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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended October 3, 2010
   
 
or
   
£
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 000-31581

OPLINK COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
No. 77-0411346
(I.R.S. Employer
Identification No.)

46335 Landing Parkway, Fremont, CA 94538
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (510) 933-7200

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 R No £

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  £
 
Accelerated filer R
 
Non-accelerated filer £
 
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 £ No R
 
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 £ No £

The number of shares of the Registrant’s common stock outstanding as of October 29, 2010 was 19,561,981.




 
 

 


OPLINK COMMUNICATIONS, INC.
 
     
   
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NOTE:  The registrant’s fiscal year ends on the Sunday closest to June 30 and each of its fiscal quarters ends on the Sunday closest to the calendar quarter end. For ease of presentation, throughout this report the registrant refers to its fiscal years as ending on June 30 and to its fiscal quarters as ending on the calendar quarter end. For example, the registrant’s most recently completed fiscal year ended on Sunday, June 27, 2010 and its most recently completed fiscal quarter ended on Sunday, October 3, 2010, but throughout this report those periods will be referred to as having ended on June 30, 2010 and September 30, 2010, respectively.

 
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ITEM 1- FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


   
September 30,
   
June 30,
 
   
2010
   
2010 (1)
 
   
(In thousands, except share
 
   
and per share data)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 55,090     $ 40,711  
Short-term investments
    104,537       109,632  
Accounts receivable, net
    34,190       29,728  
Inventories
    24,265       20,902  
Prepaid expenses and other current assets
    7,987       7,659  
Total current assets
    226,069       208,632  
Long-term investments
     -       10,000  
Property, plant and equipment, net
    34,595       33,363  
Goodwill and intangible assets, net
    5,926       6,952  
Other assets
    649       651  
Total assets
  $ 267,239     $ 259,598  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 14,629     $ 14,369  
Accrued liabilities
    11,666       11,536  
Deferred revenues
    871       -  
Income taxes payable
    1,132       121  
Total current liabilities
    28,298       26,026  
Income taxes payable, non-current
    3,549       3,415  
Other non-current liabilities
    1,538       1,508  
Total liabilities
    33,385       30,949  
                 
Commitments and contingencies (Note 16)
               
                 
Stockholders' equity:
               
Common stock, $0.001 par value, 34,000,000 shares authorized; 19,424,522 and 19,582,471 shares
               
issued and outstanding as of September 30, 2010 and June 30, 2010, respectively
    20       20  
Additional paid-in capital
    441,736       443,825  
Treasury stock, at cost (82,514 shares as of June 30, 2010)
    -       (1,196 )
Accumulated other comprehensive income
    8,761       8,243  
Accumulated deficit
    (216,663 )     (222,243 )
Total stockholders’ equity
    233,854       228,649  
Total liabilities and stockholders' equity
  $ 267,239     $ 259,598  

(1) The condensed consolidated balance sheet at June 30, 2010 has been derived from the audited consolidated financial statements at that date.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
3

 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
   
(In thousands, except per share data)
 
Revenues
  $ 49,640     $ 33,565  
Cost of revenues:
               
Cost of revenues
    33,402       23,634  
Stock compensation expense
    117       99  
Total cost of revenues
    33,519       23,733  
                 
Gross profit
    16,121       9,832  
                 
Operating expenses:
               
Research and development:
               
Research and development
    3,399       2,225  
Stock compensation expense
    334       269  
Total research and development
    3,733       2,494  
                 
Sales and marketing:
               
Sales and marketing
    2,458       2,086  
Stock compensation expense
    429       328  
Total sales and marketing
    2,887       2,414  
                 
General and administrative:
               
General and administrative
    1,868       1,721  
Stock compensation expense
    778       950  
Total general and administrative
    2,646       2,671  
                 
Amortization of intangible assets
    451       404  
Total operating expenses
    9,717       7,983  
                 
Income from operations
    6,404       1,849  
Interest and other income, net
    57       274  
Gain on sale or disposal of assets
    -       124  
Income before provision for income taxes
    6,461       2,247  
Provision for income taxes
    (881 )     (438 )
Net income
  $ 5,580     $ 1,809  
                 
Net income per share:
               
  Basic
  $ 0.29     $ 0.09  
 Diluted
  $ 0.28     $ 0.09  
                 
Shares used in per share calculation:
               
  Basic
    19,335       20,566  
 Diluted
    20,252       21,173  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
4

 

 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)

   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
   
(In thousands)
 
Cash flows from operating activities:
           
Net income
  $ 5,580     $ 1,809  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of property and equipment
    1,352       1,666  
Amortization of intangible assets
    1,026       946  
Stock compensation expense
    1,658       1,646  
Amortization of premium on investments
    129       9  
Gain on sale or disposal of assets
    -       (124 )
Other
    161       (6 )
Change in assets and liabilities:
               
Accounts receivable
    (4,409 )     1,795  
Inventories
    (3,225 )     2,105  
Prepaid expenses and other current assets
    (304 )     (445 )
Other assets
    5       18  
Accounts payable
    1,014       (672 )
Accrued liabilities and other liabilities
    2,553       386  
Net cash provided by operating activities
    5,540       9,133  
                 
Cash flows from investing activities:
               
Purchases of available-for-sale investments
    (48,841 )     (43,974 )
Maturities of available-for-sale investments
    53,865       37,685  
Maturities of held-to-maturity investments
    10,000       -  
Proceeds from sales of property and equipment
    33       147  
Purchases of property, plant and equipment
    (2,504 )     (541 )
Net cash provided by (used in) investing activities
    12,553       (6,683 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock
    2,788       1,109  
Repurchases of common stock
    (6,534 )     -  
Net cash (used in) provided by financing activities
    (3,746 )     1,109  
                 
Effect of exchange rate changes on cash and cash equivalents
    32       5  
Net increase in cash and cash equivalents
    14,379       3,564  
Cash and cash equivalents, beginning of period
    40,711       49,702  
Cash and cash equivalents, end of period
  $ 55,090     $ 53,266  


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
5

 

 
OPLINK COMMUNICATIONS, INC.
 (Unaudited)

1. Description of Business. Oplink Communications, Inc. (“Oplink” or the “Company”) was incorporated in California in September 1995 and was later reincorporated in Delaware in September 2000. The Company is headquartered in Fremont, California and has manufacturing, design and research and development facilities in Zhuhai, Shanghai and Wuhan, China, in Taiwan and in Woodland Hills, California.
 
Oplink designs, manufactures and sells optical networking components and subsystems. Its products expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance, redirect light signals, ensure signal connectivity and provide signal transmission and reception within an optical network. Its products enable greater and higher quality bandwidth over longer distances, which reduces network congestion and transmission cost per bit. Its products also enable optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks.

Oplink offers its customers design, integration and optical manufacturing solutions (“OMS”) for the production and packaging of highly-integrated optical subsystems and turnkey solutions, based upon a customer’s specific product design and specifications. Oplink also offers solutions with lower levels of component integration for customers that place more value on flexibility than would be provided with turnkey solutions.

Oplink’s product portfolio also includes optical transmission products that broaden the addressable markets as well as the range of solutions that Oplink can now offer its customers. Oplink’s transmission products consist of a comprehensive line of high-performance fiber optic modules, including fiber optic transmitters, receivers, transceivers, and transponders, primarily for use in metropolitan area network (“MAN”), local area network (“LAN”), and fiber-to-the-home (“FTTH”) applications. Fiber optic modules are pre-assembled components that are used to build network equipment. Oplink’s transmission products convert electronic signals into optical signals and back into electronic signals, thereby facilitating the transmission of information over fiber optic communication networks.

Oplink also offers communications system equipment makers a broadened suite of precision-made, cost-effective, and reliable optical connectivity products to establish multiple-use, quick pluggable fiber links among network devices for bandwidth deployment, as well as in a test and measurement environment for a wide range of system design and service applications.

2. Basis of Presentation. The unaudited condensed consolidated financial statements included herein have been prepared by the Company in conformity with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, these unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company at September 30, 2010, the results of its operations for the three-month periods ended September 30, 2010 and 2009 and its cash flows for the three-month periods ended September 30, 2010 and 2009. The results of operations for the periods presented are not necessarily indicative of those that may be expected for the full year. The condensed consolidated financial statements presented herein have been prepared by management, without audit by independent auditors who do not express an opinion thereon, and should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2010 included in the Company’s Annual Report on Form 10-K.

The Company operates and reports using a fiscal year, which ends on the Sunday closest to June 30. Interim fiscal quarters end on the Sundays closest to each calendar quarter end. For presentation purposes, the Company presents each fiscal year as if it ended on June 30. The Company presents each of the fiscal quarters as if it ended

 
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on the last day of each calendar quarter. October 3, 2010 represents the Sunday closest to the period ended September 30, 2010. The quarters ended September 30, 2010 and 2009 consist of 14 and 13 weeks, respectively. The quarter ending December 31, 2010 is a 13-week fiscal period. Fiscal 2011 will consist of 53 weeks, one week more than a typical fiscal year.

The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. With the exception of the Company’s Optical Communication Products, Inc. (“OCP”) subsidiaries, the Company presents the financial information of its consolidated foreign operating subsidiaries in its consolidated financial statements utilizing accounts as of a date one month earlier than the accounts of its parent company, U.S. subsidiary and its non-operating non-U.S. subsidiaries to ensure timely reporting of consolidated results.

The Company conducts its business within one business segment and has no organizational structure dictated by product, service lines, geography or customer type.

There have been no significant changes in new accounting pronouncements or to the Company’s significant accounting policies that were disclosed in its Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

3. Risks and Uncertainties. There are a number of risks and uncertainties facing the Company that could have a material adverse effect on the Company’s financial condition, operating results or cash flows. These risks and uncertainties include, but are not limited to, a further and sustained downturn in the telecommunications industry or the overall economy in the United States and other parts of the world, possible further reductions in customer orders, intense competition in the Company’s target markets and potential pricing pressure that may arise from changing supply or demand conditions in the industry. In addition, the Company obtains most of its critical materials from a single or limited number of suppliers and generally does not have long-term supply contracts with them. The Company could experience discontinuation of key components, price increases and late deliveries from its suppliers. Also, substantially all of the Company’s manufacturing operations are located in China and are subject to laws and regulations of China. These and other risks and uncertainties facing the Company are described from time to time in the Company’s periodic reports filed with SEC.

4. Net Income Per Share. Basic net income per share is computed by dividing the net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period, if dilutive. Potentially dilutive common equivalent shares are composed of the incremental common shares issuable upon the exercise of stock options, the vesting of restricted stock units (“RSUs”) and purchases under the employee stock purchase plan. The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations and the antidilutive common stock equivalents excluded from the computations for the periods presented (in thousands, except per share data):

 
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Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Numerator:
           
Net income
  $ 5,580     $ 1,809  
                 
Denominator:
               
Weighted average shares outstanding - basic
    19,335       20,566  
Effect of dilutive potential common shares
    917       607  
Weighted average shares outstanding - diluted
    20,252       21,173  
                 
Net income per share - basic
  $ 0.29     $ 0.09  
Net income per share - diluted
  $ 0.28     $ 0.09  
                 
Antidilutive stock options and restricted stock units
               
not included in income per share calculation
    1,496       2,644  

5. Comprehensive Income. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The components of comprehensive income consist of foreign currency translation adjustments, foreign currency transaction gains and losses from intercompany transactions and balances for which settlement is not planned or anticipated in the foreseeable future, and changes in unrealized gains and losses on investments. For presentation purposes, cumulative translation adjustment includes foreign currency transaction gains and losses from intercompany transactions and balances for which settlement is not planned or anticipated in the foreseeable future. The balance of accumulated other comprehensive income is as follows (in thousands):

   
September 30,
   
June 30,
 
   
2010
   
2009
 
Accumulated other comprehensive income:
           
Cumulative translation adjustment
  $ 8,737     $ 8,241  
Unrealized gain on investments, net
    24       2  
    $ 8,761     $ 8,243  

The reconciliation of net income to comprehensive income for the three months ended September 30, 2010 and 2009 is as follows (in thousands):

   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
             
Net income
  $ 5,580     $ 1,809  
Change in cumulative translation adjustment
    496       (38 )
Change in unrealized gain on investments, net
    22       146  
                 
Total comprehensive income
  $ 6,098     $ 1,917  

6. Cash and Cash Equivalents. The Company’s cash equivalents at September 30, 2010 consist primarily of money market funds, unrestricted deposits and commercial paper. Cash includes amounts restricted for letters of credit for purchases and deposits for equipment maintenance of $383,000 and $322,000 at September 30, 2010 and June 30, 2010, respectively.

7. Short-Term and Long-Term Investments. The Company generally invests its excess cash in certificates of deposit, debt instruments of the U.S. Treasury, government agencies and corporations with strong credit ratings.
 
 
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Such investments are made in accordance with the Company’s investment policy, which establishes guidelines relative to diversification and maturities designed to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Available-for-sale investments are reported at their fair value. Unrealized gains and losses on these securities are reported as a separate component of accumulated other comprehensive income until realized. Held-to-maturity investments are reported at amortized costs.

Short-term and long-term investments at September 30, 2010 and June 30, 2010 consist of the following (in thousands):

   
September 30, 2010
 
               
Gross
   
Gross
       
   
Carrying
   
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Value
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Short-term investments:
                             
Certificates of deposit
  $ 7,296     $ 7,296     $ -     $ -     $ 7,296  
United States government agencies
    10,000       10,000       -       -       10,000  
United States Treasury
    52,940       52,911       29       -       52,940  
Corporate securities
    34,301       34,306       4       (9 )     34,301  
Total short-term investments
  $ 104,537     $ 104,513     $ 33     $ (9 )   $ 104,537  

   
June 30, 2010
 
               
Gross
   
Gross
       
   
Carrying
   
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Value
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Short-term investments:
                             
Certificates of deposit
  $ 6,823     $ 6,823     $ -     $ -     $ 6,823  
United States government agencies
    14,994       14,993       4       -       14,997  
United States Treasury
    41,946       41,912       34       -       41,946  
Corporate securities
    45,869       45,902       -       (33 )     45,869  
Total short-term investments
    109,632       109,630       38       (33 )     109,635  
                                         
Long-term investments:
                                       
United States government agencies
    10,000       10,000       2       -       10,002  
Total long-term investments
    10,000       10,000       2       -       10,002  
                                         
Total investments
  $ 119,632     $ 119,630     $ 40     $ (33 )   $ 119,637  

The amortized cost and fair value of available-for-sale and held-to-maturity investments at September 30, 2010 and June 30, 2010 are presented in the following tables (in thousands):

 
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September 30, 2010
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Available-for-sale investments:
                       
Certificates of deposit
  $ 7,296     $ -     $ -     $ 7,296  
United States government agencies
    10,000       -       -       10,000  
United States Treasury
    52,911       29       -       52,940  
Corporate securities
    34,306       4       (9 )     34,301  
Total available-for-sale investments
  $ 104,513     $ 33     $ (9 )   $ 104,537  

   
June 30, 2010
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Available-for-sale investments:
                       
Certificates of deposit
  $ 6,823     $ -     $ -     $ 6,823  
United States government agencies
    9,993       1       -       9,994  
United States Treasury
    41,912       34       -       41,946  
Corporate securities
    42,801       -       (33 )     42,768  
Total available-for-sale investments
    101,529       35       (33 )     101,531  
                                 
Held-to-maturity investments:
                               
Corporate securities
    3,101       -       -       3,101  
United States government agencies
    15,000       5       -       15,005  
Total held-to-maturity investments
    18,101       5       -       18,106  
                                 
Total investments
  $ 119,630     $ 40     $ (33 )   $ 119,637  

There were no gross realized gains (losses) on sales of available-for-sale or held-to-maturity securities for the three months ended September 30, 2010 or 2009. The unrealized losses on available-for-sale securities are primarily due to decreases in the fair value of debt securities as a result of changes in market interest rates. The Company has the intent and the ability to hold these securities for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the initial cost of the investment. The Company expects to realize the full value of all of these investments upon maturity. In addition, the Company does not believe that it will be required to sell these securities to meet its cash or working capital requirements or contractual or regulatory obligations. Therefore, the Company has determined that the gross unrealized losses on its available-for-sale securities at September 30, 2010 are temporary in nature. The following table provides a breakdown of the Company’s available-for-sale securities with unrealized losses as of September 30, 2010 (in thousands):

 
10

 
 
   
September 30, 2010
 
   
In Loss Position
 
   
< 12 months
 
         
Gross
 
   
Fair
   
Unrealized
 
   
Value
   
Losses
 
             
Available-for-sale investments:
           
Corporate securities
  $ 22,789     $ (9 )
Total available-for-sale investments in loss position
  $ 22,789     $ (9 )

The amortized cost and estimated fair value of debt securities at September 30, 2010 and June 30, 2010 by contractual maturities are shown below (in thousands):

   
September 30, 2010
   
June 30, 2010
 
   
Amortized
   
Estimated
   
Amortized
   
Estimated
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Available-for-sale investments:
                       
Due in one year or less
  $ 104,513     $ 104,537     $ 101,529     $ 101,531  
Total available-for-sale investments
    104,513       104,537       101,529       101,531  
                                 
Held-to-maturity investments:
                               
Due in one year or less
    -       -       8,101       8,101  
Due in one year to five years
    -       -       10,000       10,005  
Total held-to-maturity investments
    -       -       18,101       18,106  
                                 
Total investments
  $ 104,513     $ 104,537     $ 119,630     $ 119,637  

8. Fair Value Accounting. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. The Company applies the fair value hierarchy which has the following three levels of inputs to measure fair value:

·  
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

·  
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

·  
Level 3 inputs are unobservable inputs for the asset or liability.

The Company’s Level 1 financial assets generally include money market funds. The Company’s Level 2 financial assets generally include United States Treasury securities, United States government agency debt securities, certificates of deposit, commercial paper, and corporate bonds.

The Company bases the fair value of its financial assets on pricing from third party sources of market information obtained through the Company’s investment brokers. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information it receives from brokers. The Company’s investment

 
11

 
 
brokers obtain pricing data from a variety of industry standard data providers (e.g., Bloomberg), and rely on comparable pricing of other securities because the Level 2 securities that the Company holds are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities. There were no changes in valuation techniques or related inputs during the three months ended September 30, 2010.

Items Measured at Fair Value on a Recurring Basis

The Company did not have any financial liabilities that are measured at fair value at September 30, 2010. The following table presents the Company’s financial assets, excluding accrued interest components, which are measured at fair value on a recurring basis at September 30, 2010 and June 30, 2010, consistent with the fair value hierarchy (in thousands):

   
September 30, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                       
Money market funds
  $ 6,527     $ -     $ -     $ 6,527  
Certificates of deposit
    -       7,296       -       7,296  
United States government agencies
    -       10,000       -       10,000  
United States Treasury
    -       52,940       -       52,940  
Corporate securities
    -       61,936       -       61,936  
Total financial assets
  $ 6,527     $ 132,172     $ -     $ 138,699  
                                 
Financial liabilities
  $ -     $ -     $ -     $ -  

   
June 30, 2010
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                       
Money market funds
  $ 10,182     $ -     $ -     $ 10,182  
Certificates of deposit
    -       6,823       -       6,823  
United States government agencies
    -       9,994       -       9,994  
United States Treasury
    -       41,946       -       41,946  
Corporate securities
    -       50,768       -       50,768  
Total financial assets
  $ 10,182     $ 109,531     $ -     $ 119,713  
                                 
Financial liabilities
  $ -     $ -     $ -     $ -  

As of September 30, 2010, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). There were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the three months ended September 30, 2010.

Items Measured at Fair Value on a Nonrecurring Basis

 Certain assets that are subject to nonrecurring fair value measurement are not included in the table above. These assets include cost method investments in private companies. The Company did not record any other-than-temporary impairment charges for these investments during the three months ended September 30, 2010 or 2009.

9. Inventories. Inventories are stated at the lower of cost or market. Inventory cost is determined using standard costs, which approximates actual cost on a first-in, first-out basis. Inventories consist of (in thousands):

 
12

 
 
   
September 30,
   
June 30,
 
   
2010
   
2010
 
             
Inventories:
           
Raw materials
  $ 14,463     $ 13,744  
Work-in-process
    6,855       7,158  
Finished goods
    2,947       -  
Total
  $ 24,265     $ 20,902  

10. Goodwill and Intangible Assets, Net. The following table presents details of the intangible assets acquired as a result of acquisitions as of September 30, 2010 and June 30, 2010 (in thousands):

   
Estimated
                   
   
Useful Life
   
Gross
   
Accumulated
       
September 30, 2010
 
(in Years)
   
Amount
   
Amortization
   
Net
 
Technology
    4-6     $ 9,592     $ 6,677     $ 2,915  
Customer relationships
    3-7       5,671       4,225       1,446  
Trade name
    3-6       1,775       842       933  
Backlog
    1       188       128       60  
Total
          $ 17,226     $ 11,872     $ 5,354  

   
Estimated
                   
   
Useful Life
   
Gross
   
Accumulated
       
June 30, 2010
 
(in Years)
   
Amount
   
Amortization
   
Net
 
Technology
    4-6     $ 9,592     $ 6,099     $ 3,493  
Customer relationships
    3-7       5,671       3,882       1,789  
Trade name
    3-6       1,775       760       1,015  
Backlog
    1       188       105       83  
Total
          $ 17,226     $ 10,846     $ 6,380  

The following table presents details of the amortization expense of intangible assets as reported in the condensed consolidated statements of operations (in thousands):

   
Three Months Ended
 
   
September 30,
 
Reported as:
 
2010
   
2009
 
Cost of revenues
  $ 575     $ 542  
Operating expenses
    451       404  
Total
  $ 1,026     $ 946  

The future amortization of intangible assets is as follows (in thousands):
 
Fiscal years ending June 30,
 
Amount
 
2011
  $ 2,977  
2012
    1,309  
2013
    484  
2014
    247  
2015
    177  
After 2015
    160  
    $ 5,354  

 
13

 
 
The Company had goodwill of $572,000 on its condensed consolidated balance sheet at September 30, 2010 and June 30, 2010 as a result of the acquisitions of Emit Technology Co., Ltd and Oridus, Inc. in fiscal 2010. During the three months ended September 30, 2010, there were no indicators of impairment for the goodwill.

11. Accrued Liabilities.  Accrued liabilities consist of (in thousands):

   
September 30,
   
June 30,
 
   
2010
   
2010
 
Accrued liabilities:
           
Payroll and related expenses
  $ 4,492     $ 3,792  
Employee withholdings and related expenses
    1,033       531  
Accrued professional fees
    469       1,168  
Accrued sales commission
    562       486  
Accrued sales return
    600       541  
Accrued warranty
    500       421  
Advance deposits from customers
    304       480  
Other
    3,706       4,117  
    $ 11,666     $ 11,536  

12. Product Warranties. The Company provides reserves for the estimated cost of product warranties at the time revenue is recognized based on its historical experience of known product failure rates and expected material and labor costs to provide warranty services. The Company generally provides a one-year warranty on its products. Additionally, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Alternatively, if estimates are determined to be greater than the actual amounts necessary, the Company may reverse a portion of such provisions in future periods.

Changes in the warranty liability, which is included as a component of “Accrued liabilities” on the condensed consolidated balance sheets as disclosed in Note 11, is as follows (in thousands):

   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Balance at the beginning of the period
  $ 421     $ 371  
Accruals for warranties issued during the period
    133       59  
Accruals related to pre-existing warranties
               
including expirations and changes in estimates
    59       14  
Cost of warranty repair
    (113 )     (73 )
Balance at the end of the period
  $ 500     $ 371  

13. Stock-Based Compensation. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the employee requisite service period. The Company’s stock-based compensation is generally accounted for as an equity instrument. The effect of recording stock-based compensation for the three months ended September 30, 2010 and 2009 was as follows (in thousands, except per share data):

 
14

 
 
   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Stock-based compensation expense by type of award:
           
Employee stock options
  $ 613     $ 1,015  
Restricted stock awards
    912       398  
Employee stock purchase plan
    133       233  
Net change of amounts capitalized as inventory
    -       -  
Total stock-based compensation
    1,658       1,646  
Tax effect on stock-based compensation
    -       -  
Net effect on net income
  $ 1,658     $ 1,646  
                 
Effect on net income per share:
               
Basic
  $ (0.09 )   $ (0.08 )
Diluted
  $ (0.08 )   $ (0.08 )

Forfeitures are estimated at the time of grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

During the three months ended September 30, 2010 and 2009, the Company granted 44,000 and 26,000 stock options, respectively, with an estimated total grant-date fair value of $347,000 and $169,000, respectively. The Company estimated that the stock compensation expense for the stock options granted in the three months ended September 30, 2010 and 2009 not expected to vest was $42,000 and $23,000, respectively.

In addition, the Company granted 221,800 and 479,733 restricted stock awards (“RSAs”) and restricted stock units (“RSUs”), with a total grant-date fair value of $4.2 million and $6.7 million during the three months ended September 30, 2010 and 2009, respectively. The Company estimated that the stock compensation expense for the RSUs granted in the three months ended September 30, 2010 and 2009 not expected to vest was $577,000 and $1.2 million, respectively.

As of September 30, 2010, the unrecognized stock compensation expense related to stock options to purchase Oplink common stock was $3.7 million which will be recognized over an estimated weighted average amortization period of 2.0 years. The unrecognized stock compensation expense related to RSUs was $7.1 million which will be recognized over an estimated weighted average amortization period of 3.1 years. Approximately $8,000 of stock compensation was capitalized as inventory at September 30, 2010 and June 30, 2010.

Valuation Assumptions

The Company estimates the fair value of stock options and purchase rights under the Company’s employee stock purchase plan using a Black-Scholes valuation model. The fair value of each option grant is estimated on the date of grant using the Black-Scholes valuation model and the straight-line attribution approach with the following weighted-average assumptions:
 
   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Risk-free interest rate
    1.38 %     2.49 %
Expected term
 
4.6 years
   
4.6 years
 
Expected dividends
    0 %     0 %
Volatility
    49 %     54 %

 
15

 
 
No purchase rights were granted under the Company’s employee stock purchase plan during the three months ended September 30, 2010 or 2009.

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded Treasury securities for terms equal to the expected term of the options or purchase rights. The expected term calculation for stock options is based on the observed historical option exercise behavior and post-vesting forfeitures of options by the Company’s employees. The expected term assumption for purchase rights is based on the average exercise date for the four purchase periods in each 24-month offering period.

The weighted-average grant date fair value for options to purchase Oplink common stock granted under the Company’s stock option plans was $7.88 and $6.49 for the three months ended September 30, 2010 and 2009, respectively.

Equity Incentive Program

Oplink adopted the 2000 Equity Incentive Plan (the “2000 Plan”) in July 2000. The 2000 Plan was terminated in November 2009 immediately upon the effectiveness of the Company’s new 2009 Equity Incentive Plan (the “2009 Plan”). No further awards will be granted under the 2000 Plan. However, the 2000 Plan will continue to govern awards previously granted under that plan.

The 2009 Plan was adopted by the Company in September 2009 and became effective upon approval by the Company’s stockholders at the annual meeting held in November 2009. The 2009 Plan provides for the grant of equity awards to employees, directors and consultants. These equity awards include stock options, RSAs, RSUs, stock appreciation rights, performance units, and performance shares. The maximum aggregate number of shares of common stock that may be issued under the 2009 Plan is 2,500,000 shares, plus any shares subject to equity awards granted under 2000 Plan that expire or otherwise terminate without having been exercised in full, or that are forfeited to or repurchased by the Company. Shares subject to “full value” awards (RSUs, RSAs, performance shares and performance units) will count against the 2009 Plan’s share reserve as 1.3 shares for every one share subject to such awards. Accordingly, if such awards are forfeited or repurchased by the Company, 1.3 times the number of shares forfeited or repurchased will return to the 2009 Plan. The maximum term of stock options and stock appreciation rights under the 2009 Plan is 7 years.

The following table summarizes activity under the equity incentive plans for the indicated periods:


         
Option Awards
   
Stock Awards
 
               
Weighted
   
Restricted
   
Weighted
 
   
Shares
   
Number of
   
Average
   
Stock
   
Average
 
   
Available
   
Options
   
Exercise
   
Awards/Units
   
Grant Date
 
   
for Grant
   
Outstanding
   
Price
   
Outstanding
   
Fair Value
 
Balance, June 30, 2010
    2,413,434       3,458,602     $ 14.02       478,733     $ 13.96  
Granted
    (332,340 )     44,000       18.87       221,800       18.83  
Exercised or vested
    -       (193,746 )     14.39       (20,000 )     18.43  
Canceled (1)
    20,276       (76,870 )     44.05       (4,500 )     18.87  
Balance, September 30, 2010
    2,101,370       3,231,986     $ 13.35       676,033     $ 16.48  
 
(1)  
The number of shares subject to option and stock awards canceled during the three months ended September 30, 2010 include 62,444 shares subject to option awards granted under the Company’s 1998 Stock Option Plan and the OCP stock option plan, which shares
were not eligible to be re-granted under the 2009 Plan.
 
The options outstanding and exercisable at September 30, 2010 were in the following exercise price ranges:

 
16

 
 
   
Options Outstanding
   
Options Vested and Exercisable
 
   
at September 30, 2010
   
at September 30, 2010
 
         
Weighted
                     
Weighted
             
         
Average
                     
Average
             
         
Remaining
   
Weighted
   
Aggregate
         
Remaining
   
Weighted
   
Aggregate
 
         
Contractual
   
Average
   
Intrinsic
         
Contractual
   
Average
   
Intrinsic
 
   
Number
   
Life
   
Exercise
   
Value
   
Number
   
Life
   
Exercise
   
Value
 
Range of Exercise Price
 
Outstanding
   
(in Years)
   
Price
   
(in thousands)
   
Outstanding
   
(in Years)
   
Price
   
(in thousands)
 
                                                 
$1.00 - $5.00     406,904       2.1     $ 4.62     $ 6,157       406,904       2.1     $ 4.62     $ 6,157  
$5.01 - $8.00     379,197       2.7       5.71       5,324       351,701       2.3       5.56       4,990  
$8.01 - $10.00     27,367       1.1       8.76       301       27,367       1.1       8.76       301  
$10.01 - $11.00     411,174       7.2       10.09       3,971       240,060       6.9       10.09       2,318  
$11.01 - $13.00     195,888       6.7       12.15       1,489       119,191       6.1       12.29       889  
$13.01 - $15.00     563,565       6.6       13.77       3,368       336,110       6.2       13.60       2,069  
$15.01 - $18.00     264,888       6.4       16.80       780       160,617       5.4       17.35       386  
$18.01 - $20.00     224,023       4.0       18.88       194       179,404       3.3       18.89       154  
$20.01 - $27.00     747,416       5.7       20.24       -       746,711       5.7       20.24       -  
$28.00 - $158.00     11,564       0.8       67.09       -       11,564       0.8       67.09       -  
      3,231,986       5.2     $ 13.35     $ 21,584       2,579,629       4.6     $ 13.41     $ 17,264  
                                                                 
Vested and expected to vest
    3,193,122       5.2     $ 13.35     $ 21,349                                  

As of September 30, 2010 and June 30, 2010, options to purchase 2,579,629 and 2,742,536 shares at weighted average exercise prices of $13.41 and $14.35 per share, respectively, were vested and exercisable.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $19.75 as of October 1, 2010, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of September 30, 2010 was 2,473,006. The total intrinsic value of options exercised during the three months ended September 30, 2010 and 2009 was $901,000 and $795,000, respectively. The total cash received by the Company from employees as a result of employee stock option exercises during the three months ended September 30, 2010 and 2009 was approximately $2.8 million and $1.1 million, respectively.

The aggregate intrinsic value and weighted average remaining contractual term of RSUs outstanding as of September 30, 2010 was $13.3 million and 1.9 years, respectively. There were no RSUs vested as of September 30, 2010.

The aggregate intrinsic value and weighted average remaining contractual term of RSUs expected to vest as of September 30, 2010 was $11.9 million and 1.8 years, respectively. The number of RSUs that are expected to vest is 602,488 shares.

The Company settles employee stock option exercises and RSUs with newly issued common shares.

Employee Stock Purchase Plan

The Company’s employee stock purchase plan authorizes the granting of stock purchase rights to eligible employees during an offering period not more than 27 months with exercise dates approximately every six months. Shares are purchased through employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the first day of each offering period or the date of purchase. No shares were purchased under the employee stock purchase plan during the three months ended September 30, 2010 or 2009. As of September 30, 2010, 1,676,785 shares were available for issuance under the Company’s employee stock purchase plan.

14. Repurchase of Common Stock. On June 1, 2010, the Company announced a program to repurchase up to $40 million of the Company’s common stock. Repurchases under the program will be made in open market or privately negotiated transactions in compliance with Securities and Exchange Commission Rule

 
17

 
 
10b-18, subject to market conditions, applicable legal requirements and other factors. $5.3 million of its common stock was repurchased under this repurchase plan during the three months ended September 30, 2010. As of September 30, 2010, repurchases of $10.8 million have been made under this repurchase program.

15. Recent Accounting Pronouncements. In January 2010, the FASB issued additional disclosure requirements for fair value measurements. The guidance requires an entity to disclose significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers. The additional requirements became effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this new guidance did not have an impact on the Company’s consolidated financial position, results of operations or cash flows as this guidance relates only to additional disclosures. In addition, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The changes are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company does not believe that the adoption will have an impact on the Company’s consolidated financial position, results of operations or cash flows as this guidance relates only to additional disclosures.

In various areas, including revenue recognition, stock option and purchase accounting, accounting standards and practices continue to evolve. The Company believes that it is in compliance with all of the rules and related guidance as they currently exist. However, any changes to accounting principles generally accepted in the United States of America in these areas could impact the future accounting of its operations.

16. Commitments and Contingencies.
 
Contractual Obligations
 
Contractual obligations as of September 30, 2010 have been summarized below (in thousands):
 
         
Contractual Obligations Due by Period
 
Contractual Obligations
 
Total
   
Less than 1 year
   
1-3 years
   
4-5 years
   
After 5 years
 
Purchase obligations
  $ 24,210     $ 24,207     $ 3     $ -     $ -  
Operating leases
    289       234       55       -       -  
Capital expenditure
    108       86       22       -       -  
Total
  $ 24,607     $ 24,527     $ 80     $ -     $ -  

Litigation
 
Finisar Corporation v. Source Photonics, Inc., et al.

On January 5, 2010, Finisar Corporation, or Finisar, filed a complaint in the United States District Court for the Northern District of California against Source Photonics, Inc., MRV Communications, Inc., NeoPhotonics Corporation and the Company, or collectively, the co-defendants. In the complaint, Finisar alleged infringement of certain of its U.S. patents arising from the co-defendants’ respective manufacture, importation, use, sale of or offer to sell certain optical transceiver products in the United States. Finisar sought to recover unspecified damages, up to treble the amount of actual damages, together with attorneys’ fees, interest and costs. Finisar alleged that at least some of the patents asserted are a part of certain digital diagnostic standards for optoelectronics transceivers and, therefore, are being utilized in such digital diagnostic standards. On March 23, 2010, the Company filed an answer to the complaint and counterclaims against Finisar. On May 5, 2010, the court dismissed without prejudice all co-defendants (including the Company) except Source Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each co-defendant. This dismissal without prejudice does not prevent Finisar from bringing a new similar lawsuit against the Company. On May 20, 2010, the Company and Finisar entered into a standstill agreement, agreeing not to refile any claims against each other until at least 90 days after a resolution of the litigation between Source Photonics and Finisar.

On September 10, 2010, Source Photonics, Inc., and its parent company MRV Communications, Inc., entered into a Settlement and Cross License Agreement with Finisar. MRV Communications filed a Form 8-K with SEC on

 
18

 
 
September 13, 2010 disclosing the settlement terms and furnishing a copy of the settlement agreement. Under the terms of the standstill agreement between the Company and Finisar, Finisar may file a new patent lawsuit against the Company any time after December 10, 2010. If Finisar brings a new similar lawsuit against the Company, and if the Company is unsuccessful in its defense of the Finisar patent infringement claims, a license to use the allegedly infringing technology may not be available to the Company on commercially reasonable terms and therefore may limit or preclude the Company from competing in the market for optical transceivers in the United States, which could materially harm its business.

Although the Company believes that it has meritorious defenses to the infringement allegations and intends to defend any new similar lawsuit vigorously, 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, a new lawsuit, if brought, would be likely to divert the efforts and attention of the Company’s management and technical personnel, which could harm its business.

IPO Securities Litigation

In November 2001, Oplink and certain of its officers and directors were named as defendants in a class action shareholder complaint filed in the United States District Court for the Southern District of New York. In the amended complaint, the plaintiffs alleged that Oplink, certain of Oplink’s officers and directors and the underwriters of Oplink’s initial public offering (“IPO”) violated Section 11 of the Securities Act of 1933 based on allegations that Oplink’s registration statement and prospectus failed to disclose material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. Similar complaints were filed by plaintiffs against hundreds of other public companies that went public in the late 1990s and early 2000s and their IPO underwriters (collectively, the “IPO Lawsuits”). During the summer of 2008, the parties engaged in a formal mediation process to discuss a global resolution of the IPO Lawsuits. Ultimately, the parties reached an agreement to settle all 309 cases against all defendants, and entered into a settlement agreement in April 2009. The settlement provides for a $586 million recovery in total, divided among the 309 cases. Oplink’s share of the settlement is roughly $327,458, which is the amount Oplink will be required to pay if the settlement is finally approved. In October 2009, the Court certified the settlement class in each case and granted final approval to the settlement. A number of appeals have been filed with the Second Circuit Court of Appeals, challenging the fairness of the settlement. A number of shareholder plaintiffs have also filed petitions for leave to appeal the class certification portion of Judge Scheindlin’s ruling. These appeals and petitions are pending.

IPO 16(b) Claim

In October 2007, Vanessa Simmonds filed in the United States District Court for the Western District of Washington a Complaint for Recovery of Short Swing Profits Under Section 16(b) of the Securities Exchange Act of 1934 against Bank of America and JP Morgan Chase & Company as defendants, and against Oplink as a nominal defendant. The complaint did not seek recovery of damages or other relief against Oplink. The Complaint alleged that in the years 2000 and 2001 the underwriters and unnamed officers, directors and principal shareholders of Oplink acted as a “group” by coordinating their efforts to undervalue the IPO price of Oplink and to thereafter inflate the aftermarket price throughout the six month lock-up period. The Complaint further alleges that the underwriters profited by (a) sharing in profits of customers to whom they had made IPO allocations, (b) allocating shares of Oplink to insiders at other companies from whom the underwriters expected to receive additional work in return; and (c) by creating the opportunity (through the alleged laddering practices) for Oplink’s directors, officers and other insiders to profit through their sale of stock after the lock-up period in return for future business for the underwriter.

The complaint against Oplink and its underwriters was one of a total of 54 nearly identical lawsuits filed by Ms. Simmonds in October 2007 against companies and underwriters that had completed IPOs in the early 2000s. All of these cases were transferred to one judge at the U.S.District Court. In March 2009, the judge dismissed the complaints, ruling that the plaintiff made an insufficient demand on the issuers and that the cases did not merit tolling the statute of limitations. The plaintiff filed notices of appeal in each of the 54 cases in April 2009, and the

 
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appeals were consolidated in June 2009 in the Ninth Circuit Court of Appeals. Each of Ms. Simmonds and the issuer and underwriter defendants has submitted their appeal briefs to the court. Oral arguments on the appeals were held on October 5, 2010. No ruling on the appeals has yet been issued.

Other Matters

The Company is subject to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on Oplink’s consolidated financial position, results of operations or cash flows.

17. Segment Reporting. The Company has determined that it has one reportable segment: fiber optic component and subsystem product sales. This segment consists of organizations located in the United States and China, which develop, manufacture, and/or market fiber optic networking components.
 
The geographic breakdown of revenues by customers’ bill-to location is as follows (in thousands):
 

   
Three Months Ended
 
   
September 30,
 
   
2010
   
2009
 
Revenues:
           
United States
  $ 17,967     $ 13,417  
China
    11,058       7,846  
Europe
    10,014       4,975  
Japan
    4,550       3,661  
Canada
    1,939       810  
Asia-Pacific (excluding China and Japan)
    4,112       2,856  
Totals
  $ 49,640     $ 33,565  

Top five customers, although not the same five customers for each period, together accounted for 55% and 58% of revenues for the three months ended September 30, 2010 and 2009, respectively.

The breakdown of property, plant and equipment, net by geographical location is as follows (in thousands):

   
September 30,
   
June 30,
 
   
2010
   
2010
 
             
United States
  $ 5,874     $ 5,959  
China
    24,542       23,325  
Asia-Pacific (excluding China)
    4,179       4,079  
Totals
  $ 34,595     $ 33,363  

18. Income Taxes. The Company accounts for income taxes under the liability method, which recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts, and for net operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance against deferred tax assets when it is more likely than not that such assets will not be realized.

The Company accounts for uncertain tax positions in accordance with the authoritative guidance on income taxes under which the Company may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as
 
 
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a component of income tax expense.

As of June 30, 2010, the Company’s total unrecognized tax benefits were $5,232,000 of which $2,832,000, if recognized, would affect the Company’s effective tax rate. There is no significant change for the three months ended September 30, 2010. The Company had accrued interest and penalties related to unrecognized tax benefits of approximately $668,000 at September 30, 2010.

Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, California, and China. The tax years 2004 to 2009 remain open in several jurisdictions.

19. Subsequent Event. The Company has reviewed and evaluated events subsequent to September 30, 2010 through the date that the condensed consolidated financial statements were issued. On October 14, 2010, the Company entered into a contract to purchase a facility in Wuhan, China, totaling approximately 86,000 square feet for approximately $3.6 million. The facility will be used for manufacturing and research and development.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions, or future strategies that are signified by the words “expects,” “anticipates,” “intends,” “believes,” or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, prospective investors should carefully consider the information set forth below under the caption “Risk Factors” in addition to the other information set forth herein. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes in this report, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, related financial information and audited consolidated financial statements contained in our Form 10-K for the fiscal year ended June 30, 2010 as filed with the Securities and Exchange Commission on September 10, 2010.

Overview

We design, manufacture and sell optical networking components and subsystems. Our products expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance, redirect light signals, ensure bandwidth distribution connectivity and provide signal transmission and reception within an optical network. Our products enable greater and higher quality bandwidth over longer distances, which reduces network congestion and transmission cost per bit. Our products also enable optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks.

We offer our customers design, integration and optical manufacturing solutions (“OMS”) for the production and packaging of highly-integrated optical subsystems and turnkey solutions, based upon a customer’s specific product design and specifications. We also offer solutions with lower levels of component integration for customers that place more value on flexibility than would be provided with turnkey solutions.

 
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Use of Estimates and Critical Accounting Policies

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure. On an ongoing basis, we evaluate our estimates, including those related to product returns, accounts receivable, inventories, intangible assets, warranty obligations, restructuring accruals, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis and by the audit committee of our board of directors at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies and our procedures relating to these policies, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

We have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations. A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. These policies may require us to make assumptions about matters that are highly uncertain at the time of the estimate, and different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations. Our critical accounting policies cover the following areas:

·  
revenue recognition and product returns;

·  
depreciation and amortization;

·  
warranty obligations;

·  
allowance for doubtful accounts;

·  
excess and obsolete inventory;

·  
impairment of investments;

·  
impairment of long-lived asset;

·  
impairment of goodwill and other intangible assets;

·  
fair value accounting;

·  
business combination;

·  
income taxes;

·  
stock compensation; and

·  
loss contingencies.
 
This is not a comprehensive list of all of our accounting policies.
 
 
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As of the date of the filing of this quarterly report, we believe there have been no material changes to our critical accounting policies and estimates during the three months ended September 30, 2010 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 as filed with the SEC on September 10, 2010. Additional information about these critical accounting policies may be found in the “Management’s Discussion & Analysis of Financial Condition and Results of Operations” section included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Results of Operations

Revenues
 
   
Three Months Ended
         
Percentage
 
   
September 30,
   
Change
   
Change
 
   
2010
   
2009
             
   
(In thousands, except percentages)
 
                         
Revenue
  $ 49,640     $ 33,565     $ 16,075       47.9 %
 
The increase in revenues for the three months ended September 30, 2010 compared to the three months ended September 30, 2009 was mainly due to increased unit shipments in all our major product categories, in particular our ROADM optical switching and routing product, all-optical dense and coarse wave-length division multiplexing product, and optical amplification product, partially offset by a decline in average selling prices, which is characteristic of the industry. We acquired Emit Technology Co., Ltd (“Emit”) in the third quarter of fiscal 2010. As a result, the acquisition of Emit contributed approximately $2.7 million of the increase in the revenues. We believe that the increase in shipments was largely due to a general increase in spending activities in the telecommunications industry.

Historically, a relatively small number of customers have accounted for a significant portion of our revenues. Our top five customers, although not necessarily the same five customers for each period together accounted for 55% and 58% of revenues for the three months ended September 30, 2010 and 2009, respectively.

For the second quarter of fiscal 2011, we expect our revenues to be in the range of $50 million to $53 million.  While our revenue has been increasing for the past few quarters, we are currently seeing some softness in orders for certain of our product lines, and we do not know whether the increasing revenue trend will continue for the third quarter of fiscal 2011.

Gross Profit

   
Three Months Ended
         
Percentage
 
   
September 30,
   
Change
   
Change
 
   
2010
   
2009
             
   
(In thousands, except percentages)
 
                         
Gross profit
  $ 16,121     $ 9,832     $ 6,289       64.0 %
Gross profit margin
    32.5 %     29.3 %                

Gross profit increased for the three months ended September 30, 2010 compared to the three months ended September 30, 2009 primarily reflecting a higher revenue and higher utilization of previously reserved inventory, partially offset by higher material costs as a result of increased revenues and higher manufacturing overhead expenses and labor costs as a result of an increase in employee headcount and employee compensation expenses in China.

 
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Our gross profit margin increased for the three months ended September 30, 2010 compared to the three months ended September 30, 2009 mainly due to lower material costs as a percentage of revenues, lower manufacturing overhead expenses as a percentage of revenues, and higher utilization of previously reserved inventory, partially offset by higher direct labor costs as a percentage of revenues.
 
We expect our gross profit margin in the second quarter of fiscal 2011 to remain at a similar level as the first quarter of fiscal 2011.
 
Research and Development
 
   
Three Months Ended
         
Percentage
 
   
September 30,
   
Change
   
Change
 
   
2010
   
2009
             
   
(In thousands, except percentages)
 
                         
Research and development
  $ 3,733     $ 2,494     $ 1,239       49.7 %

Research and development expenses increased $1.2 million for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The increase was primarily due to higher salary expenses and employee related compensation expenses associated with an increase in headcount.

We believe that developing customer solutions at the prototype stage is critical to our strategic product development objectives. In order to meet the changing requirements of our customers, we will need to fund investments in several concurrent product development projects. We expect our research and development expenses, excluding stock compensation expense, to increase slightly in the second quarter of fiscal 2011 compared to the first quarter of fiscal 2011. The research and development process can be expensive and prolonged and entails considerable uncertainty. As such, we can make no assurances that any of the products we plan to develop will be commercially successful, and there is a substantial risk that our research and development expenditures will fail to generate any meaningful return of the investment of such resources.

Sales and Marketing
 
   
Three Months Ended
         
Percentage
 
   
September 30,
   
Change
   
Change
 
   
2010
   
2009
             
   
(In thousands, except percentages)
 
                         
Sales and marketing
  $ 2,887     $ 2,414     $ 473       19.6 %

Sales and marketing expenses for the three months ended September 30, 2010 increased slightly compared to the three months ended September 30, 2009. The slight increase primarily reflected higher salary expenses driven by an increase in headcount and higher sales commission expenses as a result of increased revenues. We expect our sales and marketing expenses, excluding stock compensation expense, to remain at a similar level in the second quarter of fiscal 2011 as the first quarter of fiscal 2011.

 
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General and Administrative
 
   
Three Months Ended
         
Percentage
 
   
September 30,
   
Change
   
Change
 
   
2010
   
2009
             
   
(In thousands, except percentages)
 
                         
General and administrative
  $ 2,646     $ 2,671     $ (25 )     -0.9 %
 
Excluding the impact of stock compensation expense, general and administrative expenses increased $147,000 for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The increase was mainly due to higher payroll and employee related expenses, partially offset by lower professional fees. We expect our general and administrative expenses, excluding stock compensation expense, to decrease slightly in the second quarter of fiscal 2011 compared to the first quarter of fiscal 2011.

Stock Compensation Expense
 
   
Three Months Ended
         
Percentage
 
   
September 30,
   
Change
   
Change
 
   
2010
   
2009