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EX-31.1 - EX 31.1 - FINISAR CORPfnsr31110312010.htm
EX-32.3 - EX 32.3 - FINISAR CORPfnsr32310312010.htm
EX-31.2 - EX 31.2 - FINISAR CORPfnsr31210312010.htm
EX-31.3 - EX 31.3 - FINISAR CORPfnsr31310312010.htm
EX-32.1 - EX 32.1 - FINISAR CORPfnsr32110312010.htm
EX-32.2 - EX 32.2 - FINISAR CORPfnsr32210312010.htm

 
 
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 31, 2010
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  o  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 o
Accelerated filer x
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, 2010, there were 77,196,930 shares of the registrant's common stock, $.001 par value, issued and outstanding.
 


 
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended October 31, 2010
 
 
 
Page
 
 
 
 
 

2


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 “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.
 

3


PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
 
October 31, 2010
 
April 30, 2010
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
184,928
 
 
$
207,024
 
Accounts receivable, net of allowance for doubtful accounts of $1,190 at October 31, 2010 and $2,085 at April 30, 2010
 
173,243
 
 
127,617
 
Accounts receivable, other
11,826
 
 
12,855
 
Inventories
167,021
 
 
139,525
 
Deferred tax assets
1,559
 
 
2,238
 
Prepaid expenses
9,571
 
 
6,956
 
Total current assets
548,148
 
 
496,215
 
Property, equipment and improvements, net
100,960
 
 
89,214
 
Purchased technology, net
9,576
 
 
11,689
 
Other intangible assets, net
10,910
 
 
11,713
 
Minority investments
18,169
 
 
12,289
 
Other assets
4,995
 
 
5,610
 
Total assets
$
692,758
 
 
$
626,730
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
86,598
 
 
$
76,838
 
Accrued compensation
21,861
 
 
18,289
 
Other accrued liabilities
19,426
 
 
21,076
 
Deferred revenue
8,475
 
 
6,571
 
Current portion of convertible debt (Note 9)
 
 
28,839
 
Current portion of long-term debt (Note 10)
4,000
 
 
4,000
 
Non-cancelable purchase obligations
1,313
 
 
722
 
Total current liabilities
141,673
 
 
156,335
 
Long-term liabilities:
 
 
 
Convertible debt, net of current portion (Note 9)
100,000
 
 
100,000
 
Long-term debt, net of current portion (Note 10)
13,250
 
 
15,250
 
Other non-current liabilities
12,762
 
 
6,260
 
Deferred tax liabilities
328
 
 
239
 
Total liabilities
268,013
 
 
278,084
 
Commitments and contingencies
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at August 1, 2010 and April 30, 2010
 
 
 
Common stock, $0.001 par value, 750,000,000 shares authorized, 77,184,585 shares issued and outstanding at October 31, 2010 and 75,824,913 shares issued and outstanding at April 30, 2010
77
 
 
76
 
Additional paid-in capital
2,048,708
 
 
2,030,373
 
Accumulated other comprehensive income
20,632
 
 
15,791
 
Accumulated deficit
(1,644,672
)
 
(1,697,594
)
Total stockholders' equity
424,745
 
 
348,646
 
Total liabilities and stockholders' equity
$
692,758
 
 
$
626,730
 

4


FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share and per share data)
 
Three Months Ended
 
Six Months Ended
 
October 31,
2010
 
November 1,
2009
 
October 31,
2010
 
November 1,
2009
 
 
 
 
 
 
 
 
Revenues
$
240,943
 
 
$
145,730
 
 
$
448,825
 
 
$
274,455
 
Cost of revenues
157,343
 
 
104,745
 
 
293,135
 
 
202,875
 
Amortization of acquired developed technology
1,200
 
 
1,192
 
 
2,392
 
 
2,385
 
Gross profit
82,400
 
 
39,793
 
 
153,298
 
 
69,195
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
28,148
 
 
21,575
 
 
54,765
 
 
42,622
 
Sales and marketing
9,247
 
 
7,313
 
 
18,322
 
 
14,132
 
General and administrative
8,517
 
 
8,177
 
 
19,593
 
 
17,798
 
Restructuring charges
 
 
4,173
 
 
 
 
4,173
 
Amortization of purchased intangibles
383
 
 
518
 
 
766
 
 
1,219
 
Total operating expenses
46,295
 
 
41,756
 
 
93,446
 
 
79,944
 
Income (loss) from operations
36,105
 
 
(1,963
)
 
59,852
 
 
(10,749
)
Interest income
143
 
 
9
 
 
235
 
 
19
 
Interest expense
(2,077
)
 
(2,167
)
 
(4,232
)
 
(4,601
)
Loss on debt extinguishment
 
 
(25,067
)
 
 
 
(25,067
)
Other income (expense), net
192
 
 
(2,191
)
 
 
 
(1,938
)
Income (loss) from continuing operations before income taxes
34,363
 
 
(31,379
)
 
55,855
 
 
(42,336
)
Provision for income taxes
567
 
 
38
 
 
2,649
 
 
197
 
Income (loss) from continuing operations
$
33,796
 
 
$
(31,417
)
 
$
53,206
 
 
$
(42,533
)
Income (loss) from discontinued operations, net of income taxes
$
 
 
$
(67
)
 
$
(284
)
 
$
37,012
 
Net income (loss)
$
33,796
 
 
$
(31,484
)
 
$
52,922
 
 
$
(5,521
)
Basic:
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.44
 
 
$
(0.49
)
 
$
0.70
 
 
$
(0.68
)
Income (loss) per share from discontinued operations
$
 
 
$
(0.00
)
 
$
(0.00
)
 
$
0.60
 
Net income (loss) per share
$
0.44
 
 
$
(0.49
)
 
$
0.70
 
 
$
(0.08
)
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.39
 
 
$
(0.49
)
 
$
0.63
 
 
$
(0.68
)
Income (loss) per share from discontinued operations
$
 
 
$
(0.00
)
 
$
(0.00
)
 
$
0.60
 
Net income (loss) per share
$
0.39
 
 
$
(0.49
)
 
$
0.63
 
 
$
(0.08
)
 
 
 
 
 
 
 
 
Shares used in computing net income (loss) per share
 
 
 
 
 
 
 
Basic
76,766
 
 
64,198
 
 
76,433
 
 
62,157
 
Diluted
89,521
 
 
64,198
 
 
89,013
 
 
62,157
 
See accompanying notes.

5


FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six Months Ended
 
October 31, 2010
 
November 1, 2009
Operating activities
 
 
 
Net income (loss)
$
52,922
 
 
$
(5,521
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
17,428
 
 
14,782
 
Stock-based compensation expense
8,219
 
 
8,807
 
Non-cash interest cost on 2.5% convertible senior subordinated notes
742
 
 
2,291
 
Amortization of purchased technology and finite lived intangibles
487
 
 
1,296
 
Amortization of acquired developed technology
2,392
 
 
2,555
 
Impairment of minority investments
 
 
2,000
 
Loss on sale or retirement of assets
 
 
275
 
Loss on debt extinguishment
 
 
23,581
 
Gain on sale of equity investment
 
 
(375
)
Gain on sale of a product line
 
 
(1,250
)
Gain on sale of discontinued operations
 
 
(35,888
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(45,626
)
 
(14,104
)
Inventories
(24,692
)
 
(3,675
)
Other assets
(1,465
)
 
(2,121
)
Deferred income taxes
769
 
 
(13
)
Accounts payable
9,760
 
 
6,494
 
Accrued compensation
3,556
 
 
(886
)
Other accrued liabilities
(1,903
)
 
(2,110
)
Deferred revenue
8,659
 
 
174
 
Net cash provided by (used in) operating activities
31,248
 
 
(3,688
)
Investing activities
 
 
 
Purchases of property, equipment and improvements
(25,700
)
 
(10,711
)
Proceeds from sale of equity investment
 
 
375
 
Proceeds from disposal of product line
 
 
1,250
 
Purchase of intangible assets
 
 
(375
)
Purchase of available for sale minority investment
(5,880
)
 
 
Proceeds from sale of discontinued operation
 
 
40,683
 
Net cash provided by (used in) investing activities
(31,580
)
 
31,222
 
Financing activities
 
 
 
Repayment of convertible notes related to acquisition
 
 
 
Issuance of 5% convertible notes
 
 
98,057
 
Repayments of borrowings under notes
(2,000
)
 
(3,021
)
Repayment of convertible notes
(29,581
)
 
(82,575
)
Proceeds from exercise of stock options and stock purchase plan, net of repurchase of unvested shares
9,817
 
 
3,458
 
Net cash provided by (used in) financing activities
(21,764
)
 
15,919
 
Net increase (decrease) in cash and cash equivalents
(22,096
)
 
43,453
 
Cash and cash equivalents at beginning of period
207,024
 
 
37,221
 
Cash and cash equivalents at end of period
$
184,928
 
 
$
80,674
 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
3,177
 
 
2,215
 
Cash paid for taxes
697
 
 
211
 
Issuance of common stock for repayment of convertible debt
 
 
16,383
 
See accompanying notes.

6


FINISAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
1. Basis of Presentation
 
Description of Business
 
     Finisar Corporation (the “Company”) was incorporated in California in April 1987 and reincorporated in Delaware in November 1999. The Company is a leading provider of optical subsystems and components that are used to interconnect equipment in local area networks, or LANs, storage area networks, or SANs, metropolitan area networks, or MANs, fiber-to-the-home networks, or FTTx, cable television, or CATV, networks, and wide area networks, or WANs. The Company's 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 digital and analog RF semiconductor lasers 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 from 70 meters up to 200 kilometers. The Company supplies 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 bandwith over several wavelengths on the same fiber. The Company also provides products known as wavelength selective switches, or WSS, that are used for dynamically switching network traffic from one optical link 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. The Company's line of optical components consists primarily of packaged lasers and photodetectors used in transceivers, primarily for LAN and SAN applications, and passive optical components used in building MANs. Demand for the Company's 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.
 
     The Company's manufacturing operations are vertically integrated and include internal production, assembly and test capabilities for the Company's optical subsystem products, as well as key components used in those subsystems. The Company produces many of the key components used in making its products including lasers, photodetectors and integrated circuits, or ICs, designed by its own internal IC engineering teams. The Company also has internal assembly and test capabilities that make use of internally designed equipment for the automated testing of the optical subsystems and components.
 
     The Company sells its optical subsystem and component 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. Sales to top five customers of the Company represented 49% of the revenues in the second quarter of fiscal 2011. Sales to top five customers of the Company represented 48% of the revenues in the first six months of fiscal 2011.
 
     The Company formerly provided network performance test systems through its Network Tools Division. On July 15, 2009, the Company consummated the sale of substantially all of the assets of the Network Tools Division to JDS Uniphase Corporation (“JDSU”). In accordance with accounting guidance provided by the Financial Accounting Standards Board (“FASB”), the operating results of this business and the associated assets and liabilities are reported as discontinued operations in the accompanying condensed consolidated financial statements for the periods presented. See Note 3 for further information regarding the sale of the assets of the division.
 
     The accompanying unaudited condensed consolidated financial statements as of October 31, 2010 and for the three and six month periods ended October 31, 2010 and November 1, 2009 have been prepared in accordance with U.S. generally accepted accounting principles 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 wholly-owned subsidiaries (collectively, “Finisar” or the “Company”). 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 U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position at October 31, 2010 and its

7


operating results and cash flows for the three and six month periods ended October 31, 2010 and November 1, 2009. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes for the fiscal year ended April 30, 2010 included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2010.
 
 
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 cash flow statement 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 U.S. generally accepted accounting principles 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, 2010. 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 January 2010, the FASB issued revised guidance intended to improve disclosures related to fair value measurements. New disclosures under this guidance require (a) an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This guidance clarified previous disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured at fair value and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of existing disclosure were adopted by the Company beginning May 2010. The 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.
 
Computation of Net Income (Loss) Per Share
 
     Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from options, restricted stock units and warrants (under the treasury stock method) and convertible notes (on an as-if-converted basis) outstanding during the period.
 
     

8


The following table presents the calculation of basic and diluted net income (loss) per share from continuing operations (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
October 31,
2010
 
November 1,
2009
 
October 31, 2010
 
November 1, 2009
Numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
33,796
 
 
$
(31,417
)
 
$
53,206
 
 
$
(42,533
)
Numerator for basic income (loss) per share from continuing operations
$
33,796
 
 
$
(31,417
)
 
$
53,206
 
 
$
(42,533
)
Effect of dilutive securities:
 
 
 
 
 
 
 
Convertible debt interest expense
$
1,373
 
 
$
 
 
$
2,743
 
 
$
 
Numerator for diluted income (loss) per share from continuing operations
$
35,169
 
 
$
(31,417
)
 
$
55,949
 
 
$
(42,533
)
Denominator:
 
 
 
 
 
 
 
Denominator for basic income (loss) per share from continuing operations- weighted average shares
76,766
 
 
64,198
 
 
76,433
 
 
62,157
 
Effect of dilutive securities:
 
 
 
 
 
 
 
Employee stock options and restricted stock units
3,248
 
 
 
 
3,061
 
 
 
Warrants
36
 
 
 
 
36
 
 
 
Convertible debt
9,471
 
 
 
 
9,483
 
 
 
Dilutive potential common shares
12,755
 
 
 
 
12,580
 
 
 
Denominator for diluted income (loss) from continuing operations
89,521
 
 
64,198
 
 
89,013
 
 
62,157
 
Basic income (loss) per share from continuing operations
$
0.44
 
 
$
(0.49
)
 
$
0.70
 
 
$
(0.68
)
Diluted income (loss) per share from continuing operations
$
0.39
 
 
$
(0.49
)
 
$
0.63
 
 
$
(0.68
)
  
   For purposes of computing diluted net income per share, weighted average potential common shares do not include potential common shares that are anti-dilutive under the treasury stock method.
 
 
Three Months Ended
 
Six Months Ended
 
October 31, 2010
 
November 1, 2009
 
October 31, 2010
 
November 1, 2009
Employee stock options
2,210
 
 
5,422
 
 
2,251
 
 
6,061
 
 
     The following table presents common stock equivalents related to potentially dilutive securities excluded from the calculation of diluted net income (loss) per share from continuing operations because they are anti-dilutive (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
October 31, 2010
 
November 1, 2009
 
October 31, 2010
 
November 1, 2009
Employee stock options
 
 
1,423
 
 
 
 
1,252
 
Conversion of convertible subordinated notes
 
 
2,401
 
 
 
 
2,015
 
Warrants assumed in acquisition
 
 
34
 
 
 
 
33
 
 
 
 
3,858
 
 
 
 
3,300
 
 

9


Comprehensive Income (Loss)
 
     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 (loss).
 
     The components of comprehensive income (loss) for the three and six months ended October 31, 2010 and November 1, 2009 were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
October 31,
2010
 
November 1,
2009
 
October 31, 2010
 
November 1, 2009
 
 
 
 
 
 
 
 
Net income (loss)
$
33,796
 
 
$
(31,484
)
 
$
52,922
 
 
$
(5,521
)
Foreign currency translation adjustment, net of income taxes
4,920
 
 
3,289
 
 
4,841
 
 
7,162
 
Change in unrealized gain (loss) on securities, net of reclassification adjustments for realized loss, net of income taxes
 
 
(1
)
 
 
 
16
 
Comprehensive income (loss)
$
38,716
 
 
$
(28,196
)
 
$
57,763
 
 
$
1,657
 
 
     The component of accumulated other comprehensive income, net of taxes, was as follows (in thousands):
 
 
October 31,
2010
 
April 30,
2010
Cumulative translation adjustment
$
20,632
 
 
$
15,791
 
Accumulated other comprehensive income
$
20,632
 
 
$
15,791
 
 
 
3. Discontinued Operations
 
     During the three months ended August 2, 2009, the Company completed the sale of substantially all of the assets of its Network Tools Division to JDSU. The Company received $40.7 million in cash and recorded a net gain on sale of the business of $35.9 million before income taxes, which is included in income from discontinued operations, net of tax, in the Company's condensed consolidated statements of operations. The assets and liabilities and results of operation related to this business have been classified as discontinued operations in the condensed consolidated financial statements for all periods presented. The Company has elected not to separately disclose the cash flows associated with the discontinued operations in the condensed consolidated statements of cash flows.
 
     The following table summarizes results from discontinued operations (in thousands):
 
 
 
Three Months Ended
 
Six Months Ended
 
October 31, 2010
 
November 1, 2009
 
October 31,
2010
 
November 1,
2009
 
 
 
 
 
 
 
 
Net revenue
$
 
 
$
 
 
$
 
 
$
6,753
 
Gross profit
 
 
 
 
 
 
4,892
 
Income (loss) from discontinued operations
 
 
(67
)
 
(284
)
 
37,012
 
Gain on sale of discontinued operations
 
 
 
 
 
 
35,888
 
 
     

10


The following table summarizes the gain on sale of discontinued operations (in thousands):
Gross proceeds from sale
$
40,683
 
Assets sold
 
Inventory
(4,814
)
Property and equipment
(2,460
)
Intangibles
(845
)
Liabilities transferred
 
Deferred revenue
3,102
 
Other accruals
312
 
Other charges
(90
)
 
$
35,888
 
 
     The transition services agreement the Company had entered into with the buyer in connection with the sale of the assets of the Network Tools Division, under which the Company agreed to provide manufacturing services to the buyer during the transition period was completed on July 14, 2010. Total operating expenses incurred in relation to the transition services agreement during the six months ended October 31, 2010 were $284,000.
 
4. Inventories
 
     Inventories consist of the following (in thousands):
 
October 31,
2010
 
April 30,
2010
 
 
 
 
Raw materials
$
54,153
 
 
$
46,780
 
Work-in-process
60,505
 
 
54,352
 
Finished goods
52,363
 
 
38,393
 
Total inventories
$
167,021
 
 
$
139,525
 
 
     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. As a result, cost of revenues associated with the sale of this inventory was zero.
 
During the three and six months ended November 1, 2009, the Company recorded charges of $5.6 million and $14.8 million, respectively, for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $4.4 million and $7.1 million, respectively. As a result, cost of revenue associated with the sale of this inventory was zero.
 
     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 31, 2010 and April 30, 2010, the liability for these purchase commitments was $1.3 million and $722,000, respectively, and was recorded on the balance sheet as non-cancelable purchase obligations.
 
 

11


5. Property, Equipment and Improvements
 
     Property and equipment consist of the following (in thousands):
 
 
 
October 31,
2010
 
April 30,
2010
Buildings
$
8,621
 
 
$
8,337
 
Computer equipment
39,895
 
 
36,236
 
Office equipment, furniture and fixtures
4,020
 
 
3,853
 
Machinery and equipment
200,525
 
 
178,894
 
Leasehold improvements
19,925
 
 
18,699
 
Construction-in-process
6,968
 
 
4,190
 
Total
279,954
 
 
250,209
 
Accumulated depreciation and amortization
(178,994
)
 
(160,995
)
Property, equipment and improvements (net)
$
100,960
 
 
$
89,214
 
 
 
6. Intangible Assets
 
     The following table reflects intangible assets subject to amortization as of October 31, 2010 and April 30, 2010 (in thousands):
 
 
 
October 31, 2010
 
Gross Carrying
 
Accumulated
 
Net Carrying
 
Amount
 
Amortization
 
Amount
 
 
 
 
 
 
Purchased technology
$
76,215
 
 
$
(66,639
)
 
$
9,576
 
Purchased trade name
1,172
 
 
(1,172
)
 
 
Purchased customer relationships
15,970
 
 
(5,335
)
 
10,635
 
Purchased patents
375
 
 
(100
)
 
275
 
Total
$
93,732
 
 
$
(73,246
)
 
$
20,486
 
 
 
April 30, 2010
 
Gross Carrying
 
Accumulated
 
Net Carrying
 
Amount
 
Amortization
 
Amount
 
 
 
 
 
 
Purchased technology
$
75,936
 
 
$
(64,247
)
 
$
11,689
 
Purchased trade name
1,172
 
 
(1,172
)
 
 
Purchased customer relationships
15,970
 
 
(4,569
)
 
11,401
 
Purchased patents
375
 
 
(63
)
 
312
 
Total
$
93,453
 
 
$
(70,051
)
 
$
23,402
 
 
     

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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
2011
 
$
3,085
 
2012
 
5,503
 
2013
 
4,091
 
2014
 
2,386
 
2015 and beyond
 
5,421
 
Total
 
$
20,486
 
 
7. Investments
 
     The following table presents a summary of the Company's investments measured at fair value on a recurring basis as of October 31, 2010 (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)
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
115,175
 
 
$
 
 
$
 
 
$
115,175
 
Total cash equivalents
 
$
115,175
 
 
$
 
 
$
 
 
$
115,175
 
Cash
 
 
 
 
 
 
 
69,753
 
Total cash and cash equivalents
 
 
 
 
 
 
 
$
184,928
 
 
     The following table presents a summary of the Company's investments measured at fair value on a recurring basis as of April 30, 2010 (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)
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
140,014
 
 
$
 
 
$
 
 
$
140,014
 
Total cash equivalents
$
140,014
 
 
$
 
 
$
 
 
$
140,014
 
Cash
 
 
 
 
 
 
67,010
 
Total cash and cash equivalents
 
 
 
 
 
 
$
207,024
 
   
 
  The gross realized gains and losses for the three and six months ended October 31, 2010 and November 1, 2009 were immaterial. Realized gains and losses were calculated based on the specific identification method.
 

13


 
8. Minority Investments
 
     The carrying value of minority investments at October 31, 2010 and April 30, 2010 was $18.2 million and $12.3 million, respectively. The carrying value of such investments at April 30, 2010 was comprised of the Company's minority investment in three privately held companies accounted for under the cost method. The carrying value at October 31, 2010 also included an investment of $5.9 million in a publicly held foreign company made in September 2010 accounted for under the fair value method as it was classified as available for sale. The Company's investment in these companies was primarily motivated by its desire to gain access to new technology. The Company's investments were passive in nature in that the Company generally did not obtain representation on the board of directors of the companies in which it invested.
 
9. Convertible Debt
 
     The Company's convertible debt balances as of October 31, 2010 and April 30, 2010 were as follows (in thousands):
 
 
Carrying
 
Interest
 
Due in
Description
 
Amount
 
Rate
 
Fiscal year
As of October 31,2010
 
 
 
 
 
 
Convertible senior notes due October 2029
 
$
100,000
 
 
5.00
%
 
2030
 
 
 
 
 
 
 
Total
 
$
100,000
 
 
 
 
 
As of April 30, 2010
 
 
 
 
 
 
Convertible senior notes due October 2029
 
$
100,000
 
 
5.00
%
 
2030
Convertible subordinated notes due October 2010
 
3,900
 
 
2.50
%
 
2011
Convertible senior subordinated notes due October 2010
 
25,681
 
 
2.50
%
 
2011
Unamortized debt discount
 
(742
)
 
 
 
 
Convertible senior subordinated notes, net
 
24,939
 
 
 
 
 
Total
 
$
128,839
 
 
 
 
 
     
In October 2010, the Company repaid in cash the remaining outstanding principal amount of $25.7 million and $3.9 million that was due on its 2 1/2% Convertible Senior Subordinated Notes and 2 1/2% Convertible Subordinated Notes, respectively.
   
The following table presents the associated interest expense related to the Company's Convertible Senior Subordinated Notes that was repaid in October 2010. The interest expense consists of both the contractual interest coupon (cash interest cost) and amortization of the discount on the liability (non-cash interest cost) (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
October 31, 2010
 
November 1, 2009
 
October 31, 2010
 
November 1, 2009
 
 
 
 
 
 
 
 
Non-cash interest cost
$
367
 
 
$
1,056
 
 
$
742
 
 
$
2,291
 
Cash interest cost
132
 
 
484
 
 
294
 
 
1,085
 
Total interest expense
$
499
 
 
$
1,540
 
 
$
1,036
 
 
$
3,376
 
 

14


10. Long-term Debt
 
Malaysian Bank Loan
 
     In July 2008, the Company's Malaysian subsidiary entered into two separate loan agreements with a Malaysian bank. Under these agreements, the Company's Malaysian subsidiary borrowed a total of $20 million at an initial interest rate of 5.05% per annum. The first loan is payable in 20 equal quarterly installments of $750,000 beginning in January 2009, and the second loan is payable in 20 equal quarterly installments of $250,000 beginning in October 2008. Both loans are secured by certain property of the Company's Malaysian subsidiary, guaranteed by the Company and subject to certain covenants. The Company and its subsidiary were in compliance with all covenants associated with these loans as of October 31, 2010 and April 30, 2010.
 
Chinese Bank Loan
 
     In January 2010, the Company's Chinese subsidiary entered into a loan agreement with a bank in China. Under this agreement, the Company's Chinese subsidiary borrowed a total of $4.5 million at an initial interest rate of 2.6% per annum. In April 2010, the Chinese subsidiary borrowed an additional $1.0 million from the bank. The loan is payable on January 6, 2013. Interest is payable quarterly.
 
     The following table provides information regarding the current and long-term portion of the remaining principal outstanding under these loans as of the respective dates (in thousands):
 
 
 
October 31,
2010
 
April 30,
2010
Malaysian loan
 
 
 
Current portion of long-term debt
$
4,000
 
 
$
4,000
 
Long-term debt, net of current portion
7,750
 
 
9,750
 
Sub-total
11,750
 
 
13,750
 
 
 
 
 
Chinese loan
 
 
 
Long-term debt
5,500
 
 
5,500
 
Total long-term debt
$
17,250
 
 
$
19,250
 
 
 
11. Short-term Debt
 
     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 5.75% to 7.00% 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 31, 2010, 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 31, 2010 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, including a $5.0 million limit on individual investments that the Company may make. As described in Note 8, during the quarter ended October 31, 2010, the Company invested $5.9 million in a publicly held foreign company, which exceeded the maximum individual investment permitted under the covenant. The Company obtained a waiver from the bank to allow this investment. The Company was in compliance with all covenants associated with this facility as of October 31, 2010.
 
 
12. 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

15


warranty and records a liability in the amount of such costs based on revenue 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 31, 2010
Beginning balance at April 30, 2010
$
5,472
 
Additions during the period based on product sold
2,299
 
Settlements
(87
)
Changes in liability for pre-existing warranties, including expirations
(2,580
)
Ending balance at October 31, 2010
$
5,104
 
 
 
13. 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 31, 2010 and April 30, 2010 were as follows (in thousands):
 
 
October 31, 2010
 
April 30, 2010
 
Carrying
 
 
 
Carrying
 
 
 
Amount
 
Fair Value
 
Amount
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
184,928
 
 
$
184,928
 
 
$
207,024
 
 
$
207,024
 
Available for sale minority investment
5,880
 
 
5,880
 
 
 
 
 
Total
$
190,808
 
 
$
190,808
 
 
$
207,024
 
 
$
207,024
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Convertible notes
$
100,000
 
 
$
179,540
 
 
$
128,839
 
 
$
188,710
 
Long-term debt
17,250
 
 
16,526
 
 
19,250
 
 
18,183
 
Total
$
117,250
 
 
$
196,066
 
 
$
148,089
 
 
$
206,893
 
 
Cash and cash equivalents - The fair value of cash and cash equivalents approximates its carrying value.
 
Convertible notes -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.
 
Long-term debt - The fair value of long-term debt is determined by discounting the contractual cash flows at the current rates charged for similar debt instruments.
 
Available for sale minority investment - The fair value of minority investment is based on the sales price of the equity security listed on a foreign stock exchange.
 
     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 31, 2010, 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.
 

16


 
14. Stockholders' Equity
 
     The following table summarizes stock-based compensation expense related to employee stock options and employee stock purchases for the three months ended October 31, 2010 and November 1, 2009 which was reflected in the Company's operating results (in thousands):
 
 
 
Three Months Ended
 
Six Months Ended
 
October 31,
2010
 
November 1,
2009
 
October 31, 2010
 
November 1, 2009
Cost of revenues
$
1,310
 
 
$
1,288
 
 
$
2,056
 
 
$
2,320
 
Research and development
1,702
 
 
1,490
 
 
2,739
 
 
3,011
 
Sales and marketing
528
 
 
431
 
 
978
 
 
1,009
 
General and administrative
1,422
 
 
723
 
 
2,447
 
 
1,763
 
Total
$
4,962
 
 
$
3,932
 
 
$
8,220
 
 
$
8,103
 
 
    
The total stock-based compensation capitalized as part of inventory as of October 31, 2010 was $837,221.
 
     During the three months ended October 31, 2010 , no stock was issued under the Company's Employee Stock Purchase Plan and options to purchase 569,083 shares of common stock were exercised. During six months ended October 31, 2010, 355,580 shares of common stock were issued under the Company's Employee Stock Purchase Plan and options to purchase 869,692 shares of common stock were exercised. The number of restricted stock units released during the three and six months ended October 31, 2010 were 120,671 and 132,384, respectively.
 
As of October 31, 2010, total compensation cost, net of estimated forfeitures, related to unvested stock options and restricted stock units not yet recognized was approximately $26.1 million which is expected to be recognized over the suceeding 40 months.
 
 
15. Income Taxes
 
      The Company recorded a provision for income taxes of $567,000 and $38,000, respectively, for the three months ended October 31, 2010 and November 1, 2009 and $2.6 million and $197,000, respectively, for the six months ended October 31, 2010 and November 1, 2009. The $567,000 provision for income tax expense for the three months ended 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 31, 2010 have been fully offset by a valuation allowance.
 
     A portion of the valuation allowance for deferred tax assets at October 31, 2010 relates to the tax benefits of stock option deductions, the tax benefit of which will be credited to paid-in capital if and when realized and thereafter, to income tax expense.
 
     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 utilization.
 
     The Company's total gross unrecognized tax benefits as of April 30, 2010 and October 31, 2010 were $12.6 million. There was no change in the uncertain tax position. Excluding the effects of recorded valuation allowances for deferred tax assets, $10.6 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

17


individually material. It is the Company's belief that no significant changes in the unrecognized tax benefit positions will occur through April 30, 2011.
 
     The Company records interest and penalties related to unrecognized tax benefits in income tax expense. At October 31, 2010, there were no accrued interest or penalties related to uncertain tax positions. The Company recorded no interest or penalties for the quarter ended October 31, 2010.
 
 
16. Segment and Geographic Information
 
     The Company has one reportable segment consisting of optical subsystems and components. Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for SANs and LANs and MAN applications. Optical subsystems also include multiplexers, de-multiplexers and optical add/drop modules for use in MAN applications. Optical components consist primarily of packaged lasers and photodetectors which are incorporated in transceivers, primarily for LAN and SAN applications.
 
     The following table sets forth revenues by geographic areas based on the location of the entity purchasing the Company's products (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
October 31,
2010
 
November 1,
2009
 
October 31, 2010
 
November 1, 2009
Revenues from sales to unaffiliated customers:
 
 
 
 
 
 
 
United States
$
72,979
 
 
$
54,929
 
 
$
135,982
 
 
$
103,931
 
Malaysia
41,945
 
 
25,658
 
 
74,800
 
 
48,019
 
China
58,145
 
 
18,182
 
 
97,367
 
 
35,204
 
Rest of the world
67,874
 
 
46,961
 
 
140,676
 
 
87,301
 
 
$
240,943
 
 
$
145,730
 
 
$
448,825
 
 
$
274,455
 
   
  Revenues generated in the United States are all from sales to customers located in the United States.
 
     The following is a summary of long-lived assets within geographic areas based on the location of the assets (in thousands):
 
 
October 31,
2010
 
April 30,
2010
Long-lived assets:
 
 
 
United States
$
74,576
 
 
$
70,975
 
Malaysia
38,078
 
 
35,575
 
China
14,954
 
 
10,962
 
Rest of the world
17,002
 
 
13,003
 
 
$
144,610
 
 
$
130,515
 
 

18


 
17. Restructuring Charges
 
      As of October 31, 2010, $4.2 million of non-cancelable facilities payments related to the abandoned and unused portion of our facility in Allen, Texas remained accrued as restructuring reserve.
 
     The following table summarizes the activities of the restructuring accrual during the first six months of fiscal 2011 (in thousands):
 
Balance as of April 30, 2010
$
4,664
 
Charges
 
Cash payments
(420
)
Balance as of October 31, 2010
$
4,244
 
 
Of the $4.2 million of remaining accrual, $306,764 is expected to be fully utilized in the next twelve months and $3.9 million is expected to be paid out from fiscal 2012 through fiscal 2020.
 
 
18. Litigation Settlement
 
On September 10, 2010, the Company entered into a settlement and cross license agreement with Source Photonics, Inc., resolving a lawsuit that the Company had filed on January 5, 2010, alleging that certain optoelectronic transceivers from Source Photonics, Inc. infringed eleven Finisar patents. Under the terms of the settlement agreement, Source Photonics paid a license fee to Finisar in the amount of $14.5 million for a fully paid-up license to Finisar's digital diagnostics and transceiver module patents through December 31, 2015. Payment in full was made by September 30, 2010. The Company determined that $5.6 million of this settlement amount was attributable to past damages, and that amount was recorded as an offset to general and administrative expenses upon receipt. The remaining $8.9 million was accounted for as deferred revenue and will be recognized as license revenue ratably over the remaining license term through December 31, 2015. During the quarter ended October 31, 2010, the Company incurred contingent and other legal fees of $3.2 million in connection with the settlement of this litigation which was recorded as general and administrative expense.
 
 
19. Pending Litigation
 
Stock Option Derivative Litigation
 
     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.
 
     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

19


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 have appealed the judgment to the United States Court of Appeals for the Ninth Circuit. Oral argument in the case is set for December 10, 2010.
 
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 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, Corporate Development and Investor Relations and 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 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.
 
Section 16(b) Lawsuit
 
     A lawsuit was filed on October 3, 2007 in the United States District Court for the Western District of Washington by Vanessa Simmonds, a purported holder of the Company's common stock, against two investment banking firms that served as underwriters for the initial public offering of the Company's common stock in November 1999. None of the Company's officers, directors or employees were named as defendants in the complaint. On February 28, 2008, the plaintiff filed an amended complaint. The complaint, as amended, alleges that: (i) the defendants, other underwriters of the offering, and unspecified officers, directors and the Company's principal shareholders constituted a “group” that owned in excess of 10% of the Company's outstanding common stock between November 11, 1999 and November 20, 2000; (ii) the defendants were therefore subject to the “short swing” prohibitions of Section 16(b) of the Securities Exchange Act of 1934; and (iii) the defendants engaged in purchases and sales, or sales and purchases, of the Company's common stock within periods of less than six months in violation of the provisions of Section 16(b). The complaint seeks disgorgement of all profits allegedly received by the defendants, with interest and attorneys fees, for transactions in violation of Section 16(b). The Company, as the statutory beneficiary of any potential Section 16(b) recovery, is named as a nominal defendant in the complaint.
 
     This case is one of 54 lawsuits containing similar allegations relating to initial public offerings of technology company issuers, which were coordinated (but not consolidated) by the Court. On July 25, 2008, the real defendants in all 54 cases filed a consolidated motion to dismiss, and a majority of the nominal defendants (including the Company) filed a consolidated motion to dismiss, the amended complaints. On March 19, 2009, the Court dismissed the amended complaints naming the

20


nominal defendants that had moved to dismiss, without prejudice, because the plaintiff had not properly demanded action by their respective boards of directors before filing suit; and dismissed the amended complaints naming nominal defendants that had not moved to dismiss, with prejudice, finding the claims time-barred by the applicable statute of limitation. Also on March 19, 2009, the Court entered judgment against the plaintiff in all 54 cases. The plaintiff has appealed the order and judgments. The real defendants have cross-appealed the dismissal of certain amended complaints without prejudice, contending that dismissal should have been with prejudice because the amended complaints are barred by the applicable statute of limitation.
 
JDSU/Emcore Patent Litigation
 
     On September 11, 2006, JDSU and Emcore Corporation filed a complaint in the United States District Court for the Western District of Pennsylvania alleging that certain cable television transmission products acquired in connection with the Company's acquisition of Optium Corporation, specifically the Company's prior generation 1550 nm HFC externally modulated transmitter, infringe two U.S. patents, referred to as the “'003 and '071 Patents.” On March 14, 2007, JDSU and Emcore filed a second complaint in the United States District Court for the Western District of Pennsylvania alleging that the Company's prior generation 1550 nm HFC quadrature amplitude modulated transmitter used in cable television applications infringes another U.S. patent, referred to as the “'374 Patent”.
 
     A trial with respect to the two actions was held in October 2009. On November 1, 2009, the jury delivered its verdict that the Company had infringed the '003 and the '071 Patents as well as the '374 Patent. In addition, the jury found that the Company's infringement of the '003 and the '071 Patents was willful. The jury determined that, with respect to the '003 and the '071 Patents, Emcore was entitled to $974,364 in damages and JDSU was entitled to $622,440 in damages, and, with respect to the '374 Patent, Emcore was entitled to $1,800,000 in damages. The Court declined to enhance the damages award with respect to the '003 and '071 Patents as a result of the jury's determination that the Company's infringement was willful. In addition, the Court declined to issue a permanent injunction against further manufacture or sale of the products found to have infringed the patents-in-suit. The Company is appealing on several grounds.
 
     Based on the Company's review of the record in this case, including discussion with and analysis by counsel of the bases for the Company's appeal, the Company has determined that it has a number of strong arguments available on appeal and, although there can be no assurance as to the ultimate outcome, the Company believes that the judgment against it will ultimately be reversed, or remanded for a new trial in which the Company believes it would prevail. As a result, the Company has concluded that it is not probable that Emcore and JDSU will ultimately prevail in this matter; therefore, the Company has not recorded any liability for this judgment.
 
Export Compliance
 
     During mid-2007, Optium became aware that certain of its analog RF over fiber products may, depending on end use and customization, be subject to the International Traffic in Arms Regulations, or ITAR. Accordingly, Optium filed a detailed voluntary disclosure with the United States Department of State describing the details of possible inadvertent ITAR violations with respect to the export of a limited number of certain prototype products, as well as related technical data and defense services. Optium may have also made unauthorized transfers of ITAR-restricted technical data and defense services to foreign persons in the workplace. Additional information has been provided upon request to the Department of State with respect to this matter. In late 2008, a grand jury subpoena from the office of the U.S. Attorney for the Eastern District of Pennsylvania was received requesting documents from 2005 through the present referring to, relating to or involving the subject matter of the above referenced voluntary disclosure and export activities.
 
     While the Department of State encourages voluntary disclosures and generally affords parties mitigating credit under such circumstances, the Company nevertheless could be subject to continued investigation and potential regulatory consequences ranging from a no-action letter, government oversight of facilities and export transactions, monetary penalties, and in extreme cases, debarment from government contracting, denial of export privileges and criminal sanctions, any of which would adversely affect the Company's results of operations and cash flow. The Department of State and U.S. Attorney inquiries may require the Company to expend significant management time and incur significant legal and other expenses. The Company cannot predict how long it will take or how much more time and resources it will have to expend to resolve these government inquiries, nor can it predict the outcome of these inquiries.
 

21


Other Litigation
 
     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.
 
     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 31, 2010. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.
 
     During the first quarter of fiscal 2009, the Company's Malaysian subsidiary entered into loan agreements with a Malaysian bank (See Note 10. Long-term Debt) for which the Company has provided corporate guarantees. The Company guaranteed loan payments of up to $23.1 million in the event of non-payment by its Malaysian subsidiary. These guarantees are effective during the term of these loans. The principal balance of this loan outstanding as of October 31, 2010 was $11.8 million .
 
 
21. Related Party Transaction
 
     During the three and six months ended October 31, 2010, the Company paid $45,000 and $88,000, 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, 2,150 restricted stock units with a fair market value of $33,841, which vest as follows: 25% on June 23, 2011 and an additional 25% on each of the next 3 anniversaries thereafter, to be fully vested on June, 2014, subject to him continuing to provide services to Finisar. During the three and six months ended November 1, 2009, the Company paid Mr. Gertel's company $38,000 and $75,000, 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.
 

22


 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
 
     The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors, including those referred to in “Part II, Item 1A. Risk Factors” below. 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 to interconnect equipment in short-distance local area networks, or LANs, and storage area networks, or SANs, and longer distance metropolitan area networks, or MANs, fiber-to-the-home networks, or FTTx, cable television, or CATV, networks and wide area networks, or WANs. 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 100Gbps, 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 LAN and SAN applications, and passive optical components used in building MANs. 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, photodetectors 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
 
Litigation Settlement
 
On September 10, 2010, we entered into a settlement and cross license agreement with Source Photonics, Inc., resolving a lawsuit that we had filed on January 5, 2010, alleging that certain optoelectronic transceivers from Source Photonics, Inc. infringed eleven of our patents. Under the terms of the settlement agreement, Source Photonics paid a license fee to us in the amount of $14.5 million for a fully paid-up license to our digital diagnostics and transceiver module patents through December 31, 2015. Payment in full was made by September 30, 2010. See litigation settlement discussion under Results of Operations for further information regarding the settlement.
 
Minority Investment
 
In October 2010, we invested $5.9 million in a publicly held foreign company for strategic reasons. This investment was classified as an available for sale minority investment and accounted for as a minority investment on our balance sheet as of October 31, 2010.
 

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Sale of Network Tools Division
 
     On July 15, 2009, we completed the sale of substantially all of the assets of our Network Tools Division to JDSU. We received $40.7 million in cash and recorded a net gain on sale of the business of $35.9 million before income taxes in the first quarter of fiscal 2010. The assets, liabilities and operating results related to this business have been classified as discontinued operations in the consolidated financial statements for all periods presented. Following the completion of the sale, we no longer offer network performance test products.
 
Exchange Offers
 
     On August 11, 2009, we completed exchange offers under which we exchanged $33.1 million aggregate principal amount of our outstanding 2 1/2% Convertible Subordinated Notes due 2010 and $14.4 million aggregate principal amount of our outstanding 2 1/2% Convertible Senior Subordinated Notes due 2010 for an aggregate of approximately $24.9 million in cash and approximately 3.5 million shares of our common stock.
 
Reverse Stock Split
 
     On September 25, 2009, we effected a one-for-eight reverse split of our common stock.
 
Credit Facility
 
     On October 2, 2009, we entered into an agreement with Wells Fargo Foothill, LLC to establish a $70 million senior secured revolving credit facility to finance working capital and to refinance existing indebtedness, including the repurchase or repayment of our outstanding convertible notes. 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 5.75% to 7.00% per annum. Borrowings are guaranteed by Finisar's U.S. subsidiaries and secured by substantially all of the assets of Finisar and its U.S. subsidiaries. The credit facility matures four years following the date of the agreement, subject to certain conditions.
 
Convertible Debt Financing
 
     On October 15, 2009 we sold $100 million aggregate principal amount of a new series of 5.0% Convertible Senior Notes due 2029.
 
Repurchase and Retirement of Convertible Notes
 
     In fiscal 2010, we purchased $51.9 million aggregate principal amount of our 2 1/2% Convertible Senior Subordinated Notes due 2010 and $13.0 million aggregate principal amount of our 2 1/2% Convertible Subordinated Notes due 2010 in privately negotiated transactions. In October 2010, we paid $29.6 million in cash to retire the remaining principal amount of both series of these notes.
 
Common Stock Offering
 
     On March 23, 2010, we completed the sale of 9,787,093 shares of our common stock at a price to the public of $14.00 per share. Total gross proceeds of the offering were $137.0 million. Net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were $131.1 million.
 
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, 2010.
 

24


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 31,
2010
 
November 1,
2009
 
October 31,
2010
 
November 1,
2009
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues
65.3
 
 
71.9
 
 
65.3
 
 
73.9
 
Amortization of acquired developed technology
0.5
 
 
0.8
 
 
0.5
 
 
0.9
 
Gross profit
34.2
 
 
27.3
 
 
34.2
 
 
25.2
 
Operating expenses:
 
 
 
 
 
 
 
 
Research and development
11.7
 
 
14.8
 
 
12.2
 
 
15.5
 
Sales and marketing
3.8
 
 
5.0
 
 
4.1
 
 
5.1
 
General and administrative
3.5
 
 
5.6
 
 
4.4
 
 
6.5
 
Restructuring charges
 
4,173
 
2.9
 
 
 
 
1.5
 
Amortization of purchased intangibles
0.2
 
 
0.4
 
 
0.2
 
 
0.4
 
Total operating expenses
19.2
 
 
28.7
 
 
20.9
 
 
29.0
 
Income (loss) from operations
15.0
 
 
(1.4
)
 
13.3
 
 
(3.8
)
Interest income
0.1
 
 
0.0
 
 
0.1
 
 
0.0
 
Interest expense
(0.9
)
 
(1.5
)
 
(0.9
)
 
(1.7
)
Loss on debt extinguishment
 
 
(17.2
)
 
 
 
(9.1
)
Other income (expense), net
0.1
 
 
(1.5
)
 
 
 
(0.7
)
Income (loss) from continuing operations before income taxes
14.3
 
 
(21.6
)
 
12.5
 
 
(15.3
)
Provision for income taxes
0.2
 
 
0.0
 
 
0.6
 
 
0.1
 
Income (loss) from continuing operations
14.1
 
 
(21.6
)
 
11.9
 
 
(15.4
)
Income (loss) from discontinued operations, net of income taxes
 
 
(0.0
)
 
(0.1
)
 
13.5
 
Net income (loss)
14.1
 %
 
(21.6
)%
 
11.8
 %
 
(1.9
)%
 
     Revenues. Revenues increased $95.2 million, or 65.3%, to $240.9 million in the quarter ended October 31, 2010 compared to $145.7 million in the quarter ended November 1, 2009. Revenues increased $174.4 million, or 63.5%, to $448.8 million in the six months ended October 31, 2010 compared to $274.5 million in the six months ended November 1, 2009. These increases reflect the impact of a combination of factors including increased spending on infrastructure by business enterprises and telecommunications companies as they deal with the ongoing growth in bandwidth through their networks as well as improvement in general economic conditions that contributed to an increase in information technology infrastructure spending. Additionally, we believe that we achieved an increase in our market share, particularly for higher speed products, due in part to the qualification of several products for higher speed applications at certain customers and our entry into new markets.
 
     

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The following table sets forth the changes in revenues by product segment (in thousands):
 
Three months ended
 
October 31,
2010
 
November 1,
2009
 
Change
 
% Change
Transceivers, transponders & components
 
 
 
 
 
 
 
Greater than 10 Gbps:
 
 
 
 
 
 
 
LAN/SAN
$
37,979
 
 
$
16,463
 
 
$
21,516
 
 
130.7
 %
Metro/Telecom
69,347
 
 
38,854
 
 
30,493
 
 
78.5
 
Subtotal
107,326
 
 
55,317
 
 
52,009
 
 
94.0
 
Less than 10 Gbps:
 
 
 
 
 
 
 
LAN/SAN
58,216
 
 
43,946
 
 
14,270
 
 
32.5
 
Metro/Telecom
32,966
 
 
25,931
 
 
7,035
 
 
27.1
 
Subtotal
91,182
 
 
69,877
 
 
21,305
 
 
30.5
 
Total transceivers, transponders & components
198,508
 
 
125,194
 
 
73,314
 
 
58.6
 
ROADM linecards and WSS modules
38,811
 
 
15,464
 
 
23,347
 
 
151.0
 
CATV
3,624
 
 
5,072
 
 
(1,448
)
 
(28.5
)
Total revenues
$
240,943
 
 
$
145,730
 
 
$
95,213
 
 
65.3
 %
 
 
Six Months Ended
 
October 31,
2010
 
November 1, 2009
 
Change
 
% Change
Transceivers, transponders & components
 
 
 
 
 
 
 
Greater than 10 Gbps:
 
 
 
 
 
 
 
LAN/SAN
$
67,824
 
 
$
29,940
 
 
$
37,884
 
 
126.5
 %
Metro/Telecom
133,577
 
 
77,278
 
 
56,299
 
 
72.9
 
Subtotal
201,401
 
 
107,218
 
94,183
 
87.8
 
Less than 10 Gbps:
 
 
 
 
 
 
 
LAN/SAN
107,199
 
 
80,950
 
 
26,249
 
 
32.4
 
Metro/Telecom
63,017
 
 
51,071
 
 
11,946
 
 
23.4
 
Subtotal
170,216
 
 
132,021
 
38,195
 
28.9
 
Total transceivers, transponders & components
371,617
 
 
239,239
 
 
132,378
 
 
55.3
 
ROADM linecards and WSS modules
69,288
 
 
26,409
 
 
42,879
 
 
162.4
 
CATV
7,920
 
 
8,807
 
 
(887
)
 
(10.1
)
Total revenues
$
448,825
 
 
$
274,455
 
 
$
174,370
 
 
63.5
 %
 
 
     Amortization of Acquired Developed Technology. Amortization of acquired developed technology, a component of cost of revenues, was $1.2 million each in the quarters ended October 31, 2010 and November 1, 2009 and $2.4 million each in the six months ended October 31, 2010 and November 1, 2009.
 
     Gross Profit. Gross profit increased $42.6 million, or 107.1%, to $82.4 million in the quarter ended October 31, 2010 compared to $39.8 million in the quarter ended November 1, 2009. Gross profit as a percentage of revenues increased by 6.9%, from 27.3% in the quarter ended November 1, 2009 to 34.2% in the quarter ended October 31, 2010. We recorded charges of $2.8 million for obsolete and excess inventory in the quarter ended October 31, 2010 compared to $5.6 million in the quarter ended November 1, 2009. We sold inventory that was written-off in previous periods resulting in a benefit of $2.8 million in the quarter ended October 31, 2010 and $4.4 million in the quarter ended November 1, 2009. As a result, we recognized no net charge in the quarter ended October 31, 2010 compared to a net charge of $1.2 million in the quarter ended November 1, 2009. Manufacturing overhead included stock-based compensation charges of $1.3 million each in the quarters ended October 31, 2010 and November 1, 2009. 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 $84.9 million, or 35.2% of revenues, in the quarter ended October 31, 2010 compared to $43.5 million, or 29.8% of revenues in the quarter ended November 1, 2009. The increase in gross margin primarily

26


reflects the benefits of higher manufacturing unit volume and the increase in sales of higher margin high speed components and ROADM products, partially offset by the unfavorable impact of lower pricing on some products. In the quarter ended October 31, 2010, manufacturing overhead costs increased by 45% compared to the 65% increase in revenues.
 
Gross profit increased $84.1 million or 121.5%, to $153.3 million in the six months ended October 31, 2010 compared to $69.2 million in the six months ended November 1, 2009. Gross profit as a percentage of revenues increased by 9.0%, from 25.2% in the six months ended November 1, 2009 to 34.2% in the six months ended October 31, 2010. We recorded charges of $6.6 million for obsolete and excess inventory in the six months ended October 31, 2010 compared to $14.8 million in the six months ended November 1, 2009. We sold inventory that was written-off in previous periods resulting in a benefit of $6.4 million in the six months ended October 31, 2010 and $7.1 million in the six months ended November 1, 2009. As a result, we recognized a net charge of $200,000 in the six months ended October 31, 2010 compared to $7.7 million in the six months ended November 1, 2009. Manufacturing overhead includes stock-based compensation charges of $2.1 million in the six months ended October 31, 2010 and $2.3 million in the six months ended November 1, 2009. 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 $157.9 million, or 35.2% of revenues, in the six months ended October 31, 2010 compared to $81.6 million, or 29.7% of revenues, in the six months ended November 1, 2009. The increase in gross margin primarily reflects the benefits of higher manufacturing unit volume and the increase in sales of higher margin high speed components and ROADM products, partially offset by the unfavorable impact of lower pricing on some products. In the six months ended October 31, 2010, manufacturing overhead costs increased by 43% compared to the 63% increase in revenues.
 
     Research and Development Expenses. Research and development expenses increased $6.6 million, or 30.5%, to $28.1 million in the quarter ended October 31, 2010 compared to $21.6 million in the quarter ended November 1, 2009. The increase was due to increases in employee related expenses and costs of materials associated with new product development. Included in research and development expenses were stock-based compensation charges of $1.7 million in the quarter ended October 31, 2010 and $1.5 million in the quarter ended November 1, 2009. Research and development expenses as a percent of revenues decreased to 11.7% in the quarter ended October 31, 2010 compared to 14.8% in the quarter ended November 1, 2009.
 
Research and development expenses increased $12.1 million, or 28.5%, to $54.8 million in the six months ended October 31, 2010 compared to $42.6 million in the six months ended November 1, 2009. The increase was due to increases in employee related expenses and costs of materials associated with new product development. Included in research and development expenses were stock-based compensation charges of $2.7 million in the six months ended October 31, 2010 and $3.0 million in the six months ended November 1, 2009. Research and development expenses as a percent of revenues decreased to 12.2% in the six months ended October 31, 2010 compared to 15.5% in the six months ended November 1, 2009.
 
     Sales and Marketing Expenses. Sales and marketing expenses increased $1.9 million, or 26.4%, to $9.2 million in the quarter ended October 31, 2010 compared to $7.3 million in the quarter ended November 1, 2009. The increase was primarily due to increased sales commissions as a result of the increase in revenues. Included in sales and marketing expenses were stock-based compensation charges of $528,000 in the quarter ended October 31, 2010 and $431,000 in the quarter ended November 1, 2009. Sales and marketing expenses as a percent of revenues decreased to 3.8% in the quarter ended October 31, 2010 compared to 5.0% in the quarter ended November 1, 2009.
 
Sales and marketing expenses increased $4.2 million, or 29.6%, to $18.3 million in the six months ended October 31, 2010 compared to $14.1 million in the six months ended November 1, 2009. The increase was primarily due to increased sales commissions as a result of the increase in revenues. Included in sales and marketing expenses were stock-based compensation charges of $978,000 in the six months ended October 31, 2010 and $1.0 million in the six months ended November 1, 2009. Sales and marketing expenses as a percent of revenues decreased to 4.1% in the six months ended October 31, 2010 compared to 5.1% in the six months ended November 1, 2009.
 
     General and Administrative Expenses. General and administrative expenses increased $340,000, or 4.2%, to $8.5 million in the quarter ended October 31, 2010 compared to $8.2 million in the quarter ended November 1, 2009. The increase was primarily due to increases in personnel related costs partially offset by $1.4 million of litigation settlement income net of legal costs associated with the litigation settlement as discussed below. Included in general and administrative expenses were stock-based compensation charges of $1.4 million in the quarter ended October 31, 2010 and $723,000 in the quarter ended November 1, 2009. General and administrative expenses as a percent of revenues decreased to 3.5% in the quarter ended October 31, 2010 compared to 5.6% in the quarter ended November 1, 2009.
 
General and administrative expenses increased $1.8 million, or 10.1%, to $19.6 million in the six months ended October 31, 2010 compared to $17.8 million in the six months ended November 1, 2009. The increase was primarily due to increases in personnel related costs and legal costs partially offset by $1.4 million of litigation settlement income net of legal costs associated

27


with the litigation settlement as discussed below. Included in general and administrative expenses were stock-based compensation charges of $2.4 million in the six months ended October 31, 2010 and $1.8 million in the six months ended November 1, 2009. General and administrative expenses as a percent of revenues decreased to 4.4% in the six months October 31, 2010 compared to 6.5% in the six months ended November 1, 2009.
 
Restructuring Costs. As a result of moving certain manufacturing activities from our facility in Allen, Texas to our lower cost manufacturing facility in Ipoh, Malaysia, we determined that approximately 32% of the space in the Allen facility was no longer required for manufacturing. As a result, we closed that portion of the facility in the quarter ended November 1, 2009 and recorded a restructuring charge of $4.2 million in the quarter ended November 1, 2009 which represented the present value of the lease payments allocable to that portion of the facility that are obligated to make over the remaining lease term.
 
     Amortization of Purchased Intangibles. Amortization of purchased intangibles decreased $135,000, or 26.1%, to $383,000 in the quarter ended October 31, 2010 compared to $518,000 in the quarter ended November 1, 2009. The decrease was primarily due to the full amortization of certain purchased intangibles acquired in Optium merger.
 
Amortization of purchased intangibles decreased $453,000, or 37.2%, to $766,000 in the six months ended October 31, 2010 compared to $1.2 million in the six months ended November 1, 2009. The decrease was primarily due to the full amortization of certain purchased intangibles acquired in Optium merger.
 
     Interest Income. Interest income increased $134,000 to $143,000 in the quarter ended October 31, 2010 compared to $9,000 in the quarter ended November 1, 2009. 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.
 
Interest income increased $216,000 to $235,000 in the six months ended October 31, 2010 compared to $19,000 in the six months ended November 1, 2009. 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.
 
     Interest Expense. Interest expense decreased $90,000, or 4.2%, to $2.1 million in the quarter ended October 31, 2010 compared to $2.2 million in the quarter ended November 1, 2009. The decrease was primarily related to lower outstanding debt due to repayment of $47.5 million of aggregate principal amount of our 2 1/2% Convertible Subordinated Notes due 2010 and our 2 1/2% Convertible Senior Subordinated Notes due 2010 pursuant to exchange offers in the second quarter of fiscal 2010 and repurchases of $13.0 million principal amount of our 2 1/2% Convertible Subordinated Notes and $51.9 million of our 2 1/2% Convertible Senior Subordinated Notes in the second quarter of fiscal 2010. 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 $367,000 due to accretion of the original issue discount created by the conversion option in the 2.5% senior subordinated convertible notes, as interest expense over the term of the instrument using the interest method. Interest expense for the quarter ended November 1, 2009 included $540,000 related to our convertible subordinated notes which were fully repaid in October 2010, $570,000 related to various other debt instruments and a non-cash charge of $1.1 million due to the accretion of the original issue discount related to our senior convertible notes.
 
Interest expense decreased $369,000, or 8.0%, to $4.2 million in the six months ended October 31, 2010 compared to $4.6 million in the six months ended November 1, 2009. The decrease was primarily related to lower outstanding debt due to repayment of $47.5 million of aggregate principal amount of our 2 1/2% Convertible Subordinated Notes due 2010 and our 2 1/2% Convertible Senior Subordinated Notes due 2010 pursuant to exchange offers in the second quarter of fiscal 2010 and repurchases of $13.0 million principal amount of our 2 1/2% Convertible Subordinated Notes and $51.9 million of our 2 1/2% Convertible Senior Subordinated Notes in the second quarter of fiscal 2010. 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 accretion of the original issue discount created by the conversion option in the 2.5% senior subordinated convertible notes, as interest expense over the term of the instrument using the interest method. Interest expense for the six months ended November 1, 2009 included $1.5 million related to our convertible subordinated notes which were fully repaid in October 2010 and a non-cash charge of $2.3 million related to the accounting for our senior convertible notes.
 
Loss on Debt Extinguishment. On August 11, 2009, we retired $33.1million principal amount of our 2 1/2% Convertible Subordinated Notes due 2010 and $14.4 million principal amount of our 2 1/2% Convertible Senior Subordinated Notes due 2010 pursuant to exchange offers which commenced on July 9, 2009. The consideration for the exchange consisted of (i) $525 in cash and (ii) 596 shares of the Company's common stock per $1,000 principal amount of notes. We issued approximately 3.5 million shares of common stock and paid out approximately $24.9 million in cash to the former holders of notes in the exchange offers. The total consideration paid in the exchange was approximately $4.7 million less than the par value of the notes retired. However,

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in accordance with the provisions of ASC 470-20, this exchange was considered an induced conversion and the retirement of the notes was accounted for as if they had been converted according to their original terms, with that value compared to the fair value of the consideration paid in the exchange offers. The original conversion price of the notes was $30.08 per share. Accordingly, although the trading price of our common stock was $5.04 at the time of the exchange, we recorded a loss on debt extinguishment of $23.7 million in the quarter ended November 1, 2009. We incurred $1.5 million of expenses in connection with the exchange offers which was also recorded as loss on debt extinguishment in the quarter ended November 1, 2009.
 
     Other Income (Expense), Net. Other income was $192,000 in the quarter ended October 31, 2010 compared to other expense of $2.2 million in the quarter ended November 1, 2009. Other income in the quarter ended October 31, 2010 primarily consisted of realized foreign exchange gains of $654,000 partially offset by $248,000 of amortization of issuance costs for our 5% Convertible Senior Notes and unrealized non-cash foreign exchange losses of $183,000 related to the re-measurement of our $11.8 million note re-payable in U.S. dollars which is recorded on the books of our subsidiary in Malaysia whose functional currency is the Malaysian ringgit. Other expense in the quarter ended November 1, 2009 was primarily due to a $2.0 million write down of a minority investment as the decline in its value was other than temporary.
 
Other income was $0 in the six months ended October 31, 2010 compared to other expense of $1.9 million in the six months ended November 1, 2009. Other expense in the six months ended November 1, 2009 was primarily due to a $2.0 million write down of a minority investment as the decline in its value was other than temporary.
 
     Provision for Income Taxes. We recorded income tax provisions of $567,000 and $38,000, respectively, for the quarters ended October 31, 2010 and November 1, 2009. We recorded income tax provisions of $2.6 million and $197,000, respectively, for the six months ended October 31, 2010 and November 1, 2009. The income tax provisions for the quarters and six months ended October 31, 2010 and November 1, 2009 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 deferred tax assets which represent future income tax benefits associated with our operating losses because we do not believe it is more likely than not these assets will be realized.
 
Litigation settlement. On September 10, 2010, we entered into a settlement and cross license agreement with Source Photonics, Inc., resolving a lawsuit that we had filed on January 5, 2010, alleging that certain optoelectronic transceivers from Source Photonics, Inc. infringed eleven of our patents. Under the terms of the settlement agreement, Source Photonics paid a license fee to us in the amount of $14.5 million for a fully paid-up license to our digital diagnostics and transceiver module patents through December 31, 2015. Payment in full was made by September 30, 2010. We determined that $5.6 million of this settlement amount was attributable to past damages, and that amount was recorded as an offset to general and administrative expenses upon receipt. The remaining $8.9 million was accounted as deferred revenue and will be recognized as license revenue ratably over the remaining license term through December 31, 2015. During the quarter ended October 31, 2010 we incurred $3.2 million in contingent and other legal fees in connection with the settlement of this litigation which was recorded as general and administrative expense.
 
     Income from Discontinued Operation, Net of Taxes. The transition services agreement we had entered into with JDSU in connection with the sale of the assets of the Network Tools Division, under which we agreed to provide manufacturing services to them during the transition period, was completed on July 14, 2010. Total operating expenses incurred in relation to the transition services agreement during the six months ended October 31, 2010 was $284,000. Income from discontinued operations for the six months ended November 1, 2009 was $37.0 million, including a gain on the sale of the business unit of $35.9 million.
 
Liquidity and Capital Resources
 
Cash Flows from Operating Activities
 
     Net cash provided by operating activities was $31.2 million in the six months ended October 31, 2010, compared to net cash used in operating activities of $3.7 million in the six months ended November 1, 2009. Cash provided by 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 $29.3 million, and cash used for working capital requirements primarily related to increases in accounts receivable and inventory. Accounts receivable increased by $45.6 million primarily due to the increase in shipments. Inventory increased by $24.7 million and accounts payable increased by $9.8 million due to increased purchases to support increased sales.
Cash used in operating activities in the six months ended November 1, 2009 consisted of net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling to $55.6 million, and cash used for working capital, primarily related to increases in accounts receivable and inventories and a decrease in other accrued liabilities. Accounts receivable increased by $14.1 million primarily due to the increase in revenues. Inventory increased primarily to support higher levels of sales.
 

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Cash Flows from Investing Activities
 
     Net cash used in investing activities totaled $31.6 million in the six months ended October 31, 2010 compared to net cash provided by investing activities of $31.2 million in the six months ended November 1, 2009. Net cash used in investing activities in the six months ended October 31, 2010 represented expenditures for capital equipment of $25.7 million and $5.9 million of minority investment in a publicly held foreign company. Net cash provided by investing activities in the six months ended November 1, 2009 primarily represented $40.7 million in cash received from the sale of the assets of our Network Tools Division to JDSU on July 15, 2009. We also received $1.2 million in cash in the first quarter of fiscal 2010 from the sale of a promissory note and all of the preferred stock that we received as consideration for the sale of a product line in the first quarter of fiscal 2009. These receipts were partially offset by $10.7 million of expenditures for capital equipment.
 
Cash Flows from Financing Activities
 
     Net cash used in financing activities totaled $21.8 million in the six months ended October 31, 2010 compared to net cash provided by financing activities of $15.9 million in the six months ended November 1, 2009. Cash used in financing activities for the six months ended October 31, 2010 primarily reflected repayments of convertible notes totaling $29.6 million partially offset by proceeds from the exercise of stock options and purchases under our stock purchase plan totaling $9.8 million. Cash provided by financing activities for the six months ended November 1, 2009 primarily consisted of $98.1 million in proceeds from the issuance of our 5.0% Convertible Senior Notes, partially offset by $82.6 million of cash used to repay convertible notes.
 
Contractual Obligations and Commercial Commitment
 
     At October 31, 2010, we had contractual obligations of $355.1 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
Long-term debt
$
17,250
 
 
$
4,000
 
 
$
13,250
 
 
$
 
 
$
 
Convertible debt
100,000
 
 
 
 
 
 
 
 
100,000
 
Interest on debt (a)
20,991
 
 
5,509
 
 
10,482
 
 
5,000
 
 
 
Operating leases (b)
38,892
 
 
6,043
 
 
8,792
 
 
7,237
 
 
16,820
 
Purchase obligations (c)
178,000
 
 
178,000
 
 
 
 
 
 
 
Total contractual obligations
$
355,133
 
 
$
193,552
 
 
$
32,524
 
 
$
12,237
 
 
$
116,820
 
_________________
(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.
 
 
     At October 31, 2010, total long-term debt and principal amounts due under our convertible debt was $ 117.3 million, compared to $148.8 million at April 30, 2010.
 
     Long-term debt principally consists of borrowings by our Malaysian subsidiary under two separate loan agreements entered into with a Malaysian bank in July 2008. The first loan is payable in 20 equal quarterly installments of $750,000 beginning in January 2009 and the second loan is payable in 20 equal quarterly installments of $250,000 beginning in October 2008. Both loans are secured by certain property of our Malaysian subsidiary, guaranteed by us and subject to certain covenants. We and our subsidiary were in compliance with all covenants associated with these loans as of October 31, 2010. At October 31, 2010, the principal balance outstanding under these loans was $11.8 million. Long-term debt also includes borrowings by our Chinese subsidiary under a loan agreement entered into with a bank in China in January 2010. Under this agreement, our Chinese subsidiary borrowed a total of $5.5 million at an initial interest rate of 2.6% per annum. The loan is payable in full on January 6, 2013. Interest is payable quarterly.
 
     Convertible debt consists of a series of convertible senior notes in the aggregate principal amount of $100.0 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

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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. Aggregate annual interest payments on the notes are approximately $5.0 million.
 
     Interest on debt consists of the scheduled interest payments on our long-term and 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 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 31, 2010, the liability for these purchase commitments of $1.3 million has been expensed and recorded on the condensed consolidated balance sheet as non-cancelable purchase obligations 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 31, 2010, our principal sources of liquidity consisted of $184.9 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.
 
       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 all of our outstanding 5% Convertible Senior Notes due 2029, in the aggregate principal amount of $100 million, which are subject to redemption by the holders 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 31, 2010 and April 30, 2010, 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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