with the terms of the Lease, as amended hereby. As of the date hereof, Tenant’s Proportionate Share of Operating Expenses solely for the Extension Premises for calendar year 2015 is estimated to be $7,575.96 per month, subject to adjustment pursuant to Article 7 of the Original Lease.
VIII.
Improvements to Remaining Premises.
A.
Condition of Premises . Tenant is in possession of the Remaining Premises and agrees to accept the same “as is” without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment.
B.
Responsibility for Improvements to Remaining Premises. Any construction, alterations or improvements to the Remaining Premises shall be performed by Tenant at its sole cost and expense using contractors selected by Tenant and approved by Landlord and shall be governed in all respects by the provisions of the Original Lease.
IX.
Representations. Each party represents to the other that it has full power and authority to execute this Amendment. Tenant represents that it has not made any assignment, sublease, transfer, or conveyance of the Lease or any interest therein or in the Reduction Space other than those explicitly recited herein and further represents that there is not and will not hereafter be any claim, demand, obligation, liability, action or cause of action by any other party respecting, relating to or arising out of the Reduction Space, and Tenant agrees to indemnify and hold harmless Landlord and the Landlord Related Parties (as defined in the “Miscellaneous” Section below) from all liabilities, expenses, claims, demands, judgments, damages or costs arising from any of the same, including without limitation, attorneys' fees. Tenant acknowledges that Landlord will be relying on this Amendment in entering into leases for the Reduction Space with other parties.
X.
Option to Renew.
A.
Section 10 of the Seventh Amendment (Option to Renew) is hereby deleted in its entirety and of no further force and effect solely with respect to the Extension Premises. Notwithstanding the foregoing or anything to the contrary contained in the Lease, the Renewal Option set forth in Section 10 of the Seventh Amendment shall remain in full force and effect solely with respect to the 41644 Christy Street Premises and the 41752 Christy Street Premises collectively and Tenant may only exercise such Renewal Option for both the 41644 Christy Street Premises and the 41752 Christy Street Premises in their entireties.
B.
Provided this Lease is in full force and effect and Tenant is not in default under any of the other terms and conditions of the Lease, as amended hereby, and Tenant is in occupancy of the Extension Premises at the time of notification or commencement of the Renewal Term (defined below), Tenant shall have one (1) option to renew (the “ Extension Premises Renewal Option ”) the Sixth Extended Term solely with respect to the Extension Premises for a term of 5 years (the “ Renewal Term ”), for the Extension Premises, on the same terms and conditions set forth in the Lease, as amended hereby, except as modified by the terms, covenants and conditions as set forth below:

(i)
If Tenant elects to exercise the Extension Premises Renewal Option, then Tenant shall provide Landlord with written notice no earlier than the date which is 730 days prior to the expiration of the Sixth Extended Term, but no later than the date which is 365 days prior to the expiration of the Sixth Extended Term. If Tenant fails to provide such notice, Tenant shall have no further or additional right to extend or renew the Sixth Extended Term.

(ii)
The Base Rent in effect at the expiration of the Sixth Extended Term with respect to the Extension Premises shall be changed to reflect the Prevailing Market (as defined in Section X.E below) rate. Landlord shall advise Tenant of the new Base Rent for the Extension Premises no later than 30 days after receipt of Tenant's written request therefor. Said request shall be made no earlier than 30 days prior to the first date on

{2095-0852/00599601;2}                     3



which Tenant may exer-cise its Extension Premises Renewal Option under this Section X. Said notification of the new Base Rent may include a provision for its escala-tion to provide for a change in the Prevailing Market rate between the time of notification and the commencement of the Renewal Term.

(iii)
If Tenant and Landlord are unable to agree on a mutually acceptable rental rate for the Extension Premises for the Renewal Term not later than 60 days prior to the expiration of the Sixth Extended Term, then Landlord and Tenant, within 5 days after such date, shall each simultaneously submit to the other, in a sealed envelope, its good faith estimate of the Prevailing Market rate for the Extension Premises during the Renewal Term (collectively referred to as the " Estimates "). If the higher of such Estimates is not more than 105% of the lower of such Estimates, then the Prevailing Market rate shall be the average of the two Estimates. If the Prevailing Market rate is not established by the exchange of Estimates, then, within 7 days after the exchange of Estimates, Landlord and Tenant shall each select an appraiser to determine which of the two Estimates most closely reflects the Prevailing Market rate for the Extension Premises during the Renewal Term. Each appraiser so selected shall be certified as an MAI appraiser or as an ASA appraiser and shall have had at least 5 years experience within the previous 10 years as a real estate appraiser working in Santa Clara, California, with working knowledge of current rental rates and practices. For purposes hereof, an "MAI" appraiser means an individual who holds an MAI designation conferred by, and is an independent member of, the American Institute of Real Estate Appraisers (or its successor organization, or in the event there is no successor organization, the organization and designation most similar), and an "ASA" appraiser means an individual who holds the Senior Member designation conferred by, and is an independent member of, the American Society of Appraisers (or its successor organization, or, in the event there is no successor organization, the organization and designation most similar).

(iv)
Upon selection, Landlord's and Tenant's appraisers shall work together in good faith to agree upon which of the two Estimates most closely reflects the Prevailing Market rate for the Extension Premises. The Estimate chosen by such appraisers shall be binding on both Landlord and Tenant. If either Landlord or Tenant fails to appoint an appraiser within the 7 day period referred to above, the appraiser appointed by the other party shall be the sole appraiser for the purposes hereof. If the two appraisers cannot agree upon which of the two Estimates most closely reflects the Prevailing Market rate within 20 days after their appointment, then, within 10 days after the expiration of such 20 day period, the two appraisers shall select a third appraiser meeting the aforementioned criteria. Once the third appraiser (i.e., the arbitrator) has been selected as provided for above, then, as soon thereafter as practicable but in any case within 14 days, the arbitrator shall make his or her determination of which of the two Estimates most closely reflects the Prevailing Market rate and such Estimate shall be binding on both Landlord and Tenant as the Prevailing Market rate for the Extension Premises. If the arbitrator believes that expert advice would materially assist him or her, he or she may retain one or more qualified persons to provide such expert advice. The parties shall share equally in the costs of the arbitrator and of any experts retained by the arbitrator. Any fees of any appraiser, counsel or experts engaged directly by Landlord or Tenant, however, shall be borne by the party retaining such appraiser, counsel or expert.

(v)
If the Prevailing Market rate has not been determined by the commencement date of the Renewal Term, Tenant shall pay Base Rent applicable to the Extension Premises upon the terms and conditions in effect during the last month of the Sixth Extended Term until such time as the Prevailing Market rate has been determined. Upon such determination, the Base Rent for the Extension Premises shall be retroactively adjusted to the commencement of such Renewal Term for the Extension Premises.
C.
If Tenant is entitled to and properly exercises its Extension Premises Renewal Option, Landlord shall prepare an amendment (the “ Renewal Amendment ”) to reflect changes in the Base Rent, Term,

{2095-0852/00599601;2}                     4



Termination Date and other appropriate terms. Tenant shall execute and return the Renewal Amendment to Landlord within 15 days after Tenant’s receipt of same, but an otherwise valid exercise of the Extension Premises Renewal Option shall be fully effective whether or not the Renewal Amendment is executed.
D.
The Extension Premises Renewal Option is not transferable; the parties hereto acknowledge and agree that they intend that the Extension Premises Renewal Option shall be “personal” to Tenant as set forth above and that in no event will any assignee or sublessee have any rights to exercise the Extension Premises Renewal Option. If the Extension Premises Renewal Option is validly exercised or if Tenant fails to validly exercise the Extension Premises Renewal Option, Tenant shall have no further right to extend the Sixth Extended Term with respect to the Extension Premises.
E.
For purposes of this Renewal Option, " Prevailing Market " shall mean the arms length fair market annual rental rate per rentable square foot under leases and renewal and expansion amendments entered into on or about the date on which the Prevailing Market is being determined hereunder for space comparable to the Premises in the Building and buildings comparable to the Building in the Fremont, California area as of the date the Renewal Term is to commence, taking into account the specific provisions of this Lease which will remain constant, and may, if applicable, include parking charges. The determination of Prevailing Market shall take into account any material economic differences between the terms of this Lease and any comparison lease or amendment, such as rent abatements, construction costs and other concessions and the manner, if any, in which the landlord under any such lease is reimbursed for operating expenses and taxes.
XI .
Miscellaneous.
A.
This Amendment, including Exhibit A (Outline and Location of Reduction Space) attached hereto, sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any rent abatement, improvement allowance, leasehold improvements, or other work to the Premises, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment.
B.
Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect.
C.
In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control.
D.
Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant.
E.
The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment.
F.
Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment. Tenant agrees to indemnify and hold Landlord, its members, principals, beneficiaries, partners, officers, directors, employees, mortgagee(s) and agents, and the respective principals and members of any such agents (collectively, the “ Landlord Related Parties ”) harmless from all claims of any brokers claiming to have represented Tenant in connection with this Amendment. Landlord hereby represents to Tenant that Landlord has dealt with no broker in connection with this Amendment. Landlord agrees to indemnify and hold Tenant, its members, principals, beneficiaries, partners, officers, directors, employees, and agents, and the respective principals and members of any such agents (collectively, the “ Tenant Related Parties ”) harmless from all claims of any brokers claiming to have represented Landlord in connection with this Amendment.
G.
Each signatory of this Amendment represents hereby that he or she has the authority to execute and deliver the same on behalf of the party hereto for which such signatory is acting. Tenant hereby represents and warrants that neither Tenant, nor any persons or entities holding any legal or beneficial interest whatsoever in Tenant, are (i) the target of any sanctions program that is established by Executive Order of the President or published by the Office of Foreign Assets Control, U.S. Department of the Treasury (“ OFAC ”); (ii) designated by the President or OFAC pursuant to the Trading with the Enemy Act, 50 U.S.C. App. § 5, the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701-06, the Patriot Act, Public Law 107-56, Executive Order 13224 (September 23, 2001) or any Executive Order of the President issued pursuant to such statutes; or (iii) named on the following list that is published by OFAC: “List of Specially Designated Nationals and Blocked Persons.” If the foregoing representation is untrue at any time during the balance of the current Term or the Sixth

{2095-0852/00599601;2}                     5



Extended Term, as the same may be further extended, an event of default under the Lease will be deemed to have occurred, without the necessity of notice to Tenant.
H.
Redress for any claim against Landlord under the Lease and this Amendment shall be limited to and enforceable only against and to the extent of Landlord’s interest in the Building. The obligations of Landlord under the Lease are not intended to and shall not be personally binding on, nor shall any resort be had to the private properties of, any of its trustees or board of directors and officers, as the case may be, its investment manager, the general partners thereof, or any beneficiaries, stockholders, employees, or agents of Landlord or the investment manager.
I.
If Tenant is billed directly by a public utility with respect to Tenant’s electrical usage at the Premises, then, upon request, Tenant shall provide monthly electrical utility usage for the Premises to Landlord for the period of time requested by Landlord (in electronic or paper format) or, at Landlord’s option, provide any written authorization or other documentation required for Landlord to request information regarding Tenant's electricity usage with respect to the Premises directly from the applicable utility company.
J.
Pursuant to Civil Code section 1938, Landlord states that, as of the Extension Date, the Premises has not undergone inspection by a “Certified Access Specialist” (“ CASp ”) to determine whether the Premises meets all applicable construction-related accessibility standards under California Civil Code section 55.53.
K.
This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which, together, shall constitute one and the same Amendment. In order to expedite the transaction contemplated herein, to the extent allowable under applicable Law, telecopied signatures or signatures transmitted by electronic mail in so-called "pdf" format may be used in place of original signatures on this Amendment. Landlord and Tenant intend to be bound by the signatures on the telecopied or e-mailed document, are aware that the other party will rely on the telecopied or e-mailed signatures which shall be of the same force and effect as hand-written signatures, and hereby waive any defenses to the enforcement of the terms of this Amendment based on such telecopied or e-mailed signatures.
IN WITNESS WHEREOF , Landlord and Tenant have duly executed this Amendment as of the day and year first above written.


 
LANDLORD:
 
PSB NORTHERN CALIFORNIA INDUSTRIAL PORTFOLIO LLC,
a Delaware limited liability company

By:PS Business Parks, Inc.,
a California corporation
Its:Manager


By:/s/ Richard E. Scott

Name:Richard E. Scott

Title:Divisional Vice President


 
TENANT:
 
FINISAR CORPORATION,
a Delaware corporation

By:/s/ Chris Brown

Name:Chris Brown

Title:EVP and Chief Counsel


{2095-0852/00599601;2}                     6



EXHIBIT A

OUTLINE AND LOCATION OF REDUCTION SPACE





{2095-0852/00599601;2}                    A-1



Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jerry S. Rawls, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Finisar Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
 
 
Dated:
March 10, 2016
/s/    Jerry S. Rawls
 
 
Jerry S. Rawls
 
 
Chairman of the Board of Directors and
Chief Executive Officer









Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kurt Adzema, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Finisar Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
 
 
 
Dated:
March 10, 2016
/s/   Kurt Adzema
 
 
Kurt Adzema
 
 
Executive Vice President, Finance and
Chief Financial Officer






Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


I, Jerry S. Rawls, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Finisar Corporation (the “Company”) on Form 10-Q for the three months ended January 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
 
 
Dated:
March 10, 2016
/s/    Jerry S. Rawls
 
 
Jerry S. Rawls
 
 
Chairman of the Board of Directors and
Chief Executive Officer






Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Kurt Adzema, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Finisar Corporation (the “Company”) on Form 10-Q for the three months ended January 31, 2016 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


 
 
 
Dated:
March 10, 2016
/s/   Kurt Adzema
 
 
Kurt Adzema
 
 
Executive Vice President, Finance and
Chief Financial Officer