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 1934For the quarterly period ended April 3, 2011or£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 May 6, 2011 was 20,651,083.














OPLINK COMMUNICATIONS, INC.


TABLE OF CONTENTSPagePART I. FINANCIAL INFORMATIONItem 1.
Financial Statements (unaudited):Condensed Consolidated Balance Sheets – March 31, 2011 and June 30, 2010
3Condensed Consolidated Statements of Operations – Three and nine months ended March 31, 2011 and 2010
4Condensed Consolidated Statements of Cash Flows – Nine months ended March 31, 2011 and 2010
5Notes to Condensed Consolidated Financial Statements
6Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29Item 4.
Controls and Procedures
30PART II. OTHER INFORMATIONItem 1.
Legal Proceedings
31Item 1A.
Risk Factors
31Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
33Item 3.
Defaults Upon Senior Securities
33Item 4.
(Removed and Reserved)
33Item 5.
Other Information
33Item 6.
Exhibits
34SIGNATURES
35EX-31.1EX-31.2EX-32.1EX-32.2





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, April 3, 2011, but throughout this report those periods will be referred to as having ended on June 30, 2010 and March 31, 2011, respectively.





2
 Table of Contents




PART I.  FINANCIAL INFORMATION





ITEM 1 - FINANCIAL STATEMENTS





OPLINK COMMUNICATIONS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)





March 31,


June 30,2011


2010 (1)(In thousands, except shareand per share data)ASSETSCurrent assets:Cash and cash equivalents

$
74,687


$
40,711Short-term investments


121,282



109,632Accounts receivable, net


36,146



29,728Inventories


22,289



20,902Prepaid expenses and other current assets


7,118



7,659Total current assets


261,522



208,632Long-term investments


-



10,000Property, plant and equipment, net


35,982



33,363Goodwill and intangible assets, net


3,874



6,952Other assets


623



651Total assets

$
302,001


$
259,598LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
11,446


$
14,369Accrued liabilities


12,637



11,536Deferred revenues


119



-Income taxes payable


878



121Total current liabilities


25,080



26,026Income taxes payable, non-current


4,282



3,415Other non-current liabilities


1,688



1,508Total liabilities


31,050



30,949Commitments and contingencies(Note 16)


-



-Stockholders' equity:Common stock, $0.001 par value, 34,000,000 shares authorized; 20,649,989 and 19,582,471 sharesissued and outstanding as of March 31, 2011 and June 30, 2010, respectively


21



20Additional paid-in capital


459,379



443,825Treasury stock, at cost (82,514 shares as of June 30, 2010)


-



(1,196
)Accumulated other comprehensive income


11,538



8,243Accumulated deficit


(199,987
)


(222,243
)Total stockholders’ equity


270,951



228,649Total liabilities and stockholders' equity

$
302,001


$
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
 Table of Contents





OPLINK COMMUNICATIONS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)








Three Months Ended


Nine Months EndedMarch 31,


March 31,2011


2010


2011


2010Revenues

$
53,471


$
33,623


$
155,136


$
99,931Cost of revenues


34,188



22,643



100,623



68,107Gross profit


19,283



10,980



54,513



31,824Operating expenses:Research and development


4,665



2,815



12,705



7,822Sales and marketing


3,107



2,406



8,918



7,104General and administrative


2,456



2,575



7,367



7,970Amortization of intangible assets


451



410



1,353



1,217Gain on sale or disposal of assets


(24
)


(4
)


(107
)


(342
)Total operating expenses


10,655



8,202



30,236



23,771Income from operations


8,628



2,778



24,277



8,053Interest and other income, net


180



292



291



759Income before provision for income taxes


8,808



3,070



24,568



8,812Provision for income taxes


(620
)


(516
)


(2,312
)


(1,312
)Net income

$
8,188


$
2,554


$
22,256


$
7,500Net income per share:Basic

$
0.40


$
0.12


$
1.13


$
0.36Diluted

$
0.38


$
0.12


$
1.07


$
0.35Shares used in per share calculation:Basic


20,308



20,907



19,723



20,754Diluted


21,595



21,792



20,792



21,563




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





4
 Table of Contents





OPLINK COMMUNICATIONS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months EndedMarch 31,2011


2010(In thousands)Cash flows from operating activities:Net income

$
22,256


$
7,500Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of property, plant and equipment


3,979



4,918Amortization of intangible assets


3,078



2,849Stock-based compensation expense


4,239



4,556Amortization of premium on investments


289



290Gain on sale or disposal of assets


(107
)


(342
)Other


325



(13
)Change in assets and liabilities:Accounts receivable, net


(5,900
)


1,248Inventories


(269
)


(5,011
)Prepaid expenses and other current assets


704



(3,144
)Other assets


54



17Accounts payable


(2,491
)


2,985Accrued liabilities and other liabilities


3,129



1,101Net cash provided by operating activities


29,286



16,954Cash flows from investing activities:Purchases of available-for-sale investments


(136,275
)


(152,816
)Maturities of available-for-sale investments


124,646



142,098Purchases of held-to-maturity investments


-



(15,000
)Maturities of held-to-maturity investments


10,000



5,000Proceeds from sales of property, plant and equipment


272



371Purchases of property, plant and equipment


(5,577
)


(2,407
)Acquisiton of business, net of cash acquired


-



(3,698
)Net cash used in investing activities


(6,934
)


(26,452
)Cash flows from financing activities:Proceeds from issuance of common stock


17,849



3,827Repurchases of common stock


(6,534
)


-Net cash provided by financing activities


11,315



3,827Effect of exchange rate changes on cash and cash equivalents


309



26Net increase (decrease) in cash and cash equivalents


33,976



(5,645
)Cash and cash equivalents, beginning of period


40,711



49,702Cash and cash equivalents, end of period

$
74,687


$
44,057




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





5
 Table of Contents





OPLINK COMMUNICATIONS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(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 March 31, 2011, the results of its operations for the three and nine months ended March 31, 2011 and 2010 and its cash flows for the nine months ended March 31, 2011 and 2010. 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 on the last day of each calendar quarter. April 3, 2011 represents the Sunday closest to the period ended March 31, 2011. Fiscal 2011 consists of 53 weeks, one week more than a typical fiscal year.





6
 Table of Contents





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.





Certain items previously reported in prior periods’ consolidated financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no effect on previously reported total assets, stockholders’ equity, or net income (loss).





There have been no significant changes 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, the Company’s reliance on a small number of customers for a substantial portion of its revenues, possible 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 and a downturn in the telecommunications industry or the overall global economy. 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):




Three Months Ended


Nine Months EndedMarch 31,


March 31,2011


2010


2011


2010Numerator:Net income

$
8,188


$
2,554


$
22,256


$
7,500Denominator:Weighted average shares outstanding - basic


20,308



20,907



19,723



20,754Effect of dilutive potential common shares


1,287



885



1,069



809Weighted average shares outstanding - diluted


21,595



21,792



20,792



21,563Net income per share - basic

$
0.40


$
0.12


$
1.13


$
0.36Net income per share - diluted

$
0.38


$
0.12


$
1.07


$
0.35Antidilutive stock options and restricted stock unitsnot included in income per share calculation


80



1,694



927



1,919






7
 Table of Contents




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):




March 31,


June 30,2011


2010Accumulated other comprehensive income:Cumulative translation adjustment

$
11,514


$
8,241Unrealized gain on investments, net


24



2$
11,538


$
8,243




The reconciliation of net income to comprehensive income for the three and nine months ended March 31, 2011 and 2010 is as follows (in thousands):




Three Months Ended


Nine Months EndedMarch 31,


March 31,2011


2010


2011


2010Net income

$
8,188


$
2,554


$
22,256


$
7,500Change in cumulative translation adjustment


1,070



1



3,273



(64
)Change in unrealized gain on investments, net


3



(22
)


22



61Total comprehensive income

$
9,261


$
2,533


$
25,551


$
7,497




6. Cash and Cash Equivalents. The Company’s cash equivalents at March 31, 2011 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 $304,000 and $322,000 at March 31, 2011 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. 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 March 31, 2011 and June 30, 2010 consist of the following (in thousands):





March 31, 2011Gross


GrossCarrying


Amortized


Unrealized


Unrealized


EstimatedValue


Cost


Gains


Losses


Fair ValueShort-term investments:Certificates of deposit

$
9,689


$
9,689


$
-


$
-


$
9,689United States government agencies


9,022



9,021



1



-



9,022United States Treasury


57,954



57,929



25



-



57,954Corporate securities


44,617



44,619



-



(2
)


44,617Total short-term investments

$
121,282


$
121,258


$
26


$
(2
)

$
121,282






8
 Table of Contents






June 30, 2010Gross


GrossCarrying


Amortized


Unrealized


Unrealized


EstimatedValue


Cost


Gains


Losses


Fair ValueShort-term investments:Certificates of deposit

$
6,823


$
6,823


$
-


$
-


$
6,823United States government agencies


14,994



14,993



4



-



14,997United States Treasury


41,946



41,912



34



-



41,946Corporate securities


45,869



45,902



-



(33
)


45,869Total short-term investments


109,632



109,630



38



(33
)


109,635Long-term investments:United States government agencies


10,000



10,000



2



-



10,002Total long-term investments


10,000



10,000



2



-



10,002Total 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 March 31, 2011 and June 30, 2010 are presented in the following tables (in thousands):




March 31, 2011Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueAvailable-for-sale investments:Certificates of deposit

$
9,689


$
-


$
-


$
9,689United States government agencies


9,021



1



-



9,022United States Treasury


57,929



25



-



57,954Corporate securities


44,619



-



(2
)


44,617Total available-for-sale investments


121,258



26



(2
)


121,282Total held-to-maturity investments


-



-



-



-Total investments

$
121,258


$
26


$
(2
)

$
121,282







June 30, 2010Gross


GrossAmortized


Unrealized


Unrealized


EstimatedCost


Gains


Losses


Fair ValueAvailable-for-sale investments:Certificates of deposit

$
6,823


$
-


$
-


$
6,823United States government agencies


9,993



1



-



9,994United States Treasury


41,912



34



-



41,946Corporate securities


42,801



-



(33
)


42,768Total available-for-sale investments


101,529



35



(33
)


101,531Held-to-maturity investments:Corporate securities


3,101



-



-



3,101United States government agencies


15,000



5



-



15,005Total held-to-maturity investments


18,101



5



-



18,106Total investments

$
119,630


$
40


$
(33
)

$
119,637






9
 Table of Contents





There were no gross realized gains (losses) on sales of available-for-sale or held-to-maturity securities for the three and nine months ended March 31, 2011 or 2010. 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 March 31, 2011 are temporary in nature. The following table provides a breakdown of the Company’s available-for-sale securities with unrealized losses as of March 31, 2011 (in thousands):




March 31, 2011In Loss Position< 12 monthsGrossFair


UnrealizedValue


LossesAvailable-for-sale investments:Corporate securities

$
4,153


$
(2
)Total available-for-sale investments


4,153



(2
)Total investments in loss position

$
4,153


$
(2
)




The amortized cost and estimated fair value of debt securities at March 31, 2011 and June 30, 2010 by contractual maturities are shown below (in thousands):




March 31, 2011


June 30, 2010Amortized


Estimated


Amortized


EstimatedCost


Fair Value


Cost


Fair ValueAvailable-for-sale investments:Due in one year or less

$
121,258


$
121,282


$
101,529


$
101,531Total available-for-sale investments


121,258



121,282



101,529



101,531Held-to-maturity investments:Due in one year or less


-



-



8,101



8,101Due in one year to five years


-



-



10,000



10,005Total held-to-maturity investments


-



-



18,101



18,106Total investments

$
121,258


$
121,282


$
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:




10
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·
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 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 and nine months ended March 31, 2011.





Items Measured at Fair Value on a Recurring Basis





The Company did not have any financial liabilities that are measured at fair value at March 31, 2011 or June 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 March 31, 2011 and June 30, 2010, consistent with the fair value hierarchy (in thousands):




March 31, 2011Level 1


Level 2


Level 3


TotalFinancial assetsCash equivalents:Money market funds

$
11,587


$
-


$
-


$
11,587Corporate securities


-



33,495



-



33,495Short-term investments:Certificates of deposit


-



9,689



-



9,689United States government agencies


-



9,022



-



9,022United States Treasury


-



57,954



-



57,954Corporate securities


-



44,617



-



44,617Total financial assets

$
11,587


$
154,777


$
-


$
166,364





June 30, 2010Level 1


Level 2


Level 3


TotalFinancial assetsCash equivalents:Money market funds

$
10,182


$
-


$
-


$
10,182Corporate securities


-



8,000



-



8,000Short-term investments:Certificates of deposit


-



6,823



-



6,823United States government agencies


-



9,994



-



9,994United States Treasury


-



41,946



-



41,946Corporate securities


-



42,768



-



42,768Total financial assets

$
10,182


$
109,531


$
-


$
119,713






11
 Table of Contents





As of March 31, 2011 and June 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 and nine months ended March 31, 2011.




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 and nine months ended March 31, 2011 or 2010.




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):




March 31,


June 30,2011


2010Inventories:Raw materials

$
13,502


$
13,744Work-in-process


6,322



7,158Finished goods


2,465



-Total

$
22,289


$
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 March 31, 2011 and June 30, 2010 (in thousands):




EstimatedUseful Life


Gross


AccumulatedMarch 31, 2011

(in Years)


Amount


Amortization


NetTechnology


4-6


$
9,592


$
7,834


$
1,758Customer relationships


3-7



5,671



4,913



758Trade name


3-6



1,775



1,005



770Backlog


1



188



172



16Total





$
17,226


$
13,924


$
3,302







EstimatedUseful Life


Gross


AccumulatedJune 30, 2010

(in Years)


Amount


Amortization


NetTechnology


4-6


$
9,592


$
6,099


$
3,493Customer relationships


3-7



5,671



3,882



1,789Trade name


3-6



1,775



760



1,015Backlog


1



188



105



83Total





$
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


Nine Months EndedMarch 31,


March 31,2011


2010


2011


2010Reported as:Cost of revenues

$
575


$
548


$
1,725


$
1,632Operating expenses


451



410



1,353



1,217Total

$
1,026


$
958


$
3,078


$
2,849







12
 Table of Contents




The future amortization of intangible assets is as follows (in thousands):




Fiscal years ending June 30,

Amount2011

$
9252012


1,3092013


4842014


2472015


177After 2015


160$
3,302




The Company had goodwill of $572,000 on its condensed consolidated balance sheets at March 31, 2011 and June 30, 2010 as a result of the acquisitions of Emit Technology Co., Ltd. and Oridus, Inc. in fiscal 2010. During the three and nine months ended March 31, 2011, there were no indicators of impairment for the goodwill.





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




March 31,


June 30,2011


2010Accrued liabilities:Payroll and related expenses

$
5,990


$
3,792Accrued professional fees


1,058



1,168Employee withholdings and related expenses


982



531Accrued sales commission


540



486Accrued sales return


457



541Accrued warranty


440



421Advance deposits from customers


249



480Other


2,921



4,117$
12,637


$
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


Nine Months EndedMarch 31,


March 31,2011


2010


2011


2010Balance at the beginning of the period

$
500


$
371


$
421


$
371Accruals for warranties issued during the period


80



35



323



123Adjustments related to pre-existing warrantiesincluding expirations and changes in estimates


(99
)


33



(31
)


111Cost of warranty repair


(41
)


(68
)


(273
)


(234
)Balance at the end of the period

$
440


$
371


$
440


$
371








13
 Table of Contents







13. Stock-Based Compensation. Stock-based compensation expense 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 following table presents details of stock-based compensation expense by function line item for the three and nine months ended March 31, 2011 and 2010 (in thousands):




Three Months Ended


Nine Months EndedMarch 31,


March 31,2011


2010


2011


2010Cost of revenues

$
123


$
81


$
342


$
268Research and development


343



241



992



755Sales and marketing


482



329



1,353



1,018General and administrative


404



651



1,552



2,515Total stock-based compensation expense

$
1,352


$
1,302


$
4,239


$
4,556




The effect of recording stock-based compensation expense for the three and nine months ended March 31, 2011 and 2010 was as follows (in thousands, except per share data):




Three Months Ended


Nine Months EndedMarch 31,


March 31,2011


2010


2011


2010Stock-based compensation expense by type of award:Employee stock options

$
509


$
838


$
1,643


$
2,967Restricted stock awards and restricted stock units


670



320



2,193



1,137Employee stock purchase plan


173



144



403



452Total stock-based compensation


1,352



1,302



4,239



4,556Tax effect on stock-based compensation


-



-



-



-Net effect on net income

$
1,352


$
1,302


$
4,239


$
4,556Effect on net income per share:Basic

$
(0.07
)

$
(0.06
)

$
(0.21
)

$
(0.22
)Diluted

$
(0.06
)

$
(0.06
)

$
(0.20
)

$
(0.21
)




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 March 31, 2011 and 2010, the Company granted 9,000 and 64,500 stock options, respectively, with an estimated total grant-date fair value of $117,000 and $384,000, respectively. In addition, the Company granted 6,000 restricted stock units (“RSUs”) with a total grant-date fair value of $157,000 for the three months ended March 31, 2011. The Company estimated that the stock compensation expense for the stock options and RSUs granted in the three months ended March 31, 2011 and 2010 not expected to vest was $30,000 and $52,000, respectively.




During the nine months ended March 31, 2011 and 2010, the Company granted 83,000 and 152,000 stock options, respectively, with an estimated total grant-date fair value of $687,000 and $973,000, respectively. In addition, the Company granted 231,000 and 483,000 restricted stock awards (“RSAs”) and RSUs, with a total grant-date fair value of $4.4 million and $6.7 million during the nine months ended March 31, 2011 and 2010, respectively. The Company estimated that the stock compensation expense for the stock options, RSUs and RSAs granted in the nine months ended March 31, 2011 and 2010 not expected to vest was $684,000 and $1.3 million, respectively.






14
 Table of Contents





As of March 31, 2011, the unrecognized stock compensation expense related to stock options to purchase Oplink common stock was $2.7 million which will be recognized over an estimated weighted average amortization period of 1.8 years. The unrecognized stock compensation expense related to RSUs was $6.0 million which will be recognized over an estimated weighted average amortization period of 2.6 years. Approximately $8,000 of stock compensation was capitalized as inventory at March 31, 2011 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


Nine Months EndedMarch 31,


March 31,2011


2010


2011


2010Risk-free interest rate


2.17
%


2.18
%


1.296
%


2.23
%Expected term

4.6 years


4.6 years


4.6 years


4.6 yearsExpected dividends


0
%


0
%


0
%


0
%Volatility


59
%


45
%


51
%


49
%




No purchase rights were granted under the Company’s employee stock purchase plan during the three months ended March 31, 2011 or 2010. For the nine months ended March 31, 2011 and 2010, the estimated fair value of purchase rights under the Company’s employee stock purchase plan is determined using the Black-Scholes valuation model with the following weighted-average assumptions:




Nine Months EndedMarch 31,2011


2010Risk-free interest rate


0.25
%


0.53
%Expected term

1.3 years


1.3 yearsExpected dividends


0
%


0
%Volatility


47
%


50
%




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 $12.98 and $5.96 per share for the three months ended March 31, 2011 and 2010, respectively, and $8.28 and $6.40 per share for the nine months ended March 31, 2011 and 2010, 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.





15
 Table of Contents





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:




Options


AwardsWeighted


Restricted


WeightedShares


Number of


Average


Stock


AverageAvailable


Options


Exercise


Awards/Units


Grant Datefor Grant


Outstanding


Price


Outstanding


Fair ValueBalance, June 30, 2010


2,413,434



3,458,602


$
14.02



478,733


$
13.96Granted


(383,040
)


83,000



19.17



230,800



19.00Exercised or vested


-



(1,328,472
)


12.96



(26,000
)


18.52Canceled (1)


46,942



(105,349
)


40.46



(5,500
)


18.87Balance, March 31, 2011


2,077,336



2,107,781


$
13.58



678,033


$
15.46




(1)
The number of shares subject to option and stock awards canceled during the nine months ended March 31, 2011 include 65,557 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 March 31, 2011 were in the following exercise price ranges:




Options Outstanding


Options Vested and Exercisableat March 31, 2011


at March 31, 2011Range of Exercise Price

Number Outstanding


Weighted Average Remaining Contractual Life (in Years)


Weighted Average Exercise Price


Average Intrinsic Value (in thousands)


Number Outstanding


Weighted Average Remaining Contractual Life (in Years)


Weighted Average Exercise Price


Average Intrinsic Value (in thousands)$4.00 - $5.00


396,904



1.6


$
4.63


$
6,029



396,904



1.6


$
4.63


$
6,029$5.01 - $8.00


205,517



2.1



5.72



2,899



190,368



1.7



5.56



2,714$8.01 - $10.00


1,908



0.7



8.90



21



1,908



0.7



8.90



21$10.01 - $11.00


191,128



6.9



10.10



1,857



71,440



6.6



10.13



693$11.01 - $13.00


113,629



6.4



12.13



874



61,769



5.8



12.34



462$13.01 - $15.00


236,310



6.6



13.92



1,393



87,248



6.3



13.61



542$15.01 - $18.00


154,458



6.4



16.61



496



71,555



5.2



17.20



187$18.01 - $20.00


77,118



5.6



19.08



57



37,118



4.7



19.31



19$20.01 - $27.00


723,785



5.2



20.32



-



714,785



5.2



20.25



-$28.00 - $102.00


7,024



0.7



34.94



-



7,024



0.7



34.94



-2,107,781



4.7


$
13.58


$
13,625



1,640,119



4.0


$
13.57


$
10,667Vested and expected to vest


2,082,924



4.7


$
13.56


$
19,741







16
 Table of Contents




As of March 31, 2011 and June 30, 2010, options to purchase 1,640,119 and 2,742,536 shares at weighted average exercise prices of $13.57 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 $19.82 as of April 1, 2011, 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 March 31, 2011 was 1,376,972. The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010 was $12.5 million and $369,000, respectively. The total intrinsic value of options exercised during the nine months ended March 31, 2011 and 2010 was $14.1 million and $2.0 million, respectively.





The total cash received by the Company from employees as a result of employee stock option exercises during the three months ended March 31, 2011 and 2010 was approximately $13.0 million and $422,000, respectively, and for the nine months ended March 31, 2011 and 2010 was $17.2 million and $3.3 million, respectively.





The aggregate intrinsic value and weighted average remaining contractual term of RSUs outstanding as of March 31, 2011 was $15.6 million and 1.4 years, respectively.





The aggregate intrinsic value and weighted average remaining contractual term of RSUs vested and expected to vest as of March 31, 2011 was $14.3 million and 1.4 years, respectively. The number of RSUs that are vested and expected to vest is 622,556 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 (“ESPP”) 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. As of March 31, 2011, 1,592,044 shares were available for issuance under the Company’s employee stock purchase plan.





No shares were purchased under the ESPP for the three months ended March 31, 2011 or 2010. 84,741 and 80,172 shares were purchased under the ESPP during the nine months ended March 31, 2011 and 2010, respectively. The total cash received by the Company from employees as a result of purchases under the ESPP during the nine months ended March 31, 2011 and 2010 was $632,000 and $535,000, respectively.





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 10b-18, subject to market conditions, applicable legal requirements and other factors. As of March 31, 2011, repurchases of $10.8 million have been made under this repurchase program and approximately $29.2 million is remaining under this repurchase program.





15. Recent Accounting Pronouncements. In December 2010, the FASB issued authoritative guidance on disclosure of supplementary pro forma information for business combinations. The new guidance requires that pro forma financial information should be prepared as if the business combination occurred as of the beginning of the prior annual period. The new guidance also expands the required supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The guidance is effective for the Company in the first quarter of fiscal 2012 and will be applied prospectively to business combinations for which the acquisition date is after the effective date. The adoption of this guidance will not impact the Company's consolidated financial positions, results of operations or cash flows.






17
 Table of Contents





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 March 31, 2011 have been summarized below (in thousands):




Contractual Obligations Due by PeriodContractual Obligations

Total


Less than 1 year


1-3 years


4-5 years


After 5 yearsPurchase obligations

$
18,576


$
18,576


$
-


$
-


$
-Operating leases


244



212



32



-



-Capital expenditure


5,155



5,133



22



-



-Total

$
23,975


$
23,921


$
54


$
-


$
-




Litigation




Patent Litigation with Finisar Corporation





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 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. 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 September 13, 2010 disclosing the settlement terms and furnishing a copy of the settlement agreement.





On December 20, 2010, Finisar filed a new complaint against the Company and its subsidiary, Optical Communication Products, Inc. (“OCP”) in the United States District Court for the Northern District of California. The new complaint is substantially similar to the complaint filed by Finisar in January 2010. On January 24, 2011 the Company filed an answer to the complaint, denyingall material allegations and asserting numerous affirmative defenses.





18
 Table of Contents





On March 7, 2011, the Company’s subsidiary OCP filed a complaint against Finisar in the United States District Court for the Eastern District of Texas, alleging infringement by Finisar of certain U.S. patents owned by OCP primarily relating to vertical-cavity surface-emitting laser (“VCSEL”) technology. On April 29, 2011, Finisar filed an answer to the complaint, denyingall material allegations, asserting numerous affirmative defenses and asserting counterclaims against OCP alleging infringement by OCP of certain U.S. patents owned by Finisar primarily relating to pluggable transceiver latch mechanisms.





Although the Company believes that it has meritorious defenses to all of the infringement allegations asserted by Finisar in both lawsuits, as well strong arguments that Finisar infringes OCP’s patents, there can be no assurance that it will be successful in these lawsuits. Even if the Company is successful, it may incur substantial legal fees and other costs as a result of the lawsuits, and the efforts and attention of the Company’s management and technical personnel may be diverted, 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.





19
 Table of Contents





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 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.





On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to dismiss the moving issuers’ cases (including the Company’s) on the grounds that plaintiff’s demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice.  The Ninth Circuit, however, reversed and remanded the District Court’s decision on the underwriter’ motion to dismiss as to the claims arising from the non-moving issuers’ IPOs, finding plaintiff’s claims were not time-barred under the applicable statute of limitations.  In remanding, the Ninth Circuit advised the non-moving issuers and underwriters to file in the District Court the same challenges to plaintiff’s demand letters that moving issuers had filed.





On December 16, 2010, underwriters filed a petition for panel rehearing and a petition for rehearing en banc.  Appellant Vanessa Simmonds also filed a petition for rehearing en banc.  On January 18, 2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc.  It further ordered that no further petitions for rehearing may be filed.





On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuit’s mandate in the cases involving the non-moving issuers.  On January 25, 2011, the Ninth Circuit granted the underwriters’ motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court.  On January 26, 2011, Appellant Vanessa Simmonds moved to join the underwriters’ motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellant’s motion and ruled that the mandate in all cases (including the Company’s and other moving issuers) is stayed for ninety days pending Appellant’s filing of a petition for writ of certiorari in the United States Supreme Court. On April 5, 2011, Appellant Vanessa Simmonds filed a petition for writ of certiorari with the U.S. Supreme Court seeking reversal of the Ninth Circuit's December 2, 2010 decision.





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


Nine Months EndedMarch 31,


March 31,2011


2010


2011


2010Revenues:United States

$
21,733


$
10,926


$
58,640


$
35,654China


11,160



9,712



33,840



26,145Europe


6,875



5,536



26,320



15,186Japan


5,210



4,061



15,186



12,266Canada


2,375



970



6,682



2,525Asia-Pacific (excluding China and Japan)


6,118



2,418



14,468



8,155Totals

$
53,471


$
33,623


$
155,136


$
99,931







20
 Table of Contents





Top five customers, although not the same five customers for each period, together accounted for 59% and 56% of revenues for the three months ended March 31, 2011 and 2010, respectively, and 54% revenues for both the nine months ended March 31, 2011 and 2010.





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




March 31,


June 30,2011


2010United States

$
6,227


$
5,959China


25,341



23,325Asia-Pacific (excluding China)


4,414



4,079Totals

$
35,982


$
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 a component of income tax expense.





As of March 31, 2011, the Company’s total unrecognized tax benefits were $5,839,000 of which $3,439,000, if recognized, would affect the Company’s effective tax rate. The Company had accrued interest and penalties related to unrecognized tax benefits of approximately $843,000 at March 31, 2011.





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. In April 2011, the Company used cash of approximately $4.0 million to purchase facilities in Shanghai and Wuhan, China, totaling approximately 133,000 square feet. The remaining balance of approximately $1.2 million will be due before the year ending June 30, 2011. The facilities will be used for manufacturing and research and development.






21
 Table of Contents





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.





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.





22
 Table of Contents








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.





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 and nine months ended March 31, 2011 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.





23
 Table of Contents








Results of Operations





Revenues





Three Months Ended





Percentage


Nine Months Ended





PercentageMarch 31,


Change


Change


March 31,


Change


Change2011


2010








2011


2010(In thousands, except percentages)Revenues

$
53,471


$
33,623


$
19,848



59.0
%

$
155,136


$
99,931


$
55,205



55.2
%




The increase in revenues for the three and nine months ended March 31, 2011 compared to the three and nine months ended March 31, 2010 was mainly driven by increased unit shipments in all our major product categories, in particular our ROADM optical switching and routing products, partially offset by a slight 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 $2.0 million and $7.7 million of the increases in revenues for the three and nine months ended March 31, 2011 compared to the three and nine months ended March 31, 2010, respectively. The increase in shipments was largely due to increase in demands from our customers.





Historically, a relatively small number of customers have accounted for a significant portion of our revenues. Top five customers, although not the same five customers for each period, together accounted for 59% and 56% of revenues for the three months ended March 31, 2011 and 2010, respectively, and 54% of revenues for both the nine months ended March 31, 2011 and 2010. We expect that the majority of our revenues will continue to depend on sales to a relatively small number of customers.





For the fourth quarter of fiscal 2011, we expect our revenues to be in the range of $43 million to $47 million.





Gross Profit




Three Months Ended





Percentage


Nine Months Ended





PercentageMarch 31,


Change


Change


March 31,


Change


Change2011


2010








2011


2010(In thousands, except percentages)Gross profit

$
19,283


$
10,980


$
8,303



75.6
%

$
54,513


$
31,824


$
22,689



71.3
%Gross profit margin


36.1
%


32.7
%










35.1
%


31.8
%





Gross profit increased for the three and nine months ended March 31, 2011 compared to the three and nine months ended March 31, 2010 primarily reflecting higher revenues, partially offset by higher material costs driven by increased revenues, higher labor costs and manufacturing overhead expenses as a result of an increase in employee headcount and employee compensation expenses in China, and lower utilization of previously reserved inventory. The gross profit for the three months ended March 31, 2011 and 2010 were positively impacted by the sales of previously reserved inventory of $886,000 and $1.7 million, respectively. The gross profit for the nine months ended March 31, 2011 and 2010 were positively impacted by the sales of previously reserved inventory of $4.4 million and $4.6 million, respectively.





Our gross profit margin increased for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 mainly due to lower manufacturing overhead expenses as a percentage of revenues and lower material costs as a percentage of revenues, partially offset by lower utilization of previously reserved inventory.





Our gross profit margin increased for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010 mainly due to lower manufacturing overhead expenses as a percentage of revenues and lower material costs as a percentage of revenues, partially offset by higher direct labor costs as a percentage of revenues and lower utilization of previously reserved inventory.





We expect our gross profit margin in the fourth quarter of fiscal 2011 to decrease compared to the third quarter of fiscal 2011 as a result of lower revenue and higher labor costs mainly due to government-mandated increases in minimum wage levels.




24
 Table of Contents





Research and Development




Three Months Ended





Percentage


Nine Months Ended





PercentageMarch 31,


Change


Change


March 31,


Change


Change2011


2010








2011


2010(In thousands, except percentages)Research and development

$
4,322


$
2,574


$
1,748



67.9
%

$
11,713


$
7,067


$
4,646



65.7
%Stock-based compensation


343



241



102



42.3
%


992



755



237



31.4
%Total expenses

$
4,665


$
2,815


$
1,850



65.7
%

$
12,705


$
7,822


$
4,883



62.4
%





Research and development expenses increased $1.9 million and $4.9 million for the three and nine months ended March 31, 2011 compared to the three and nine months ended March 31, 2010, respectively. The increase was primarily due to higher salary expenses and employee related compensation expenses as a result of an increase in headcount and higher costs of materials associated with increased level of product development projects.





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 fourth quarter of fiscal 2011 compared to the third 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


Nine Months Ended





PercentageMarch 31,


Change


Change


March 31,


Change


Change2011


2010








2011


2010(In thousands, except percentages)Sales and marketing

$
2,625


$
2,077


$
548



26.4
%

$
7,565


$
6,086


$
1,479



24.3
%Stock-based compensation


482



329



153



46.5
%


1,353



1,018



335



32.9
%Total expenses

$
3,107


$
2,406


$
701



29.1
%

$
8,918


$
7,104


$
1,814



25.5
%





Sales and marketing expenses increased $701,000 for the three months ended March 31, 2011 compared to the three months ended March 31, 2010, and increased $1.8 million for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010. The increase primarily reflected higher salary expenses and employee related compensation expenses driven by an increase in headcount and higher sales commission expenses as a result of increased revenues. Our acquisition of Emit in the third quarter of fiscal 2010 further contributed to the increase in sales and marketing expenses for the three and nine months ended March 31, 2011 compared to the three and nine months ended March 31, 2010. We expect our sales and marketing expenses, excluding stock compensation expense, to remain at a similar level in the fourth quarter of fiscal 2011 as the third quarter of fiscal 2011.





General and Administrative




Three Months Ended





Percentage


Nine Months Ended





PercentageMarch 31,


Change


Change


March 31,


Change


Change2011


2010








2011


2010(In thousands, except percentages)General and administrative

$
2,052


$
1,924


$
128



6.7
%

$
5,815


$
5,455


$
360



6.6
%Stock-based compensation


404



651



(247
)


-37.9
%


1,552



2,515



(963
)


-38.3
%Total expenses

$
2,456


$
2,575


$
(119
)


-4.6
%

$
7,367


$
7,970


$
(603
)


-7.6
%





Excluding the impact of stock compensation expense, general and administrative expenses remained largely unchanged for the three months ended March 31, 2011 compared to the three months ended March 31, 2010, and increased $360,000 for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010. The increase was mainly due to our acquisition of Emit in the third quarter of fiscal 2010 and higher litigation costs. We expect our general and administrative expenses, excluding stock compensation expense, to increase in the fourth quarter of fiscal 2011 compared to the third quarter of fiscal 2011 mainly due to higher litigation costs.





25
 Table of Contents





Stock-Based Compensation Expense




Three Months Ended





Percentage


Nine Months Ended





PercentageMarch 31,


Change


Change


March 31,


Change


Change2011


2010








2011


2010(In thousands, except percentages)Stock-based compensation expense

$
1,352


$
1,302


$
50



3.8
%

$
4,239


$
4,556


$
(317
)


-7.0
%




Stock-based compensation expense recorded in cost of revenues, research and development, sales and marketing, and general and administrative is the amortization of the fair value of share-based payments made to employees and members of our board of directors, primarily in the form of stock options, restricted stock awards and units (“RSAs” and “RSUs”) and purchases under the employee stock purchase plan (see Note 13 – Stock-Based Compensation). The fair value of stock options and purchase rights granted to purchase our common stock under the employee stock purchase plan is estimated using a Black-Scholes valuation model and is recognized as expense over the employee requisite service period. The compensation expense incurred for RSAs and RSUs is based on the closing market price of Oplink’s common stock on the date of grant and is amortized on a straight-line basis over the requisite service period.





Stock-based compensation expense for the three and nine months ended March 31, 2011 includes the continued amortization of previously-granted stock options and RSUs and amortization of new grants in fiscal 2011. The decrease in stock-based compensation expense was primarily due to canceled or fully vested equity awards. We expect our stock compensation expense in the fourth quarter of fiscal 2011 to continue to decrease compared to the third quarter of fiscal 2011.





Amortization of Intangible Assets





Amortization of intangible assets was approximately $1.0 million and $958,000 for the three months ended March 31, 2011 and 2010, respectively, and was approximately $3.1 million and $2.8 million for the nine months ended March 31, 2011 and 2010, respectively.





Interest and Other Income, Net





Three Months Ended





Percentage


Nine Months Ended





PercentageMarch 31,


Change


Change


March 31,


Change


Change2011


2010








2011


2010(In thousands, except percentages)Interest and other income, net

$
180


$
292


$
(112
)


-38.4
%

$
291


$
759


$
(468
)


-61.7
%




The decrease in interest and other income for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 was mainly due to lower yields on our investments, partially offset by a gain related to employee pension liabilities mainly due to change in estimate.





The decrease in interest and other income for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010 was primarily due to lower yields on our investments and a lower average balance of cash and cash equivalents, short-term and long-term investments as a result of cash used for stock repurchases in the last two quarters of fiscal 2010 and first quarter of fiscal 2011.





Provision for Income Taxes





As a multinational corporation, we are subject to taxation in the United States and in foreign jurisdictions. The taxation of our business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, and the availability of tax credits and carryforwards. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate.





We are required to make our best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. We recorded a tax provision of $620,000 and $516,000 for the three months ended March 31, 2011 and 2010, respectively. We recorded a tax provision of $2.3 million and $1.3 million for the nine months ended March 31, 2011 and 2010, respectively. The increase in provision for income taxes was mainly due to higher taxable income in all jurisdictions.





The effective tax rates for the three and nine months ended March 31, 2011 and 2010 differ from the statutory rate. This is primarily due to taxable income being reduced as a result of carrying forward net operating losses from previous years and tax holidays in certain jurisdictions. The effective tax rate could increase in the future due to changes in the taxable income mix between various jurisdictions and the expiration of certain tax holidays.





26
 Table of Contents





Liquidity and Capital Resources





Since our inception, we have financed our operations primarily through issuances of equity, which totaled approximately $319.4 million in aggregate net proceeds, partially offset by $54.9 million in common stock repurchases, net of proceeds from exercise of stock options, employee stock purchase plan and warrants through March 31, 2011. As of March 31, 2011, we had cash, cash equivalents and short-term investments of $196.0 million and working capital of $236.4 million.





We believe that our current cash, cash equivalent and short-term investment balances will be sufficient to meet our operating and capital requirements for at least the next 12 months. We may use cash and cash equivalents from time to time to fund our acquisition of businesses and technologies. We may be required to raise funds through public or private financings, strategic relationships or other arrangements. We cannot assure you that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed could harm our ability to pursue our business strategy and achieve and maintain profitability.





Nine Months Ended March 31, 2011





Our operating activities provided cash of $29.3 million in the nine months ended March 31, 2011 primarily as a result of a net income of $22.3 million for the period adjusted by $7.1 million in non-cash depreciation and amortization charges, $4.2 million in non-cash stock-based compensation expense and $507,000 in other non-cash expenses, partially offset by a decrease of cash of $4.8 million as a result of a net change in assets and liabilities.





For the nine months ended March 31, 2011, the change in net assets and liabilities was primarily the result of an increase in accounts receivables and inventory of $5.9 million and $269,000, respectively, and a decrease of accounts payable of $2.5 million, partially offset by an increase in accrued liabilities and other liabilities of $3.1 million and a decrease in prepaid expenses and other assets of $758,000.





Accounts receivable used $5.9 million of cash primarily due to higher shipments in the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010. Days sales outstanding (“DSO”) was 67 days, 70 days, and 62 days for the first, the second, the third quarters of fiscal 2011, respectively, compared to 70 days for the fourth quarter of fiscal 2010. We typically bill customers on an open account basis with net thirty to ninety day payment terms. We would generally expect the level of accounts receivable at the end of any quarter to reflect the level of sales in that quarter and to change from one period to another in a direct relationship to the change in the level of sales. Our level of accounts receivable would also increase if shipments are made closer to the end of the quarter, if customers delayed their payments or if we offered extended payment terms to our customers.





Inventory used $269,000 of cash in the nine months ended March 31, 2011. In order to maintain an adequate supply of product for our customers, we must carry a certain level of inventory. Our inventory level may vary based primarily upon orders received from our customers, our forecast of demand for these products and lead-time for materials. These considerations are balanced against risk of obsolescence or potentially excess inventory levels. We generally expect the level of inventory to vary from one period to another as a result of changes in the level of sales.





Prepaid expenses and other assets provided $758,000 of cash in the nine months ended March 31, 2011 mainly reflecting decreased balance of bankers’ acceptance notes.





Accounts payable used $2.5 million of cash in the nine months ended March 31, 2011, largely due to the change in the level of inventory purchase and as a result of the timing of payments to our vendors.





Accrued liabilities and other liabilities generated $3.1 million of cash in the nine months ended March 31, 2011 primarily due to increases in income taxes payable and other payables.





Our investing activities used cash of $6.9 million in the nine months ended March 31, 2011 primarily due to purchase of investment of $136.2 million and purchase of property, plant and equipment of $5.3 million, net of proceeds from sales of property and equipment, partially offset by maturities of marketable investment securities of $134.6 million. We anticipate that cash outlays in capital expenditures will be approximately $6.0 million for the remaining three months of fiscal 2011.





27
 Table of Contents





Our financing activities provided cash of $11.3 million in the nine months ended March 31, 2011 due to $17.9 million in proceeds from issuance of common stock in connection with the exercise of stock options and the employee stock purchase plan, partially offset by $6.5 million of cash spent on the repurchase of our common stock.





Nine Months Ended March 31, 2010





Our operating activities provided cash of $17.0 million in the nine months ended March 31, 2010 as a result of a net income of $7.5 million for the period adjusted by $7.8 million in non-cash charges of depreciation and amortization, and $4.5 million in non-cash stock-based compensation expenses, partially offset by a decrease of cash of $2.8 million as a result of change in assets and liabilities.





For the nine months ended March 31, 2010, cash used as a result of the net change in assets and liabilities was primarily the result of an increase in inventory of $5.0 million, an increase in prepaid expenses and other assets of $3.1 million, partially offset by a decrease in accounts receivables of $1.2 million, an increase in accounts payable of $3.0 million and an increase in accrued liabilities of $1.1 million.





Accounts receivable provided $1.2 million of cash driven by improved collections of receivables in the nine months ended March 31, 2010 compared to the fourth quarter of fiscal 2009. DSO was 74 days, 71 days and 78 days for the first, second, and third quarters of fiscal 2010, respectively, compared to 82 days for the fourth quarter of fiscal 2009. It increased partially due to increased sales to customers with longer payment terms in the third quarter of fiscal 2010.





Inventory used $5.0 million of cash during the nine months period ended March 31, 2010 due to a change in the level of inventory purchases as a result of anticipated higher shipments in the fourth quarter of fiscal 2010.





Prepaid expenses and other assets used $3.1 million of cash during the nine months ended March 31, 2010 primarily reflecting increased balance of bankers’ acceptance notes from certain customers.





Accounts payable provided cash of $3.0 million in the nine months ended March 31, 2010 primarily due to a change in the level of inventory purchases and as a result of the timing of payments to our vendors.





Accrued liabilities and other liabilities increased and therefore provided cash of $1.1 million in the nine months ended March 31, 2010 mainly due to an increase of our acquisition liabilities associated with the Emit acquisition in the third quarter of fiscal 2010.





Our investing activities used cash of $26.5 million in the nine months ended March 31, 2010 as a result of purchases of available-for-sale and held-to-maturity investments of $167.8 million, net cash used in the Emit acquisition of $3.7 million, and purchases of equipment of $2.4 million, partially offset by sales and maturities of available-for-sale and held-to-maturity investments of $147.1 million.





Our financing activities provided $3.8 million of cash in the nine months ended March 31, 2010 due to proceeds from issuance of common stock in connection with the exercise of stock options and the employee stock purchase plan.





Off-Balance Sheet Arrangements





As of March 31, 2011, we did not have any off-balance sheet financing arrangements and have never established any special purpose entities.





28
 Table of Contents





Contractual Obligations





Our contractual obligations as of March 31, 2011 have been summarized below (in thousands):




Contractual Obligations Due by PeriodContractual Obligations

Total


Less than 1 year


1-3 years


4-5 years


After 5 yearsPurchase obligations

$
18,576


$
18,576


$
-


$
-


$
-Operating leases


244



212



32



-



-Capital expenditure


5,155



5,133



22



-



-Total

$
23,975


$
23,921


$
54


$
-


$
-




Recent Accounting Pronouncements





In December 2010, the FASB issued authoritative guidance on disclosure of supplementary pro forma information for business combinations. The new guidance requires that pro forma financial information should be prepared as if the business combination occurred as of the beginning of the prior annual period. The new guidance also expands the required supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The guidance is effective for us in the first quarter of fiscal 2012 and will be applied prospectively to business combinations for which the acquisition date is after the effective date. The adoption of this guidance will not have an impact on our consolidated financial positions, results of operations or cash flows.





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 our 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. We do not believe that the adoption will have an impact on our 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. We believe that we are 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 our operations.





ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK




We are exposed to market risk related to fluctuations in interest rates and in foreign currency exchange rates as follows:




Interest Rate Exposure




The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in are subject to market risk. To minimize this risk, we maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and corporate bonds.





29
 Table of Contents





As of March 31, 2011, all of our short-term investments were in certificates of deposit, high quality commercial paper, corporate securities, and government and government agency debt securities. We invest our excess cash in short-term and long-term investments to take advantage of higher yields generated by these investments. We do not hold any instruments for trading purposes. As of March 31, 2011, the gross unrealized losses on our investments classified as available-for-sale were immaterial which were primarily due to decreases in the fair value of debt securities as a result of changes in market interest rates. We have 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. We expect to realize the full value of all of these investments upon maturity. In addition, we do not believe that we will be required to sell these securities to meet its cash or working capital requirements or contractual or regulatory obligations. Therefore, we have determined that the gross unrealized losses on the available-for-sale securities at March 31, 2011 are temporary in nature. The following table summarizes our investment securities (in thousands, except percentages):





Carrying


Average Rate


Carrying


Average RateValue at


of Return at


Value at


of Return atMarch 31,


March 31,


June 30,


June 30,2011


2011


2010


2010(Annualized)





(Annualized)Investment Securities:Cash equivalents - variable rate

$
-



-


$
8,423



0.1
%Cash equivalents - fixed rate


45,082



0.2
%


9,759



0.2
%Short-term investments - fixed rate


121,282



0.4
%


109,632



1.0
%Long-term investments - fixed rate


-



-



10,000



1.4
%Total

$
166,364






$
137,814




Foreign Currency Exchange Rate Exposure





We operate in the United States, primarily manufacture in China, and the majority of our sales to date have been made in U.S. dollars. The majority of expenses from our China operations are incurred in the Chinese Renminbi (“RMB”). As a result, currency fluctuations between the U.S. dollar and the RMB could cause foreign currency transaction gains or losses that we would recognize in the period incurred. A 10% fluctuation in the dollar at March 31, 2011 would have an immaterial impact on our net dollar position in outstanding trade receivables and payables.





We use the U.S. dollar as the reporting currency for our consolidated financial statements. Any significant revaluation of the RMB may materially and adversely affect our results of operations upon translation of our Chinese subsidiaries’ financial statements into U.S. dollars. We generate a significant amount of our revenue in RMB and the majority of our labor and manufacturing overhead expenses are in RMB. Additionally, a significant portion of our operating expenses are in RMB. Therefore, a significant fluctuation in RMB against the U.S. dollar could affect our business and results of operations upon translation to U.S. dollars. A 10% appreciation or depreciation in RMB against the U.S. dollar would have an immaterial impact on our results of operations for the three or nine months ended March 31, 2011.





We expect our international revenues to continue to be denominated largely in U.S. dollars. We also believe that our China operations will likely expand in the future if our business continues to grow. As a result, we anticipate that we may experience increased exposure to the risks of fluctuating currencies and may choose to engage in currency hedging activities to reduce these risks. However, we cannot be certain that any such hedging activities will be effective, or available to us at commercially reasonable rates.





ITEM 4 - CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures.Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the quarterly period covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.





Changes in Internal Control over Financial Reporting.There was no change in our internal control over financial reporting that occurred during the quarterly period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





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PART II.  OTHER INFORMATION





ITEM 1 - LEGAL PROCEEDINGS





The material set forth under the caption “Litigation” in Note 16 of the Notes to Condensed Consolidated Financial Statements appearing in Part I, Item I of this Quarterly Report on Form 10-Q is incorporated herein by reference.





Item 1A - RISK FACTORS





Other than with respect to the risk factors set forth below, there have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.





We expect volatility in our stock price, which could cause you to lose all or part of your investment.




We expect the market price of our common stock to fluctuate significantly. For example, the market price of our common stock has fluctuated from an intra-day low of $5.05 in November 2008 to a recent intra-day high of $29.48 on February 18, 2011. These fluctuations may occur in response to a number of factors, some of which are beyond our control, including:





·
quarterly variations in our operating results;





·
changes in financial estimates by securities analysts and/or our failure to meet estimates;





·
changes in market values of comparable companies;





·
announcements by our competitors or us of new products or of significant acquisitions, strategic partnerships or joint ventures;





·
any loss by us of a major customer;





·
economic fluctuations in the market for optical communications products, or in the telecommunications industry generally;





·
the outcome of, and costs associated with, any litigation to which we are or may become a party;





·
departures of key management or engineering personnel; and





·
future sales of our common stock.





We depend upon a small number of customers for a substantial portion of our revenues, and any decrease in revenues from, or loss of, these customers without a corresponding increase in revenues from other customers would harm our operating results.





We depend upon a small number of customers for a substantial portion of our revenues. Our dependence on orders from a relatively small number of customers makes our relationship with each customer critical to our business.





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Our top five customers, although not the same five customers for each period, together accounted for 53%, 60% and 60% of our revenues in the fiscal years ended June 30, 2010, 2009 and 2008, respectively, and 54% of our revenues for the nine month period ended March 31, 2011. Tellabs Operations, Inc. (“Tellabs”) and Hua Wei Technologies Co. Ltd. (“Huawei”) each accounted for greater than 10% of our revenues for the fiscal years ended June 30, 2010, 2009 and 2008, as well as for the nine month period ended March 31, 2011. We expect that the majority of our revenues will continue to depend on sales to a relatively small number of customers. We expect that sales to Tellabs, in particular, may increase as a percentage of our total sales in the coming quarters.





We may not be the sole source of supply to our customers, and they may choose to purchase products from other vendors. The loss of one or more of our significant customers, our inability to successfully develop relationships with additional customers or future price reductions could cause our revenue to decline significantly. Our dependence on a small number of customers may increase if the fiber optic components and subsystems industry and our other target markets continue to consolidate.





Our cost advantage from having our manufacturing and most of our R&D in China may diminish over time due to increasing labor costs.





The labor market in China, particularly in the manufacturing-heavy Southeast region of China where our manufacturing facilities are located, has become more challenging for employers, and many companies are facing higher costs due to increased wages. We increased our wage rates at our Zhuhai facility by more than 30% during our 2010 fiscal year due to government-mandated increases in minimum wage levels. We expect another government-mandated increase in the fourth quarter of fiscal 2011, and we may be required to increase wages even more in the future due to market conditions and/or additional government mandates. If labor costs in China continue to increase, our gross margins and profit margins and results of operations may be adversely affected. In addition, our competitive advantage against competitors with manufacturing in traditionally higher cost countries would be diminished.





We may be involved in intellectual property disputes in the future, which could divert management’s attention, cause us to incur significant costs and prevent us from selling or using the challenged technology.





Participants in the communications and fiber optic components and subsystems markets in which we sell our products have experienced frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including our competitors. In addition, from time to time, we have become aware of the possibility or have been notified that we may be infringing certain patents or other intellectual property rights of others. Regardless of their merit, responding to such claims can be time consuming, divert management’s attention and resources and may cause us to incur significant expenses. In addition, intellectual property claims against us could invalidate our proprietary rights and force us to do one or more of the following:





·
obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all;





·
stop selling, incorporating or using our products that use the challenged intellectual property;





·
pay substantial monetary damages; or





·
redesign the products that use the technology.





Any of these actions could result in a substantial reduction in our revenue and could result in losses over an extended period of time.





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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 us, 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 May 5, 2010, the court dismissed without prejudice all co-defendants (including us) except Source Photonics, Inc., on grounds that such claims should have been asserted in four separate lawsuits, one against each co-defendant. On May 20, 2010, we 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 September 13, 2010 disclosing the settlement terms and furnishing a copy of the settlement agreement.





On December 20, 2010, Finisar filed a new complaint against us and our subsidiary, Optical Communication Products, Inc. (“OCP”) in the United States District Court for the Northern District of California. The new complaint is substantially similar to the complaint filed by Finisar in January 2010. On January 24, 2011, we filed an answer to the complaint, denyingall material allegations and asserting numerous affirmative defenses.





On March 7, 2011, our subsidiary OCP filed a complaint against Finisar in the United States District Court for the Eastern District of Texas, alleging infringement by Finisar of certain U.S. patents owned by OCP primarily relating to vertical-cavity surface-emitting laser (“VCSEL”) technology. On April 29, 2011, Finisar filed an answer to the complaint, denyingall material allegations, asserting numerous affirmative defenses and asserting counterclaims against OCP alleging infringement by OCP of certain U.S. patents owned by Finisar primarily relating to pluggable transceiver latch mechanisms.





Although we believe that we have meritorious defenses to all of the infringement allegations asserted by Finisar in both lawsuits, as well strong arguments that Finisar infringes OCP’s patents, there can be no assurance that we will be successful in these lawsuits. Even if we are successful, we may incur substantial legal fees and other costs as a result of the lawsuits, and the efforts and attention of our management and technical personnel may be diverted, which could harm our business.





ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





None.





ITEM 3 - DEFAULTS UPON SENIOR SECURITIES





None.





ITEM 4 – (Removed and Reserved)





ITEM 5 - OTHER INFORMATION





None.





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ITEM 6 - EXHIBITS


Exhibit Index


Exhibit No.

Description3.1(1)

Amended and Restated Certificate of Incorporation of the Registrant.3.2(2)

Bylaws of the Registrant.3.3(3)

Certificate of Designation of Series A Junior Participating Preferred Stock.3.4(4)

Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant.3.5(5)

Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant.3.6(6)

Amendment to Bylaws of the Registrant31.1

Certification of Chief Executive Officer Required under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.31.2

Certification of Chief Financial Officer Required under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.32.1
*
Certification of Chief Executive Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350).32.2
*
Certification of Chief Financial Officer Required under Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.





(1)
Previously filed as Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1/A filed on August 29, 2000 and incorporated herein by reference.(2)
Previously filed as Exhibit 3.3 to the Registrant’s Registration Statement on Form S-1/A filed on August 1, 2000 and incorporated herein by reference.(3)
Previously filed as Exhibit 4.1 to the Registrant’s Report on Form 8-K filed on March 22, 2002 and incorporated herein by reference.(4)
Previously filed as Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005 and incorporated herein by reference.(5)
Previously filed as Exhibit 3.5 to the Registrant’s Quarterly Report on Form 10-Q filed on February 9, 2007 and incorporated herein by reference.(6)
Previously filed as Exhibit 3.1 to the Registrant’s Report on Form 8-K filed on December 20, 2007 and incorporated herein by reference.




*
The certifications attached as Exhibits 32.1 and 32.2 accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.








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SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 OPLINK COMMUNICATIONS, INC.Date: May 13, 2011
By:
/s/ Shirley YinShirley YinChief Financial Officer(Principal Financial Officer)






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