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EX-31.1 - EX 31.1 - FINISAR CORPfnsr311013011.htm
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EX-32.2 - EX 32.2 - FINISAR CORPfnsr322013011.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 January 30, 2011
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to
 
Commission file number 000-27999
 
Finisar Corporation
(Exact name of Registrant as specified in its charter)
 
Delaware
 
94-3038428 
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
1389 Moffett Park Drive
 
 
Sunnyvale, California
 
94089
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code:
408-548-1000
 
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o
 
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  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 February 28, 2011, there were 89,631,781 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 January 30, 2011
 
 
 
Page
 
 
Condensed Consolidated Balance Sheets as of  January 30, 2011 and April 30, 2010
Condensed Consolidated Statements of Operations for the three and nine month periods ended January 30, 2011 and January 31, 2010
Condensed Consolidated Statements of Cash Flows for the nine month periods ended January 30, 2011 and January 31, 2010
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
FINISAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
January 30, 2011
 
April 30, 2010
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
310,232
 
 
$
207,024
 
Accounts receivable, net of allowance for doubtful accounts of $1,246 at January 30, 2011 and $2,085 at April 30, 2010
175,173
 
 
127,617
 
Accounts receivable, other
13,910
 
 
12,855
 
Inventories
176,811
 
 
139,525
 
Deferred tax assets
2,437
 
 
2,238
 
Prepaid expenses and other
11,253
 
 
6,956
 
Total current assets
689,816
 
 
496,215
 
Property, equipment and improvements, net
112,324
 
 
89,214
 
Purchased technology, net
8,403
 
 
11,689
 
Other intangible assets, net
10,509
 
 
11,713
 
Minority investments
18,610
 
 
12,289
 
Other assets
4,178
 
 
5,610
 
Total assets
$
843,840
 
 
$
626,730
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 
 
 
Accounts payable
$
83,263
 
 
$
76,838
 
Accrued compensation
21,872
 
 
18,289
 
Other accrued liabilities
25,101
 
 
21,798
 
Deferred revenue
7,186
 
 
6,571
 
Current portion of convertible debt (Note 9)
 
 
28,839
 
Current portion of long-term debt (Note 10)
 
 
4,000
 
Total current liabilities
137,422
 
 
156,335
 
Long-term liabilities:
 
 
 
Convertible debt, net of current portion (Note 9)
57,850
 
 
100,000
 
Long-term debt, net of current portion (Note 10)
 
 
15,250
 
Other non-current liabilities
12,706
 
 
6,260
 
Deferred tax liabilities
387
 
 
239
 
Total liabilities
208,365
 
 
278,084
 
Commitments and contingencies
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at January 30, 2011 and April 30, 2010
 
 
 
Common stock, $0.001 par value, 750,000,000 shares authorized, 87,376,362 shares issued and outstanding at January 30, 2011 and 75,824,913 shares issued and outstanding at April 30, 2010
87
 
 
76
 
Additional paid-in capital
2,239,726
 
 
2,030,373
 
Accumulated other comprehensive income
21,513
 
 
15,791
 
Accumulated deficit
(1,625,851
)
 
(1,697,594
)
Total stockholders' equity
635,475
 
 
348,646
 
Total liabilities and stockholders' equity
$
843,840
 
 
$
626,730
 

3


FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
January 30,
2011
 
January 31,
2010
 
January 30,
2011
 
January 31,
2010
 
 
 
 
 
 
 
 
Revenues
$
263,016
 
 
$
166,935
 
 
$
711,841
 
 
$
441,390
 
Cost of revenues
177,730
 
 
114,048
 
 
470,865
 
 
316,923
 
Amortization of acquired developed technology
1,221
 
 
1,192
 
 
3,613
 
 
3,577
 
Gross profit
84,065
 
 
51,695
 
 
237,363
 
 
120,890
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
29,607
 
 
24,892
 
 
84,372
 
 
67,514
 
Sales and marketing
8,818
 
 
7,922
 
 
27,140
 
 
22,054
 
General and administrative
20,604
 
 
9,329
 
 
40,197
 
 
27,127
 
Restructuring charges
 
 
 
 
 
 
4,173
 
Amortization of purchased intangibles
383
 
 
426
 
 
1,149
 
 
1,645
 
Total operating expenses
59,412
 
 
42,569
 
 
152,858
 
 
122,513
 
Income (loss) from operations
24,653
 
 
9,126
 
 
84,505
 
 
(1,623
)
Interest income
204
 
 
85
 
 
439
 
 
104
 
Interest expense
(1,465
)
 
(2,241
)
 
(5,697
)
 
(6,842
)
Loss on debt extinguishment
 
 
28
 
 
 
 
(25,039
)
Other income (expense), net
(3,404
)
 
(961
)
 
(3,404
)
 
(2,899
)
Income (loss) from continuing operations before income taxes
19,988
 
 
6,037
 
 
75,843
 
 
(36,299
)
Provision for income taxes
1,167
 
 
421
 
 
3,816
 
 
618
 
Income (loss) from continuing operations
$
18,821
 
 
$
5,616
 
 
$
72,027
 
 
$
(36,917
)
Income (loss) from discontinued operations, net of income taxes
 
 
(131
)
 
(284
)
 
36,881
 
Net income (loss)
$
18,821
 
 
$
5,485
 
 
$
71,743
 
 
$
(36
)
Net income (loss) per share- basic and diluted
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.24
 
 
$
0.09
 
 
$
0.93
 
 
$
(0.58
)
Income (loss) per share from discontinued operations
$
 
 
$
 
 
$
 
 
$
0.58
 
Net income (loss) per share
$
0.24
 
 
$
0.09
 
 
$
0.93
 
 
$
 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.22
 
 
$
0.08
 
 
$
0.84
 
 
$
(0.58
)
Income (loss) per share from discontinued operations
$
 
 
$
 
 
$
 
 
$
0.58
 
Net income (loss) per share
$
0.22
 
 
$
0.08
 
 
$
0.84
 
 
$
 
 
 
 
 
 
 
 
 
Shares used in computing net income (loss) per share
 
 
 
 
 
 
 
Basic
80,080
 
 
65,113
 
 
77,638
 
 
63,131
 
Diluted
93,388
 
 
66,719
 
 
90,694
 
 
63,131
 
See accompanying notes.

4


FINISAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended
 
January 30, 2011
 
January 31, 2010
Operating activities
 
 
 
Net income (loss)
$
71,743
 
 
$
(36
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
31,668
 
 
28,179
 
Stock-based compensation expense
12,727
 
 
12,322
 
Stock-based defined contribution retirement plan expense
155
 
 
 
Non-cash interest cost on 2.5% convertible senior subordinated notes
742
 
 
2,674
 
Impairment of minority investments
 
 
2,000
 
Loss on sale or retirement of assets
163
 
 
327
 
Debt conversion inducement expense
5,946
 
 
 
Loss on debt extinguishment
 
 
23,552
 
Gain on sale of equity investment
 
 
(1,625
)
Gain on sale of discontinued operations
 
 
(35,888
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(47,556
)
 
(34,579
)
Inventories
(35,564
)
 
(12,432
)
Other assets
(5,288
)
 
(1,185
)
Deferred income taxes
(50
)
 
(13
)
Accounts payable
6,425
 
 
16,703
 
Accrued compensation
3,426
 
 
924
 
Other accrued liabilities
3,159
 
 
(6,278
)
Deferred revenue
7,173
 
 
3,611
 
Net cash provided by (used in) operating activities
$
54,869
 
 
$
(1,744
)
Investing activities
 
 
 
Purchases of property, equipment and improvements
(44,723
)
 
(21,419
)
Proceeds from sale of equity investment
 
 
1,625
 
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
$
(50,603
)
 
$
20,514
 
Financing activities
 
 
 
Proceeds from borrowings under line of credit
 
 
10,000
 
Restricted cash and cash equivalents
 
 
(3,400
)
Proceeds from term loan
 
 
4,500
 
Net proceeds from issuance of 5% convertible notes
 
 
98,057
 
Repayments of borrowings under notes
(19,250
)
 
(6,663
)
Repayment of convertible notes
(29,581
)
 
(87,951
)
Net proceeds from common stock offering
117,906
 
 
 
Proceeds from exercise of stock options and stock purchase plan, net of repurchase of unvested shares
29,867
 
 
5,047
 
Net cash provided by financing activities
$
98,942
 
 
$
19,590
 
Net increase in cash and cash equivalents
103,208
 
 
38,360
 
Cash and cash equivalents at beginning of period
207,024
 
 
37,221
 
Cash and cash equivalents at end of period
$
310,232
 
 
$
75,581
 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
3,311
 
 
$
2,488
 
Cash paid for taxes
2,052
 
 
408
 
Issuance of common stock upon conversion of convertible debt
48,655
 
 
16,383
 
See accompanying notes.

5


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 the Company's top five customers represented 50% and 43% of total revenues in the third quarter of fiscal 2011 and third quarter of fiscal 2010, respectively and 49% and 43% of total revenues in the first nine months of fiscal 2011 and first nine months of fiscal 2010, respectively.
 
     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 January 30, 2011 and for the three and nine month periods ended January 30, 2011 and January 31, 2010 have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and include the accounts of Finisar Corporation and its 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 GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's financial position at January 30, 2011 and its operating results and cash flows for the

6


three and nine month periods ended January 30, 2011 and January 31, 2010. Operating results for the three and nine month periods ended January 30, 2011, are not necessarily indicative of the results that may be expected for the fiscal year ending April 30, 2011. The condensed consolidated balance sheet at April 30, 2010 has been derived from the audited consolidated financial statements at that date but does not include all the footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes 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 prior period's balance sheet and 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 GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
 
 
2. Summary of Significant Accounting Policies
 
     For a description of significant accounting policies, see Note 2, Summary of Significant Accounting Policies to the consolidated financial statements included in the Company's annual report on Form 10-K for the fiscal year ended April 30, 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
 
In November 2010, the FASB issued authoritative guidance on disclosure of supplementary pro forma information for business combinations. The new guidance requires that pro forma financial information should be prepared as if the business combination occurred as of the beginning of the prior annual period. The amendments also expand the required supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The guidance is effective for the Company for business combinations with acquisition dates occurring in and from the first quarter of fiscal 2012.
     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

7


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.
     
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
 
Nine Months Ended
 
January 30,
2011
 
January 31,
2010
 
January 30,
2011
 
January 31,
2010
Numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
18,821
 
 
$
5,616
 
 
$
72,027
 
 
$
(36,917
)
Numerator for basic income (loss) per share from continuing operations
$
18,821
 
 
$
5,616
 
 
$
72,027
 
 
$
(36,917
)
Effect of dilutive securities:
 
 
 
 
 
 
 
Convertible debt interest expense
1,282
 
 
 
 
4,054
 
 
 
Numerator for diluted income (loss) per share from continuing operations
$
20,103
 
 
$
5,616
 
 
$
76,081
 
 
$
(36,917
)
Denominator:
 
 
 
 
 
 
 
Denominator for basic income (loss) per share from continuing operations- weighted average shares
80,080
 
 
65,113
 
 
77,638
 
 
63,131
 
Effect of dilutive securities:
 
 
 
 
 
 
 
Employee stock options and restricted stock units
4,361
 
 
1,571
 
 
3,723
 
 
 
Warrants
36
 
 
35
 
 
36
 
 
 
Convertible debt
8,911
 
 
 
 
9,297
 
 
 
Dilutive potential common shares
13,308
 
 
1,606
 
 
13,056
 
 
 
Denominator for diluted income (loss) per share from continuing operations
93,388
 
 
66,719
 
 
90,694
 
 
63,131
 
Basic income (loss) per share from continuing operations
$
0.24
 
 
$
0.09
 
 
$
0.93
 
 
$
(0.58
)
Diluted income (loss) per share from continuing operations
$
0.22
 
 
$
0.08
 
 
$
0.84
 
 
$
(0.58
)
  
   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
 
Nine Months Ended
 
January 30, 2011
 
January 31, 2010
 
January 30, 2011
 
January 31, 2010
Employee stock options
1,324
 
 
5,636
 
 
1,978
 
 
5,948
 
 
     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):
 

8


 
Three Months Ended
 
Nine Months Ended
 
January 30, 2011
 
January 31, 2010
 
January 30,
2011
 
January 31,
2010
Employee stock options
 
 
 
 
 
 
1,450
 
Conversion of convertible subordinated notes
 
 
9,498
 
 
 
 
3,808
 
Warrants assumed in acquisition
 
 
 
 
 
 
35
 
 
 
 
9,498
 
 
 
 
5,293
 
 
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 nine months ended January 30, 2011 and January 31, 2010 were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
January 30,
2011
 
January 31,
2010
 
January 30,
2011
 
January 31,
2010
 
 
 
 
 
 
 
 
Net income (loss)
$
18,821
 
 
$
5,485
 
 
$
71,743
 
 
$
(36
)
Foreign currency translation adjustment, net of income taxes
440
 
 
(589
)
 
5,281
 
 
7,751
 
Change in unrealized gain (loss) on securities, net of reclassification adjustments, net of income taxes
441
 
 
(2
)
 
441
 
 
(18
)
Other comprehensive income (loss)
$
19,702
 
 
$
4,894
 
 
$
77,465
 
 
$
7,697
 
 
     The components of accumulated other comprehensive income, net of taxes, were as follows (in thousands):
 
 
January 30,
2011
 
April 30,
2010
Net unrealized gain on available-for-sale security
$
441
 
 
$
 
Cumulative translation adjustment
21,072
 
 
15,791
 
Accumulated other comprehensive income
$
21,513
 
 
$
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):
 
 

9


 
Three Months Ended
 
Nine Months Ended
 
January 30,
2011
 
January 31,
2010
 
January 30,
2011
 
January 31,
2010
 
 
 
 
 
 
 
 
Net revenue
$
 
 
$
 
 
$
 
 
$
6,753
 
Gross profit
 
 
 
 
 
 
4,892
 
Income (loss) from discontinued operations
 
 
(131
)
 
(284
)
 
36,881
 
Gain (loss) on sale of discontinued operations
 
 
(165
)
 
 
 
35,888
 
 
     
The following table summarizes the gain on sale of discontinued operations for the nine months ended January 31, 2010 (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 nine months ended January 30, 2011 were $284,000.
 
4. Inventories
 
     Inventories consist of the following (in thousands):
 
January 30,
2011
 
April 30,
2010
 
 
 
 
Raw materials
$
56,978
 
 
$
46,780
 
Work-in-process
63,436
 
 
54,352
 
Finished goods
56,397
 
 
38,393
 
Total inventories
$
176,811
 
 
$
139,525
 
 
     During the three and nine months ended January 30, 2011, the Company recorded charges of $6.9 million and $13.5 million, respectively, for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $3.1 million and $9.5 million, respectively. This resulted in a net charge for excess and obsolete inventory of $3.8 million and $4.0 million, respectively, during the three and nine months ended January 30, 2011.
 
During the three and nine months ended January 31, 2010, the Company recorded charges of $4.1 million and $18.9 million, respectively, for excess and obsolete inventory, and sold inventory that was written-off in previous periods with an approximate cost of $4.3 million and $11.4 million, respectively. This resulted in a net credit for excess and obsolete inventory of $200,000 during the three months ended January 31, 2010 and a net charge for excess and obsolete inventory of $7.5 million during the nine months ended January 31, 2010.
 
     The Company enters into agreements with subcontractors that allow them to procure inventory on behalf of the Company to

10


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 January 30, 2011 and April 30, 2010, the liability for these purchase commitments was $1.9 million and $722,000, respectively, and was recorded on the balance sheet as other accrued liabilities.
 
 
5. Property, Equipment and Improvements
 
     Property, equipment and improvements consist of the following (in thousands):
 
 
 
January 30,
2011
 
April 30,
2010
Buildings
$
8,924
 
 
$
8,337
 
Computer equipment
41,231
 
 
36,236
 
Office equipment, furniture and fixtures
4,086
 
 
3,853
 
Machinery and equipment
215,929
 
 
178,894
 
Leasehold improvements
20,383
 
 
18,699
 
Construction-in-process
10,751
 
 
4,190
 
Total
301,304
 
 
250,209
 
Accumulated depreciation and amortization
(188,980
)
 
(160,995
)
Property, equipment and improvements (net)
$
112,324
 
 
$
89,214
 
 
 
6. Intangible Assets
 
     The following table reflects intangible assets subject to amortization as of January 30, 2011 and April 30, 2010 (in thousands):
 
 
 
January 30, 2011
 
Gross Carrying
 
Accumulated
 
Net Carrying
 
Amount
 
Amortization
 
Amount
 
 
 
 
 
 
Purchased technology
$
76,264
 
 
$
(67,861
)
 
$
8,403
 
Purchased trade name
1,172
 
 
(1,172
)
 
 
Purchased customer relationships
15,970
 
 
(5,717
)
 
10,253
 
Purchased patents
375
 
 
(119
)
 
256
 
Total
$
93,781
 
 
$
(74,869
)
 
$
18,912
 
 
 
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
 
 
     

11


Estimated remaining amortization expense for each of the next five fiscal years ending April 30, is as follows (in thousands):
 
 
Year
 
Amount
2011
 
$
1,473
 
2012
 
5,519
 
2013
 
4,107
 
2014
 
2,392
 
2015 and beyond
 
5,421
 
Total
 
$
18,912
 
 
7. Investments
 
     The following table presents a summary of the Company's investments measured at fair value on a recurring basis as of January 30, 2011 (in thousands):
 
 
 
 
 
Significant
 
 
 
 
 
 
Quoted Prices
 
Other
 
 
 
 
 
 
in Active
 
Observable
 
Significant
 
 
 
 
Markets For
 
Remaining
 
Unobservable
 
 
Assets Measured at Fair Value on a Recurring Basis
 
Identical Assets
 
Inputs
 
Inputs
 
Total
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
Assets
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
 
Money market funds
 
$
115,229
 
 
$
 
 
$
 
 
$
115,229
 
Cash
 
 
 
 
 
 
 
195,003
 
Total cash and cash equivalents
 
 
 
 
 
 
 
310,232
 
Available for sale minority investment
 
6,322
 
 
 
 
 
 
6,322
 
Total assets
 
 
 
 
 
 
 
$
316,554
 
 
     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)
 
 
Assets
 
 
 
 
 
 
 
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 nine months ended January 30, 2011 and January 31, 2010 were

12


immaterial. Realized gains and losses were calculated based on the specific identification method. The amortized cost basis of the available-for-sale minority investment as of January 30, 2011 was $5.9 million, and the net unrealized gain for this investment included in accumulated other comprehensive income was $441,000.
 
 
8. Minority Investments
 
     The carrying value of minority investments at January 30, 2011 and April 30, 2010 was $18.6 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 January 30, 2011 also included an investment of $6.3 million in a publicly held foreign company made in September 2010 that was accounted for under the fair value method as it was classified as available for sale. The Company's investments in these companies were 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 January 30, 2011 and April 30, 2010 were as follows (in thousands):
 
 
Carrying
 
Interest
 
Due in
Description
 
Amount
 
Rate
 
Fiscal year
As of January 30, 2011
 
 
 
 
 
 
Convertible senior notes due October 2029
 
$
57,850
 
 
5.00
%
 
2030
 
 
 
 
 
 
 
Total
 
$
57,850
 
 
 
 
 
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 January 2011, the Company entered into privately-negotiated agreements with existing holders of the Company’s 5% Convertible Senior Notes due 2029 to exchange an aggregate of approximately $42.2 million principal amount of the notes for a total of approximately 3.9 million shares of the Company’s common stock, based on the conversion price of the notes of $10.68 per share, plus 188,496 additional shares including16,202 shares issued in payment of accrued and unpaid interest of $558,997. Following these exchanges, as of January 30, 2011, approximately $57.9 million aggregate principal amount of the notes remained outstanding. The Company recognized debt conversion inducement expense of $5.9 million on these exchanges, representing the fair value of the shares issued in excess of the number of shares issuable in accordance with the original conversion terms of the notes. This amount was recorded as general and administrative expense.
Subsequent to January 30, 2011, the Company entered into additional privately-negotiated agreements with existing holders of the Company’s 5% Convertible Senior Notes due 2029 to exchange an aggregate of approximately $17.8 million principal amount of the notes for shares of the Company's common stock. See Note 22 for additional information regarding these exchanges.
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 were 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):
 

13


 
Three Months Ended
 
Nine Months Ended
 
January 30, 2011
 
January 31, 2010
 
January 30, 2011
 
January 31, 2010
 
 
 
 
 
 
 
 
Non-cash interest cost
$
 
 
$
383
 
 
$
742
 
 
$
2,674
 
Cash interest cost
 
 
171
 
 
294
 
 
1,256
 
Total interest expense
$
 
 
$
554
 
 
$
1,036
 
 
$
3,930
 
 
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 was payable in 20 equal quarterly installments of $750,000 beginning in January 2009, and the second loan was payable in 20 equal quarterly installments of $250,000 beginning in October 2008. As of April 30, 2010, $13.8 million of this loan was outstanding of which $4.0 million was the current portion. In January 2011, the remaining principal balance of the loan was repaid in full by the Company's Malaysian subsidiary.
 
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 was payable on January 6, 2013. As of April 30, 2010, $5.5 million of this loan was outstanding. In January 2011, the remaining principal balance of the loan was repaid in full by the Company's Chinese subsidiary.
 
     
 
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 January 30, 2011, the availability of credit under the facility was reduced by $3.4 million for outstanding letters of credit secured under the agreement. Borrowing availability as of January 30, 2011 was $66.6 million, and there were no borrowings outstanding against the facility as of that date.
 
The credit facility is subject to certain financial covenants. Prior to February 2011, the Company was subject to a $4.0 million limit on individual investments that it could make. 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 January 30, 2011. In February 2011, the credit agreement was amended to modify certain financial covenants, including the $4.0 million limit on individual investments which was increased to $50.0 million.
 
 
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 warranty and records a liability for the amount of such costs based at the time revenue is recognized. Factors that affect the Company's warranty liability include the historical and anticipated rates of warranty claims. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
 
     Changes in the Company's warranty liability during the following period were as follows (in thousands):
 

14


 
 
Nine Months Ended
 
January 30, 2011
Beginning balance at April 30, 2010
$
5,472
 
Additions during the period based on product sold
3,338
 
Settlements
121
 
Changes in liability for pre-existing warranties, including expirations
(3,798
)
Ending balance at January 30, 2011
$
5,133
 
 
 
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 January 30, 2011 and April 30, 2010 were as follows (in thousands):
 
 
January 30, 2011
 
April 30, 2010
 
Carrying
 
 
 
Carrying
 
 
 
Amount
 
Fair Value
 
Amount
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
310,232
 
 
$
310,232
 
 
$
207,024
 
 
$
207,024
 
Available for sale minority investment
6,321
 
 
6,321
 
 
 
 
 
Total
$
316,553
 
 
$
316,553
 
 
$
207,024
 
 
$
207,024
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Convertible notes
$
57,850
 
 
$
188,051
 
 
$
128,839
 
 
$
188,710
 
Long-term debt
 
 
 
 
19,250
 
 
18,183
 
Total
$
57,850
 
 
$
188,051
 
 
$
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 January 30, 2011, the carrying value of the Company's minority investments in these three privately held companies was $12.3 million, which management believes is not impaired.
 

15


 
14. Stockholders' Equity
 
Common Stock Offering
 
On December 27, 2010, the Company completed the sale of 4,140,000 shares of its common stock at a price to the underwriter of $28.54 per share. Net proceeds to the Company after deducting offering expenses were $117.9 million.
 
Stock-based Compensation Expense Information
 
The following table summarizes stock-based compensation expense related to employee stock options and employee stock purchases for the three and nine months ended January 30, 2011 and January 31, 2010 which was reflected in the Company's operating results (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
January 30,
2011
 
January 31,
2010
 
January 30,
2011
 
January 31,
2010
Cost of revenues
$
1,305
 
 
$
909
 
 
$
3,361
 
 
$
3,228
 
Research and development
1,540
 
 
1,364
 
 
4,279
 
 
4,375
 
Sales and marketing
519
 
 
463
 
 
1,497
 
 
1,472
 
General and administrative
1,158
 
 
776
 
 
3,590
 
 
2,540
 
Total
$
4,522
 
 
$
3,512
 
 
$
12,727
 
 
$
11,615
 
 
    
The total stock-based compensation capitalized as part of inventory as of January 30, 2011 was $732,423.
 
     During the three months ended January 30, 2011, 343,402 shares of common stock were issued under the Company's Employee Stock Purchase Plan and options to purchase 1,400,415 shares of common stock were exercised. During nine months ended January 30, 2011, 698,982 shares of common stock were issued under the Company's Employee Stock Purchase Plan and options to purchase 2,266,948 shares of common stock were exercised. The number of restricted stock units issued during the three and nine months ended January 30, 2011 were 170,988 and 303,372, respectively.
 
As of January 30, 2011, total compensation expense, net of estimated forfeitures, related to unvested stock options and restricted stock units not yet recognized was approximately $24.1 million which is expected to be recognized over the succeeding 38 months.
 
 
15. Income Taxes
 
      The Company recorded a provision for income taxes of $1.2 million and $421,000, respectively, for the three months ended January 30, 2011 and January 31, 2010 and $3.8 million and $618,000, respectively, for the nine months ended January 30, 2011 and January 31, 2010. The income tax provision for the three and nine months ended January 30, 2011 includes state taxes and income taxes arising in certain foreign jurisdictions in which the Company conducts business. The income tax provision for the three and nine months ended January 31, 2010 includes minimum state taxes and 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 January 30, 2011 have been fully offset by a valuation allowance.
 
     Utilization of the Company's net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth by Internal Revenue Code Sections 382 and 383 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before full utilization.
 
     The Company's total gross unrecognized tax benefits as of April 30, 2010 and January 30, 2011 were $12.6 million and

16


$12.8 million, respectively. Excluding the effects of recorded valuation allowances for deferred tax assets, $10.8 million of the unrecognized tax benefits would favorably impact the effective tax rate in future periods if recognized.
 
     Due to the Company's taxable loss position in previous years, all tax years since inception are subject to examination in the U.S. and state jurisdictions. The Company is also subject to examinations in various foreign jurisdictions, none of which were individually material. It is the Company's belief that no significant changes in the unrecognized tax benefit positions will occur through April 30, 2011.
 
     The Company records interest and penalties related to unrecognized tax benefits in income tax expense. At January 30, 2011, there were no accrued interest or penalties related to uncertain tax positions. The Company recorded no interest or penalties for the three and nine months ended January 30, 2011.
 
 
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
 
Nine Months Ended
 
January 30,
2011
 
January 31,
2010
 
January 30,
2011
 
January 31,
2010
Revenues from sales to unaffiliated customers:
 
 
 
 
 
 
 
United States
$
73,327
 
 
$
61,685
 
 
$
209,309
 
 
$
165,616
 
Malaysia
44,616
 
 
33,738
 
 
119,416
 
 
81,757
 
China
71,887
 
 
22,503
 
 
169,254
 
 
57,707
 
Rest of the world
73,186
 
 
49,009
 
 
213,862
 
 
136,310
 
 
$
263,016
 
 
$
166,935
 
 
$
711,841
 
 
$
441,390
 
   
  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):
 
 
January 30,
2011
 
April 30,
2010
Long-lived assets:
 
 
 
United States
$
76,361
 
 
$
70,975
 
Malaysia
40,018
 
 
35,575
 
China
18,666
 
 
10,962
 
Rest of the world
18,979
 
 
13,003
 
 
$
154,024
 
 
$
130,515
 
 

17


 
17. Restructuring Charges
 
      As of January 30, 2011, $4.2 million of non-cancelable facilities payments related to the abandoned and unused portion of the Company's facility in Allen, Texas remained accrued as restructuring reserve.
 
     The following table summarizes the activities of the restructuring accrual during the first nine months of fiscal 2011 (in thousands):
 
Balance as of April 30, 2010
$
4,664
 
Charges
 
Cash payments
(512
)
Balance as of January 30, 2011
$
4,152
 
 
Of the $4.2 million of remaining accrual, $289,866 is expected to be paid in the next twelve months and $3.9 million is expected to be paid out from fiscal 2012 through fiscal 2020.
 
 
18. Litigation Settlements
 
 In November 2009, following trial in the United States District Court for the Western District of Pennsylvania ("the Court"), Optium Corporation, a wholly owned subsidiary of the Company, was found liable for patent infringement. As a result the Court awarded the plaintiffs, JDSU and Emcore Corporation, approximately $3.4 million in damages plus interest. The judgment was with respect to complaints filed on September 11, 2006 and March 14, 2007 by JDSU and Emcore alleging that certain cable television transmission products sold by Optium infringed certain U.S. patents. The Company appealed the judgment to the United States Court of Appeals for the Federal Circuit. On January 26, 2011, the Federal Circuit affirmed the judgment. A petition for rehearing has been filed. Nevertheless, because of the historically low percentage of requests for rehearing that are granted by the Federal Circuit, the Company has recorded a charge for the judgment of approximately $3.5 million as general and administrative expense.
 
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 second quarter of fiscal 2011 the Company incurred contingent and other legal fees of $3.2 million in connection with the settlement of this litigation which were recorded as general and administrative expense.
 
 
19. Pending Litigation
 
Oplink/OCP Patent Litigations
 
On December 10, 2010, the Company filed a complaint for patent infringement in the United States District Court for the Northern District of California. The complaint alleges that certain optoelectronic transceivers from Oplink Communications, Inc. and Optical Communication Products Inc. (OCP) infringe eleven Finisar patents. OCP is a wholly-owned subsidiary of Oplink. The complaint asks the Court to enter judgment (a) that the defendants have infringed, actively induced infringement of, and/or contributorily infringed the patents-in-suit, (b) preliminarily and permanently enjoining the defendants from further infringement of the patents-in-suit, or, to the extent not so enjoined, ordering the defendants to pay compulsory ongoing royalties for any continuing infringement of the patents-in-suit, (c) ordering that the defendants account, and pay actual damages (but no less than a reasonable royalty), to the Company for the defendants' infringement of the patents-in-suit, (d) declaring that the defendants are willfully infringing one or more of the patents-in-suit and ordering that the defendants pay treble damages to the Company, (e) ordering that the defendants pay the Company's costs, expenses, and interest, including prejudgment interest, (f) declaring that this is an exceptional case and awarding the Company its attorneys' fees and expenses, and (g) granting such other and further

18


relief as the Court deems just and appropriate, or that the Company may be entitled to as a matter of law or equity.
 
On March 7, 2011, OCP filed a complaint for patent infringement in the United States District Court for the Eastern District of Texas. The complaint alleges that certain vertical cavity surface emitting lasers (VCSELs) and active optical cables manufactured and sold by the Company infringe five OCP patents. The complaint asks the Court to enter judgment (a) holding Finisar liable for infringement of the asserted patents, (b) that the Company account for damages resulting from its infringement of the patents, together with pre-judgment and post-judgment interest, (c) preliminarily and permanently enjoining the Company from further infringement of the asserted patents, (d) holding the case to an exceptional case, and an award to OCP for its attorneys' fees and costs, and (g) granting such other relief as the Court deems just and equitable. The Company is evaluating the complaint and intends to defend the lawsuit vigorously. However, there can be no assurance that it will be successful in its defense. Even if the Company is successful, it may incur substantial legal fees and other costs in defending the lawsuit. Further, the lawsuit could divert the efforts and attention of the Company's management and technical personnel, which could harm its business.
 
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 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 occured 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

19


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 District 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 District Court dismissed the amended complaints naming the 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 District Court entered judgment against the plaintiff in all 54 cases. The plaintiff appealed the order and judgments. The real defendants 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. On December 2, 2010, the United States Court of Appeals for the Ninth Circuit affirmed the District Court's dismissal and further ruled that the dismissal is with prejudice. The plaintiff has indicated its intention to file a writ of certiorari seeking review by the United States Supreme Court.
 
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 was 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.
 

20


On December 17, 2010, the Company received a letter from the Department of State advising the Company that its inquiry into the events that were the subject of the voluntary disclosure was complete and that its inquiry was being closed without further action. Subsequent to receipt of this letter, the Company was informed orally that the U.S. Attorney's office had concluded and closed its grand jury investigation of the matter.
 
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 January 30, 2011. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.
 
    
 
21. Related Party Transaction
 
     During the three and nine months ended January 30, 2011, the Company paid $46,900 and $134,900, 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 nine months ended January 31, 2010, the Company paid Mr. Gertel's company $41,000 and $116,500, 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. Subsequent Events
In February 2011, the Company entered into privately-negotiated agreements with existing holders of the Company’s 5% Convertible Senior Notes due 2029, to exchange an aggregate of $17.8 million principal amount of notes for a total of 1,670,724 shares of the Company’s common stock, based on the conversion price of the notes of $10.68 per share, plus 74,932 additional shares, including 7,875 shares issued in payment of accrued and unpaid interest of $281,675. Following these exchanges, $40.0 million of principal amount of the notes remained outstanding. The Company will recognize debt conversion inducement expense of $2.4 million on these exchanges in the quarter ending April 30, 2011.
 

21


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Note Regarding Forward-Looking Statements
    This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use words like “anticipates,” “believes,” “plans,” “expects,” “future,” “intends” and similar expressions to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events; however, our business and operations are subject to a variety of risks and uncertainties, and, consequently, actual results may materially differ from those projected by any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements since they may not occur.
  
   Certain factors that could cause actual results to differ from those projected are discussed in “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.
 
The following discussion should be read together with our condensed consolidated financial statements and related notes thereto included elsewhere in this report.
 
Business Overview
  
   We are a leading provider of optical subsystems and components that are used 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
 
Common Stock Offering
 
     On December 27, 2010, we completed the sale of 4,140,000 shares of our common stock at a price to the underwriter of $28.54 per share. Net proceeds to us after deducting offering expenses were $117.9 million.
 
Private Exchange of Convertible Notes
 
     In January 2011, we entered into privately-negotiated agreements with existing holders of our 5% Convertible Senior Notes due

22


2029 to exchange an aggregate of approximately $42.2 million principal amount of the notes for a total of approximately 3.9 million shares of our common stock, based on the conversion price of the notes of $10.68 per share, plus 188,496 additional shares, including 16,202 shares issued in payment of accrued and unpaid interest of $558,997. Following these exchanges, as of January 30, 2011, approximately $57.9 million aggregate principal amount of the notes remained outstanding. During the three months period ended January 30, 2011, we recognized debt conversion inducement expense of $5.9 million on these exchanges, representing the fair value of the shares issued in excess of the number of shares issuable in accordance with the original conversion terms of the notes. This debt conversion expense compares to $7.9 million of interest expense that would have been payable with respect to the $42.2 million in exchanged notes through their first maturity date in October 2014 had such notes not been exchanged. This amount was recorded as general and administrative expense.
 
In February 2011, we entered into privately-negotiated agreements with existing holders of the Company’s 5% Convertible Senior Notes due 2029, to exchange an aggregate of $17.8 million principal amount of notes for a total of approximately 1,670,724 shares of our common stock, based on the conversion price of the notes of $10.68 per share, plus 74,932 additional shares, including 7,875 shares issued in payment of accrued and unpaid interest of $281,675. As a result, we will recognize debt conversion inducement expense of $2.4 million on these exchanges in the quarter ending April 30, 2011. Following these exchanges, $40.0 million of principal amount of the notes remained outstanding.
 
Repayment of Long-term debt
 
In the third quarter of fiscal 2011, we repaid in full the remaining principal amounts outstanding of our Malaysian and Chinese bank loans. The principal balance outstanding under these loans as of the end of second quarter of fiscal 2011 was $11.8 million and $5.5 million, respectively.
 
Litigation Settlements
 
In November 2009, following trial in the United States District Court for the Western District of Pennsylvania ("the Court"), Optium Corporation, a wholly-owned subsidiary of Finisar, was found liable for patent infringement. As a result, the Court awarded the plaintiffs, JDSU and Emcore Corporations, approximately $3.4 million in damages plus interest. The judgment was with respect to complaints filed on September 11, 2006 and March 14, 2007 by JDSU and Emcore alleging that certain cable television transmission products sold by Optium infringed certain U.S. patents. We appealed this judgment to the Unites States Court of Appeals for the Federal Circuit. On January 26, 2011, the Federal Circuit affirmed the judgment. A petition for rehearing has been filed. Nevertheless, because of the historically low percentage of requests for rehearing that are granted by the Federal Circuit, we have recorded a charge for the judgment of approximately $3.5 million as general and administrative expense in the quarterly period ended January 30, 2011.
 
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 a reduction 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.
 
Minority Investment
 
In September 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 is accounted for as a minority investment on our balance sheet as of January 30, 2011.
 
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.
 

23


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
 
Nine Months Ended
 
January 30,
2011
 
January 31,
2010
 
January 30,
2011
 
January 31,
2010
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues
67.6
 
 
68.3
 
 
66.2
 
 
71.8
 
Amortization of acquired developed technology
0.4
 
 
0.7
 
 
0.5
 
 
0.8
 
Gross profit
32.0
 
 
31.0
 
 
33.3
 
 
27.4
 
Operating expenses:
 
 
 
 
 
 
 
 
Research and development
11.3
 
 
14.9
 
 
11.9
 
 
15.3
 
Sales and marketing
3.4
 
 
4.7
 
 
3.8
 
 
5.0
 
General and administrative
7.8
 
 
5.6
 
 
5.6
 
 
6.1
 
Restructuring charges
 
 
 
 
 
 
0.9
 
Amortization of purchased intangibles
0.1
 
 
0.3
 
 
0.2
 
 
0.4
 
Total operating expenses
22.6
 
 
25.5
 
 
21.5
 
 
27.7
 
Income (loss) from operations
9.4
 
 
5.5
 
 
11.8
 
 
(0.3
)
Interest income
0.1
 
 
0.1
 
 
0.1
 
 
0.0
 
Interest expense
(0.6
)
 
(1.3
)
 
(0.8
)
 
(1.6
)
Loss on debt extinguishment
 
 
0.0
 
 
 
 
(5.7
)
Other income (expense), net
(1.3
)
 
(0.6
)
 
(0.5
)
 
(0.7
)
Income (loss) from continuing operations before income taxes
7.6
 
 
3.7
 
 
10.6
 
 
(8.3
)
Provision for income taxes
0.4
 
 
0.3
 
 
0.5
 
 
0.1
 
Income (loss) from continuing operations
7.2
 
 
3.4
 
 
10.1
 
 
(8.4
)
Income (loss) from discontinued operations, net of income taxes
 
 
(0.1
)
 
(0.0
)
 
8.4
 
Net income (loss)
7.2
 %
 
3.3
 %
 
10.1
 %
 
(0.0
)%
 
     Revenues. Revenues increased $96.1 million, or 57.6%, to $263.0 million in the quarter ended January 30, 2011 compared to $166.9 million in the quarter ended January 31, 2010. Revenues increased $270.5 million, or 61.3%, to $711.8 million in the nine months ended January 30, 2011 compared to $441.4 million in the nine months ended January 31, 2010. These increases reflect the impact of a combination of factors including increased spending on infrastructure by business enterprises and telecommunications companies as they respond to 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 category (in thousands):
 
Three months ended
 
January 30,
2011
 
January 31,
2010
 
Change
 
% Change
Transceivers, transponders and components
 
 
 
 
 
 
 
Greater than 10 Gbps:
 
 
 
 
 
 
 
LAN/SAN
$
39,920
 
 
$
25,665
 
 
$
14,255
 
 
55.5
 %
Metro/Telecom
77,789
 
 
41,708
 
 
36,081
 
 
86.5
 
Subtotal
117,709
 
 
67,373
 
 
50,336
 
 
74.7
 
Less than 10 Gbps:
 
 
 
 
 
 
 
LAN/SAN
60,569
 
 
48,496
 
 
12,073
 
 
24.9
 
Metro/Telecom
33,206
 
 
26,098
 
 
7,108
 
 
27.2
 
Subtotal
93,775
 
 
74,594
 
 
19,181
 
 
25.7
 
Total transceivers, transponders and components
211,484
 
 
141,967
 
 
69,517
 
 
49.0
 
ROADM linecards and WSS modules
47,640
 
 
19,140
 
 
28,500
 
 
148.9
 
CATV
3,892
 
 
5,828
 
 
(1,936
)
 
(33.2
)
Total revenues
$
263,016
 
 
$
166,935
 
 
$
96,081
 
 
57.6
 %
 
 
Nine Months Ended
 
January 30,
2011
 
January 31,
2010
 
Change
 
% Change
Transceivers, transponders & components
 
 
 
 
 
 
 
Greater than 10 Gbps:
 
 
 
 
 
 
 
LAN/SAN
$
107,744
 
 
$
55,605
 
 
$
52,139
 
 
93.8
 %
Metro/Telecom
211,366
 
 
118,986
 
 
92,380
 
 
77.6
 
Subtotal
319,110
 
 
174,591
 
144,519
 
82.8
 
Less than 10 Gbps:
 
 
 
 
 
 
 
LAN/SAN
167,768
 
 
129,446
 
 
38,322
 
 
29.6
 
Metro/Telecom
96,223
 
 
77,169
 
 
19,054
 
 
24.7
 
Subtotal
263,991
 
 
206,615
 
57,376
 
27.8
 
Total transceivers, transponders & components
583,101
 
 
381,206
 
 
201,895
 
 
53.0
 
ROADM linecards and WSS modules
116,928
 
 
45,549
 
 
71,379
 
 
156.7
 
CATV
11,812
 
 
14,635
 
 
(2,823
)
 
(19.3
)
Total revenues
$
711,841
 
 
$
441,390
 
 
$
270,451
 
 
61.3
 %
 
 
     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 January 30, 2011 and January 31, 2010 and $3.6 million each in the nine months ended January 30, 2011 and January 31, 2010.
 
     Gross Profit. Gross profit increased $32.4 million, or 62.6%, to $84.1 million in the quarter ended January 30, 2011 compared to $51.7 million in the quarter ended January 31, 2010. Gross profit as a percentage of revenues increased by 1.0%, from 31.0% in the quarter ended January 31, 2010 to 32.0% in the quarter ended January 30, 2011. We recorded charges of $6.9 million for obsolete and excess inventory in the quarter ended January 30, 2011 compared to $4.1 million in the quarter ended January 31, 2010. We sold inventory that was written-off in previous periods resulting in a benefit of $3.1 million in the quarter ended January 30, 2011 and $4.3 million in the quarter ended January 31, 2010. As a result, we recognized a net charge of $3.8 million in the quarter ended January 30, 2011 compared to a net credit of $200,000 in the quarter ended January 31, 2010. Manufacturing overhead included stock-based compensation charges of $1.3 million in the quarter ended January 30, 2011 and $909,000 in the quarter ended January 31, 2010. Excluding amortization of acquired developed technology, the net impact of excess and obsolete inventory charges and stock-based compensation charges, gross profit would have been $90.4 million, or 34.4% of revenues, in the quarter ended January 30, 2011 compared to $53.6 million, or 32.1% of revenues, in the quarter ended January 31, 2010. The

25


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. Manufacturing overhead costs in the quarter ended January 30, 2011 increased by 45% compared to the quarter ended January 31, 2010, whereas the increase in revenues was 58% in the same period, primarily due to higher utilization of fixed manufacturing capacity.
 
Gross profit increased $116.5 million or 96.3%, to $237.4 million in the nine months ended January 30, 2011 compared to $120.9 million in the nine months ended January 31, 2010. Gross profit as a percentage of revenues increased by 6.0%, from 27.4% in the nine months ended January 31, 2010 to 33.3% in the nine months ended January 30, 2011. We recorded charges of $13.5 million for obsolete and excess inventory in the nine months ended January 30, 2011 compared to $18.9 million in the nine months ended January 31, 2010. We sold inventory that was written-off in previous periods resulting in a benefit of $9.5 million in the nine months ended January 30, 2011 and $11.4 million in the nine months ended January 31, 2010. As a result, we recognized a net charge of $4.0 million in the nine months ended January 30, 2011 compared to $7.5 million in the nine months ended January 31, 2010. Manufacturing overhead includes stock-based compensation charges of $3.4 million in the nine months ended January 30, 2011 and $3.2 million in the nine months ended January 31, 2010. Excluding amortization of acquired developed technology, the net impact of excess and obsolete inventory charges and stock-based compensation charges, gross profit would have been $248.3 million, or 34.9% of revenues, in the nine months ended January 30, 2011 compared to $135.2 million, or 30.6% of revenues, in the nine months ended January 31, 2010. 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. Manufacturing overhead costs in the nine months ended January 30, 2011 increased by 43% compared to the nine months ended January 31, 2010 whereas the increase in revenues was 61% in the same period, primarily due to higher utilization of fixed manufacturing capacity.
 
     Research and Development Expenses. Research and development expenses increased $4.7 million, or 18.9%, to $29.6 million in the quarter ended January 30, 2011 compared to $24.9 million in the quarter ended January 31, 2010. 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 $1.5 million in the quarter ended January 30, 2011 and $1.4 million in the quarter ended January 31, 2010. Research and development expenses as a percent of revenues decreased to 11.3% in the quarter ended January 30, 2011 compared to 14.9% in the quarter ended January 31, 2010.
 
Research and development expenses increased $16.9 million, or 25.0%, to $84.4 million in the nine months ended January 30, 2011 compared to $67.5 million in the nine months ended January 31, 2010. 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 $4.3 million in the nine months ended January 30, 2011 and $4.4 million in the nine months ended January 31, 2010. Research and development expenses as a percent of revenues decreased to 11.9% in the nine months ended January 30, 2011 compared to 15.3% in the nine months ended January 31, 2010.
 
     Sales and Marketing Expenses. Sales and marketing expenses increased $896,000, or 11.3%, to $8.8 million in the quarter ended January 30, 2011 compared to $7.9 million in the quarter ended January 31, 2010. 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 $519,000 in the quarter ended January 30, 2011 and $463,000 in the quarter ended January 31, 2010. Sales and marketing expenses as a percent of revenues decreased to 3.4% in the quarter ended January 30, 2011 compared to 4.7% in the quarter ended January 31, 2010.
 
Sales and marketing expenses increased $5.1 million, or 23.1%, to $27.1 million in the nine months ended January 30, 2011 compared to $22.1 million in the nine months ended January 31, 2010. The increase was primarily due to increased sales commissions as a result of the increase in revenues. The increase was also partly due to an increase in employee related expenses. Included in sales and marketing expenses were stock-based compensation charges of $1.5 million in the nine months ended January 30, 2011 and $1.5 million in the nine months ended January 31, 2010. Sales and marketing expenses as a percent of revenues decreased to 3.8% in the nine months ended January 30, 2011 compared to 5.0% in the nine months ended January 31, 2010.
 
     General and Administrative Expenses. General and administrative expenses increased $11.3 million, or 120.9%, to $20.6 million in the quarter ended January 30, 2011 compared to $9.3 million in the quarter ended January 31, 2010. The increase was primarily due to an accrual of $3.5 million for damages payable as a result of an appellate court's ruling affirming an unfavorable judgment in a patent infringement lawsuit, $5.9 million of debt conversion inducement expenses recorded on the exchange of approximately $42.2 million principal amount of our outstanding convertible notes and an increase in personnel related costs. Included in general and administrative expenses were stock-based compensation charges of $1.2 million in the quarter ended January 30, 2011 and $776,000 in the quarter ended January 31, 2010. General and administrative expenses as a percent of

26


revenues increased to 7.8% in the quarter ended January 30, 2011 compared to 5.6% in the quarter ended January 31, 2010.
 
General and administrative expenses increased $13.1 million, or 48.2%, to $40.2 million in the nine months ended January 30, 2011 compared to $27.1 million in the nine months ended January 31, 2010. The increase was primarily due to the $3.5 million accrual for damages and the $5.9 million of debt conversion inducement expenses described above, and an increase in personnel related costs, partially offset by $2.4 million of litigation settlement income net of legal costs associated with the litigation settlement with Source Photonics Inc. Included in general and administrative expenses were stock-based compensation charges of $3.6 million in the nine months ended January 30, 2011 and $2.5 million in the six months ended January 31, 2010. General and administrative expenses as a percent of revenues decreased to 5.6% in the nine months January 30, 2011 compared to 6.1% in the nine months ended January 31, 2010.
 
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 we are obligated to pay over the remaining lease term.
 
     Amortization of Purchased Intangibles. Amortization of purchased intangibles decreased $43,000, or 10.1%, to $383,000 in the quarter ended January 30, 2011 compared to $426,000 in the quarter ended January 31, 2010. The decrease was primarily due to the full amortization of certain intangibles acquired in connection with the purchase of assets from Infineon Technologies AG in fiscal 2005.
 
Amortization of purchased intangibles decreased $496,000, or 30.2%, to $1,149,000 in the nine months ended January 30, 2011 compared to $1.6 million in the nine months ended January 31, 2010. The decrease was primarily due to the full amortization of certain intangibles acquired in the Optium merger in fiscal 2009.
 
     Interest Income. Interest income increased $119,000 to $204,000 in the quarter ended January 30, 2011 compared to $85,000 in the quarter ended January 31, 2010. The increase was primarily due to an increase in our cash balances reflecting the receipt of $131.1 million in net proceeds from our common stock offering in March 2010 and $117.9 million in net proceeds from our common stock offering in December 2010.
 
Interest income increased $335,000 to $439,000 in the nine months ended January 30, 2011 compared to $104,000 in the nine months ended January 31, 2010. The increase was primarily due to an increase in our cash balances reflecting the receipt of $131.1 million in net proceeds from our common stock offering in March 2010 and $117.9 million in net proceeds from our common stock offering in December 2010.
 
     Interest Expense. Interest expense decreased $776,000, or 34.6%, to $1.5 million in the quarter ended January 30, 2011 compared to $2.2 million in the quarter ended January 31, 2010. The decrease was primarily related to lower outstanding debt due to repayment of $3.9 million aggregate principal amount of our 2 1/2% Convertible Subordinated Notes due 2010 and $25.7 million principal amount of our 2 1/2% Convertible Senior Subordinated Notes due 2010 in the second quarter of fiscal 2011 and repayment of the $2.6 million remaining balance of a loan in the third quarter of fiscal 2010. Interest expense for the quarter ended January 30, 2011 included $1.2 million related to our 5% Convertible Subordinated Notes due October 2029 and $260,000 related to various other debt instruments. Interest expense for the quarter ended January 31, 2010 included $1.2 million related to our 5% Convertible Subordinated Notes due October 2029, $190,000 related to our convertible subordinated notes which were fully repaid in October 2010, $400,000 related to various other debt instruments and a non-cash charge of $383,000 due to the accretion of the original issue discount related to our senior convertible notes.
 
Interest expense decreased $1.1 million, or 16.7%, to $5.7 million in the nine months ended January 30, 2011 compared to $6.8 million in the nine months ended January 31, 2010. The decrease was primarily related to lower outstanding debt due to repayment of $47.5 million 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, 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 and repayment of $3.9 million principal amount of our 2 1/2% Convertible Subordinated Notes due 2010 and $25.7 million principal amount of our 2 1/2% Convertible Senior Subordinated Notes due 2010 in the second quarter of fiscal 2011. Interest expense for the nine months ended January 30, 2011 included $3.7 million related to our 5% Convertible Subordinated Notes due October 2029, $1.2 million 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 nine months ended January 31, 2010 included $1.8 million related to our convertible subordinated notes which were fully repaid in

27


October 2010 and a non-cash charge of $2.7 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, 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 expense was $3.4 million in the quarter ended January 30, 2011 compared to other expense of $1.0 million in the quarter ended January 31, 2010. Other expense in the quarter ended January 30, 2011 primarily consisted of foreign exchange losses of $2.4 million and $865,000 of amortization of debt issuance costs for our 5% Convertible Senior Notes. Other expense in the quarter ended January 31, 2010 primarily consisted of foreign exchange losses of $726,000 and $248,000 of amortization of debt issuance costs for our 5% Convertible Senior Note.
 
Other expense was $3.4 million in the nine months ended January 30, 2011 compared to other expense of $2.9 million in the nine months ended January 31, 2010. Other expense in the quarter ended January 30, 2011 primarily consisted of foreign exchange losses of $2.0 million and $1.4 million of amortization of debt issuance costs for our 5% Convertible Senior Notes. Other expense in the nine months ended January 31, 2010 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 $1.2 million and $421,000, respectively, for the quarters ended January 30, 2011 and January 31, 2010. We recorded income tax provisions of $3.8 million and $618,000, respectively, for the nine months ended January 30, 2011 and January 31, 2010. The income tax provisions for the quarters and nine months ended January 30, 2011 and January 31, 2010 primarily represent current state and foreign income taxes arising in certain jurisdictions in which we conduct business. Due to the uncertainty regarding the timing and extent of our future profitability, we have recorded a valuation allowance to offset our 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.
 
     Income from Discontinued Operation, Net of Taxes. The transition services agreement we entered into in connection with the sale of the assets of the Network Tools Division, under which we agreed to provide manufacturing services to JDSU during the transition period, was completed on July 14, 2010. Total operating expenses incurred in relation to the transition services agreement during the nine months ended January 30, 2011 was $284,000. Income from discontinued operations for the nine months ended January 31, 2010 was $36.9 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 $54.9 million in the nine months ended January 30, 2011, compared to net cash used in operating activities of $1.7 million in the nine months ended January 31, 2010. Cash provided by operating activities in the nine months ended January 30, 2011 consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $51.4 million, and cash used for working capital requirements primarily related to increases in accounts receivable, inventory and accounts payable. Accounts receivable increased by $47.6 million primarily due to the increase in shipments. Inventory increased by $35.6 million and accounts payable increased by $6.4 million due to increased purchases to support increased sales. Cash used in operating activities in the nine months ended January 31, 2010 consisted of net loss, as adjusted to exclude depreciation, amortization and other non-cash items totaling to $69.1 million, and cash used for working capital, primarily related to increases in accounts receivable and inventories offset by an increase in accounts payable. Accounts receivable increased by $34.6 million primarily due to the increase in revenues. Inventory and accounts payable increased by $12.4 million and $16.7 million, respectively, primarily due to increase in purchases to support higher levels of sales.
 
Cash Flows from Investing Activities
 

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     Net cash used in investing activities totaled $50.6 million in the nine months ended January 30, 2011 compared to net cash provided by investing activities of $20.5 million in the nine months ended January 31, 2010. Net cash used in investing activities in the nine months ended January 30, 2011 represented expenditures of $44.7 million for capital equipment and $5.9 million for a minority investment in a publicly held foreign company. Net cash provided by investing activities in the nine months ended January 31, 2010 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 $21.4 million of expenditures for capital equipment.
 
Cash Flows from Financing Activities
 
     Net cash provided by financing activities totaled $98.9 million in the nine months ended January 30, 2011 compared to $19.6 million in the nine months ended January 31, 2010. Cash provided by financing activities for the nine months ended January 30, 2011 primarily reflected proceeds from our common stock offering of $117.9 million and proceeds from the exercise of stock options and purchases under our stock purchase plan totaling $29.9 million, partially offset by repayments of convertible notes totaling $29.6 million and repayments of long-term debt of $19.3 million. Cash provided by financing activities for the nine months ended January 31, 2010 primarily consisted of $98.1 million in proceeds from the issuance of our 5.0% Convertible Senior Notes and $10.0 million of borrowings under our revolving line of credit, partially offset by $88.0 million of cash used to repay convertible notes.
 
Contractual Obligations and Commercial Commitments
 
     At January 30, 2011, we had contractual obligations of $270.1 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
Convertible debt
$
57,850
 
 
$
 
 
$
 
 
$
 
 
$
57,850
 
Interest on debt (a)
11,570
 
 
2,893
 
 
5,785
 
 
2,892
 
 
 
Operating leases (b)
37,668
 
 
5,970
 
 
8,523
 
 
7,277
 
 
15,898
 
Purchase obligations (c)
162,971