UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-27999

 

Finisar Corporation

Delaware (State or other jurisdiction of incorporation or organization)		94-3038428 (I.R.S. Employer Identification No.)

1389 Moffett Park Drive Sunnyvale, California		94089
(Address of principal executive offices)		(Zip Code)

     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 þ   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 þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if as smaller reporting company)

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

     At February 28, 2010, there were 65,536,100 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 31, 2010

		Page
PART I FINANCIAL INFORMATION			4
Item 1. Financial Statements:			4
Condensed Consolidated Balance Sheets as of January 31, 2010 and April 30, 2009			4
Condensed Consolidated Statements of Operations for the three and nine month periods ended January 31, 2010 and February 1, 2009			5
Condensed Consolidated Statements of Cash Flows for the nine month periods ended January 31, 2010 and February 1, 2009			6
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosure About Market Risk			41
Item 4. Controls and Procedures			41
PART II OTHER INFORMATION
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 4. Submission of Matters to a Vote of Security Holders			54
Item 6. Exhibits			54
Signatures			55
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-31.3
EX-32.1
EX-32.2
EX-32.3

FORWARD LOOKING STATEMENTS

     This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use words like “anticipates,” “believes,” “plans,” “expects,” “future,” “intends” and similar expressions to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events; however, our business and operations are subject to a variety of risks and uncertainties, and, consequently, actual results may materially differ from those projected by any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements since they may not occur.

     Certain factors that could cause actual results to differ from those projected are discussed in “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

FINISAR CORPORATION

		January 31, 2010				April 30, 2009 *
		(In thousands, except share and per share data)
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	75,514			$	37,129
Restricted cash and cash equivalents (Note 16)			3,400				—
Short-term available-for-sale investments			67				92
Accounts receivable, net of allowance for doubtful accounts of $1,936 at January 31, 2010 and $1,069 at April 30, 2009			116,399				81,820
Accounts receivable, other			8,456				10,033
Inventories			122,680				107,764
Prepaid expenses			7,024				6,795
Current assets associated with discontinued operations			—				4,863
Total current assets			333,540				248,496
Property, plant and improvements, net			83,926				81,606
Purchased technology, net			12,882				16,459
Other intangible assets, net			12,115				13,427
Minority investments			12,289				14,289
Other assets			5,961				2,584
Non-current assets associated with discontinued operations			—				3,527
Total assets		$	460,713			$	380,388
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	65,124			$	48,421
Accrued compensation			12,698				11,428
Other accrued liabilities (Note 12)			21,059				30,513
Deferred revenue			5,516				1,703
Short- term debt (Note 15)			14,500				—
Current portion of convertible debt (Note 13)			28,480				—
Current portion of long-term debt (Note 14)			4,000				6,107
Non-cancelable purchase obligations			521				2,965
Current liabilities associated with discontinued operations			—				3,160
Total current liabilities			151,898				104,297
Long-term liabilities:
Convertible notes, net of current portion (Note 13)			100,000				134,255
Long-term debt, net of current portion (Note 14)			10,750				15,305
Other non-current liabilities			6,008				2,511
Deferred income taxes			1,136				1,149
Non-current liabilities associated with discontinued operations			—				650
Total liabilities			269,792				258,167
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at January 31, 2010 and April 30, 2009			—				—
Common stock, $0.001 par value, 750,000,000 shares authorized, 65,433,790 shares issued and outstanding at January 31, 2010 and 59,686,507 shares issued and outstanding at April 30, 2009			65				60
Additional paid-in capital			1,892,186				1,831,224
Accumulated other comprehensive income			10,431				2,662
Accumulated deficit			(1,711,761	)			(1,711,725	)
Total stockholders’ equity			190,921				122,221
Total liabilities and stockholders’ equity		$	460,713			$	380,388

FINISAR CORPORATION

(Unaudited, in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		January 31, 2010				February 1, 2009				January 31, 2010				February 1, 2009
Revenues		$	166,935			$	126,081			$	441,390			$	389,601
Cost of revenues			114,048				89,789				316,923				270,460
Amortization of acquired developed technology			1,192				1,455				3,577				3,558
Gross profit			51,695				34,837				120,890				115,583
Operating expenses:
Research and development			24,892				21,181				67,514				60,368
Sales and marketing			7,922				7,043				22,054				21,822
General and administrative			9,329				9,050				27,127				28,099
Acquired in-process research and development			—				—				—				10,500
Restructuring charges			—				—				4,173				—
Amortization of purchased intangibles			426				702				1,645				1,445
Impairment of goodwill and intangible assets			—				46,534				—				225,302
Total operating expenses			42,569				84,510				122,513				347,536
Income (loss) from operations			9,126				(49,673	)			(1,623	)			(231,953	)
Interest income			85				119				104				1,744
Interest expense			(2,241	)			(2,724	)			(6,842	)			(12,080	)
Gain (loss) on debt extinguishment			28				3,295				(25,039	)			3,064
Other income (expense), net			(961	)			(744	)			(2,899	)			(3,692	)
Income (loss) from continuing operations before income taxes			6,037				(49,727	)			(36,299	)			(242,917	)
Provision (benefit) for income taxes			421				(432	)			618				(7,429	)
Income (loss) from continuing operations		$	5,616			$	(49,295	)		$	(36,917	)		$	(235,488	)
Income (loss) from discontinued operations, net of income taxes		$	(131	)		$	(87	)		$	36,881			$	903
Net income (loss)		$	5,485			$	(49,382	)		$	(36	)		$	(234,585	)
Basic:
Income (loss) per share from continuing operations		$	0.09			$	(0.83	)		$	(0.58	)		$	(4.20	)
Income (loss) per share from discontinued operations		$	(0.00	)		$	(0.00	)		$	0.58			$	0.02
Net income (loss) per share		$	0.09			$	(0.83	)		$	(0.00	)		$	(4.18	)
Diluted:
Income (loss) per share from continuing operations		$	0.08			$	(0.83	)		$	(0.58	)		$	(4.20	)
Income (loss) per share from discontinued operations		$	(0.00	)		$	(0.00	)		$	0.58			$	0.02
Net income (loss) per share		$	0.08			$	(0.83	)		$	(0.00	)		$	(4.18	)
Weighted average number of common shares outstanding:
Basic			65,113				59,350				63,131				56,039
Diluted			66,719				59,350				63,131				56,039

See accompanying notes.

FINISAR CORPORATION

		Nine Months Ended
		January 31, 2010				February 1, 2009
Operating activities
Net loss		$	(36	)		$	(234,585	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			22,710				22,381
Stock-based compensation expense			12,322				10,960
Amortization of beneficial conversion feature of convertible notes			—				1,817
Non-cash interest cost on 2.5% convertible senior subordinated notes			2,674				3,725
Amortization of purchased technology and finite lived intangibles			1,722				1,862
Amortization of acquired developed technology			3,747				4,454
Impairment of minority investments			2,000				—
Loss on sale or retirement of assets			327				539
Loss (gain) on debt extinguishment			23,552				(3,063	)
Gain on remeasurement of derivative liability			—				(1,135	)
Loss (gain) on sale of equity investment			(375	)			12
Loss (gain) on sale of a product line			(1,250	)			919
Gain on sale of discontinued operations			(36,053	)			—
Other than temporary decline in fair market value of equity security			—				1,920
Impairment of goodwill			—				225,302
Acquired in-process research and development			—				10,500
Changes in operating assets and liabilities:
Accounts receivable			(34,579	)			(7,057	)
Inventories			(12,432	)			(3,476	)
Other assets			(1,198	)			978
Deferred income taxes			(13	)			(7,846	)
Accounts payable			16,703				(22,917	)
Accrued compensation			924				(3,214	)
Other accrued liabilities			(6,113	)			(12,782	)
Deferred revenue			3,611				(289	)
Net cash used in operating activities			(1,757	)			(10,995	)
Investing activities
Purchases of property, equipment and improvements			(21,419	)			(20,653	)
Sale of short and long-term investments, net			38				37,861
Proceeds from sale of equity investment			375				90
Purchase of intangible assets			(375	)			—
Proceeds from disposal of product line			1,250				—
Proceeds from sale of discontinued operation			40,683				—
Purchases of subsidiaries, net of cash assumed			—				30,137
Net cash provided by investing activities			20,552				47,435
Financing activities
Borrowings under line of credit			10,000				—
Restricted cash and cash equivalents			(3,400	)			—
Proceeds from term loan			4,500				25,000
Issuance of 5% convertible notes			98,057				—
Repayment of convertible notes issued in connection with acquisition			—				(11,918	)
Repayments of long-term debt			(6,663	)			(2,734	)
Repayment of convertible notes			(87,951	)			(95,956	)
Proceeds from exercise of stock options and stock purchase plan, net of repurchase of unvested shares			5,047				4,371
Net cash provided by (used in) financing activities			19,590				(81,237	)

		Nine Months Ended
		January 31, 2010				February 1, 2009
Net increase (decrease) in cash and cash equivalents			38,385				(44,797	)
Cash and cash equivalents at beginning of period			37,129				79,442
Cash and cash equivalents at end of period		$	75,514			$	34,645
Supplemental disclosure of cash flow information
Cash paid for interest		$	2,488				3,838
Cash paid for taxes		$	408				898
Issuance of common stock and assumption of options and warrants in connection with merger		$	—				251,382
Issuance of common stock for repayment of convertible debt		$	16,383				—

     See accompanying notes.

FINISAR CORPORATION

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-home networks, or FTTx, cable television networks, or CATV, 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 various types of 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 Gbps to 40Gbps 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 for dynamically switching network traffic from one optical link to another across multiple wavelengths without first converting to an electrical signal 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 integrated circuit design and internal assembly and test capabilities for the Company’s optical subsystem products, as well as key components used in those subsystems. The Company utilizes its internal sources for many of the key components used in making its products including lasers, photodetectors and integrated circuits, or IC’s designed by its own internal IC engineering teams. The Company sells its optical subsystem and component products to manufacturers of storage systems, networking equipment and telecommunication equipment or their contract manufacturers, such as Alcatel-Lucent, Brocade, Cisco Systems, EMC, Emulex, Ericsson, Hewlett-Packard Company, Huawei, IBM, Juniper, Qlogic, Siemens and Tellabs. These customers in turn sell their systems to businesses and to wireline and wireless telecommunications service providers and cable TV operators, collectively referred to as carriers.

     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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements, Discontinued Operations (formerly referenced as Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long Lived Assets), 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 all periods presented. See Note 6 for further details regarding the sale of the division.

     The accompanying unaudited condensed consolidated financial statements as of January 31, 2010 and for the three and nine month periods ended January 31, 2010 and February 1, 2009, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and include the accounts of Finisar Corporation and its wholly-owned subsidiaries (collectively, “Finisar” or the “Company”). Inter-company accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. 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 31, 2010 and its operating results and cash flows for the three and nine month periods ended January 31, 2010 and February 1, 2009. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes for the fiscal year ended April 30, 2009.

FASB Accounting Standards Codification

     In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (GAAP)—a replacement of SFAS No. 162 (“SFAS 168”), which establishes the FASB ASC as the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. This guidance is effective for interim periods and fiscal years ending after September 15, 2009. On July 1, 2009, the Company adopted the provisions of this guidance and as a result, the majority of references to historically issued accounting pronouncements are now superseded by references to the FASB ASC. Certain accounting pronouncements, such as SFAS 168, will remain authoritative until they are integrated into the FASB ASC.

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 year financial statements to conform to the current year presentation. These changes had no impact on the Company’s previously reported financial position, results of operations and cash flows.

Use of Estimates

     The preparation of financial statements in conformity with U.S. 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.

Convertible Senior Subordinated Notes

     In May 2008, the FASB issued FASB ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”) (formerly referenced as FASB Staff Position (“FSP”) Accounting Principles Board Opinion No. 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”)). This standard addresses instruments commonly referred to as Instrument C which requires the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer’s option. It requires that issuers of these instruments account for their liability and equity components separately by bifurcating the conversion option from the debt instrument, classifying the conversion option in equity and then accreting the resulting discount on the debt as additional interest expense over the expected life of the debt. ASC 470-20 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and requires retrospective application to all periods presented. On May 1, 2009, the Company adopted the provisions of ASC 470-20 on a retrospective basis and as a result has recorded additional interest expense of $383,000 and $1.3 million for the three months ended January 31, 2010 and February 1, 2009, respectively, and $2.7 million and $3.7 million for the nine months ended January 31, 2010 and February 1, 2009, respectively, in its condensed consolidated statement of operations. In addition, the retrospective adoption of ASC 470-20 decreased debt issuance costs included in other assets by an aggregate of $313,000, decreased convertible senior notes, net included in long-term liabilities by $7.7 million, and increased total stockholders’ equity by $7.4 million after a charge of $12.1 million to accumulated deficit on its condensed consolidated balance sheet as of April 30, 2009. See Note 13 for the impact of the adoption of ASC 470-20 on prior period balances.

Reverse Stock Split

     On September 25, 2009, the Company effected a 1-for-8 reverse split of its common stock, pursuant to previously obtained stockholder authorization. The number of authorized shares of common stock was not changed. The reverse stock split reduced the Company’s issued and outstanding shares of common stock as of September 25, 2009 from approximately 517,161,351 shares of Common Stock to approximately 64,645,169 shares.

     All share and per-share information in the accompanying financial statements have been restated retroactively to reflect the reverse stock split. The common stock and additional paid-in capital accounts at April 30, 2009 were adjusted retroactively to reflect the reverse stock split.

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, 2009. 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.

Segment Reporting

     FASB ASC 280, Segment Reporting (formerly referenced as SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information) establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers. Prior to the first quarter of fiscal 2010, the Company had determined that it operated in two segments consisting of optical subsystems and components and network test systems. After the sale of the assets of the Network Tools Division to JDSU in the first

quarter of fiscal 2010, the Company has one reportable segment comprising 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 photo-detectors which are incorporated in transceivers, primarily for LAN and SAN applications.

Recent Adoption of New Accounting Standards

     As discussed earlier, the Company has adopted SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (GAAP) — a Replacement of FASB Statement No. 162 (“SFAS 168”) and provides references to the topics of the codification in this report alongside references to the previous standards.

     In the first quarter of fiscal 2010, the Company adopted FASB ASC 470-20 which specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. See Note 13 for the impact of the adoption of ASC 470-20 on the Company’s financial position and results of operations.

     In May 2009, the FASB issued FASB ASC 855, Subsequent Events (“ASC 855”) (formerly referenced as SFAS No. 165, Subsequent Events). ASC 855 requires an entity to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet. For nonrecognized subsequent events that must be disclosed to keep the financial statements from being misleading, an entity will be required to disclose the nature of the event as well as an estimate of its financial effect, or a statement that such an estimate cannot be made. In addition, ASC 855 requires an entity to disclose the date through which subsequent events have been evaluated. ASC 855 is effective for the Company beginning in the first quarter of fiscal 2010 and is required to be applied prospectively. The implementation of this standard did not have any impact on the financial statements of the Company. Subsequent events through the filing date of this Form 10-Q report have been evaluated for disclosure and recognition.

     In April 2009, the FASB issued FASB ASC 825-10, Financial Instruments (“ASC 825-10”) (formerly referenced as SFAS No. 107-1) and FASB ASC 270-10-05-01, Interim Reporting (“ASC 270-10-05-01”) (formerly referenced as Accounting Principle Board Opinion No. 28-1, “Interim Disclosures About Fair Value of Financial Instrument”). ASC 825-10 and ASC 270-10-05-01 require fair value disclosures in both interim and annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. ASC 825-10 and ASC 270-10-05-01 are effective for interim and annual periods ending after June 15, 2009. The Company adopted these standards as of May 1, 2009. As ASC 825-10 and ASC 270-10-05-01 relate specifically to disclosures, these standards had no impact on the Company’s financial condition, results of operations or cash flows. See Note 19 for further discussion.

     In December 2007, the FASB issued FASB ASC 810, Consolidation, Non-Controlling Interests (“ASC 810”) (formerly referenced as SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51). ASC 810 addresses the accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. ASC 810 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. ASC 810 is effective for fiscal years beginning after December 15, 2008. The adoption of this standard had no impact on the Company’s financial condition, results of operations or cash flows.

     In December 2007, the FASB issued FASB ASC 805, Business Combinations (“ASC 805”) (formerly referenced as SFAS No. 141 (revised 2007), Business Combinations) which established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. ASC 805 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations the Company engages in subsequent to May 1, 2009 will be accounted for in accordance with ASC 805. The Company expects ASC 805 will have an impact on its consolidated financial statements but the nature and magnitude of the specific effects will depend upon the nature, terms and size of any acquisitions it may consummate after the effective date. There were no business combinations consummated in the first nine months of fiscal 2010 by the Company.

Pending Adoption of New Accounting Standards

     In January 2010, the FASB issued ASU 2009-14, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2009-14 provides new disclosure requirements and clarification for existing

disclosures requirements. More specifically, this update will 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 clarifies existing 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 are effective for fiscal years beginning after December 15, 2009, except for the disclosure requirements related to the purchases, sales, issuances and settlements in the rollforward activity of Level 3 fair value measurements. Those disclosure requirements are effective for fiscal years ending after December 31, 2010. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

     In September 2009, the FASB amended the ASC as summarized in Accounting Standard Update (“ASU”) 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry specific revenue accounting guidance for software and software related transactions, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price; and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. The Company believes the adoption of this guidance will not have a material impact on its financial condition, results of operations or cash flows.

     In June 2009, the FASB issued FASB ASC 860, Transfers and Servicing (“ASC 860”) (formerly referenced as SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities). The FASB’s objective in issuing ASC 860 was to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASC 860 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. ASC 860 must be applied to transfers occurring on or after the effective date. The Company is currently evaluating the potential impact, if any, of the adoption of ASC 860 on its consolidated results of operations and financial condition.

3. 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 and warrants (under the treasury stock method) and convertible notes (on an as-if-converted basis) outstanding during the period.

     The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

		Three Months Ended								Nine Months Ended
		January 31,				February 1,				January 31,				February 1,
		2010				2009				2010				2009
Numerator for basic and diluted income (loss) per share:
Income (loss) from continuing operations		$	5,616			$	(49,295	)		$	(36,917	)		$	(235,488	)
Denominator:
Denominator for basic income (loss) per share from			65,113				59,350				63,131				56,039
continuing operations- weighted average shares
Effect of dilutive securities:
Employee stock options and restricted stock units			1,571				—				—				—
Warrants			35				—				—				—
Dilutive potential common shares			1,606				—				—				—
Denominator for diluted income(loss) from continuing operations			66,719				59,350				63,131				56,039
Basic income (loss) per share from continuing operations		$	0.09			$	(0.83	)		$	(0.58	)		$	(4.20	)
Diluted income (loss) per share from continuing operations		$	0.08			$	(0.83	)		$	(0.58	)		$	(4.20	)

     The following table presents common stock equivalents related to potentially dilutive securities excluded from the calculation of diluted net income (loss) per share from continuing operations because they are anti-dilutive (in thousands):

		Three Months Ended								Nine Months Ended
		January 31,				February 1,				January 31,				February 1,
		2010				2009				2010				2009
Employee stock options and restricted stock units			—				3,569				1,450				3,898
Conversion of convertible subordinated notes			9,498				13,495				3,808				30,166
Warrants			—				—				35				—
			9,498				17,064				5,293				34,064

4. Comprehensive Income (Loss)

     The components of comprehensive income (loss) for the three and nine months ended January 31, 2010 and February 1, 2009 were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		January 31,				February 1,				January 31,				February 1,
		2010				2009				2010				2009
Net income (loss)		$	5,485			$	(49,382	)		$	(36	)		$	(234,585	)
Foreign currency translation adjustment			(589	)			(1,382	)			(7,751	)			(10,563	)
Change in unrealized gain (loss) on securities, net of
reclassification adjustments for realized loss			(2	)			83				(18	)			(983	)
Comprehensive income (loss)		$	4,894			$	(50,681	)		$	(7,805	)		$	(246,131	)

The components of accumulated other comprehensive income, net of taxes, were as follows (in thousands):

		January 31, 2010				April 30, 2009
Net unrealized losses on available-for-sale securities		$	(3	)		$	(21	)
Cumulative translation adjustment			10,434				2,683
Accumulated other comprehensive income		$	10,431			$	2,662

5. Business Combination

     On August 29, 2008, the Company consummated a combination with Optium Corporation, a leading designer and manufacturer of high performance optical subsystems for use in telecommunications and cable TV network systems, through the merger of Optium with a wholly-owned subsidiary of the Company. The Company’s management and board of directors believe that the combination of the two companies created the world’s largest supplier of optical components, modules and subsystems for the communications industry and will leverage the Company’s leadership position in the storage and data networking sectors of the industry and Optium’s leadership position in the telecommunications and CATV sectors to create a more competitive industry participant. In addition, as a result of the combination, management believes that the Company should be able to realize cost synergies related to operating expenses and manufacturing costs resulting from (1) the transfer of production to lower cost locations, (2) improved purchasing power associated with being a larger company and (3) cost synergies associated with the integration of internally manufactured components into product designs in place of components previously purchased by Optium in the open market. The Company has accounted for the combination using the purchase method of accounting and as a result has included the operating results of Optium in its consolidated financial results since the August 29, 2008 consummation date. The following table summarizes the components of the total purchase price (in thousands):

Fair value of Finisar common stock issued		$	242,821
Fair value of vested Optium stock options and warrants assumed			8,561
Direct transaction costs			2,431
Total purchase price		$	253,813

     At the closing of the merger, the Company issued 20,101,082 shares of its common stock valued at approximately $242.8 million for all of the outstanding common stock of Optium. The value of the shares issued was calculated using the five day average of the closing price of the Company’s common stock from the second trading day before the merger announcement date on May 16, 2008 through the second trading day following the announcement, or $12.08 per share. There were approximately 2,150,325 shares of the Company’s common stock issuable upon the exercise of the outstanding options, warrants and restricted stock awards it assumed in accordance with the terms of the merger agreement. The number of shares was calculated based on the fixed conversion ratio of 0.7827 shares of Finisar common stock for each share of Optium common stock. The purchase price includes $8.6 million representing the fair market value of the vested options and warrants assumed.

     The Company also expects to recognize approximately $5.1 million of non-cash stock-based compensation expense related to the unvested options assumed on the acquisition date. This expense will be recognized beginning from the acquisition date over the remaining service periods of the options. As of January 31, 2010, $1.7 million of this expense remained unrecognized and is expected to be recognized over the weighted average remaining recognition period of 12 months. The stock options and warrants were valued using the Black-Scholes option pricing model based on the following weighted average assumptions:

Interest rate			2.17 — 4.5	%
Volatility			47 — 136	%
Expected life		1 — 6 years
Expected dividend yield			0	%

     Direct transaction costs include estimated legal and accounting fees and other external costs directly related to the merger.

Purchase Price Allocation

     The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date of August 29, 2008. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill. The Company believes the fair value assigned to the assets acquired and liabilities assumed was based on reasonable assumptions. The total purchase price has been allocated to the fair value of assets acquired and liabilities assumed as follows (in thousands):

Tangible assets acquired and liabilities assumed:
Cash and short-term investments		$	31,825
Other current assets			64,233
Fixed assets			19,129
Other non-current assets			889
Accounts payable and accrued liabilities			(47,005	)
Other liabilities			(973	)
Net tangible assets			68,098
Identifiable intangible assets			25,100
In-process research and development			10,500
Goodwill			150,115
Total purchase price allocation		$	253,813

Identifiable Intangible Assets

     Intangible assets consist primarily of developed technology, customer relationships and trademarks. Developed technology is comprised of products that have reached technological feasibility and are a part of Optium’s product lines. This proprietary know-how can be leveraged to develop new technology and products and improve our existing products. Customer relationships represent Optium’s underlying relationships with its customers. Trademarks represent the fair value of brand name recognition associated with the marketing of Optium’s products. The fair values of identified intangible assets were calculated using an income approach and estimates and assumptions provided by both Finisar and Optium management. The rates utilized to discount net cash flows to their present values were based on the Company’s weighted average cost of capital and ranged from 15% to 30%. This discount rate was determined after consideration for the Company’s rate of return on debt capital and equity and the weighted average return on invested capital. The amounts assigned to developed technology, customer relationships, and trademarks were $12.1 million, $11.9 million and $1.1 million, respectively. The Company expects to amortize developed technology, customer relationships, and trademarks on a straight-line basis over their weighted average expected useful life of 10, 5, and 1 years, respectively. Developed technology is amortized into cost of sales while customer relationships and trademarks are amortized into operating expenses.

In-Process Research and Development

     The Company expensed in-process research and development (“IPR&D”) upon acquisition as it represented incomplete Optium research and development projects that had not reached technological feasibility and had no alternative future use as of the date of the merger. Technological feasibility is established when an enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design specifications including functions, features, and technical performance requirements. The value assigned to IPR&D of $10.5 million was determined by considering the importance of each project to the Company’s overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present values based on the percentage of completion of the IPR&D projects as of the date of the merger.

Pro Forma Financial Information

     The unaudited financial information in the table below summarizes the combined results of operations of the Company and Optium on a pro forma basis after giving effect to the merger at the beginning of the fiscal year in which the merger was consummated. The pro forma information is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the merger had happened at the beginning of the fiscal year in which the merger was consummated.

     The unaudited pro forma financial information for the nine months ended February 1, 2009 combines the historical results of the Company for the nine months ended February 1, 2009 with the historical results of Optium for the four months ended August 29, 2008.

     The following pro forma financial information includes purchase accounting adjustments for amortization charges from acquired identifiable intangible assets and depreciation on acquired property and equipment (in thousands, except per share information):

		Nine months ended
		February 1, 2009
Net revenue		$	441,593
Net loss			(245,287	)
Net loss per share — basic and diluted		$	(4.38	)

6. 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 $40.6 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. In accordance with FASB ASC 360, Property, Plant and Equipment- Impairment or Disposal of Long Lived Assets (“ASC 360”) (formerly referenced as SFAS 144, Accounting for the Impairment or Disposal of Long Lived Assets), the operating results of this business, through January 31, 2010 and for all applicable prior periods, are reported as discontinued operations in the condensed consolidated financial statements. The assets and liabilities related to this business have been classified as discontinued operations in the consolidated financial statements for all periods presented. As a result, the prior period comparative financial statements have been restated. In accordance with FASB ASC 230, Statement of Cash Flows (formerly referenced as SFAS No. 95, Statement of Cash Flows), the Company has elected not to separately disclose the cash flows associated with the discontinued operations in the condensed consolidated statements of cash flows.

     The following table summarizes results from discontinued operations (in thousands):

		Three Months Ended								Nine Months Ended
		January 31,				February 1,				January 31,				February 1,
		2010				2009				2010				2009
Net revenue		$	—			$	10,274			$	6,753			$	34,972
Gross profit			—				6,322				4,892				23,141
Income (loss) from discontinued operations			(131	)			(87	)			36,881				903
Gain (loss) on sale of discontinued operations			(165	)			—				35,888				—

     The following table summarizes assets and liabilities classified as discontinued operations (in thousands):

		April 30, 2009
ASSETS
Current assets:
Prepaid expenses		$	327
Inventories			4,536
Total current assets			4,863
Purchased technoloy, net		$	204
Other intangible assets, net			889
Property, plant and improvements, net			2,434
Total assets of discontinued operations		$	8,390
LIABILITIES
Current liabilities:
Warranty accrual			200
Deferred revenue			2,960
			3,160
Non-current liabilities associated with discontinued operations
Deferred Revenue			650
Total liabilities of discontinued operations		$	3,810

     The following table summarizes the gain on sale of discontinued operations (in thousands):

Gross proceeds from sale		$	40,683
Assets sold
Inventory			(4,814	)
Property and equipment			(2,460	)
Intangibles			(845	)
Liabilities transferred
Deferred revenue			3,102
Other accruals			312
Other charges			(90	)
		$	35,888

     In connection with the sale of the assets of the Network Tools Division, the Company entered into a transition services agreement with the buyer. Under this agreement, the Company will provide manufacturing services to the buyer for a period which is not expected to be more than one year. The buyer will reimburse the Company for material costs plus 10% for the first six months, plus 12% for the first three months of any extension and plus 15% for the second three months of any extension. The buyer will also pay the Company a fixed fee of $50,000 per month to cover manufacturing overhead and direct labor costs. Under the agreement, the buyer will also pay a fixed fee for leasing the Company’s facilities and a service fee for the use of the Company’s information technology, communication services and employee services. The duration for which these services will be provided is not expected to be more than twelve months. During the second quarter of fiscal 2010, the Company incurred net operating expense of $67,000 for providing manufacturing services to the buyer. During the third quarter of fiscal 2010, the Company incurred net operating expense of $131,000 for providing manufacturing services to the buyer which included an immaterial adjustment of $165,000 recorded as adjustment to the gain on sale of discontinued operations. Total operating expenses incurred in relation to the transition services agreement from July 15, 2009 through January 31, 2010 were $33,000.

7. Inventories

     Inventories consist of the following (in thousands):

		January 31, 2010				April 30, 2009
Raw materials		$	38,798			$	36,153
Work-in-process			49,204				36,042
Finished goods			34,678				35,569
Total inventories		$	122,680			$	107,764

     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 of $4.3 million and $11.4 million, respectively, that was written-off in previous periods and therefore had an associated cost of revenue of zero.

     During the three and nine months ended February 1, 2009, the Company recorded charges of $3.6 million and $9.5 million, respectively, for excess and obsolete inventory, and sold inventory of $3.0 million and $5.8 million, respectively that was written-off in previous periods and therefore had an associated cost of revenue of zero..

8. Property and Equipment

     Property and equipment consist of the following (in thousands):

		January 31, 2010				April 30, 2009
Buildings		$	7,807			$	7,416
Computer equipment			34,517				33,232
Office equipment, furniture and fixtures			3,572				3,739
Machinery and equipment			169,248				154,505
Leasehold improvements			18,069				17,246
Construction-in-process			2,817				445
Total			236,030				216,583
Accumulated depreciation and amortization			(152,104	)			(134,977	)
Property, equipment and improvements (net)		$	83,926			$	81,606

9. Intangible Assets Including Goodwill

Intangible Assets

     The following table reflects intangible assets subject to amortization as of January 31, 2010 and April 30, 2009 (in thousands):

		January 31, 2010
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Purchased technology		$	75,936			$	(63,054	)		$	12,882
Purchased trade name			1,172				(1,172	)			—
Purchased customer relationships			15,970				(4,186	)			11,784
Purchased patents			375				(44	)			331
Totals		$	93,453			$	(68,456	)		$	24,997

		April 30, 2009
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Purchased technology		$	75,936			$	(59,478	)		$	16,458
Purchased trade name			1,172				(805	)			367
Purchased customer relationships			15,970				(2,909	)			13,061
Totals		$	93,078			$	(63,192	)		$	29,886

     Estimated remaining amortization expense for each of the next five fiscal years ending April 30, is as follows (in thousands):

Year		Amount
2010		$	1,592
2011			6,222
2012			5,405
2013			3,993
2014 and beyond			7,785
Total		$	24,997

Goodwill Impairment

     During the second quarter of fiscal 2009, the Company performed a goodwill impairment analysis as it concluded that there were sufficient indicators to require an interim goodwill impairment analysis. Among these indicators were a significant deterioration in the macroeconomic environment largely caused by the widespread unavailability of business and consumer credit, a significant decrease in the Company’s market capitalization as a result of a decrease in the trading price of its common stock to $4.88 at the end of the quarter and a decrease in internal expectations for near term revenues, especially those expected to result from the Optium merger. For the purposes of this analysis, the Company’s estimates of fair value were based on a combination of the income approach, which estimates the fair value of its reporting units based on future discounted cash flows, and the market approach, which estimates the fair value of its reporting units based on comparable market prices. As of the filing of its quarterly report on Form 10-Q for the second quarter of fiscal 2009, the Company had not completed its analysis due to the complexities involved in determining the implied fair value of the goodwill for the optical subsystems and components reporting unit, which is based on the determination of the fair value of all assets and liabilities of this reporting unit. However, based on the work performed through the date of the filing of the quarterly report for the second quarter of fiscal 2009, the Company concluded that an impairment loss was probable and could be reasonably estimated. Accordingly, it recorded a $178.8 million non-cash goodwill impairment charge, representing its best estimate of the impairment loss during the second quarter of fiscal 2009.

     While finalizing its impairment analysis during the third quarter of fiscal 2009, the Company concluded that there were additional indicators sufficient to require another interim goodwill impairment analysis. Among these indicators were a worsening of the macroeconomic environment largely caused by the unavailability of business and consumer credit, an additional decrease in the Company’s market capitalization as a result of a decrease in the trading price of its common stock to $4.08 at the end of the quarter

and a further decrease in internal expectations for near term revenues. For the purposes of this analysis, the Company’s estimates of fair value were again based on a combination of the income approach and the market approach. As of the filing of its quarterly report on Form 10-Q for the third quarter of fiscal 2009, the Company had not completed its analysis due to the complexities involved in determining the implied fair value of the goodwill for the optical subsystems and components reporting unit, which is based on the determination of the fair value of all assets and liabilities of this reporting unit. However, based on the work performed through the date of the filing of the quarterly report for the third quarter of fiscal 2009, the Company concluded that an impairment loss was probable and could be reasonably estimated. Accordingly, it recorded an additional $46.5 million non-cash goodwill impairment charge, representing its best estimate of the impairment loss during the third quarter of fiscal 2009. Giving effect to the impairment charges, the remaining balance of goodwill at February 1, 2009 was $13.9 million, all of which related to the optical subsystems and components reporting unit. No adjustments were subsequently made to the initial estimates of goodwill impairment loss and the remaining balance of goodwill as of February 1, 2009 of $13.9 million was determined to be impaired and was recorded as an impairment loss in the fourth quarter of fiscal 2009.

10. Investments

Available-for-Sale Investments

     The following table presents a summary of the Company’s available-for-sale investments measured at fair value on a recurring basis as of January 31, 2010 (in thousands):

		Quoted
		Prices in				Significant
		Active				Other
		Markets For				Observable				Significant
		Identical				Remaining				Unobservable
Assets Measured at Fair Value on a Recurring Basis		Assets				Inputs				Inputs				Total
		(Level 1)				(Level 2)				(Level 3)
Cash equivalents and available-for-sale investments:
Money market funds		$	342			$	—			$	—			$	342
Mortgage-backed debt			—				67				—				67
Total cash equivalents and available-for-sale investments		$	342			$	67			$	—			$	409
Cash															75,172
Restricted cash and cash equivalents															3,400
Total cash, cash equivalents and available-for-sale investments														$	78,981
Reported as:
Cash and cash equivalents														$	75,514
Restricted cash and cash equivalents															3,400
Short-term available-for-sale investments															67
Total cash, cash equivalents and available-for-sale investments														$	78,981

     The following table presents a summary of the Company’s available-for-sale investments measured at fair value on a recurring basis as of April 30, 2009 (in thousands):

		Quoted
		Prices in				Significant
		Active				Other
		Markets For				Observable				Significant
		Identical				Remaining				Unobservable
Assets Measured at Fair Value on a Recurring Basis		Assets				Inputs				Inputs				Total
		(Level 1)				(Level 2)				(Level 3)
Cash equivalents, and available-for-sales investments:
Money market funds		$	25			$	—			$	—			$	25
Mortgage-backed debt			—			$	92				—				92
Total cash equivalents and available-for-sale investments		$	25			$	92			$	—				117
Cash															37,104
Total cash, cash equivalents and available-for-sale investments														$	37,221
Reported as:
Cash and cash equivalents														$	37,129
Short-term available-for-sale investments															92
Total cash, cash equivalents and available-for-sale investments														$	37,221

     The following is a summary of the Company’s available-for-sale investments by contractual maturity (in thousands):

		January 31, 2010												April 30, 2009
		Amortized				Unrealized				Market				Amortized				Unrealized				Market
		Cost				Loss				Value				Cost				Loss				Value
Mature in less than one year		$	70			$	3			$	67			$	113			$	21			$	92

     Gross realized gains and losses for the three and nine months ended January 31, 2010 and February 1, 2009 were calculated based on the specific identification method and were immaterial.

Sale of an Available-for-Sale Equity Security

     During fiscal 2008, the Company granted an option to a third party to acquire 3.8 million shares of stock of a publicly-held company held by the Company. The Company determined that this option should be accounted for under the provisions of FASB ASC

815, Derivatives and Hedging (formerly referenced as SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities), which requires the Company to calculate the fair value of the option at the end of each reporting period, upon the exercise of the option or at the time the option expires and recognize the change in fair value through other income (expense), net. As of April 30, 2008, the Company had recorded a current liability of $1.1 million related to the fair value of this option. During the first quarter of fiscal 2009, the third party did not exercise its option to purchase any of the shares and the option expired. Accordingly, the Company reduced the carrying value of the option liability to zero and recorded $1.1 million of other income during the first quarter of fiscal 2009. During the second quarter of fiscal 2009, the Company sold 300,000 shares of this investment for $90,000 resulting in a realized loss of $12,000. As of November 2, 2008, the Company classified the remaining 3.5 million shares as available-for-sale securities in accordance with FASB ASC 320, Investments- Debt and Equity Securities (formerly referenced as SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). The Company determined that the full carrying value of these shares was other-than-temporarily impaired and it recorded a loss of $1.2 million during the second quarter of fiscal 2009.

11. Minority Investments

     The carrying value of the Company’s minority investments at April 30, 2009 was $14.3 million and was comprised of minority investment in four privately held companies accounted for under the cost method. The Company concluded that there were sufficient indicators during the second quarter of fiscal 2010 to require an investment impairment analysis of its investment in one of these companies. Among these indicators was the completion of a new round of equity financing by the investee and the resultant conversion of the Company’s preferred stock holdings to common stock. The Company determined that the value of its minority equity investment was impaired and recorded a $2.0 million impairment loss as other expense on the condensed consolidated statement of operations. At January 31, 2010 the carrying value of minority investments was $12.3 million and was comprised of the Company’s minority investment in three privately held companies.

     During the first half of fiscal 2009, the Company completed the sale of a product line to a third party in exchange for an 11% equity interest in the acquiring company in the form of preferred stock and a note convertible into preferred stock. This product line was related to the Company’s Network Tools Division, the remaining assets of which were sold to JDSU in the first quarter of fiscal 2010 and accounted for as discontinued operations. For accounting purposes, no value was originally placed on the equity interest due to the uncertainty in the recoverability of this investment and note. The sale included the transfer of certain assets and liabilities and the retention of certain obligations related to the sale of the product line resulting in a net loss of approximately $919,000 which was included in operating expenses. In the first quarter of fiscal 2010, the Company sold the note and all of the preferred stock back to the buyer of the product line for $1.2 million in cash and recorded the $1.2 million as income from discontinued operations.

12. Other Accrued Liabilities

     Accrued liabilities consist of the following (in thousands):

		January 31, 2010				April 30, 2009
Warranty accrual (Note 18)		$	6,036			$	6,413
Other liabilities			15,023				24,100
Total		$	21,059			$	30,513

13. Convertible Debt

5.0% Convertible Senior Notes due 2029

     On October 15, 2009, the Company sold $100 million aggregate principal amount of 5.0% Convertible Senior Notes due 2029. The notes will mature on October 15, 2029, unless earlier repurchased, redeemed or converted. Interest on the notes will be payable semi-annually in arrears at a rate of 5.0% per annum on each April 15 and October 15, beginning on April 15, 2010. The notes are senior unsecured and unsubordinated obligations of the Company, and rank equally in right of payment with the Company’s other unsecured and unsubordinated indebtedness, but are effectively subordinated to the Company’s secured indebtedness and liabilities to the extent of the value of the collateral securing those obligations, and structurally subordinated to the indebtedness and other liabilities of the Company’s subsidiaries. Holders may convert the notes into shares of the Company’s common stock, at their option at any time prior to the close of business on the trading day before the stated maturity date. The initial conversion rate is 93.6768 shares of Common Stock per $1,000 principal amount of the notes (equivalent to an initial conversion price of approximately $10.68 per share of common stock), subject to adjustment upon the occurrence of certain events. Upon conversion of the notes, holders will

receive shares of common stock unless the Company obtains consent from a majority of the holders to deliver cash or a combination of cash and shares of common stock in satisfaction of its conversion obligation. If a holder elects to convert the notes in connection with a “fundamental change” (as defined in the indenture) that occurs prior to October 15, 2014, the conversion rate applicable to the notes will be increased as provided in the indenture.

     Holders may require the Company to redeem, for cash, all or part of their notes upon a “fundamental change” at a redemption price equal to 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest up to, but excluding, the redemption date. Holders may also require the Company to redeem, for cash, any of their notes on October 15, 2014, October 15, 2016, October 15, 2019 and October 15, 2024 at a redemption price equal to 100% of the principal amount of the Notes being redeemed plus accrued and unpaid interest up to, but excluding, the redemption date.

     The Company has the right to redeem the notes in whole or in part at a redemption price equal to 100% of the principal amount of the Notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, at any time on or after October 22, 2014 if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date on which the Company provides the notice of redemption.

Convertible Debt Balances

     The Company’s convertible senior notes, convertible subordinated notes and convertible senior subordinated notes as of January 31, 2010 and April 30, 2009 were as follows (in thousands):

		Carrying				Interest				Due in
Description		Amount				Rate				Fiscal year
As of January 31, 2010
Convertible senior notes		$	100,000				5.00	%			2030
Convertible subordinated notes			3,900				2.50	%			2011
Convertible senior subordinated notes			25,681				2.50	%			2011
Unamortized debt discount			(1,101	)
Convertible senior subordinated notes, net			24,580
Total		$	128,480
As of April 30, 2009
Convertible subordinated notes		$	50,000				2.50	%			2011
Convertible senior subordinated notes			92,000				2.50	%			2011
Unamortized debt discount			(7,745	)
Convertible senior subordinated notes, net			84,255
Total		$	134,255

     As discussed in Note 1, the Company adopted the provisions of FASB ASC 470-20 in the first quarter of fiscal 2010. The provisions of this ASC apply to the Company’s 2 1/2% Convertible Senior Subordinated Notes due 2010, and the Company has accounted for the debt and equity components of the notes to reflect the estimated nonconvertible debt borrowing rate at the date of issuance of 8.59%. The following table presents the previously reported amounts, along with the adjusted amounts reflecting the adoption of ASC 470-20.

Condensed Consolidated Statement of Operations (Unaudited)
		As Reported				As Adjusted				Effect of Change
		(in thousands, except per share data)
Three Months Ended February 1, 2009
Interest expense		$	1,469			$	2,724			$	1,255
Loss from continuing operations			(47,270	)			(49,295	)			(2,025	)
Net loss			(47,357	)			(49,382	)			(2,025	)
Loss per share from continuing operations:
Basic			(0.80	)			(0.83	)			(0.03	)
Diluted			(0.80	)			(0.83	)			(0.03	)

		As Reported				As Adjusted				Effect of Change
		(in thousands, except per share data)
Nine Months Ended February 1, 2009
Interest expense		$	8,355			$	12,080			$	3,725
Loss from continuing operations			(231,085	)			(235,488	)			(4,403	)
Net loss			(230,182	)			(234,585	)			(4,403	)
Loss per share from continuing operations:
Basic			(4.12	)			(4.20	)			(0.08	)
Diluted			(4.12	)			(4.20	)			(0.08	)

Condensed Consolidated Balance Sheet (Unaudited)
		As Reported				As Adjusted				Effect of Change
		(in thousands)
As of April 30, 2009
Other assets		$	2,897			$	2,584			$	(313	)
Convertible notes			142,000				134,255				(7,745	)
Additional paid in capital			1,811,298				1,831,224	*			19,926
Accumulated deficit			(1,699,648	)			(1,711,725	)			(12,077	)

     Interest (cash interest cost) on the 2 1/2% Convertible Senior Subordinated Notes is payable semiannually on April 15 and October 15. The notes become convertible, at the option of the holder, upon the trading price of the Company’s common stock reaching $39.36 for a period of time at a conversion price of $26.24 per share, which is equal to a rate of approximately 38.1097 shares of common stock per $1,000 principal amount of the notes. The conversion price is subject to adjustment. The notes contain a net share settlement feature which requires that, upon conversion of the notes into common stock, Finisar will pay holders in cash for up to the principal amount of the converted notes and that any amounts in excess of the cash amount will be settled in shares of common stock. At January 31, 2010 the if-converted value of the 2 1/2% Convertible Senior Subordinated Notes did not exceed the principal balance.

     At January 31, 2010 the $1.1 million unamortized debt discount had a remaining amortization period of approximately 9 months.

     The following table provides additional information about the Company’s 2 1/2% Convertible Senior Subordinated Notes that may be settled for cash (dollars in thousands):

		January 31, 2010				April 30, 2009
Carrying amount of the equity component		$	19,283			$	19,509
Effective interest rate on liability component			8.59	%			8.59	%

     The following table presents the associated interest expense related to the Company’s 2 1/2% Convertible Senior Subordinated Notes that may be settled in cash, which consists of both the contractual interest coupon (cash interest cost) and amortization of the discount on the liability (non-cash interest cost) (in thousands):

		Three Months Ended								Nine Months Ended
		January 31,				February 1,				January 31,				February 1,
		2010				2009				2010				2009
Non-cash interest cost		$	383			$	1,255			$	2,674			$	3,725
Cash interest cost			171				613				1,256				1,883
		$	554			$	1,868			$	3,930			$	5,608

Settlement of Exchange Offers

     On August 11, 2009, the Company exchanged $47,504,000 aggregate principal amount of its 2 1/2% Convertible Senior Subordinated Notes due 2010 and its 2 1/2% Convertible Subordinated Notes due 2010 pursuant to exchange offers which commenced on July 9, 2009 at a price of $870 for each $1,000 principal amount of notes. 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. The Company issued approximately 3.5 million shares of common stock and paid out approximately $24.9 million in cash to the former holders of notes validly tendered and not withdrawn in the exchange offers. The Company settled $33,100,000, or 66.2%, of the $50,000,000 aggregate outstanding principal amount of 2 1/2% Convertible Subordinated Notes due 2010; and $14,404,000, or approximately 15.7%, of the $92,000,000 aggregate outstanding principal amount of 2 1/2% Convertible Senior Subordinated Notes due 2010. The total consideration paid in the exchange was approximately $4.7 million less than the par value of the notes retired. In accordance with the provisions of ASC 470-20, this exchange was considered to be 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. The Company incurred $1.5 million of expenses in connection with the exchange offers which was recorded as loss on debt extinguishment in the condensed consolidated statement of operations.

Repurchases of Convertible Senior Subordinated Notes

     During the first nine months of fiscal 2010, the Company repurchased an aggregate of $51.9 million principal amount of its 2 1/2% Senior Subordinated Notes due 2010 in privately negotiated transactions for a total purchase price of $50.3 million plus accrued interest of $183,000 and recorded a loss on debt extinguishment of $1.3 million in connection with these transactions.

Repurchase of Convertible Subordinated Notes

     During the first nine months of fiscal 2010, the Company repurchased $13.0 million principal amount of the 2 1/2% Subordinated Notes due 2010 in privately negotiated transactions for a total purchase price of $12.7 million plus accrued interest of $11,000 and recorded a gain on debt extinguishment of $308,000 in connection with these transactions.

14. Long-term Debt

     In December 2005, the Company entered into a note and security agreement with a financial institution. Under this agreement, the Company borrowed $9.9 million at an interest rate of 5.9% per annum. The note was payable in 60 equal monthly installments beginning in January 2006 and was secured by certain property and equipment of the Company. In January 2009, the agreement was amended to increase the rate of interest from 5.9% to 12.9% per annum. In November 2009, the Company repaid the outstanding balance of this loan in full.

     In July 2008, the Company’s Malaysian subsidiary entered into two separate loan agreements with a Malaysian bank. Under these agreements, the Company’s Malaysian subsidiary borrowed a total of $20 million at an initial interest rate of 5.05% per annum. The first loan is payable in 20 equal quarterly installments of $750,000 beginning in January 2009, and the second loan is payable in 20 equal quarterly installments of $250,000 beginning in October 2008. Both loans are secured by certain property of the Company’s Malaysian subsidiary, guaranteed by the Company and subject to certain covenants. The Company was in compliance with all covenants associated with these loans as of January 31, 2010 and April 30, 2009. The following table provides information regarding the current and long-term portion of the remaining principal outstanding under these notes as of the respective dates (in thousands):

		January 31,				April 30,
		2010				2009
Current portion of long-term debt		$	4,000			$	4,000
Long-term debt, net of current portion			10,750				13,750
Total		$	14,750			$	17,750

15. Short- term Debt

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. The loan is payable on January 6, 2013. The Bank has the right to terminate the agreement on January 6 of each year, with or without reason, in which case the outstanding balance would become due and payable. Interest is payable quarterly.

Former Credit Facility

     On October 23, 2009, the Company terminated its revolving line of credit agreement with Silicon Valley Bank. This line of credit agreement allowed for advances in the aggregate amount of $25 million subject to certain restrictions and limitations. Borrowings under this line were collateralized by substantially all of the Company’s assets except its intellectual property rights and bore interest, at the Company’s option, at either the bank’s prime rate plus 0.5% or LIBOR plus 3%. There were no outstanding borrowings under this revolving line as of April 30, 2009 or on the date of termination of the agreement.

New Credit Facility

     On October 2, 2009, the Company entered into an agreement with Wells Fargo Foothill, LLC to establish a new 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. The Company was in compliance with all covenants associated with this facility as of January 31, 2010. The Company had $10 million of outstanding borrowings under this revolving line of credit at January 31, 2010 which were subsequently repaid. As of January 31, 2010, the availability of credit under the facility was reduced by $1.6 million due to certain loan reserves and by $3.5 million for outstanding letters of credit secured under this agreement.

16. Letter of Credit Reimbursement Agreement

     In April 2005, the Company entered into a letter of credit reimbursement agreement with Silicon Valley Bank. Several amendments were made to the agreement subsequently. The last amendment was on April 30, 2009. Under the terms of the amended agreement, Silicon Valley Bank agreed to provide to the Company, through October 24, 2009, a $4.0 million letter of credit facility covering existing letters of credit issued by Silicon Valley Bank and any other letters of credit that may be required by the Company. The cost related to the credit facility consisted of the bank’s out of pocket expenses associated with the credit facility. The credit facility was unsecured but included a negative pledge that prohibited the Company from creating a security interest in any of its assets in favor of a subsequent creditor without the approval of Silicon Valley Bank. Outstanding letters of credit secured under this agreement at April 30, 2009 totaled $3.4 million. On October 23, 2009, the Company terminated this letter of credit agreement. As of January 31, 2010, the $3.4 million of letters of credit issued by Silicon Valley Bank remained outstanding, as the Company was in the process of obtaining new replacement letters of credit through Wells Fargo Bank. Following the termination of the agreement, the Company secured the outstanding letters of credit with restricted certificates of deposit of $3.4 million which are presented on the condensed consolidated balance sheet as restricted cash and cash equivalents.

17. Non-recourse Accounts Receivable Purchase Agreement

     On October 28, 2004, the Company entered into a non-recourse accounts receivable purchase agreement with Silicon Valley Bank. Several amendments were subsequently made to the agreement. The last amendment was on October 28, 2008. Under the terms of the amended agreement, the Company could sell to Silicon Valley Bank, through October 24, 2009 up to $16 million of qualifying receivables whereby all right, title and interest in the Company’s invoices were purchased by Silicon Valley Bank. In these non-recourse sales, the Company removed sold receivables from its books and records no liability related to the sale, as the Company has assessed that the sales should be accounted for as “true sales” in accordance with FASB ASC 860, Transfers and Servicing. The discount interest for the facility is based on the number of days in the discount period multiplied by Silicon Valley Bank’s prime rate plus 0.25% and a non-refundable administrative fee of 0.25% of the face amount of each invoice. During the three and nine months ended February 1, 2009 the Company sold approximately $12.1 million and $27.3 million, respectively of its trade receivables. During the first half of fiscal 2010, the Company did not sell any receivables under the facility. On October 23, 2009, the Company terminated this non-recourse accounts receivable purchase agreement with Silicon Valley Bank.

18. 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 in the amount of such costs based on revenue recognized. Factors that affect the Company’s warranty liability include the historical and anticipated rates of warranty claims. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

     Changes in the Company’s warranty liability during the following period were as follows (in thousands):

		Nine Months Ended
		January 31, 2010
Beginning balance at April 30, 2009		$	6,413
Additions during the period based on product sold			2,795
Settlements			(1,067	)
Changes in liability for pre-existing warranties, including expirations			(2,105	)
Ending balance at January 31, 2010		$	6,036

19. 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 31, 2010 are as follows (in thousands):

		January 31, 2010
		Carrying Amount				Fair value
Financial assets:
Cash and cash equivalents		$	75,514			$	75,514
Restricted cash and cash equivalents			3,400				3,400
Short-term available-for-sale investments			67				67
Financial liabilities:
Convertible notes			128,480				149,305
Short-term debt			14,500				14,500
Long-term debt			14,750				12,890

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

Restricted cash and cash equivalents — The fair value of restricted cash and cash equivalents approximates its carrying value.

Short-term available-for-sale investments — The fair value of short-term available-for-sale investments approximates their carrying value.

Convertible notes —The fair value of subordinated and senior subordinated convertible notes is estimated using the price from the repurchase transaction that the Company completed during November 2009. The fair value of the 5.0% Senior Convertible Notes due 2029 is based on its market price in open market as on January 31, 2010.

Short-term debt — The fair value of short-term debt approximates its carrying value.

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.

     The Company has not estimated the fair value of its minority investments 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 31, 2010 the carrying value of its minority investments is $12.3 million which management believes is not impaired as of January 31, 2010.

20. Stockholders’ Equity

Valuation and Expense

     The following table summarizes stock-based compensation expense related to employee stock options, restricted stock awards and employee stock purchases under FASB ASC 718 for the three and nine months ended January 31, 2010 and February 1, 2009 which was reflected in the Company’s operating results (in thousands):

		Three Months Ended								Nine Months Ended
		January 31,				February 1,				January 31,				February 1,
		2010				2009				2010				2009
Cost of revenues		$	909			$	777			$	3,228			$	2,438
Research and development			1,364				1,659				4,375				4,028
Sales and marketing			463				454				1,472				1,221
General and administrative			776				890				2,540				2,091
Total		$	3,512			$	3,780			$	11,615			$	9,778

     The total stock-based compensation capitalized as part of inventory as of January 31, 2010 was $606,277.

     The fair value of each option grant was estimated on the date of grant using the Black-Scholes single option pricing model with the following weighted-average assumptions:

		Employee Stock Option Plans								Employee Stock Purchase Plan								Employee Stock Option Plans								Employee Stock Purchase Plan
		Three months ended																Nine months ended
		January 31, 2010				February 1, 2009				January 31, 2010				February 1, 2009				January 31, 2010				February 1, 2009				January 31, 2010				February 1, 2009
Weighted average fair value per share		$	5.65			$	2.16			$	4.1			$	1.6			$	5.55			$	2.65			$	1.4 —$4.1			$	1.6 —$4.1
Expected term (in years)			5.26				5.28				0.75				0.73				5.23				5.26				0.73 — 0.75				0.73 — 0.74
Volatility			83	%			79	%			93%—109	%			102	%			83	%			78	%			93%— 109	%			58% — 102	%
Risk-free interest rate			2.3	%			1.9	%			0.2—0.3	%			0.5	%			2.4	%			2.0	%			0.2 —0.5	%			0.5% — 3.3	%
Dividend yield			0.00	%			0.00	%			0.00	%			0.00	%			0.00	%			0.00	%			0.00	%			0.00	%