Finisar Corporation
FINISAR CORP (Form: 10-Q, Received: 12/08/2011 16:45:28)
Table of Contents


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 30, 2011
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to

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

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

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

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

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

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

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

     At November 30, 2011, there were 90,829,334 sha res of the registrant's common stock, $.001 par value, issued and outstanding.


Table of Contents


INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended October 30, 2011
 
 
 
Page
 
 
Condensed Consolidated Balance Sheets as of  October 30, 2011 and April 30, 2011
Condensed Consolidated Statements of Operations for the three and six month periods ended October 30, 2011 and October 31, 2010
Condensed Consolidated Statements of Cash Flows for the  six month periods ended October 30, 2011 and October 31, 2010
EX-31.1
EX-31.2
EX-31.3
EX-32.1
EX-32.2
EX-32.3




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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.


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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
October 30, 2011
 
April 30, 2011
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
228,040

 
$
314,765

Accounts receivable, net of allowance for doubtful accounts of $1,561 at October 30, 2011 and $1,324 at April 30, 2011
176,494

 
168,386

Accounts receivable, other
11,558

 
12,733

Inventories
214,940

 
187,617

Prepaid expenses and other
19,120

 
9,906

Total current assets
650,152

 
693,407

Property, equipment and improvements, net
143,139

 
125,693

Purchased intangible assets, net
47,306

 
17,439

Goodwill
82,936

 

Minority investments
12,289

 
12,289

Equity method investment

 
31,142

Other assets
21,773

 
5,179

Total assets
$
957,595

 
$
885,149

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
91,034

 
$
76,288

Accrued compensation
24,410

 
24,525

Other accrued liabilities
32,118

 
25,112

Deferred revenue
7,909

 
8,064

Short-term debt
4,281

 

Total current liabilities
159,752

 
133,989

Long-term liabilities:
 
 
 
Convertible debt
40,015

 
40,015

Other non-current liabilities
15,771

 
11,988

Deferred tax liabilities
4,052

 

Total liabilities
219,590

 
185,992

Commitments and contingencies

 

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at October 30, 2011 and April 30, 2011

 

Common stock, $0.001 par value, 750,000,000 shares authorized, 90,821,597 shares issued and outstanding at October 30, 2011 and 89,903,095 shares issued and outstanding at April 30, 2011
91

 
90

Additional paid-in capital
2,293,485

 
2,275,600

Accumulated other comprehensive income
29,323

 
32,966

Accumulated deficit
(1,593,430
)
 
(1,609,499
)
Finisar Corporation stockholders' equity
729,469

 
699,157

Non-controlling interest
8,536

 

Total stockholders' equity
738,005

 
699,157

Total liabilities and stockholders' equity
$
957,595

 
$
885,149


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FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
Three Months Ended
 
Six Months Ended
 
October 30,
2011
 
October 31,
2010
 
October 30,
2011
 
October 31,
2010
 
 
 
 
 
 
 
 
Revenues
$
241,489

 
$
240,943

 
$
469,715

 
$
448,825

Cost of revenues
169,571

 
157,343

 
329,794

 
293,419

Amortization of acquired developed technology
1,637

 
1,200

 
3,159

 
2,392

Gross profit
70,281

 
82,400

 
136,762

 
153,014

Operating expenses:
 
 
 
 
 
 
 
Research and development
36,707

 
28,148

 
72,103

 
54,765

Sales and marketing
10,125

 
9,247

 
19,711

 
18,322

General and administrative
13,773

 
8,517

 
27,725

 
19,593

Restructuring charges (recoveries)

 

 
(322
)
 

Amortization of purchased intangibles
859

 
383

 
1,638

 
766

Total operating expenses
61,464

 
46,295

 
120,855

 
93,446

Income from operations
8,817

 
36,105

 
15,907

 
59,568

Interest income
100

 
143

 
260

 
235

Interest expense
(1,138
)
 
(2,077
)
 
(2,049
)
 
(4,232
)
Loss on debt extinguishment

 

 
(419
)
 

Other income (expense), net
(140
)
 
192

 
4,523

 

Income before income taxes and non-controlling interest
7,639

 
34,363

 
18,222

 
55,571

Provision for income taxes
1,369

 
567

 
1,917

 
2,649

Consolidated net income
6,270

 
33,796

 
16,305

 
52,922

Adjust for net income attributable to non-controlling interest
(343
)
 

 
(236
)
 

Net income attributable to Finisar Corporation
$
5,927

 
$
33,796

 
$
16,069

 
$
52,922

Net income per share attributable to Finisar Corporation common stockholders:
 
 
 
 
 
 
 
Basic
$
0.07

 
$
0.44

 
$
0.18

 
$
0.69

Diluted
$
0.06

 
$
0.39

 
$
0.17

 
$
0.63

 
 

 
 

 
 
 
 
Shares used in computing net income per share:
 
 
 
 
 
 
 
Basic
90,715

 
76,766

 
90,470

 
76,433

Diluted
93,599

 
89,521

 
93,712

 
89,013


See accompanying notes.

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FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six Months Ended
 
October 30, 2011
 
October 31, 2010
Operating activities
 
 
 
Consolidated net income
$
16,305

 
$
52,922

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

 

Depreciation
21,590

 
16,850

Amortization
5,211

 
3,457

Stock-based compensation expense
13,764

 
8,219

Non-cash interest cost on 2.5% convertible senior subordinated notes

 
742

Loss on sale or retirement of assets
220

 

Equity in losses of equity method investment
619

 

Gain on fair value remeasurement of equity investment
(5,429
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
3,159

 
(45,626
)
Inventories
(16,617
)
 
(24,692
)
Other assets
(21,840
)
 
(1,465
)
Deferred income taxes
542

 
769

Accounts payable
6,705

 
9,760

Accrued compensation
458

 
3,556

Other accrued liabilities
2,665

 
(1,903
)
Deferred revenue
(1,001
)
 
8,659

Net cash provided by operating activities
$
26,351

 
$
31,248

Investing activities
 
 
 
Purchases of property, equipment and improvements
(33,464
)
 
(25,700
)
Proceeds from sale of property and equipment
32

 

Acquisition of controlling interest in subsidiary, net of cash acquired
(71,125
)
 

Purchase of available for sale minority investment

 
(5,880
)
Net cash used in investing activities
$
(104,557
)
 
$
(31,580
)
Financing activities
 
 
 
Proceeds from term loan
1,800

 

Repayments of long-term debt
(14,026
)
 
(2,000
)
Repayment of convertible notes

 
(29,581
)
Proceeds from the issuance of shares under employee stock option and stock purchase plans, net of repurchase of unvested shares
3,707

 
9,817

Net cash used in financing activities
$
(8,519
)
 
$
(21,764
)
Net decrease in cash and cash equivalents
(86,725
)
 
(22,096
)
Cash and cash equivalents at beginning of period
314,765

 
207,024

Cash and cash equivalents at end of period
$
228,040

 
$
184,928

Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
1,408

 
$
3,177

Cash paid for taxes
5,015

 
697




See accompanying notes.

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FINISAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements as of October 30, 2011 and for the three and six month periods ended October 30, 2011 and October 31, 2010 have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and include the accounts of Finisar Corporation and its controlled subsidiaries (collectively, “Finisar” or the “Company”). Non-controlling interest represents the minority shareholders' proportionate share of the net assets and results of operations of the Company's majority-owned subsidiaries. Inter-company accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position at October 30, 2011 , its operating results for the three and six month periods ended October 30, 2011 and October 31, 2010 , and cash flows for the six month periods ended October 30, 2011 and October 31, 2010 . Operating results for the three and six month periods ended October 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2012 . The condensed consolidated balance sheet at April 30, 2011 has been derived from the audited consolidated financial statements at that date but does not include all the footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2011 .

Fiscal Periods

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

Reclassifications

     Certain reclassifications have been made to the prior period's statement of cash flows and footnotes to conform to the current year presentation. These changes had no impact on the Company's previously reported financial position, results of operations and cash flows.

Use of Estimates

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


2. Summary of Significant Accounting Policies

     For a description of significant accounting policies, see Note 2, Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's annual report on Form 10-K for the fiscal year ended April 30, 2011 . There have been no material changes to the Company's significant accounting policies since the filing of the annual report on Form 10-K, except as noted below.

Recent Adoption of New Accounting Standards

     In October 2009, the Financial Accounting Standards Board ("FASB") amended the accounting standards for revenue recognition to remove tangible products containing software components and nonsoftware components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to:
(i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

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(ii) require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
(iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.
The accounting changes summarized in this guidance are effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. The Company adopted this guidance on a prospective basis during the first quarter of fiscal 2012. Adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

  Pending Adoption of New Accounting Standards

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


3. Acquisition of Ignis ASA
 
On March 22, 2011, the Company entered into a transaction agreement with Ignis ASA ("Ignis"), a Norwegian company whose securities were traded on the Oslo Stock Exchange, under which, on April 7, 2011, the Company made a recommended voluntary public cash tender offer to acquire all of the outstanding Ignis shares not then owned by the Company for NOK 8 per share. On May 18, 2011, the Company completed this tender offer and purchased an additional 38.1 million shares of Ignis (in addition to 25.7 million shares of Ignis that the Company owned prior to the offer) for an aggregate purchase price of $54.7 million , resulting in the Company owning approximately 81% of all outstanding Ignis shares.

Under the Norwegian Securities Trading Act, the Company's ownership of more than one-third of the voting shares of Ignis triggered the requirement for the Company to make a mandatory unconditional offer for all remaining outstanding Ignis shares. On May 24, 2011, the Company launched the mandatory offer at a cash offer price of NOK 8 per share. During the offer period, which ended on June 22, 2011, approximately 12.8 million additional shares of Ignis were tendered, further increasing the Company's ownership position to approximately 97% of all outstanding Ignis shares. As the owner of more than 90% of all outstanding Ignis shares, the Company then exercised its right to effect a compulsory acquisition of the balance of all outstanding Ignis shares for a cash price of NOK  8 per share. As of June 29, 2011, the Company owned 100% of all outstanding Ignis shares, and the shares were de-listed from the Oslo Stock Exchange.

Ignis is an innovative provider of optical components and network solutions for fiber optic communications. It operates globally through four subsidiaries: Fi-ra Photonics ("Fi-ra") in Korea ( 71.8% owned by Ignis) and wholly-owned subsidiaries Syntune in Sweden, Ignis Photonyx in Denmark, and SmartOptics in Norway. Ignis' product and services portfolio comprises passive optical components including optical chips, splitters and multiplexers, active optical components such as tunable lasers and modulators, and WDM-based solutions enabling the building of simple and cost effective high-capacity optical networks. The Company's management and board of directors believe that this acquisition will: a) provide the Company a secure supply of Ignis' tunable laser products which the Company believes have the highest performance of any such devices currently available in the market; b) further the Company's vertical integration strategy by providing an internal source of these devices, which the Company currently purchases on the merchant market; c) enable the Company to offer its customers a number of new 40 and 100 Gbps products based on the advanced optical device integration technologies of Ignis' various business units; and d) allow the Company to expand its product portfolio to include a number of other products incorporating innovative technologies and focus on attractive growth markets.

Ignis and its subsidiaries maintain their financial records on the basis of a fiscal year ending on December 31, with fiscal quarters ending on March 31, June 30 and September 30, which will change to the Company's basis of a fiscal year ending on April 30, with fiscal quarters ending on Sunday closest to the end of the three-month period, when financial records of Ignis and its subsidiaries are integrated with the Company's consolidated financial reporting system. The results of Ignis' operations have been included in the consolidated financial statements since May 18, 2011, the date the Company obtained control of Ignis, through September 30, 2011. There were no intervening events in the operating results of Ignis for the month ended October 30, 2011 that materially affected the Company's consolidated financial position or results of operations.


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Prior to May 18, 2011, the Company accounted for its 32% interest in Ignis as an equity-method investment. The acquisition-date fair value of this equity interest was $36.6 million (based on the trading price of Ignis shares as quoted on the Oslo Stock Exchange), and is included in the measurement of the consideration transferred. The Company recognized a gain of $5.4 million as a result of remeasuring the equity interest in Ignis that it held before the acquisition date. This gain is included in other income (expense), net in the condensed consolidated statement of operations.


The provisional fair value of the consideration transferred in exchange for the Ignis shares is as follows (in thousands):

Cash
$
98,900

Contingent consideration
13,598

Total
$
112,498


The contingent consideration arrangement requires the Company to pay up to approximately $14.3 million of additional consideration to the former shareholders of one of Ignis' subsidiaries if during calendar years 2011 and 2012 the subsidiary achieves specified levels of revenues, revenue growth, EBITDA and cash flow and successfully launches a new product. The fair value of the contingent consideration arrangement at the acquisition date was $13.6 million . The Company estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The key assumptions in applying the income approach are as follows: 5.5% discount rate and 100% probability of achieving specified milestones.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed (in thousands):

Cash and cash equivalents
$
5,543

Accounts receivable
11,267

Inventory
14,721

Other current assets
2,161

Property, equipment and improvements
6,515

Intangible assets
34,860

Other assets
1,457

Total identifiable assets acquired
76,524

 
 
Current liabilities
(17,439
)
Short-term debt
(9,985
)
Long-term debt
(7,526
)
Deferred tax liabilities
(3,553
)
Other long-term liabilities
(330
)
Total liabilities assumed
(38,833
)
Net identifiable assets acquired
37,691

Non-controlling interest
(8,300
)
Goodwill
83,107

Net assets acquired
$
112,498


The Company is in the process of obtaining third-party valuations of certain intangible assets; thus, the provisional measurements of intangible assets, goodwill and deferred income tax liabilities are subject to change.

Of the $34.9 million of acquired intangible assets, $250,000 was provisionally assigned to in-process research and development assets that were recognized at fair value on the acquisition date. The remaining $34.6 million of acquired intangible assets are subject to a weighted-average useful life of approximately 9 years. Those definite-lived intangible assets include developed technology of $16.3 million ( 7 -year weighted-average useful life), customer relationships of $16.3 million ( 12 -year weighted-average useful life), internal use software of $880,000 ( 7 -year useful life), trade name of $800,000 ( 15 -year useful life), and order backlog of $350,000 ( 1 -year useful life). As noted above, the fair value of the acquired identifiable

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intangible assets is provisional pending receipt of the final valuations for these assets.

As noted above, one of Ignis' subsidiaries (Fi-ra) is 71.8% owned by Ignis. The acquisition-date fair value of the 28.2% non-controlling interest in Fi-ra is estimated to be $8.3 million , based on the estimated fair value of Fi-ra's equity.

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

The acquisition-date fair value of accounts receivable acquired is $11.3 million , with the gross contractual amount being $11.6 million . The Company expects $300,000 to be uncollectible.

The Company recognized $1.1 million of acquisition related costs that were expensed in the six months ended October 30, 2011 . These costs are included in general and administrative operating expenses in the consolidated statement of operations.

Unaudited pro forma and other supplemental financial statement disclosures otherwise required by ASC 850 for material business combinations have not been presented herein because management does not believe the acquisition of Ignis is significant to the consolidated financial position or operating results of Finisar.


4. 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 options, restricted stock units and warrants (under the treasury stock method) and convertible notes (on an as-if-converted basis) outstanding during the period.
     
The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
October 30,
2011
 
October 31,
2010
 
October 30,
2011
 
October 31,
2010
Numerator:
 
 
 
 
 
 
 
Net income attributable to Finisar Corporation
$
5,927

 
$
33,796

 
$
16,069

 
$
52,922

Numerator for basic net income per share
$
5,927

 
$
33,796

 
$
16,069

 
$
52,922

Effect of dilutive securities:
 
 
 
 
 
 
 
Convertible debt interest expense

 
1,373

 

 
2,743

Numerator for diluted net income per share
$
5,927

 
$
35,169

 
$
16,069

 
$
55,665

Denominator:
 
 
 
 
 
 
 
Denominator for basic net income per share - weighted average shares
90,715

 
76,766

 
90,470

 
76,433

Effect of dilutive securities:
 
 
 
 
 
 
 
Employee stock options and restricted stock units
2,848

 
3,248

 
3,206

 
3,061

Warrants
36

 
36

 
36

 
36

Convertible debt

 
9,471

 

 
9,483

Dilutive potential common shares
2,884

 
12,755

 
3,242

 
12,580

Denominator for diluted net income per share
93,599

 
89,521

 
93,712

 
89,013

Net income per share attributable to Finisar Corporation common stockholders:
 
 
 
 
 
 
 
Basic
$
0.07

 
$
0.44

 
$
0.18

 
$
0.69

Diluted
$
0.06

 
$
0.39

 
$
0.17

 
$
0.63

  
        

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The following table presents potentially dilutive securities excluded from the calculation of diluted net income per share because their effect would have been anti-dilutive (in thousands):

 
Three Months Ended
 
Six Months Ended
 
October 30,
2011
 
October 31, 2010
 
October 30,
2011
 
October 31, 2010
Common shares issuable upon:
 
 
 
 
 
 
 
Exercise of employee stock options
1,263

 
2,181

 
1,273

 
2,232

  Conversion of convertible subordinated notes
3,748

 

 
3,748

 

 
5,011

 
2,181

 
5,021

 
2,232


5. Inventories

     Inventories consist of the following (in thousands):
 
October 30,
2011
 
April 30,
2011
 
 
 
 
Raw materials
$
47,993

 
$
64,997

Work-in-process
97,020

 
66,073

Finished goods
69,927

 
56,547

Total inventories
$
214,940

 
$
187,617

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

During the three and six months ended October 31, 2010 , the Company recorded charges of $2.8 million and $6.6 million , respectively, for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $2.8 million and $6.4 million , respectively. This resulted in a net charge for excess and obsolete inventory of $200,000 during the six months ended October 31, 2010 .

     The Company enters into agreements with subcontractors that allow them to procure inventory on behalf of the Company to fulfill subcontractor obligations. The Company records a liability for noncancelable purchase commitments with these subcontractors for quantities in excess of its future demand forecasts. As of October 30, 2011 and April 30, 2011 , the liability for these purchase commitments was $2.1 million and $3.2 million , respectively, and was recorded on the balance sheet as other accrued liabilities.

6. Property, Equipment and Improvements

     Property, equipment and improvements consist of the following (in thousands):
 
October 30,
2011
 
April 30,
2011
Land
$
273

 
$

Buildings
9,104

 
9,733

Computer equipment
45,250

 
42,888

Office equipment, furniture and fixtures
4,315

 
4,163

Machinery and equipment
279,321

 
248,641

Leasehold improvements
22,794

 
21,626

Total
361,057

 
327,051

Accumulated depreciation and amortization
(217,918
)
 
(201,358
)
Property, equipment and improvements (net)
$
143,139

 
$
125,693


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7. Intangible Assets Including Goodwill

The following table reflects the changes to the carrying amount of goodwill (in thousands):

 
Total
Balance at April 30, 2011
$

Addition related to acquisition of subsidiary (Note 3)
83,107

Balance at July 31, 2011
$
83,107

Purchase price allocation adjustment
(171
)
Balance at October 30, 2011
$
82,936


The following table reflects intangible assets subject to amortization as of October 30, 2011 and April 30, 2011 (in thousands):
 
October 30, 2011
 
Gross Carrying
 
Accumulated
 
Net Carrying
 
Amount
 
Amortization
 
Amount
 
 
 
 
 
 
Purchased technology
$
92,564

 
$
(72,090
)
 
$
20,474

Purchased trade name
1,972

 
(1,196
)
 
776

Purchased customer relationships
32,090

 
(7,498
)
 
24,592

Purchased internal use software, backlog and in-process research and development
1,480

 
(216
)
 
1,264

Purchased patents
375

 
(175
)
 
200

Total
$
128,481

 
$
(81,175
)
 
$
47,306


 
April 30, 2011
 
Gross Carrying
 
Accumulated
 
Net Carrying
 
Amount
 
Amortization
 
Amount
 
 
 
 
 
 
Purchased technology
$
76,264

 
$
(68,932
)
 
$
7,332

Purchased trade name
1,172

 
(1,172
)
 

Purchased customer relationships
15,970

 
(6,100
)
 
9,870

Purchased patents
375

 
(138
)
 
237

Total
$
93,781

 
$
(76,342
)
 
$
17,439


     During the first quarter of fiscal 2012, the Company recorded approximately $34.9 million of purchased intangible assets related to its acquisition of Ignis (see "Note 3. Acquisition of Ignis ASA"). During the three months ended October 30, 2011 , a purchase price allocation adjustment of $0.2 million was recorded.

The amortization expense on intangible assets for the three and six months ended October 30, 2011 was $2.5 million and $4.8 million , respectively. The amortization expense on intangible assets for the three and six months ended October 31, 2010 was $1.6 million and $3.2 million , respectively.


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Estimated remaining amortization expense for each of the next five fiscal years ending April 30, is as follows (in thousands):
Year
 
Amount
2012 (remainder of year)
 
$
4,915

2013
 
8,205

2014
 
6,474

2015
 
5,537

2016 and beyond
 
22,175

Total
 
$
47,306


8. Investments

     The following table presents a summary of the Company's investments measured at fair value on a recurring basis as of October 30, 2011 (in thousands):
 
 
 
 
Significant
 
 
 
 
 
 
Quoted Prices
 
Other
 
 
 
 
 
 
in Active
 
Observable
 
Significant
 
 
 
 
Markets For
 
Remaining
 
Unobservable
 
 
Assets Measured at Fair Value on a Recurring Basis
 
Identical Assets
 
Inputs
 
Inputs
 
Total
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
Assets
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
115,346

 
$

 
$

 
$
115,346

Cash
 

 

 

 
112,694

Total cash and cash equivalents
 
 
 
 
 
 
 
$
228,040


     The following table presents a summary of the Company's investments measured at fair value on a recurring basis as of April 30, 2011 (in thousands):
 
 
 
Significant
 
 
 
 
 
Quoted Prices
 
Other
 
 
 
 
 
in Active
 
Observable
 
Significant
 
 
 
Markets For
 
Remaining
 
Unobservable
 
 
Assets Measured at Fair Value on a Recurring Basis
Identical Assets
 
Inputs
 
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
115,294

 
$

 
$

 
$
115,294

Cash
 
 
 
 
 
 
199,471

Total cash and cash equivalents
 
 
 
 
 
 
$
314,765

   
The gross realized gains and losses for the three and six months ended October 30, 2011 and October 31, 2010 were immaterial . Realized gains and losses are calculated using the specific identification method.


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9. Minority Investments

Cost Method Investments

     The carrying value of minority investments at both October 30, 2011 and April 30, 2011 was $12.3 million and was comprised of the Company's minority investment in three privately held companies accounted for under the cost method. The Company's investments in these companies were primarily motivated by its desire to gain access to new technology. The Company's investments are passive in nature in that the Company generally does not obtain representation on the board of directors of the companies in which it invests.

Equity Method Investments

As of April 30, 2011, the Company's investment in Ignis was carried at approximately $31.1 million and was accounted for under the equity method. During the six month period ended October 30, 2011 , the Company completed the acquisition of 100% of all outstanding Ignis shares and as a result no longer accounted for this investment under the equity method (see "Note 3. Acquisition of Ignis ASA").

10. Convertible Debt

     The Company's convertible debt balances as of October 30, 2011 and April 30, 2011 were as follows (in thousands):

 
 
Carrying
 
Interest
 
Due in
Description
 
Amount
 
Rate
 
Fiscal year
As of October 30, 2011
 
 
 
 
 
 
Convertible senior notes due October 2029
 
$
40,015

 
5.00
%
 
2030
 
 
 
 
 
 
 
Total
 
$
40,015

 
 

 
 
As of April 30, 2011
 
 
 
 
 
 
Convertible senior notes due October 2029
 
$
40,015

 
5.00
%
 
2030
 
 
 
 
 
 
 
Total
 
$
40,015

 
 
 
 

11. Debt

Korean Bank Loans

As a result of the acquisition of Ignis (see "Note 3. Acquisition of Ignis ASA"), the Company's consolidated liabilities include certain loan obligations of Fi-ra to three Korean banks under which an acquisition-date aggregate principal balance of approximately $2.5 million was outstanding, with interest rates ranging from 4.5% to 6.7% per annum. These loans require monthly interest payments with all principal payable at maturity. These loans mature at various dates beginning in February 2012 through June 2012 and are secured by certain property of Fi-ra.

During the first quarter of fiscal 2012, Fi-ra entered into a $1.8 million loan agreement with a Korean bank. Borrowings under this loan bear interest at variable rates based on the 4-month KORIBOR plus 0.33% , under which the applicable interest rate is currently 4% per annum. This loan requires monthly interest payments with all principal payable at maturity. This loan matures in May 2012 and is secured by certain property of Fi-ra.

The remaining principal outstanding under these loans as of October 30, 2011 was $4.3 million .

Norwegian Bank Loans

As a result of the acquisition of Ignis, the Company's consolidated liabilities included two loan obligations of SmartOptics to a Norwegian bank under which an acquisition-date aggregate principal balance of approximately $5.6 million was outstanding with interest rates ranging from 5.25% to 6% per annum. These loans were fully repaid in October 2011.


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Swedish Loan

As a result of the acquisition of Ignis, the Company's consolidated liabilities included a loan obligation of Syntune to a financing institution under which an acquisition-date aggregate principal balance of approximately $7.8 million was outstanding, with an interest rate of 12% per annum. This loan was fully repaid in July 2011. As a result of the early repayment of this loan, the Company incurred a prepayment charge of $419,000 which the Company recognized as loss on debt extinguishment in its condensed consolidated statement of operations for the six months ended October 30, 2011 .


12. Revolving Credit Facility

     On October 2, 2009, the Company entered into an agreement with Wells Fargo Foothill, LLC to establish a four-year $70 million senior secured revolving credit facility. Borrowings under the credit facility bear interest at rates based on the prime rate and LIBOR plus variable margins, under which applicable interest rates currently range from 2.75% to 5.00% per annum. Borrowings are guaranteed by the Company's U.S. subsidiaries and secured by substantially all of the assets of the Company and its U.S. subsidiaries. The credit facility matures four years following the date of the agreement, subject to certain conditions. As of October 30, 2011 , the availability of credit under the facility was reduced by $3.4 million for outstanding letters of credit secured under the agreement. Borrowing availability as of October 30, 2011 was $66.6 million , and there were no borrowings outstanding against the facility as of that date.

The credit facility is subject to certain financial covenants. The Company was in compliance with all financial covenants associated with this facility as of October 30, 2011 .


13. Warranty

     The Company generally offers a one-year limited warranty for its products. The specific terms and conditions of these warranties vary depending upon the product sold. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability for the amount of such costs based at the time revenue is recognized. Factors that affect the Company's warranty liability include the historical and anticipated rates of warranty claims. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
     
Changes in the Company's warranty liability during the following period were as follows (in thousands):
 
Six Months Ended
 
October 30, 2011
Beginning balance at April 30, 2011
$
4,469

Additions during the period based on product sold
1,452

Additions during the period due to acquisition of controlling interest in subsidiary
313

Change in estimates
(557
)
Settlements and expirations
(2,238
)
Ending balance at October 30, 2011
$
3,439


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14. Fair Value of Financial Instruments

     The following disclosure of the estimated fair value of financial instruments presents amounts that have been determined using available market information and appropriate valuation methodologies. The estimated fair values of the Company's financial instruments as of October 30, 2011 and April 30, 2011 were as follows (in thousands):

 
October 30, 2011
 
April 30, 2011
 
Carrying
 
 
 
Carrying
 
 
 
Amount
 
Fair Value
 
Amount
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
228,040

 
$
228,040

 
$
314,765

 
$
314,765

Equity method investment

 

 
31,142

 
38,671

Total
$
228,040

 
$
228,040

 
$
345,907

 
$
353,436

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Convertible debt
$
40,015

 
$
87,105

 
$
40,015

 
$
113,023

Short-term debt
4,281

 
4,281

 

 

Contingent consideration
14,340

 
14,340

 

 

Total
$
58,636

 
$
105,726

 
$
40,015

 
$
113,023


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

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

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

Equity method investment - The fair value of the equity method investment is based on the quoted market price of the equity security listed on a foreign stock exchange.

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

     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 a quoted market price and the inability to estimate fair value without incurring excessive costs. As of October 30, 2011 , the carrying value of the Company's minority investments in these three privately held companies was $12.3 million , which management believes is not impaired.

The following table presents a reconciliation of the beginning and ending balances of the Company's liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended October 31, 2011 (in thousands), consisting of contingent consideration recorded in connection with the acquisition of Ignis:

 
 
Three Months Ended
 
 
October 30, 2011
Balance at July 31, 2011
 
$
13,598

Accretion
 
742

Balance at October 30, 2011
 
$
14,340





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15. Stockholders' Equity

Comprehensive Income

     FASB authoritative guidance establishes rules for reporting and display of comprehensive income or loss and its components and requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments to be included in comprehensive income.

     The components of comprehensive income for the three and six months ended October 30, 2011 and October 31, 2010 were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
October 30,
2011
 
October 31,
2010
 
October 30,
2011
 
October 31,
2010
 
 
 
 
 
 
 
 
Consolidated net income
$
6,270

 
$
33,796

 
$
16,305

 
$
52,922

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment, net of tax
(4,081
)
 
4,920

 
(3,643
)
 
4,841

Total other comprehensive income (loss), net of tax
(4,081
)
 
4,920

 
(3,643
)
 
4,841

Consolidated comprehensive income
2,189

 
38,716

 
12,662

 
57,763

Adjust for comprehensive income attributable to non-controlling interest, net of tax
(343
)
 

 
(236
)
 

Comprehensive income attributable to Finisar Corporation
$
1,846

 
$
38,716

 
$
12,426

 
$
57,763


     Accumulated other comprehensive income, net of taxes, as of October 30, 2011 and April 30, 2011 , consists only of cumulative foreign currency translation adjustment.

Share-based Compensation Expense Information

The following table summarizes share-based compensation expense related to employee stock options and employee stock purchases for the three and six months ended October 30, 2011 and October 31, 2010 which was reflected in the Company's operating results (in thousands):

 
Three Months Ended
 
Six Months Ended
 
October 30,
2011
 
October 31,
2010
 
October 30,
2011
 
October 31,
2010
Cost of revenues
$
1,569

 
$
1,310

 
$
3,280

 
$
2,055

Research and development
2,109

 
1,702

 
4,238

 
2,739

Sales and marketing
729

 
528

 
1,524

 
978

General and administrative
1,897

 
1,422

 
3,826

 
2,447

Total
$
6,304

 
$
4,962

 
$
12,868

 
$
8,219

  
The total share-based compensation capitalized as part of inventory as of October 30, 2011 was $1.1 million .

     During the three months ended October 30, 2011 , no stock was issued under the Company's Employee Stock Purchase Plan and options to purchase 145,182 shares of common stock were exercised. During the six months ended October 30, 2011 , 191,794 shares of common stock were issued under the Company's Employee Stock Purchase Plan and options to purchase 220,311 shares of common stock were exercised. The number of restricted stock units issued during the three and six months ended October 30, 2011 was 93,067 and 552,029 , respectively.

As of October 30, 2011 , total compensation expense, net of estimated forfeitures, related to unvested stock options and restricted stock units not yet recognized was approximately $112.6 million , which is expected to be recognized in the Company's operating results over the succeeding 37  months.



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16. Income Taxes

      The Company recorded a provision for income taxes of $1.4 million and $567,000 , respectively, for the three months ended October 30, 2011 and October 31, 2010 and $1.9 million and $2.6 million , respectively, for the six months ended October 30, 2011 and October 31, 2010 . The income tax provisions for the three and six months ended October 30, 2011 and October 31, 2010 includes state taxes and foreign income taxes arising in certain foreign jurisdictions in which the Company conducts business.

     The Company records a valuation allowance against its deferred tax assets for each period in which management concludes that it is more likely than not that the deferred tax assets will not be realized. Realization of the Company's net deferred tax assets is dependent upon future taxable income, the amount and timing of which are uncertain. Accordingly, substantially all of the Company's net deferred tax assets as of October 30, 2011 have been fully offset by a valuation allowance.

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

     The Company's total gross unrecognized tax benefit as of April 30, 2011 and October 30, 2011 was $13.9 million . Excluding the effects of recorded valuation allowances for deferred tax assets, $11.7 million of the unrecognized tax benefits would favorably impact the effective tax rate in future periods if recognized.

     Due to the Company's taxable loss position in previous years, all tax years since inception are subject to examination in the U.S. and state jurisdictions. The Company is also subject to examinations in various foreign jurisdictions, none of which were individually material. It is the Company's belief that no significant changes in the unrecognized tax benefit positions will occur through April 30, 2012.

     The Company records interest and penalties related to unrecognized tax benefits in income tax expense. At October 30, 2011 , there were no accrued interest or penalties related to uncertain tax positions.

17. Segment and Geographic Information

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

The following is a summary of operations within geographic areas based on the location of the entity purchasing the Company's products (in thousands):
 
Three Months Ended
 
Six Months Ended
 
October 30,
2011
 
October 31,
2010
 
October 30,
2011
 
October 31,
2010
Revenues from sales to unaffiliated customers:
 
 
 
 
 
 
 
United States
$
56,830

 
$
72,979

 
$
114,780

 
$
135,982

Malaysia
45,217

 
38,616

 
98,399

 
69,164

China
48,656

 
56,846

 
93,659

 
97,278

Rest of the world
90,786

 
72,502

 
162,877

 
146,401

 
$
241,489

 
$
240,943

 
$
469,715

 
$
448,825

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

Two customers each represented more than 10% of total revenues in the three months ended October 30, 2011 and October 31, 2010. Three customers each represented more than 10% of total revenues in the six months ended October 30, 2011 and October 31, 2010.


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The following is a summary of long-lived assets within geographic areas based on the location of the assets (in thousands):

 
October 30,
2011
 
April 30,
2011
Long-lived assets:
 
 
 
United States
$
118,615

 
$
103,468

Malaysia
37,443

 
41,125

China
37,329

 
24,872

Rest of the world
31,120

 
22,277

 
$
224,507

 
$
191,742


The increase in long-lived assets was primarily due to the Company's acquisition of Ignis (see "Note 3. Acquisition of Ignis ASA") as well as additions of machinery and equipment in the United States and China.

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

The following table summarizes the activities of the restructuring accrual during the first six months of fiscal 2012 (in thousands):
Balance as of April 30, 2011
$
4,083

Adjustments
(322
)
Cash payments, net of sublease income
(129
)
Balance as of October 30, 2011
$
3,632


Adjustments in the above table relate to a sublease agreement with a third party entered into during the first quarter of fiscal 2012 for a portion of the above mentioned facility.

Of the $3.6 million remaining accrual, $264,000 is expected to be paid in the next twelve months and $3.4 million is expected to be paid out from fiscal 2013 through fiscal 2020.


19. Pending Litigation

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

Oplink/OCP Patent Litigation

On December 10, 2010, the Company filed a complaint for patent infringement in the United States District Court for the Northern District of California. The complaint alleges that certain optoelectronic transceivers from Oplink Communications, Inc. ("Oplink") and its wholly-owned subsidiary Optical Communication Products Inc. ("OCP") infringe eleven Finisar patents. The complaint asks the Court to enter judgment (a) that the defendants have infringed, actively induced infringement of, and/or contributorily infringed the patents-in-suit, (b) preliminarily and permanently enjoining the defendants from further infringement of the patents-in-suit, or, to the extent not so enjoined, ordering the defendants to pay compulsory ongoing royalties for any continuing infringement, (c) ordering that the defendants account, and pay actual damages (but no less than a reasonable royalty), to the Company for the defendants' infringement, (d) declaring that the defendants are willfully infringing one or more of the patents-in-suit and ordering that the defendants pay treble damages to the Company, (e) ordering that the defendants pay the Company's costs, expenses, and interest, including prejudgment interest, (f) declaring that this is an exceptional case and awarding the Company its attorneys' fees and expenses, and (g) granting such other and further relief as the Court deems just and appropriate, or that the Company may be entitled to as a matter of law or equity.

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On March 7, 2011, OCP filed a complaint against the Company for patent infringement in the United States District Court for the Eastern District of Texas. The complaint alleges that certain vertical cavity surface emitting lasers ("VCSELs") and active optical cables manufactured and sold by the Company infringe five OCP patents. The Company has answered the complaint denying that it has infringed any of these patents and asserting that the patents are invalid. In addition, the Company has counterclaimed in the case that certain optoelectronic transceivers from OCP and its parent Oplink infringe five Finisar patents.

The complaint and the counter complaints each ask the Court to enter judgment (a) holding the accused party(ies) liable for infringement of the asserted patents, (b) that the accused party(ies) account for damages resulting from its infringement of the patents, together with pre-judgment and post-judgment interest, (c) preliminarily and permanently enjoining the accused party(ies) from further infringement of the asserted patents, (d) holding the case to an exceptional case, and awarding to the complaining party its attorneys' fees and costs, and (e) granting such other relief as the Court deems just and equitable. The Company intends to prosecute its lawsuit against Oplink and defend OCP's lawsuit vigorously. However, there can be no assurance that it will be successful in its defense. The Company is not currently able to estimate a range of possible losses if it is not successful in defending the OCP lawsuit. However, if it is not successful, the Company's business could be materially harmed. Even if the Company is successful, it 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.

On May 13, 2011, Oplink and OCP filed a complaint in the United States District Court for the Northern District of California seeking a declaration that the products accused of infringement by the Company as counterclaims in the Texas lawsuit do not infringe the asserted patents. The Company is seeking dismissal of this action as the patents and the accused products are subject to the Texas proceeding.
Class Action and Shareholder Derivative Litigation

March 8, 2011 Earnings Announcement Cases
Several securities class action lawsuits related to the Company's March 8, 2011 earnings announcement alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 have been filed on behalf of a purported class of persons who purchased stock between December 1 or 2, 2010 through March 8, 2011. The named defendants are the Company and its Chairman of the Board, Chief Executive Officer and Chief Financial Officer. To date, no specific amount of damages have been alleged. The cases have consolidated and lead plaintiffs have been appointed to file a consolidated complaint.
In addition, two shareholder derivative lawsuits related to the Company's March 8, 2011 earnings announcement were filed in California state court. 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 its board of directors, including the Company's Chairman of the Board, Chief Executive Officer and our Chief Financial Officer. No specific amount of damages have been alleged and, by the derivative nature of the lawsuits, no damages will be alleged, against the Company. The cases have been consolidated and a lead plaintiff has been appointed to file a consolidated complaint.
Stock Option Cases

     On November 30, 2006, the Company announced that it had undertaken a voluntary review of its historical stock option
grant practices subsequent to its initial public offering in November 1999. The review was initiated by senior management, and preliminary results of the review were discussed with the Audit Committee of the Company's board of directors. Based on the preliminary results of the review, senior management concluded, and the Audit Committee agreed, that it was likely that the measurement dates for certain stock option grants differed from the recorded grant dates for such awards and that the Company would likely need to restate its historical financial statements to record non-cash charges for compensation expense relating to some past stock option grants. The Audit Committee thereafter conducted a further investigation and engaged independent legal counsel and financial advisors to assist in that investigation. The Audit Committee concluded that measurement dates for certain option grants differed from the recorded grant dates for such awards. The Company's management, in conjunction with the Audit Committee, conducted a further review to finalize revised measurement dates and determine the appropriate accounting adjustments to its historical financial statements. The announcement of the investigation resulted in delays in filing the Company's quarterly reports on Form 10-Q for the quarters ended October 29, 2006, January 28, 2007, and January 27, 2008, and the Company's annual report on Form 10-K for the fiscal year ended April 30, 2007. On December 4, 2007, the Company filed all four of these reports which included revised financial statements.


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Table of Contents

     Following the Company's announcement on November 30, 2006 that the Audit Committee of the board of directors had voluntarily commenced an investigation of the Company's historical stock option grant practices, the Company was named as a nominal defendant in several shareholder derivative cases. These cases have been consolidated into two proceedings pending in federal and state courts in California. The federal court cases have been consolidated in the United States District Court for the Northern District of California. The state court cases have been consolidated in the Superior Court of California for the County of Santa Clara. The plaintiffs in all cases have alleged that certain of the Company's current or former officers and directors caused the Company to grant stock options at less than fair market value, contrary to the Company's public statements (including its financial statements), and that, as a result, those officers and directors are liable to the Company. No specific amount of damages has been alleged, and by the nature of the lawsuits, no damages will be alleged against the Company. On May 22, 2007, the state court granted the Company's motion to stay the state court action pending resolution of the consolidated federal court action. On June 12, 2007, the plaintiffs in the federal court case filed an amended complaint to reflect the results of the stock option investigation announced by the Audit Committee in June 2007. On August 28, 2007, the Company and the individual defendants filed motions to dismiss the complaint. On January 11, 2008, the Court granted the motions to dismiss, with leave to amend. On May 12, 2008, the plaintiffs filed an amended complaint. The Company and the individual defendants filed motions to dismiss the amended complaint on July 1, 2008. The Court granted the motions to dismiss on September 22, 2009, and entered judgment in favor of the defendants. The plaintiffs appealed the judgment to the United States Court of Appeals for the Ninth Circuit. On April 26, 2011, a panel of the Ninth Circuit reversed the District Court ruling and remanded the case to the District Court for further proceedings. The Company and the individual defendants filed a motion seeking rehearing of the case en banc before the full Ninth Circuit, which was denied on July 8, 2011.

Cheetah Omni Litigation

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

To date, Finisar has received a request for indemnification from two customers with respect to the two patents mentioned above and may receive additional requests in the future. The Company is currently evaluating the request for indemnification. The Company also expects that the defendant customers will defend the lawsuit vigorously at least with respect to the claims that implicate any Finisar products. However, there can be no assurance that they will be successful in their defense and, if they are not successful with respect to the two patents mentioned above, Finisar may be liable to indemnify the accused customers for significant damages. Even if the defense is successful, the Company may incur substantial legal fees and other costs in defending and/or aiding in the defense of the lawsuit with respect to the two patents mentioned above. Further, the lawsuit could divert the efforts and attention of the Company's management and technical personnel, which could harm its business.

Securities Class Action

     A securities class action lawsuit was filed on November 30, 2001 in the United States District Court for the Southern District of New York, purportedly on behalf of all persons who purchased the Company's common stock from November 17, 1999 through December 6, 2000. The complaint named as defendants the Company, Jerry S. Rawls, its Chairman of the Board and formerly its President and Chief Executive Officer, Frank H. Levinson, its former Chairman of the Board and Chief Technical Officer, Stephen K. Workman, its former Senior Vice President and Chief Financial Officer, and an investment banking firm that served as an underwriter for the Company's initial public offering in November 1999 and a secondary offering in April 2000. The complaint, as subsequently amended, alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(b) of the Securities Exchange Act of 1934, on the grounds that the prospectuses incorporated in the registration statements for the offerings failed to disclose, among other things, that (i) the underwriter had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriter allocated to those investors material portions of the shares of the Company's stock sold in the offerings and (ii) the underwriter had entered into agreements with customers whereby the underwriter agreed to allocate shares of the Company's stock sold in the offerings to those customers in exchange for which the customers agreed to purchase additional shares of the Company's stock in the

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after market at pre-determined prices. No specific damages are claimed. Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, which were consolidated for pretrial purposes. In October 2002, all claims against the individual defendants were dismissed without prejudice. On February 19, 2003, the Court denied defendants' motion to dismiss the complaint.

     
In February 2009, the parties reached an understanding regarding the principal elements of a settlement, subject to formal documentation and Court approval. Under the settlement, the underwriter defendants will pay a total of $486 million , and the issuer defendants and their insurers will pay a total of $100 million to settle all of the cases. On August 25, 2009, the Company funded approximately $327,000 with respect to its pro rata share of the issuers' contribution to the settlement and certain costs. This amount was accrued in the Company's consolidated financial statements during the first quarter of fiscal 2010. On October 2, 2009, the Court granted approval of the settlement and on November 19, 2009 the Court entered final judgment. The judgment has been appealed by certain individual class members.

Other

During the second quarter of fiscal 2012, the Company received a favorable arbitrator's decision in an intellectual property legal dispute unrelated to current or future quarters awarding the Company $7.4 million .  As litigation related to the decision is ongoing, no amounts were recognized in the Company's consolidated financial statements as of, and for the three- and six-month periods ending, October 30, 201 1.

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


20. Guarantees and Indemnifications

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

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

     Historically, the Company has not made any significant indemnification payments under such arrangements. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of October 30, 2011 .

21. Related Party Transaction

During the three and six months ended October 30, 2011 , the Company paid $47,102 and $130,302 , respectively, in cash compensation to a company owned by Guy Gertel, the brother of the Chief Executive Officer of the Company, for sales and marketing services. In addition, the Company granted to Mr. Gertel, for no additional consideration, 2,000 restricted stock units with a fair market value of $29,300 , which vest as follows: 25% on June 20, 2012 and an additional 25% on each of the next three annual anniversaries thereafter, to be fully vested on June 20, 2015, subject to him continuing to provide services to the Company. During the three and six months ended October 31, 2010 , the Company paid Mr. Gertel's company $45,000 and $88,000 , respectively, in cash compensation. The amounts paid to Mr. Gertel represented values considered by management to be fair and reasonable, reflective of an arm's length transaction.


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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 and transponders which provide the fundamental optical-electrical interface for connecting the equipment used in building these networks, including switches, routers and file servers used in wireline networks as well as antennas and base stations for wireless networks. These products rely on the use of semiconductor lasers and photodetectors in conjunction with integrated circuit design and novel packaging technology to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable at speeds ranging from less than 1 gigabit per second, or Gbps, to 100 Gbps, using a wide range of network protocols and physical configurations over distances of 70 meters to 200 kilometers. 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-gigabit bandwidth over several wavelengths on the same fiber. We also provide products known as wavelength selective switches, or WSS, that are used for dynamically switching network traffic from one optical wavelength to another across multiple wavelengths without first converting to an electrical signal. These products are sometimes combined with other components and sold as linecards, also known as reconfigurable optical add/drop multiplexers, or ROADMs. Our line of optical components consists primarily of packaged lasers and photodetectors used in transceivers, primarily for data communication and telecommunication applications, and passive optical components used in telecommunication applications. Demand for our products is largely driven by the continually growing need for additional bandwidth created by the ongoing proliferation of data and video traffic that must be handled by both wireline and wireless networks.

     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 own internal IC engineering teams. We also have internal assembly and test capabilities that make use of internally designed equipment for the automated testing of our optical subsystems and components.

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

Recent Developments

Acquisition of Ignis ASA
 
In several transactions during fiscal 2011, we acquired an aggregate of 25.7 million shares of Ignis ASA (“Ignis”), a Norwegian company whose securities were traded on the Oslo Stock Exchange, representing approximately 32% of the outstanding Ignis shares.
On March 22, 2011, we entered into a transaction agreement with Ignis under which, on April 7, 2011, we made a recommended voluntary public cash tender offer to acquire all of the outstanding Ignis shares not then owned by us for NOK 8 per share. On May 18, 2011, we completed this tender offer and purchased an additional 38.1 million Ignis shares for an aggregate

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purchase price of $54.7 million , increasing our ownership to approximately 81% of all outstanding Ignis shares.
Under the Norwegian Securities Trading Act, our ownership of more than one-third of the voting shares of Ignis triggered the requirement for us to make a mandatory unconditional offer for all remaining outstanding Ignis shares. On May 24, 2011, we launched the mandatory offer at a cash offer price of NOK 8 per share. During the offer period, which ended on June 22, 2011, approximately 12.8 million additional Ignis shares were tendered, further increasing our ownership position to approximately 97% of all outstanding Ignis shares. As the owner of more than 90% of all outstanding Ignis shares, we then exercised our right to effect a compulsory acquisition of the balance of all outstanding Ignis shares for a cash price of NOK 8 per share and, as of June 29, 2011, we owned 100% of the outstanding Ignis shares, and the shares were de-listed from the Oslo Stock Exchange.
Ignis is an innovative provider of optical components and network solutions for fiber optic communications. It operates globally through four subsidiaries. Ignis's product and services portfolio comprises passive optical components including optical chips, splitters and multiplexers, active optical components such as tunable lasers and modulators, and WDM-based solutions enabling the building of simple and cost effective high-capacity optical networks. Our management and board of directors believe that this acquisition will:
provide us a secure supply of Ignis' tunable laser products which we believe have the highest performance of any such devices currently available in the market;
further our vertical integration strategy by providing an internal source of these devices, which we currently purchase on the merchant market;
enable us to offer our customers a number of new 40 and 100 Gbps products based on the advanced optical device integration technologies of Ignis' various business units; and
allow us to expand our product portfolio to include a number of other products incorporating innovative technologies and focus on attractive growth markets.

The results of Ignis' operations have been included in the consolidated financial statements since May 18, 2011, the date we obtained control of Ignis. Prior to May 18, 2011, we accounted for our 32% interest in Ignis as an equity-method investment. The acquisition-date fair value of this equity interest was $36.6 million (based on the trading price of the Ignis shares as quoted on the Oslo Stock Exchange), and is included in the measurement of the consideration transferred. We recognized a gain of $5.4 million as a result of remeasuring the equity interest in Ignis that we held before the acquisition date. This gain is included in other income (expense), net in the condensed consolidated statement of operations.
The provisional fair value of the consideration transferred in exchange for the Ignis shares is as follows (in thousands):

Cash
$
98,900

Contingent consideration
13,598

Total
$
112,498

The contingent consideration arrangement requires us to pay up to approximately $14.3 million of additional consideration to the former shareholders of one of Ignis' subsidiaries if, during calendar years 2011 and 2012, the subsidiary achieves specified levels of revenues, revenue growth, EBITDA and cash flow, and successfully launches a new product. The fair value of the contingent consideration arrangement at the acquisition date was $13.6 million. For additional information regarding the estimation of the contingent consideration and the allocation of the provisional fair value of the consideration, see "Part I, Item 1, Financial Statements - Note 3. Acquisition of Ignis ASA.”
We recognized $1.1 million of acquisition related costs that were expensed in the six months ended October 30, 2011 . These costs are included in general and administrative expenses in the condensed consolidated statement of operations.

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 as discussed in our Annual Report on Form 10-K for the year ended April 30, 2011 .


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Results of Operations

     The following table sets forth certain statement of operations data as a percentage of revenues for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
October 30,
2011
 
October 31,
2010
 
October 30,
2011
 
October 31,
2010
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues
70.2

 
65.3

 
70.2

 
65.4

Amortization of acquired developed technology
0.7

 
0.5

 
0.7

 
0.5

Gross profit
29.1

 
34.2

 
29.1

 
34.1

Operating expenses:
 
 


 
 
 
 
Research and development
15.2

 
11.7

 
15.4

 
12.2

Sales and marketing
4.2

 
3.8

 
4.2

 
4.1

General and administrative
5.7

 
3.5

 
5.9

 
4.4

Restructuring charges (recoveries)

 

 
(0.1
)
 

Amortization of purchased intangibles
0.4

 
0.2

 
0.3

 
0.2

Total operating expenses
25.5

 
19.2

 
25.7

 
20.9

Income from operations
3.7

 
15.0

 
3.4

 
13.3

Interest income

 
0.1

 
0.1

 
0.1

Interest expense
(0.5
)
 
(0.9
)
 
(0.4
)
 
(0.9
)
Loss on debt extinguishment

 

 
(0.1
)
 

Other income (expense), net
(0.1
)
 
0.1

 
1.0

 

Income before income taxes and non-controlling interest
3.2

 
14.3

 
3.9

 
12.5

Provision for income taxes
0.6

 
0.2

 
0.4

 
0.6

Consolidated net income
2.6

 
14.1

 
3.5

 
11.8

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

 
(0.1
)
 

Net income attributable to Finisar Corporation
2.5
 %
 
14.1
 %
 
3.4
 %
 
11.8
 %

      Revenues. Revenues increased $546,000 , or 0.2% , to $241.5 million in the quarter ended October 30, 2011 compared to $240.9 million in the quarter ended October 31, 2010 . Revenues increased $20.9 million , or 4.7% , to $469.7 million in the six months ended October 30, 2011 compared to $448.8 million in the six months ended October 31, 2010 .
    
The following table sets forth the changes in revenues by market application (in thousands):
 
Three Months Ended
 
October 30,
2011
 
October 31,
2010
 
Change
 
% Change
Datacom revenue
$
128,521

 
$
122,482

 
$
6,039

 
4.9
 %
Telecom revenue
112,968

 
118,461

 
(5,493
)
 
(4.6
)%
Total revenues
$
241,489

 
$
240,943

 
$
546

 
0.2
 %

 
Six Months Ended
 
October 30, 2011
 
October 31, 2010
 
Change
 
% Change
Datacom revenue
$
257,593

 
$
226,714

 
$
30,879

 
13.6
 %
Telecom revenue
212,122

 
222,111

 
(9,989
)
 
(4.5
)%
Total revenues
$
469,715

 
$
448,825

 
$
20,890

 
4.7
 %
    

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The datacom revenues increased primarily due to increase in market demand for our datacom products and the inclusion of a full quarter and one and one-half quarters, respectively, in Ignis revenues for the three and six months ended October 30, 2011 . The telecom revenues decreased primarily due to decline in market demand for our telecom products, particularly ROADM products, largely offset by the inclusion of a full quarter and approximately one and one-half quarters, respectively, in Ignis revenues, for the three and six months ended October 30, 2011 .

Amortization of Acquired Developed Technology. Amortization of acquired developed technology, a component of cost of revenues, increased $437,000 , or 36.4% , to $1.6 million in the quarter ended October 30, 2011 compared to $1.2 million in the quarter ended October 31, 2010 . It increased $767,000 , or 32.1% , to $3.2 million in the six months ended October 30, 2011 compared to $2.4 million for the six months ended October 31, 2010 . These increases were due to the amortization of the acquired developed technology related to the Ignis acquisition.

      Gross Profit. Gross profit decreased $12.1 million , or 14.7% , to $70.3 million in the quarter ended October 30, 2011 compared to $82.4 million in the quarter ended October 31, 2010 . Gross profit as a percentage of revenues decreased by 5.1% , from 34.2% in the quarter ended October 31, 2010 to 29.1% in the quarter ended October 30, 2011 . We recorded charges of $5.7 million for obsolete and excess inventory in the quarter ended October 30, 2011 compared to $2.8 million in the quarter ended October 31, 2010 . We sold inventory that was written-off in previous periods resulting in a benefit of $3.0 million in the quarter ended October 30, 2011 and $2.8 million in the quarter ended October 31, 2010 . As a result, we recognized a net charge of $2.7 million in the quarter ended October 30, 2011 compared to no net charge in the quarter ended October 31, 2010 . Cost of revenues included stock-based compensation charges of $1.6 million in the quarter ended October 30, 2011 and $1.3 million in the quarter ended October 31, 2010 . Excluding amortization of acquired developed technology, the net impact of excess and obsolete inventory charges and stock-based compensation charges, gross profit would have been $76.2 million , or 31.5% of revenues, in the quarter ended October 30, 2011 compared to $84.9 million , or 35.2% of revenues, in the quarter ended October 31, 2010 . The decrease in gross margin primarily reflects the decline in average selling prices, offset by reduced material costs, as well as under-utilization of certain manufacturing facilities, higher amortization of acquired developed technology, higher net charges for excess and obsolete inventory and consolidation of the financial results of Ignis, which has a lower average gross margin than the overall corporate average.

Gross profit decreased $16.3 million , or 10.6% , to $136.8 million in the six months ended October 30, 2011 compared to $153.0 million in the six months ended October 31, 2010 . Gross profit as a percentage of revenues decreased by 5.0% , from 34.1% in the six months ended October 31, 2010 to 29.1% in the six months ended October 30, 2011 . We recorded charges of $11.4 million for obsolete and excess inventory in the six months ended October 30, 2011 compared to $6.6 million in the six months ended October 31, 2010 . We sold inventory that was written-off in previous periods resulting in a benefit of $7.0 million in the six months ended October 30, 2011 and $6.4 million in the six months ended October 31, 2010 . As a result, we recognized a net charge of $4.4 million in the six months ended October 30, 2011 compared to a net charge of $200,000 in the six months ended October 31, 2010 . Cost of revenues included stock-based compensation charges of $3.3 million in the six months ended October 30, 2011 and $2.1 million in the six months ended October 31, 2010 . Excluding amortization of acquired developed technology, the net impact of excess and obsolete inventory charges and stock-based compensation charges, gross profit would have been $147.7 million , or 31.4% of revenues, in the six months ended October 30, 2011 compared to $157.7 million , or 35.1% of revenues, in the six months ended October 31, 2010 . The decrease in gross margin primarily reflects the decline in average selling prices, offset by reduced material costs, as well as under-utilization of certain manufacturing facilities, higher amortization of acquired developed technology, higher net charges for excess and obsolete inventory and consolidation of the financial results of Ignis, which has a lower average gross margin than the overall corporate average.

      Research and Development Expenses. Research and development expenses increased $8.6 million , or 30.4% , to $36.7 million in the quarter ended October 30, 2011 compared to $28.1 million in the quarter ended October 31, 2010 . The increase was due primarily to increases in employee related expenses, costs of materials associated with new product development, and the consolidation of financial results of Ignis for the quarter ended October 30, 2011 . Included in research and development expenses were stock-based compensation charges of $2.1 million in the quarter ended October 30, 2011 and $1.7 million in the quarter ended October 31, 2010 . Research and development expenses as a percent of revenues increased to 15.2% in the quarter ended October 30, 2011 compared to 11.7% in the quarter ended October 31, 2010 .
   
Research and development expenses increased $17.3 million , or 31.7% , to $72.1 million in the six months ended October 30, 2011 compared to $54.8 million in the six months ended October 31, 2010 . The increase was due primarily to increases in employee related expenses, costs of materials associated with new product development, and the consolidation of financial results of Ignis. Included in research and development expenses were stock-based compensation charges of $4.2 million in the six months ended October 30, 2011 and $2.7 million in the six months ended October 31, 2010 . Research and development expenses as a percent of revenues increased to 15.4% in the six months ended October 30, 2011 compared to 12.2% in the six months ended October 31, 2010 .

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Sales and Marketing Expenses. Sales and marketing expenses increased $878,000 , or 9.5% , to $10.1 million in the quarter ended October 30, 2011 compared to $9.2 million in the quarter ended October 31, 2010 . The increase was primarily due to increases in employee related expenses and the consolidation of financial results of Ignis for the quarter ended October 30, 2011 . Included in sales and marketing expenses were stock-based compensation charges of $729,000 in the quarter ended October 30, 2011 and $528,000 in the quarter ended October 31, 2010 . Sales and marketing expenses as a percent of revenues increased to 4.2% in the quarter ended October 30, 2011 compared to 3.8% in the quarter ended October 31, 2010 .

Sales and marketing expenses increased $1.4 million , or 7.6% , to $19.7 million in the six months ended October 30, 2011 compared to $18.3 million in the six months ended October 31, 2010 . The increase was primarily due to increases in employee related expenses and the consolidation of financial results of Ignis. Included in sales and marketing expenses were stock-based compensation charges of $1.5 million in the six months ended October 30, 2011 and $978,000 in the six months ended October 31, 2010 . Sales and marketing expenses as a percent of revenues increased to 4.2% in the six months ended October 30, 2011 compared to 4.1% in the six months ended October 31, 2010 .

      General and Administrative Expenses. General and administrative expenses increased $5.3 million , or 61.7% , to $13.8 million in the quarter ended October 30, 2011 compared to $8.5 million in the quarter ended October 31, 2010 . The increase was primarily due to a non-recurring net gain of $2.4 million related to the settlement of legal proceedings in the prior year quarter and the consolidation of financial results of Ignis for the quarter ended October 30, 2011 . Included in general and administrative expenses were stock-based compensation charges of $1.9 million in the quarter ended October 30, 2011 and $1.4 million in the quarter ended October 31, 2010 . General and administrative expenses as a percent of revenues increased to 5.7% in the quarter ended October 30, 2011 compared to 3.5% in the quarter ended October 31, 2010 .

General and administrative expenses increased $8.1 million , or 41.5% , to $27.7 million in the six months ended October 30, 2011 compared to $19.6 million in the six months ended October 31, 2010 . The increase was primarily due to $1.1 million of transaction costs incurred in connection with our acquisition of Ignis, a non-recurring net gain of $2.4 million related to the settlement of legal proceedings in the prior year and the consolidation of the financial results of Ignis. Included in general and administrative expenses were stock-based compensation charges of $3.8 million in the six months ended October 30, 2011 and $2.4 million in the six months ended October 31, 2010 . General and administrative expenses as a percent of revenues increased to 5.9% in the six months ended October 30, 2011 compared to 4.4% in the six months ended October 31, 2010 .

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

      Amortization of Purchased Intangibles. Amortization of purchased intangibles increased $476,000 , or 124.3% , to $859,000 in the quarter ended October 30, 2011 compared to $383,000 in the quarter ended October 31, 2010 . The increase was due to the amortization of certain intangibles related to the acquisition of Ignis.

Amortization of purchased intangibles increased $872,000 , or 113.8% , to $1.6 million in the six months ended October 30, 2011 compared to $766,000 in the six months ended October 31, 2010 . The increase was due to the amortization of certain intangibles related to the acquisition of Ignis.

      Interest Income. Interest income decreased $43,000 to $100,000 in the quarter ended October 30, 2011 compared to $143,000 in the quarter ended October 31, 2010 . The decrease was primarily due to decreases in interest rates.

Interest income increased $25,000 to $260,000 in the six months ended October 30, 2011 compared to $235,000 in the six months ended October 31, 2010 . The increase was primarily due to an increase in our cash balances reflecting the receipt of $131.1 million in net proceeds from our common stock offering in March 2010 and $117.9 million in net proceeds from our common stock offering in December 2010, partially offset by decreases in interest rates.
     
Interest Expense. Interest expense decreased $939,000 , or 45.2% , to $1.1 million in the quarter ended October 30, 2011 compared to $2.1 million in the quarter ended October 31, 2010 . The decrease was primarily related to lower outstanding convertible debt due to conversion to equity and lower long-term debt balances due to their repayment in fiscal 2011. Interest expense for the quarter ended October 30, 2011 included $743,000 related to our 5% Convertible Subordinated Notes due October 2029 and various other debt instruments related to our acquisition of Ignis. Interest expense for the quarter ended October 31, 2010 included $1.3 million related to our 5% Convertible Subordinated Notes due October 2029, $460,000 related to various other debt instruments, and a non-cash charge of $376,000 due to the adoption of authoritative accounting guidance which requires us to separately account for the liability (debt) and equity (conversion option) components of our 2.5% senior

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subordinated convertible notes that may be settled in cash (or other assets) on conversion in a manner that reflects our non-convertible debt borrowing rate. The separation of the conversion option created an original issue discount in the bond component which is accreted as interest expense over the term of the instrument using the interest method, resulting in an increase in interest expense.

Interest expense decreased $2.2 million , or 51.6% , to $2.0 million in the six months ended October 30, 2011 compared to $4.2 million in the six months ended October 31, 2010 . The decrease was primarily related to lower outstanding convertible debt due to conversion to equity and lower long-term debt balances due to their repayment in fiscal 2011. Interest expense for the six months ended October 30, 2011 included $1.6 million related to our 5% Convertible Subordinated Notes due October 2029 and various other debt instruments acquired with the acquisition of Ignis. Interest expense for the six months ended October 31, 2010 included $2.5 million related to our 5% Convertible Subordinated Notes due October 2029, $960,000 related to various other debt instruments, and a non-cash charge of $742,000 due to the adoption of authoritative accounting guidance which requires us to separately account for the liability (debt) and equity (conversion option) components of our 2.5% senior subordinated convertible notes that may be settled in cash (or other assets) on conversion in a manner that reflects our non-convertible debt borrowing rate. The separation of the conversion option created an original issue discount in the bond component which is accreted as interest expense over the term of the instrument using the interest method, resulting in an increase in interest expense.

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

      Other Income (Expense), Net. Other expense, net was $140,000 in the quarter ended October 30, 2011 compared to other income, net of $192,000 in the quarter ended October 31, 2010 . Other expense, net in the quarter ended October 30, 2011 primarily consisted of amortization of debt issuance costs.

Other income, net was $4.5 million in the six months ended October 30, 2011 compared to other income, net of $0 in the six months ended October 31, 2010 . Other income, net in the six months ended October 30, 2011 primarily consisted of a gain of $5.4 million related to remeasurement of our equity interest in Ignis upon obtaining a controlling interest in May 2011, offset by $619,000, representing our proportionate share of the net losses of Ignis during the period prior to our acquisition of a controlling interest, during which period we accounted for our investment using the equity method.

Non-controlling interest. Non-controlling interest for the quarter ended October 30, 2011 , represents minority shareholders' proportionate share of the net income of Fi-ra.

Non-controlling interest for the six months ended October 30, 2011 represents $187,000 of the minority shareholders' proportionate share of the net loss of Ignis offset by $423,000 of the minority shareholders' proportionate share of the net income of Fi-ra.

      Provision for Income Taxes. We recorded income tax provisions of $1.4 million and $567,000 , respectively, for the quarters ended October 30, 2011 and October 31, 2010 and $1.9 million and $2.6 million , respectively, for the six months ended October 30, 2011 and October 31, 2010 . The income tax provisions for the three months ended October 30, 2011 and October 31, 2010 primarily represent current state and foreign income taxes arising in certain jurisdictions in which we conduct business.

Due to the uncertainty regarding the timing and extent of our future profitability, we have recorded a valuation allowance to offset our U.S. deferred tax assets which represent future income tax benefits associated with our operating losses because we do not currently believe it is more likely than not these assets will be realized. We calculated the valuation allowance in accordance with the provisions of ASC 740, “Income Taxes,” which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets, when measuring the need for a valuation allowance. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In determining net deferred tax assets and valuation allowances, management is required to make judgments and estimates related to projections of profitability, the timing and extent of the utilization of net operating loss carry-forwards, applicable tax rates and tax planning strategies. We review the valuation allowance quarterly and will maintain it until sufficient positive evidence exists to support a reversal. Because evidence such as our operating results during the most recent three-year period is afforded more weight than forecasted results for future periods, we have determined that our cumulative loss during this three-year period represents sufficient negative evidence regarding the need for a full valuation allowance under ASC 740. If we conclude that sufficient positive evidence exists to support a reversal of all or a portion of the valuation allowance, we expect that a significant portion of any release of the valuation allowance will be recorded as an income tax benefit at the time of release, which could occur in the fiscal year ending April 30, 2012 .


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Liquidity and Capital Resources

Cash Flows from Operating Activities

Net cash provided by operating activities was $26.4 million in the six months ended October 30, 2011 , compared to net cash used in operating activities of $31.2 million in the six months ended October 31, 2010 . Cash provided by operating activities in the six months ended October 30, 2011 consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $36.0 million , less cash used for working capital requirements primarily related to increases in accounts receivable, inventory and accounts payable. Accounts receivable decreased by $3.2 million primarily due to strong collections near the end of the second quarter. Inventory increased by $16.6 million and accounts payable increased by $6.7 million due to increased purchases to support projected increased levels of sales. Cash used in operating activities in the six months ended October 31, 2010 consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling to $29.3 million and cash used for working capital, primarily related to increases in accounts receivable and inventories, offset by an increase in accounts payable. Accounts receivable increased by $45.6 million primarily due to the increase in revenues. Inventory and accounts payable increased by $24.7 million and $9.8 million , respectively, primarily due to increase in purchases to support higher levels of sales.

Cash Flows from Investing Activities

     Net cash used in investing activities totaled $104.6 million in the six months ended October 30, 2011 compared to $31.6 million in the six months ended October 31, 2010 . Net cash used in investing activities in the six months ended October 30, 2011 consisted of $71.1 million related to the acquisition of Ignis and $33.5 million of expenditures for capital equipment. Net cash used in investing activities in the six months ended October 31, 2010 consisted of $25.7 million of expenditures for capital equipment.

Cash Flows from Financing Activities

     Net cash used in financing activities totaled $8.5 million in the six months ended October 30, 2011 compared to $21.8 million in the six months ended October 31, 2010 . Cash used in financing activities for the six months ended October 30, 2011 primarily reflected repayments of borrowings related to the Ignis acquisition totaling $14.0 million , partially offset by additional borrowings of $1.8 million by Fi-ra (Ignis' Korean subsidiary) and proceeds from the issuance of shares under employee stock option and stock purchase plans totaling $3.7 million . Cash used in financing activities for the six months ended October 31, 2010 primarily reflected repayment of convertible notes of $29.6 million and repayments of borrowings totaling $2.0 million , partially offset by proceeds from the exercise of stock options and purchases under our stock purchase plan totaling $9.8 million .

Contractual Obligations and Commercial Commitments

     At October 30, 2011 , we had contractual obligations of $196.7 million as shown in the following table (in thousands):

 
 
 
Payments Due by Period
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than
 
 
 
 
 
After
Contractual Obligations
Total
 
1 Year
 
1-3 Years
 
4-5 Years
 
5 Years
Short-term debt
$
4,281

 
$
4,281

 
$

 


 
$

Convertible debt
40,015

 

 

 
40,015

 

Interest on debt (a)
6,127

 
2,126

 
4,001

 


 

Operating leases (b)
45,580

 
9,101

 
14,093

 
9,119

 
13,267

Purchase obligations (c)
100,686

 
100,686

 

 

 

Total contractual obligations
$
196,689

 
$
116,194

 
$
18,094

 
$
49,134

 
$
13,267

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


 Short-term debt consists of bank loans that resulted from our acquisition of Ignis. These loans mature at various dates beginning in February 2012 through June 2012.

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

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

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

Purchase obligations represent all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services. Although open purchase orders are considered enforceable and legally binding, their terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. Our policy with respect to all non-cancelable purchase obligations is to record losses, if any, when they are probable and reasonably estimable.
Our subcontractors purchase materials based on forecasts provided by us. We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities held by subcontractors on our behalf to fulfill the subcontractors' purchase order obligations at their facilities which are in excess of our future demand forecasts. As of October 30, 2011 , the liability for these purchase commitments of $2.1 million has been expensed and recorded on the condensed consolidated balance sheet as other accrued liabilities and is not included in the preceding table.
We believe we have made adequate provisions for potential exposure related to inventory purchases for orders that may not be utilized.

Sources of Liquidity and Capital Resource Requirements

At October 30, 2011 , our principal sources of liquidity consisted of $228.0 million of cash and cash equivalents and an aggregate of $66.6 million available for borrowing under our credit facility with Wells Fargo Foothill, LLC, subject to certain restrictions and limitations. Cash and cash equivalents totaling $31.5 million was held by our foreign subsidiaries as of October 30, 2011 .
   
We believe that our existing balances of cash and cash equivalents, together with the cash expected to be generated from future operations and borrowings under our bank credit facility, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future, to finance future acquisitions that we may propose to undertake or to repay or otherwise retire our outstanding 5% Convertible Senior Notes due 2029, in the aggregate principal amount of $40.0 million, which are subject to redemption by the holders at their option in October 2014, 2016, 2019 and 2024. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operations will be adversely affected.

Off-Balance-Sheet Arrangements

At October 30, 2011 and April 30, 2011 , 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     For quantitative and qualitative disclosures about market risk affecting Finisar, see Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2011 . Our exposure related to market risk has not changed materially since April 30, 2011 .


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 October 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

          Reference is made to “Part I, Item 1, Financial Statements - Note 19. Pending Litigation” for descriptions of pending legal proceedings, including material developments in certain of those proceedings during the quarter ended October 30, 2011 .

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 APRIL 30, 2011.

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;