e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
FOR ANNUAL AND TRANSITION
REPORTS
PURSUANT TO SECTIONS 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended:
July 1, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-30684
Bookham, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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20-1303994
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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2584 Junction Avenue
San Jose, California
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95134
(Zip Code)
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(Address of Principal Executive
Offices)
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Registrants telephone number, including area code:
408-383-1400
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class:
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Name of each exchange on which registered:
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Common stock, par value $0.01 per
share
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The NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant was $175,610,528 based on the
last reported sale price of the registrants common stock
on September 1, 2006 as reported by the NASDAQ Global
Market ($3.09 per share) (reference is made to Part II,
Item 5 herein for a Statement of Assumptions upon which this
calculation is based). As of September 1, 2006, there were
57,978,908 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The registrant intends to file a proxy statement pursuant to
Regulation 14A within 120 days of the end of the
fiscal year ended July 1, 2006. Portions of the proxy
statement are incorporated herein by reference into
Part III of this Annual Report on
Form 10-K.
ANNUAL
REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED JULY 1, 2006
TABLE OF
CONTENTS
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
and the documents incorporated herein by reference contain
forward-looking statements, within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as
amended, about our plans, objectives, expectations and
intentions. You can identify these statements by words such as
expect, anticipate, intend,
objective, plan, goal,
attempt, believe, seek,
estimate, may, will and
continue or similar words or phrases. You should
read statements that contain these words or phrases carefully.
They discuss our future expectations, contain projections of our
future results of operations or our financial condition or state
other forward-looking information, and may involve known and
unknown risks over which we have limited or no control. Our
actual results could differ significantly from results discussed
in these forward-looking statements. You should not place undue
reliance on forward-looking statements. We cannot guarantee any
future results, levels of activity, performance or achievements.
Moreover, we assume no obligation to update forward-looking
statements or update the reasons actual results could differ
materially from those anticipated in forward-looking statements.
Several of the important factors that may cause our actual
results to differ materially from the expectations we describe
in our forward-looking statements are identified in the sections
captioned Business, Risk Factors, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations in this Annual Report
on
Form 10-K
and the documents incorporated herein by reference.
PART I
We design, manufacture and market optical components, modules
and subsystems that generate, detect, amplify, combine and
separate light signals principally for use in high-performance
fiber optics communications networks. Due to its advantages of
higher capacity and transmission speed, optical transmission has
become the predominant technology for large scale communications
networks. We believe we are the second largest vendor of optical
components used for fiber optic telecommunications networks
applications, on the basis of revenue.
Innovation at the component level has been a primary enabler of
optical networking, facilitating increased transmission
capacity, improving signal quality and lowering cost. For this
reason, optical communications equipment vendors initially
developed and manufactured their own optical components. Due to
a variety of industry-related reasons, the majority of optical
equipment vendors have sold, eliminated or outsourced their
internal component capabilities and now rely on third-party
sources for their optical component needs. In the absence of
significant internal component technology expertise or
manufacturing capability, communications equipment vendors have
become more demanding of their component suppliers, seeking
companies with broad technology portfolios, component innovation
expertise, advanced manufacturing capabilities, the ability to
provide more integrated solutions and financial strength.
We believe we offer one of the most comprehensive
end-to-end
portfolios of optical component solutions to the
telecommunications market, enabling us to deliver more of the
components our customers require. Our product portfolio includes
several leading products (on the basis of our market share),
such as our 10 gigabit per second, or Gb/s, discrete
transmitters, receivers and optical amplifiers. We intend to
maintain our leadership position for these products, as well as
develop new solutions that leverage the knowledge and capital
invested in our current generation of offerings.
We believe our advanced component design and manufacturing
facilities, which would be prohibitively expensive to replicate
in the current market environment, are a significant competitive
advantage. On-chip, or monolithic, integration of functionality
is more difficult to achieve without access to the production
process, and requires advanced process know-how and equipment.
Although the market for optical integrated circuits is still in
its early stages, it shares many characteristics with the
semiconductor market, including the positive relationship
between the number of features integrated on a chip, the wafer
size and the cost and sophistication of the fabrication
equipment. For this reason, we believe our
3-inch wafer
indium phosphide semiconductor fabrication facility in Caswell,
U.K. provides us a competitive advantage as it allows us to
increase the complexity of the circuits that we design and
manufacture.
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We intend to draw upon our internal development and
manufacturing capability to continue to create innovative
solutions for our customers, such as our pluggable
telecommunications transceiver products and our small form
factor 10 Gb/s transmitter. One example of a monolithically
integrated component we make is our LMC10 transmitter, which
integrates a 10 Gb/s modulator and a transmit laser on two
single indium phosphide chips in a single package. On-chip
integration enables us to fit the device inside a package
identical in size to current, slow speed lasers, making it
easier for our customers to upgrade their equipment for 10 Gb/s
transmission. We believe the LMC10 transmitter is the only
transmitter of its kind on the market today, and it is currently
sole-sourced to a number of customers.
Through our acquisition and integration of seven optical
components companies and businesses including those of Nortel
Networks Corporation, which we refer to as Nortel Networks, and
Marconi Optical Components Limited, which we refer to as
Marconi, we significantly increased our product portfolio and
manufacturing expertise, and we believe we enhanced established
relationships with leading optical systems vendors. As part of
the process of integrating acquired businesses and companies, we
have taken significant steps to rationalize production capacity,
adjust headcount and restructure resources to reduce
manufacturing and operating overhead.
We acquired the optical components business of Nortel Networks
in 2002 in a transaction financed in part through promissory
notes issued to Nortel Networks having an aggregate principal
amount of $50 million. In connection with the acquisition,
Nortel Networks entered into a supply agreement with us which
specified a minimum amount of products to be purchased from us.
This supply agreement has since been amended three times, most
recently by the third addendum to the supply agreement in
January 2006. Under the second addendum, which we entered into
in May 2005, Nortel Networks agreed to purchase approximately
$100 million of products from us, equally divided into two
categories of products: those we will discontinue manufacturing
following fulfillment of the Nortel Networks orders, which we
call last-time buy products, and products that we
will continue to manufacture. In addition, pursuant to this
second addendum, the price of certain products covered by the
supply agreement were increased. The third addendum to the
supply agreement, among other things, (i) extended the term
of the supply agreement to the end of calendar 2006, and
(ii) requires Nortel Networks to purchase approximately
$72 million of products from us. Remaining obligations of
approximately $30 million under the supply agreement, as
amended, are expected to be fulfilled by the end of the December
2006 quarter. As of July 1, 2006, substantially all of
Nortel Networks last-time buy obligations have
been fulfilled. Non-last-time buy purchases will be
transacted at the then current market prices and not at the
increased prices which were agreed to in the second addendum. In
January 2006, in connection with a series of transactions, we
paid all outstanding principal and interest on the promissory
notes we issued to Nortel Networks, and the security agreements
and related security interests securing our obligations under
the notes and the supply agreement were terminated.
Nortel Networks has been our largest customer over the past
three fiscal years, and accounted for 48% of our revenue for the
fiscal year ended July 1, 2006. Over the past two quarters,
revenues from Nortel Networks have been decreasing as its
last-time buy obligations under supply agreements,
as amended, have been fulfilled. We expect quarterly revenues
from Nortel Networks to remain flat or decline through the
remainder of calendar 2006. During the quarters ended
April 1, 2006 and July 1, 2006, our quarterly revenues
from all customers other than Nortel Networks have increased by
11% and 25%, respectively. One of our key strategic objectives
is to continue diversifying our customer and revenue base by
increasing revenues from customers other than Nortel Networks.
Bookham, Inc., a Delaware corporation, was incorporated on
June 29, 2004. On September 10, 2004, pursuant to a
scheme of arrangement under the laws of the United Kingdom,
Bookham, Inc. became the publicly traded parent company of the
Bookham Technology plc group of companies, including Bookham
Technology plc, a public limited company incorporated under the
laws of England and Wales whose stock was previously traded on
the London Stock Exchange and the NASDAQ National Market. Our
common stock is traded on the NASDAQ Global Market under the
symbol BKHM.
We maintain a Web site with the address www.bookham.com. Our Web
site includes links to our Code of Business Conduct and Ethics,
and our Audit Committee, Compensation Committee, and Nominating
and Corporate Governance Committee charters. We are not
including the information contained in our Web site as part of,
or incorporating it by reference into, this Annual Report on
Form 10-K.
We make available free of charge, through our Web site, our
Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and Current Reports on
Form 8-K,
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and amendments to these reports, as soon as reasonably practical
after such material is electronically filed with, or furnished
to, the Securities and Exchange Commission.
Industry
Background
In the 1990s, telecommunications network vendors and data
communications vendors increasingly incorporated optical systems
into communications infrastructures, taking advantage of the
ability of fiber optic systems to support dramatically greater
bandwidths than traditional copper networks. Widespread adoption
of fiber optic systems has significantly improved the ability of
these networks to transmit and manage the high volume of voice,
video and data traffic generated in recent years by the growth
of the Internet and other innovative communications
technologies. The build-out of fiber optic networks requires
optical components that generate, detect, amplify, combine and
separate light signals as they are transmitted.
During the late 1990s, demand for telecommunications equipment,
and the components that went into that equipment, grew
dramatically. This demand was driven in part by bandwidth
demands resulting from the rise of the Internet and in part by
regulatory changes in the U.S. that opened the
telecommunications markets to new network service providers.
Many of these new networking companies elected to draw upon
optical networking technology and to build their own networks in
response to forecasts for exponential network traffic growth and
supported by ready availability of capital.
The business climate for telecommunications companies became
less favorable in late 2000, as network service providers began
to experience significant financial difficulties. Unable to
obtain financing for continued growth, and with actual network
utilization below expectations due to an overbuilt
infrastructure network, service providers stopped buying new
equipment. In turn, many equipment providers stopped buying
components, which severely affected optical component
manufacturers, who were left with significant inventories,
excess production capacity and cost structures not aligned with
industry demand levels. In response, optical component suppliers
have reduced manufacturing and operating cost overheads
dramatically in order to sustain their businesses during a
period of reduced demand and to achieve cost efficiencies
required to meet their customers pricing objectives.
As the market for optical systems declined, optical systems
vendors were exposed to many of the same inefficiencies
confronting independent optical component companies. These
challenges, as well as the prioritization on optical systems
design manufacturing, resulted in the divestiture or closure of
many captive optical component businesses. As a result, during
the last three years, optical systems vendors have been seeking
component suppliers with (i) a depth of technology
expertise and breadth of product portfolio that no longer exists
within their own organizations, and (ii) the manufacturing
capabilities that they have sold, outsourced or eliminated.
Fewer customers, each demanding more complete solutions and
requiring continued innovation at reduced cost, have led to
significant consolidation among optical component suppliers. We
have played an active role in this consolidation, acquiring the
optical components businesses of Nortel Networks and Marconi,
among others. We believe that the trend toward consolidation
will continue, providing companies positioned as consolidators
with the opportunity to capture increased market share and to
improve profitability through increased capacity utilization and
other operating efficiencies.
The market for optical components, modules and subsystems
continues to evolve. Telecommunications network vendors are
requiring optical component suppliers to take advantage of
developments in product integration and miniaturization to
provide solutions incorporating multiple optical components on a
single subsystem or module, thereby reducing the need for
component assembly and additional testing by the vendor.
Accordingly, optical component suppliers who are able to offer
more integrated, technologically-advanced modules and subsystems
have an advantage over suppliers who can only offer discrete
optical components. In addition, optical component suppliers
have increasingly had to address the requirements of both the
telecommunications and data communications markets.
Historically, telecommunications products were characterized by
high performance, high cost and significant product
customization, while data communications products were
characterized by high volume, low cost and standard product
specifications. This distinction is becoming blurred as
technologies evolve that cost-effectively address both sets of
applications at attractive price points, creating an opportunity
to leverage technologies that meet the broader demands of the
two markets. In addition, optical technologies originally
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developed for the communications industry, such as high-power
lasers, are also being deployed in industrial, automotive,
aerospace and military applications. These technologies offer
optical component suppliers the opportunity to achieve improved
margins and leverage embedded research and development expertise
in new applications that are less dependent on the cycles of the
telecommunications industry.
In early 2004, the optical components market showed signs of
recovery, driven by customers and service providers with
stronger balance sheets, a growing economy and regulatory
changes that spurred competition among providers of voice, video
and data services. Certain signs of recovery in the industry
have been continuing. We believe that there are three primary
drivers of this market: (i) the continued recovery of
spending by telecommunications networking equipment companies,
(ii) the introduction of new, more cost-effective product
technologies, such as 10 Gb/s pluggable transceivers, and
(iii) the expansion of optical networking in the metro
space, driven by the build out of broadband access networks such
as
fiber-to-the-home
initiatives. In addition, the growing competition among cable
network operators offering voice, video and data services and
traditional telephony service providers is resulting in
increased utilization of optical networking technologies as
communications networks converge.
To succeed in such a challenging and evolving market, we believe
that an optical component supplier must:
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Offer a broad product portfolio of components, modules and
subsystems to provide equipment manufacturers solutions at
different levels of integration;
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Maintain strong relationships with leading optical systems
vendors;
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Develop innovative products that address challenges currently
faced by equipment providers and technologies that provide a
foundation for new products in the future;
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Invest in integrated, cost-efficient manufacturing facilities
which incorporate a variety of process technologies; and
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Possess the necessary scale and cost structure to be
cost-competitive, and the financial resources to endure periodic
industry cycles.
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Our
Solution
We are a leading supplier of optical component solutions for the
telecommunications market. Through a focused acquisition
strategy, we have significantly increased our product portfolio
and manufacturing expertise, and enhanced established
relationships with leading optical systems vendors. We believe
we are well-positioned to succeed as an optical component vendor
for the following reasons:
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Breadth of technology and products. We believe
that we offer one of the most comprehensive
end-to-end
portfolios of optical component solutions to the
telecommunications market. We believe that our range of
technical capabilities allows us to provide customers with
integrated solutions to satisfy their optical component needs,
including integrated subsystems and pluggable modules.
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Leading networking customers. We are suppliers
to leading equipment system vendors, such as Nortel Networks,
Huawei, Cisco and others. For many of our designs, we are
sole-sourced by certain customers , including small form factor
10 Gb/s transmitters and certain optical amplifiers and
receivers. We believe this reflects the technical superiority of
our products and our customers satisfaction with our
products and service.
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Product innovation and technology
leadership. Through internal development and
selective acquisitions of external technology, we continue to
innovate and introduce new products for the telecommunications
market. In general, we focus our development efforts on the
higher performance segment of the market, as we find customers
in this segment value technology differentiation. We also intend
to work to maintain our leadership in existing areas of special
expertise, such as 10Gb/s transmitters, receivers, optical
amplifiers and pump laser chips.
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Advanced semiconductor manufacturing
facilities. We believe our advanced component
design and manufacturing facilities, which would be
prohibitively expensive to replicate in the current market
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environment, is a significant competitive advantage. On-chip
integration of functionality is more difficult without access to
the production process, and requires advanced process know-how
and equipment. Our
3-inch wafer
indium phosphide semiconductor fabrication facility in Caswell
U.K. utilizes advanced production processes to improve
production yields and increase the complexity of the circuits we
design and manufacture.
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Low-cost, advanced assembly facilities. Our
Shenzhen, China facility is an advanced production facility with
approximately 250,000 square feet of manufacturing and
office space that we expect will significantly reduce our
assembly and test costs. We have substantially completed our
transition of our assembly and test to this facility. All of our
major product platforms manufactured in our Shenzhen facility
have been qualified to ship to customers. The substantial
portion of our revenues are now derived from products shipping
out of our Shenzhen facility. We believe that the transfer of
our assembly and test operations to Shenzhen, while maintaining
our Caswell and Zurich facilities, among others, has enabled us
to reduce our costs over the most recent fiscal year while
helping to preserve our technology differentiation.
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Realigned cost structure and improved financial
condition. As part of the process of integrating
acquired businesses and companies, we have taken significant
steps to rationalize production capacity, decrease headcount and
restructure resources to reduce manufacturing and operating
overhead. These steps have resulted in reduced expenses over the
most recently completed fiscal year and enabled us to deliver
our customers component solutions at lower cost. In addition to
restructuring and streamlining measures, we have also taken
measures to improve our capital position during the most
recently completed fiscal year, including raising approximately
$101 million in various financing activities (net of
estimated fees incurred in connection with these financings),
and we entered into a series of transactions that resulted in,
among other things, the payment to Nortel Networks of
$45.9 million which constituted the outstanding aggregate
principle amount under the promissory notes issued to Nortel
Networks, and the conversion of $25.5 million of our
outstanding convertible debentures into common stock. In August
2006 we entered into a three-year senior secured revolving
credit facility of $25 million, under which advances are
available based on a percentage of accounts receivable at the
time the advance is requested. For additional information about
these series of transactions, see Note 17
Debt, to our consolidated financial statement,
appearing herein. In September 2006, we also entered into a
definitive agreement for the private placement of
8,696,000 shares of our common stock at $2.70 per
share, and warrants to purchase 2,174,000 shares of common
stock, with selected institutional investors, for gross proceeds
of approximately $23.5 million. The warrants have a term of
five years and become exercisable after March 1, 2007, and
have an exercise price of $4.00 per share. Certain
additional institutional investors will have the right to
purchase, on or before September 19, 2006, up to
2,898,667 shares of common stock and warrants to purchase
up to 724,667 shares of common stock at the same purchase
price.
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We continue to evaluate further means of enhancing our financial
position through various forms of financing, which could include
the sale of certain assets.
Our
Strategy
Our goal is to maintain and enhance our position as a leading
provider of optical components, module and subsystem solutions
for telecommunications providers and broaden our leadership into
new markets by:
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Leveraging broad product portfolio and technology
expertise. We believe that our broad product
portfolio positions us to increase our penetration of existing
customers, such as Nortel Networks, Cisco and Huawei and gives
us a competitive advantage in winning new customers. In
addition, we intend to continue to apply our optical component
technologies to opportunities in other, non-telecommunications
markets, including military, industrial research, semiconductor
capital equipment and biotechnology, where we believe the use of
those technologies is expanding.
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Providing more comprehensive and technologically advanced
solutions. We intend to continue to invest in
innovative component level technologies that we believe will
allow us to lead the market in quality, price and performance.
We also plan to leverage our component level technologies into a
series of components, modules and subsystems, enabling us to
meet our customers growing demand for complete solutions.
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Broadening sales, marketing and customer support
capabilities. We intend to develop our sales and
marketing infrastructure and customer support functions that
will (i) allow our customer relationships to evolve after
products are deployed, (ii) aid in the retention of
existing customers and (iii) help identify areas for
further technical improvement and development.
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Continuing to improve cost structure. We
intend to continue to identify and implement cost-saving
programs across our organization, including programs to align
our manufacturing resources appropriately. We are implementing
plans to transfer our remaining manufacturing and supply chain
management functions from our Paignton U.K. facility to our
lower cost Shenzhen facility. These plans also include the
rationalization of our Caswell U.K. wafer facility capacity to
match our near term fabrication requirements. We intend to
continue to focus on managing our variable costs through yield
improvements, labor productivity gains, component substitutions
and aggressive supply chain management.
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Selectively pursuing acquisitions. As we have
done in the past, we will continue to consider the use of
acquisitions as a means to enhance our scale, obtain critical
technologies and enter new markets.
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Our
Product Offerings
We design, manufacture and market optical components, modules
and subsystems that generate, detect, amplify, combine and
separate light signals with primary application in fiber optic
telecommunications networks. We have significant expertise in
technology such as III-V optoelectronic semiconductors
utilizing indium phosphide and gallium arsenide substrates, thin
film filters and micro-optic assembly and packaging technology.
In addition to these technologies, we also have electronics
design, firmware and software capabilities to produce
transceivers, transponders, optical amplifiers and other
value-added subsystems.
We believe that our acquisitions of the optical component
businesses of Nortel Networks and Marconi, as well as our
acquisitions of Ignis Optics, New Focus, Avalon and Onetta and
the assets of Cierra Photonics, Inc., which we refer to as
Cierra Photonics, have significantly enhanced our product
portfolio. We believe our enhanced portfolio will enable us to
provide optical systems suppliers with subsystems and modules
based on our components. This ability to offer a more
comprehensive array of products addresses our customers
goals of reducing the number of suppliers from whom they
purchase.
Our products provide functionality for the various elements
within the optical networking system from transmitting to
receiving light signals, and include products that generate,
detect, amplify, combine and separate light signals. Our product
offerings that are principally aimed at the telecommunications
marketplace include:
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Transmitters. Our transmitter product lines
include products with fixed and tunable wavelength designed for
both long-haul and metro applications at 2.5 Gb/s and 10 Gb/s.
This product line includes lasers that are either directly or
externally modulated depending on the application.
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Transceivers. Our small form factor pluggable
transceiver portfolio includes SFP products operating at
2.5 Gb/s and XFP products operating at 10 Gb/s.
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Tunable lasers and transmitter modules. Our
tunable laser products include both thermally and electronically
tunable devices that are co-packaged with a modulator to
optimize performance and reduce the size of the product. We also
have innovative technology to deliver wide band electronic
tunability.
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Receivers. Our portfolio of discrete receivers
for metro, long and ultra long-haul applications at 2.5 Gb/s and
10 Gb/s includes avalanche photodiode, or APD, preamp receivers,
as well as photodiode, or PIN, preamp receivers, and PIN and APD
modules and products that feature integrated attenuators.
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Amplifiers. Erbium doped fiber amplifiers, or
EDFAs, are used to boost the brightness of optical signals and
offer compact amplification for ultra long-haul, long-haul and
metro networks. We offer a semi-custom product portfolio of
multi-wavelength amplifiers from gain blocks to full card level
or subsystem solutions designed for use in wide bandwidth wave
division multiplexing, or WDM, optical transmission systems. We
also offer lower cost narrow band
mini-amplifiers.
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Pump laser chips. Our 980 nanometer pump laser
diodes are designed for use as high-power, reliable pump sources
for EDFAs. Uncooled modules are designed for low- cost, reliable
amplification for metro, cross-connect or other single/multi
channel amplification applications.
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Transponder modules. Our transponder modules
provide both transmitter and receiver functions. A transponder
includes electrical circuitry to control the laser diode and
modulation function of the transmitter as well as the receiver
electronics.
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Thin Film Filters. Our thin film filter, or
TFF, products are used for multiplexing and demultiplexing
optical signals within dense WDM transmission systems. In
addition to this, TFF products are used to attenuate and control
light within our amplifier product range.
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TOA/ROA. Transmitter optical assemblies, or
TOAs, and receiver optical assemblies, or ROAs, are card-level
transmitter and receiver assemblies that are customized for the
Nortel Networks 10 Gb/s network systems. These products
integrate several individual optical components onto one circuit
board that contains components sourced both internally and from
third parties.
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The optical technology originally developed for the
telecommunications industry is also increasingly being deployed
in other markets, such as industrial, consumer display and life
sciences, in addition to the test and measurement market where
it has been deployed for some time. Advancements in laser
technology have improved the cost, size and power of devices,
making them more suitable for non-telecommunications
applications. We believe that we are positioned to benefit from
the increased use of lasers in new markets as a leading provider
of such technology, including advanced pump laser technology for
industrial applications. Optical thin film filter technology is
already widely deployed outside of telecommunications; we are
focusing our efforts on developing applications for life
sciences, biotechnology and consumer display industries.
Through our New Focus division, we develop photonics and
microwave solutions for diversified markets such as research,
semiconductor capital equipment and the military. We sell two
primary families of products in the area of photonics and
microwave solutions: advanced photonic tools principally used
for generating, measuring, moving, manipulating, modulating and
detecting optical signals, and tunable lasers for test and
measurement applications. We sell our products to the research
market primarily via an extensive catalog, and believe we
benefit from the broad market awareness of our New Focus brand
in this market. We pursue a direct sales approach for the
semiconductor capital equipment and military markets, and
currently sell to several of the leading companies in the
semiconductor capital equipment market.
Customers,
Sales and Marketing
We principally sell our optical component products to
telecommunications systems vendors as well as to customers in
the data communications, military, aerospace, industrial and
manufacturing industries. Customers for our photonics and
microwave product portfolio include academic and governmental
research institutions that engage in advanced research and
development activities, and semiconductor capital equipment
manufacturers.
We operate in two business segments: (i) optics and
(ii) research and industrial. Optics relates to the design,
development, manufacture, marketing and sale of optical
solutions for telecommunications and industrial applications.
Research and industrial relates to the design, manufacture,
marketing and sale of photonics and microwave solutions.
9
The following table sets forth our revenues by segment for the
periods indicated:
Revenues
by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Optics
|
|
$
|
206,019
|
|
|
$
|
176,598
|
|
|
$
|
69,315
|
|
|
$
|
146,197
|
|
Research and Industrial
|
|
|
25,630
|
|
|
|
23,658
|
|
|
|
10,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
231,649
|
|
|
$
|
200,256
|
|
|
$
|
79,763
|
|
|
$
|
146,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For additional information on the optics and research and
industrial segments, see Note 12 Segments
of an Enterprise and Related Information to
our consolidated financial statements appearing elsewhere herein.
Nortel Networks accounted for 48% of our total revenue in the
year ended July 1, 2006 (or fiscal 2006), 45% in the year
ended July 2, 2005, 46% in the six-month period ended
July 3, 2004, and 59% in the year ended December 31,
2003, respectively. Marconi accounted for 13% of our total
revenue in the year ended December 31, 2003. In addition to
our efforts to rationalize and streamline our operations, we
have also undertaken efforts to realign our relationship with
our largest customer, Nortel Networks, with whom we have entered
into several agreements. In connection with our purchase of
Nortel Networks optical components business in 2002,
Nortel Networks agreed to a long-term supply agreement which,
among other things, required Nortel Networks to purchase a
specified level of products from us, and they obtained certain
rights from us. We financed the acquisition of the optical
components business in part through the issuance of two
promissory notes having an initial aggregate principal amount of
$50 million, which were settled in full in January 2006, at
which time the security agreements we entered into with Nortel
Networks and related security interests securing our obligations
under the promissory notes and the supply agreement were
terminated. Pursuant to the third addendum to the supply
agreement, Nortel Networks is obligated to purchase
$72 million of product from us through the end of calendar
2006.
During the past three years, Nortel Networks has been our
largest customer. In the process of completing the delivery of a
majority of the last-time buys required under the
second addendum to the Nortel Networks supply agreement, our
revenues from Nortel Networks decreased in the third and fourth
quarters of fiscal 2006, from $34.3 million in the second
quarter of fiscal 2006, to $24.1 million in the third
quarter of fiscal 2006, to $18.5 million in this fourth
quarter of fiscal 2006. Under the third addendum to the Nortel
Networks supply agreement, we anticipate our quarterly revenues
from Nortel Networks will continue to drop through the remaining
two quarters of calendar 2006, which are the first two quarters
of our fiscal 2007, and potentially decline further in future
quarters.
General
We believe it is essential to maintain a comprehensive and
capable direct sales and marketing organization. As of
July 1, 2006, we had an established direct sales and
marketing force of 91 people for all of our products sold in the
U.K., China, France, Germany, Switzerland, Canada, Italy and the
U.S. In addition to our direct sales and marketing force,
we also sell and market our products through international sales
representatives and resellers that extend our commercial reach
to smaller geographic locations and customers that are not
currently covered by our direct sales and marketing force. Our
products targeted at research and industrial applications are
sold through catalogs.
Our products typically have a long sales cycle. The period of
time between our initial contact with a customer to the receipt
of an actual purchase order is frequently a year or more. In
addition, many customers perform, and require us to perform,
extensive process and product evaluation and testing of
components before entering into purchase arrangements.
In certain instances, support services for our products include
customer service and technical support. Customer service
representatives assist customers with orders, warranty returns
and other administrative functions. Technical support engineers
provide customers with answers to technical and product-related
questions. Technical support engineers also provide application
support to customers who have incorporated our products into
custom applications.
10
The following table sets forth our revenues by geographic region
for the periods, determined based on the country shipped to,
indicated:
Revenues
by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Canada
|
|
$
|
107,445
|
|
|
$
|
85,006
|
|
|
$
|
35,529
|
|
|
$
|
78,373
|
|
United States
|
|
|
47,762
|
|
|
|
54,660
|
|
|
|
20,446
|
|
|
|
13,584
|
|
China
|
|
|
27,781
|
|
|
|
19,420
|
|
|
|
9,426
|
|
|
|
14,155
|
|
Europe Other Than United Kingdom
|
|
|
18,896
|
|
|
|
19,274
|
|
|
|
8,797
|
|
|
|
13,356
|
|
Asia Other Than China
|
|
|
15,655
|
|
|
|
5,019
|
|
|
|
1,449
|
|
|
|
840
|
|
United Kingdom
|
|
|
9,857
|
|
|
|
15,727
|
|
|
|
4,023
|
|
|
|
25,069
|
|
Rest of the World
|
|
|
4,253
|
|
|
|
1,150
|
|
|
|
93
|
|
|
|
820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
231,649
|
|
|
$
|
200,256
|
|
|
$
|
79,763
|
|
|
$
|
146,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are subject to risks related to operating in foreign
countries. These risks include, among others: currency
fluctuations; difficulty in accounts receivable collection and
longer collection periods; difficulty in enforcing or adequately
protecting our intellectual property; foreign taxes; political,
legal and economic instability in foreign markets; and foreign
regulations. Any of these risks, or any other risks related to
our foreign operations, could materially adversely affect our
business, financial condition and results of operations and
could result in increased operating expenses and reduced
revenues.
Intellectual
Property
We believe that our proprietary technology provides us with a
competitive advantage, and we intend to continue to protect our
technology, as appropriate, including design, process and
assembly aspects. We believe that our intellectual property
portfolio is a strategic asset that we can use to develop our
own sophisticated solutions and applications, or in conjunction
with the technologies of the companies with whom we collaborate,
for use in optical networking. Our intellectual property
portfolio is supplemented by our expertise and application and
process engineering know-how developed by our personnel,
including personnel who joined us from Nortel Networks, Marconi,
Cierra Photonics, Ignis Optics, New Focus, Avalon and Onetta. We
believe that the future success of our business will depend on
our ability to translate our intellectual property portfolio and
the technological expertise and innovation of our personnel into
new and enhanced products.
As of August 1, 2006, we held 292 U.S. patents and 173
non-U.S. patents,
and we had approximately 295 patent applications pending in
various countries. The patents we currently hold expire between
2006 and 2025. We maintain an active program to identify
technology appropriate for patent protection. We require
employees and consultants to execute non-disclosure and
proprietary rights agreements upon commencement of employment or
consulting arrangements. These agreements acknowledge our
exclusive ownership of all intellectual property developed by
the individuals during their work for us and require that all
proprietary information disclosed will remain confidential.
While such agreements may be binding, we may not be able to
enforce them in all jurisdictions.
Although we continue to take steps to identify and protect our
patentable technology and to obtain and protect proprietary
rights to our technology, we cannot be certain the steps we have
taken will prevent misappropriation of our technology. We may,
as appropriate, take legal action to enforce our patents and
trademarks and otherwise to protect our intellectual property
rights, including our trade secrets. In the future, situations
may arise in which we may decide to grant licenses to certain of
our proprietary technology.
11
Research
and Development
Since the inception of Bookham Technology plc in 1988, we have
been committed to our research and development activities. We
spent $42.6 million during the year ended July 1,
2006, $44.8 million during the year ended July 2,
2005, $26.9 million during the six-month period ended
July 3, 2004, and $50.4 million during the year ended
December 31, 2003 on our research and development programs.
We believe that continued focus on the development of our
technology is critical to our future competitive success and our
goal is to expand and develop our line of telecommunications
products, particularly in the area of subsystems, expand and
develop our line of non-telecommunications products and
technologies for use in a variety of different applications,
enhance our manufacturing processes to reduce production costs,
provide increased device performance and reduce product time to
market. We also believe it is critical to focus our resources on
those technologies where our strengths as a company may
translate into the most significant potential for product demand
and profitability. Accordingly, in connection with our most
recent cost reduction plan announced in May 2006, we are
rationalizing our product development portfolio to focus on such
programs. As of July 1, 2006, our research and development
organization comprised 352 people.
Our research and development facilities in Paignton, U.K., Santa
Rosa and San Jose, California, and Ottawa, Canada, include
computer-aided design stations, modern laboratories and
automated test equipment. Our research and development
organization has optical and electronic integration expertise
that facilitates meeting customer-specific requirements as they
arise.
Manufacturing
Our manufacturing capabilities include fabrication processing
for indium phosphide, gallium arsenide and TTFs, including clean
room facilities for each of these fabrication processes, along
with assembly and test capability and reliability/quality
testing. We utilize sophisticated semiconductor processing
equipment, such as epitaxy reactors, metal deposition systems,
and photolithography, etching, analytical measurement and
control equipment. Our assembly and test facilities include
specialized automated assembly equipment, temperature and
humidity control and reliability and testing facilities.
We lease an advanced
3-inch wafer
indium phosphide semiconductor fabrication facility, which we
believe is one of our key competitive differentiators, in
Caswell U.K. under a 20 year lease with an option to extend
an additional 5 years after the initial 20 year period
and for additional 2 year increments indefinitely after the
initial 25 year period. We previously owned this facility,
but in March 2006 we sold it to a subsidiary of Scarborough
Development as a part of a sale-leaseback arrangement. For
additional information about the sale-leaseback arrangement of
the Caswell facility, see Note 5 Commitments
and Contingencies to our consolidated financial statement,
appearing herein. We also have assembly and test facilities in
Shenzhen, China and San Jose, California, and an assembly
and test facility in Paignton U.K. a substantial portion of the
manufacturing related activities at the Paignton U.K. facility
has been transferred to Shenzhen, and the remainder are expected
to be transferred no later than the end of the December 2006
quarter. We have a wafer fabrication facility in Zurich,
Switzerland, and a TTF manufacturing facility in Santa Rosa,
California. We previously had manufacturing facilities in
Abingdon, Harlow and Swindon, U.K.; Columbia, Maryland;
Poughkeepsie, New York; and Ottawa, Canada, all of which are now
closed. During 2003, we consolidated our Ottawa manufacturing
equipment and activities into our existing Caswell facility and
consolidated our optical amplifier assembly and test operations
and
chip-on-carrier
operations into our Paignton site. In 2003, we substantially
underutilized our existing manufacturing capacity. In 2004, we
implemented a restructuring plan which included a reduction in
our excess manufacturing floor space to 700,000 square feet
and the transfer of a majority of our assembly and test
operations from Paignton to Shenzhen in order to take advantage
of the comparatively low manufacturing costs in China. In the
quarter ended October 2, 2004, we commenced assembly and
test operations in Shenzhen. Revenues shipped from our Shenzhen
facility have increased from $3.1 million in the quarter
ended March 31, 2005 to $36.8 million in the quarter
ended July 1, 2006. The transfer of assembly and test
operations from our Paignton facility was substantially complete
by the end of the quarter ended April 1, 2006, except for a
remaining assembly process expected to transition to Shenzhen by
the end of December 2006. In May 2006, we announced plans to
transition all remaining supply chain and manufacturing overhead
support from Paignton to Shenzhen.
12
The following table sets forth our long-lived tangible assets by
geographic region as of the dates indicated:
Long-Lived
Tangible Assets
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
United Kingdom
|
|
$
|
30,319
|
|
|
$
|
40,813
|
|
China
|
|
|
14,529
|
|
|
|
14,905
|
|
Europe Other Than United Kingdom
|
|
|
4,806
|
|
|
|
5,312
|
|
United States
|
|
|
1,893
|
|
|
|
2,229
|
|
Canada
|
|
|
616
|
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
Total long-lived tangible assets
|
|
$
|
52,163
|
|
|
$
|
64,156
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our total assets by geographic
region as of the dates indicated:
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
United Kingdom
|
|
$
|
121,337
|
|
|
$
|
150,876
|
|
United States
|
|
|
46,115
|
|
|
|
47,695
|
|
China
|
|
|
47,611
|
|
|
|
24,940
|
|
Europe Other Than United Kingdom
|
|
|
19,090
|
|
|
|
11,660
|
|
Canada
|
|
|
2,644
|
|
|
|
3,407
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
236,797
|
|
|
$
|
238,578
|
|
|
|
|
|
|
|
|
|
|
Competition
The market for our products is highly competitive. We believe we
compete favorably with respect to the following factors:
|
|
|
|
|
product quality, performance and price;
|
|
|
|
future product evolution;
|
|
|
|
manufacturing capabilities; and
|
|
|
|
customer service and support.
|
With respect to our telecommunications products, we also believe
we compete favorably on the basis of our historical customer
relationships and the breadth of our product lines.
Although we believe that we compete favorably with respect to
these factors, there can be no assurance that we will continue
to do so. We encounter substantial competition in most of our
markets, although no one competitor competes with us across all
product lines or markets.
We believe that our principal competitors in telecommunications
are the major suppliers of optical components and modules,
including both vendors selling to third parties and components
companies owned by large telecommunications equipment
manufacturers. Specifically, we believe that we compete against
two main categories of competitors in telecommunications:
|
|
|
|
|
broad-based merchant suppliers of components, principally JDSU,
Avanex, Opnext and CyOptics; and
|
|
|
|
the vertically integrated equipment manufacturers, such as
Fujitsu, Huawei and Sumitomo.
|
13
In addition, as we integrate and expand our offerings into new
markets, we may compete against market leaders, such as Agilent,
Finisar and Marvell, which acquired Intels communications
business, in industries such as semiconductor and data
communications, who may have significantly more resources than
we do.
In the area of photonics and microwave solutions, we compete
with a number of companies including Melles Griot, Newport,
Thermo Oriel (a unit of the Thermo Photonics Division of Thermo
Electron Corporation), Thorlabs, Miteq and Aeroflex.
Employees
As of July 1, 2006, we employed 2,123 persons, including
352 in research and development, 1,571 in manufacturing, 90 in
sales and marketing, and 110 in finance and administration. None
of our employees are subject to collective bargaining
agreements. We believe that our relations with our employees are
good.
Investing in our securities involves a high degree of risk.
You should carefully consider the risks and uncertainties
described below in addition to the other information included or
incorporated by reference in this Annual Report on
Form 10-K.
If any of the following risks actually occur, our business,
financial condition or results of operations would likely
suffer. In that case, the trading price of our common stock
could fall.
Risks
Related to Our Business
We
have a history of large operating losses and we expect to
generate losses in the future unless we achieve further cost
reductions and revenue increases.
We have never been profitable. We have incurred losses and
negative cash flow from operations since our inception. As of
July 1, 2006, we had an accumulated deficit of
$954 million.
Our net loss for the year ended July 1, 2006 was
$87.5 million, which included an $18.8 million loss on
conversion of convertible debt and early extinguishment of debt,
a $11.7 million tax gain, and an aggregate of
$11.2 million of restructuring charges. For the year ended
July 2, 2005 our net loss was $248 million, which
included goodwill and intangibles impairment charges of
$114.2 million and restructuring charges of
$20.9 million.
Even though we generated positive gross margins in each of the
past five fiscal quarters, we have a history of negative gross
margins. In the quarter ended April 1, 2006, we experienced
a decrease in margins when compared with the prior fiscal
quarter, which is the result of a shift to lower margin products
as we transition to new products, underutilization of our
semiconductor facility located in Caswell, U.K. as a result of
the changing product mix, and costs associated with the shutdown
of certain production lines in our Paignton assembly and test
facility. We may not be able to maintain positive gross margins
if we do not address these issues, continue to reduce our costs,
improve our product mix and generate sufficient revenues from
new and existing customers to offset the revenues we will lose
after Nortel Networks completes its last-time-buy
purchases and its other purchases pursuant to the supply
agreement, as amended.
In
order to continue as a going concern, we will need capital in
excess of our current cash resources.
Based on our cash balances, and given our continuing and
expected losses for the foreseeable future, if we fail to meet
managements current cash flow forecasts, or we are unable
to draw sufficient amounts under the three year $25 million
senior secured revolving credit agreement with Wells Fargo
Foothill, Inc. and other lenders, which was entered into in
August 2006, for any reason, we will need to raise additional
funding of at least $10 million to $20 million through
external sources prior to July 2007 in order to maintain
sufficient financial resources in order to operate as a going
concern through the end of fiscal 2007. If necessary, we will
attempt to raise additional funds by any one or a combination of
the following: (i) completing the sale of certain assets;
(ii) issuing equity, debt or convertible debt
(iii) selling certain non core businesses. There can be no
assurance of our ability to raise sufficient capital through the
above, or any other efforts.
14
We
remain highly dependent on sales to Nortel Networks and we
expect revenues from Nortel Networks to decrease at least
through calendar 2006.
Historically, Nortel Networks has been our largest customer. In
the fiscal year ended July 1, 2006 and in the fiscal year
ended July 2, 2005, we sold $110.5 million and
$89.5 million of products and services to Nortel Networks,
or 48% and 45% of our total revenues, respectively.
In connection with the third addendum to the supply agreement
with Nortel Networks we entered into on January 13, 2006,
Nortel Networks is obligated to purchase $72 million of our
products through calendar year 2006. There can be no assurance
Nortel Networks will continue to buy any of our products after
the supply agreement, as amended, is completed, or if Nortel
Networks does not continue to buy at its current level, that we
can replace the loss of revenue from Nortel Networks with
revenue from other customers. To the extent that we may rely on
Nortel Networks for revenues in the future, Nortel Networks has
experienced significant losses in the past and any future
adverse change in Nortel Networks financial condition
could adversely affect their demand for our products.
Our
success will depend on our ability to anticipate and respond to
evolving technologies and customer requirements.
The market for telecommunications equipment is characterized by
substantial capital investment and diverse and evolving
technologies. For example, the market for optical components is
currently characterized by a trend toward the adoption of
pluggable components and tunable transmitters that
do not require the customized interconnections of traditional
fixed wave length gold box devices and the increased
integration of components on subsystems. Our ability to
anticipate and respond to these and other changes in technology,
industry standards, customer requirements and product offerings
and to develop and introduce new and enhanced products will be
significant factors in our ability to succeed. We expect that
new technologies will continue to emerge as competition in the
telecommunications industry increases and the need for higher
and more cost efficient bandwidth expands. The introduction of
new products embodying new technologies or the emergence of new
industry standards could render our existing products
uncompetitive from a pricing standpoint, obsolete or
unmarketable.
We may
encounter unexpected costs or delays in transferring our
assembly and test operations from the United Kingdom to
Shenzhen, China.
A key element of our restructuring and cost reduction efforts is
the successful transfer of substantially all of our assembly and
test operations from Paignton, U.K. to Shenzhen, China.
Accordingly, we expect that our ability to transfer
manufacturing capabilities to, and to operate effectively in,
China is critical to the overall success of our business. We
began to implement the transfer of our assembly and test
operations from Paignton to Shenzhen in the fall of 2004. The
substantial portion of the manufacturing transfer has been
completed as of July 1, 2006. In November 2005, we
announced that our
chip-on-carrier
assembly will also be transferred from Paignton to Shenzhen. We
expect that the transfer of
chip-on-carrier
assembly operation to Shenzhen will continue at least into the
quarter ended December 31, 2006. In May 2006, we announced
that substantially all remaining manufacturing and supply chain
management and related activities in Paignton would also be
transferred to Shenzhen, and that transfer will also continue at
least into the quarter ended December 31, 2006. Our
business and results of operations would be materially adversely
affected if we experience delays in, increased costs related to,
or if we are ultimately unable to:
|
|
|
|
|
qualify our manufacturing lines and the products we produce in
Shenzhen, as required by our customers;
|
|
|
|
transfer our assembly and test equipment, including
chip-on-carrier
equipment, from Paignton to Shenzhen;
|
|
|
|
attract qualified personnel to operate our Shenzhen facility;
|
|
|
|
retain employees at our Shenzhen facility;
|
|
|
|
achieve the requisite production levels for products
manufactured at our Shenzhen facility; and
|
|
|
|
wind down operations at our Paignton facility.
|
15
During the year ended July 1, 2006, we recorded significant
unanticipated costs related to the wind-down of manufacturing
activities in Paignton, and the transfer of the related
activities to Shenzhen, and we may continue to do so in the
future. If we continue to incur these unanticipated costs in
connection with transferring certain operations to our Shenzhen
facility, our business and results of operations will be
adversely affected.
The
market for optical components continues to be characterized by
excess capacity and intense price competition which has had, and
will continue to have, a material adverse affect on our results
of operations.
By 2002, actual demand for optical communications equipment and
components was dramatically less than that forecasted by leading
market researchers only two years before. Even though the market
for optical components has been recovering recently,
particularly in the metro market segment, there continues to be
excess capacity, intense price competition among optical
component manufacturers and continued consolidation of the
industry. As a result of this excess capacity, and other
industry factors, pricing pressure remains intense. The
continued uncertainties in the telecommunications industry and
the global economy make it difficult for us to anticipate
revenue levels and therefore to make appropriate estimates and
plans relating to cost management. Continued uncertain demand
for optical components has had, and will continue to have, a
material adverse effect on our results of operations.
A
default under our supply agreement with Nortel Networks would
have an adverse impact on our ability to conduct our
business.
We are party to a supply agreement with Nortel Networks that has
been amended three times, most recently in January 2006. The
supply agreement, as amended, requires that we grant a license
for the assembly, test, post-processing and test intellectual
property (but excluding wafer technology) of certain critical
products to Nortel Networks and to any designated alternative
supplier, if at any time, we: are unable to manufacture critical
products for Nortel Networks in any material respect for a
continuous period of not less than six weeks, or are subject to
an insolvency event, such as a petition or assignment in
bankruptcy, appointment of a trustee, custodian or receiver, or
entrance into an arrangement for the general benefit of
creditors. In addition, if there is an insolvency event, Nortel
Networks will have the right to buy all Nortel Networks
inventory we hold, and we will be obligated to grant a license
to Nortel Networks or any alternative supplier for the
manufacture of all products covered by the first addendum to the
supply agreement. Our revenues and business would be
substantially harmed if we were required to license this
assembly, test, post-processing and test intellectual property
to Nortel Networks or any supplier they were to designate.
We and
our customers are each dependent upon a limited number of
customers.
Historically, we have generated most of our revenues from a
limited number of customers. Sales to one customer, Nortel
Networks, accounted for 48% and 45% of our revenues for the year
ended July 1, 2006 and the year ended July 2, 2005,
respectively. In addition to the reduced outlook for revenue
from Nortel Networks after the purchase orders under the supply
agreement, as amended, are filled, we expect that revenue from
our other major customers may decline or fluctuate significantly
during the remainder of calendar year 2006 and beyond. We may
not be able to offset any such decline in revenues from our
existing major customers with revenues from new customers.
Our dependence on a limited number of customers is due to the
fact that the optical telecommunications systems industry is
dominated by a small number of large companies. Similarly, our
customers depend primarily on a limited number of major
telecommunications carrier customers to purchase their products
that incorporate our optical components. Many major
telecommunication systems companies and telecommunication
carriers are experiencing losses from operations. The further
consolidation of the industry, coupled with declining revenues
from our major customers, may have a material adverse impact on
our business.
16
As a
result of our global operations, our business is subject to
currency fluctuations that have adversely affected our results
of operations in recent quarters and may continue to do so in
the future.
Our financial results have been materially impacted by foreign
currency fluctuations and our future financial results may also
be materially impacted by foreign currency fluctuations. At
certain times in our history, declines in the value of the
U.S. dollar versus the U.K. pound sterling have had a major
negative effect on our profit margins and our cash flow. Despite
our change in domicile from the United Kingdom to the United
States and the implementation of our restructuring program to
move all assembly and test operations from Paignton, U.K. to
Shenzhen, China, the majority of our expenses are still
denominated in U.K. pounds sterling and substantially all of our
revenues are denominated in U.S. dollars. Fluctuations in
the exchange rate between these two currencies and, to a lesser
extent, other currencies in which we collect revenues and pay
expenses will continue to have a material affect on our
operating results. Additional exposure could result should the
exchange rate between the U.S. dollar and the Chinese Yuan
vary more significantly than it has to date.
We engage in currency transactions in an effort to cover any
exposure to such fluctuations, and we may be required to convert
currencies to meet our obligations. Under certain circumstances,
these transactions can have an adverse effect on our financial
condition.
We are
increasing manufacturing operations in China, which exposes us
to risks inherent in doing business in China.
We are taking advantage of the comparatively low manufacturing
costs in China by transferring substantially all of our assembly
and test operations,
chip-on-carrier
operations and manufacturing and supply chain management
operations to our facility in Shenzhen, China. Operations in
China are subject to greater political, legal and economic risks
than our operations in other countries. In order to operate the
facility, we must obtain and retain required legal authorization
and train and hire a workforce. In particular, the political,
legal and economic climate in China, both nationally and
regionally, is fluid and unpredictable. Our ability to operate
in China may be adversely affected by changes in Chinese laws
and regulations such as those related to taxation, import and
export tariffs, environmental regulations, land use rights,
intellectual property and other matters. In addition, we may not
obtain or retain the requisite legal permits to continue to
operate in China and costs or operational limitations may be
imposed in connection with obtaining and complying with such
permits.
We have been advised that power may be rationed in the location
of our Shenzhen facility, and were power rationing to be
implemented, it could either have an adverse impact on our
ability to complete manufacturing commitments on a timely basis
or, alternatively, could require significant investment in
generating capacity to sustain uninterrupted operations at the
facility. Our ability to transfer
chip-on-carrier
operations and manufacturing and supply chain management
operations from our facilities in the U.K. to China would be
hindered by a power rationing. We may also be required to expend
greater amounts than we currently anticipate in connection with
increasing production at the facility. Any one of these factors,
or a combination of them, could result in unanticipated costs,
which could materially and adversely affect our business.
We intend to export the majority of the products manufactured at
our Shenzhen facility. Under current regulations, upon
application and approval by the relevant governmental
authorities, we will not be subject to certain Chinese taxes and
will be exempt from certain duties on imported materials that
are used in the manufacturing process and subsequently exported
from China as finished products. However, Chinese trade
regulations are in a state of flux, and we may become subject to
other forms of taxation and duties in China or may be required
to pay export fees in the future. In the event that we become
subject to new forms of taxation in China, our business and
results of operation could be materially adversely affected.
Fluctuations
in operating results could adversely affect the market price of
our common stock.
Our revenues and operating results are likely to fluctuate
significantly in the future. The timing of order placement, size
of orders and satisfaction of contractual customer acceptance
criteria, as well as order or shipment delays or deferrals, with
respect to our products, may cause material fluctuations in
revenues. Our lengthy sales cycle, which may extend to more than
one year, may cause our revenues and operating results to vary
from period to period and it may be difficult to predict the
timing and amount of any variation. Delays or deferrals in
purchasing
17
decisions may increase as we develop new or enhanced products
for new markets, including data communications, aerospace,
industrial and military markets. Our current and anticipated
future dependence on a small number of customers increases the
revenue impact of each customers decision to delay or
defer purchases from us. Our expense levels in the future will
be based, in large part, on our expectations regarding future
revenue sources and, as a result, net income for any quarterly
period in which material orders fail to occur, or are delayed or
deferred could vary significantly.
Because of these and other factors,
quarter-to-quarter
comparisons of our results of operations may not be an
indication of future performance. In future periods, results of
operations may differ from the estimates of public market
analysts and investors. Such a discrepancy could cause the
market price of our common stock to decline.
We may
incur additional significant restructuring charges that will
adversely affect our results of operations.
Over the past five years, we have enacted a series of
restructuring plans and cost reduction plans designed to reduce
our manufacturing overhead and our operating expenses. In 2001,
we reduced manufacturing overhead and our operating expenses in
response to the initial decline in demand in the optics
components industry. In connection with our acquisitions of
Nortel Networks optical components business in November
2002 and New Focus in March 2004, we enacted restructuring
plans related to the consolidation of our operations, which we
expanded in September 2004 to include the transfer of our main
corporate functions, including consolidated accounting,
financial reporting, tax and treasury, from Abingdon, U.K. to
our new U.S headquarters in San Jose, California.
In May and November of 2004, we adopted additional restructuring
plans, which included the transfer of our assembly and test
operations from Paignton, U.K. to Shenzhen, China, a process
that commenced in the quarter ended October 2, 2004. This
transition was substantially complete by the end of March 2006,
except for a chip-on-carrier assembly process we added to the
transition plan in November 2005, and which we expect to be
completed by the end of December 2006. In May 2006, we announced
our latest cost reduction plans, which included transitioning
all remaining manufacturing support and supply chain management,
along with pilot line production and production planning, from
Paignton to Shenzhen, also by the end of December, 2006.
With respect to the transfer of the operations described in the
previous paragraph, some of which are still in the process of
being transferred, we have spent $22.6 million as of July 1,
2006, and we anticipate spending a total of approximately $30
million to $37 million, including $6.0 million to $7.0 million
on the cost reduction plan announced in May 2006. The
substantial portion of the remaining spending relates to
personnel and personnel related costs. We expect the cost
reduction plan announced in May 2006 to reduce our costs by
between $5.5 million and $6.5 million a quarter, when compared
to the expenses incurred in the quarter ended April 1,
2006, with the cost savings expected to be realized in the March
2007 quarter.
We may incur charges in excess of amounts currently estimated
for these restructuring and cost reduction plans. We may incur
additional charges in the future in connection with future
restructurings and cost reduction plans. These charges, along
with any other charges, have adversely affected, and will
continue to adversely affect, our results of operations for the
periods in which such charges have been, or will be, incurred.
Our
results of operations may suffer if we do not effectively manage
our inventory, and we may incur inventory-related
charges.
We need to manage our inventory of component parts and finished
goods effectively to meet changing customer requirements. The
ability to accurately forecast customers product needs is
difficult. Some of our products and supplies have in the past,
and may in the future, become obsolete while in inventory due to
rapidly changing customer specifications or a decrease in
customer demand. If we are not able to manage our inventory
effectively, we may need to write down the value of some of our
existing inventory or write off unsaleable or obsolete
inventory, which would adversely affect our results of
operations. We have from time to time incurred significant
inventory-related charges. During the year ended July 1,
2006, we incurred significant costs for inventory production
variances associated with unanticipated shifts in the mix of our
customers product orders. Any such charges we incur in
future periods could significantly adversely affect our results
of operations.
18
Charges
to earnings resulting from the application of the purchase
method of accounting may adversely affect the market value of
our common stock.
We account for our acquisitions, including the acquisition of
New Focus, using the purchase method of accounting. In
accordance with GAAP, we allocate the total estimated purchase
price to the acquired companys net tangible assets,
amortizable intangible assets, and in-process research and
development based on their fair values as of the date of
announcement of the transaction, and record the excess of the
purchase price over those fair values as goodwill. With respect
to our acquisition of New Focus, we expensed the portion of the
estimated purchase price allocated to in-process research and
development in the third quarter of fiscal 2004. We will incur
an increase in the amount of amortization expense over the
estimated useful lives of certain of the intangible assets
acquired in connection with the acquisition on an annual basis.
To the extent the value of goodwill or intangible assets with
indefinite lives becomes impaired, we may be required to incur
material charges relating to the impairment of those assets. In
the year ended July 2, 2005, following a triggering event
in the third quarter and in accordance with our policy of
evaluating long-lived assets for impairment in the fourth
quarter, we recorded charges totaling $114.2 million
related to the impairment of goodwill and purchased intangible
assets. In addition, in the past, after the completion of a
transaction, we have amended the provisional values of assets
and liabilities we obtained as part of transactions,
specifically the acquisition of the optical components business
of Nortel Networks. This amendment resulted in the value of our
inventory being increased by $20.2 million, current
liabilities being increased by approximately $1.3 million,
intangible assets being decreased by approximately
$9.1 million and property, plant and equipment being
increased by $9.8 million. In March 2006, we acquired
Avalon Photonics AG, and recorded $2.5 million as the value
of goodwill and $2.2 million as the value of purchased
intangible assets, both of which will be subject to reviews for
impairment of value in the future. We cannot assure you that we
will not incur charges in the future as a result of any such
transaction, which charges may have an adverse effect on our
earnings.
Bookham
Technology plc may not be able to utilize tax losses and other
tax attributes against the receivables that arise as a result of
its transaction with Deutsche Bank.
On August 10, 2005, Bookham Technology plc purchased all of
the issued share capital of City Leasing (Creekside) Limited, a
subsidiary of Deutsche Bank. Creekside is entitled to
receivables of £73.8 million (approximately
$135.8 million, based on an exchange rate of £1.00 to
$1.8403, the noon buying rate on September 2, 2005 for
cable transfers in foreign currencies as certified by the
Federal Reserve Bank of New York) from Deutsche Bank in
connection with certain aircraft subleases and will in turn
apply those payments over a two-year term to obligations of
£73.1 million (approximately $134.5 million based
on an exchange rate of £1.00 to $1.8403) owed to Deutsche
Bank. As a result of these transactions, Bookham Technology plc
will have available through Creekside cash of approximately
£6.63 million (approximately $12.2 million based
on an exchange rate of £1.00 to $1.8405). We expect Bookham
Technology plc to utilize certain expected tax losses and other
tax attributes to reduce the taxes that might otherwise be due
by Creekside as the receivables are paid. In the event that
Bookham Technology plc is not able to utilize these tax losses
and other tax attributes when U.K. tax returns are filed for the
relevant periods (or these tax losses and other tax attributes
do not arise), Creekside may have to pay taxes, reducing the
cash available from Creekside. In the event there is a future
change in applicable U.K. tax law, Creekside, and in turn
Bookham Technology plc, would be responsible for any resulting
tax liabilities, which amounts could be material to our
financial condition or operating results.
Our
products are complex, may take longer to develop than
anticipated and we may not recognize revenues from new products
until after long field testing and customer acceptance
periods.
Many of our new products must be tailored to customer
specifications. As a result, we are constantly developing new
products and using new technologies in those products. For
example, while we currently manufacture and sell discrete
gold box technology, we expect that many of our sales of
gold box technology will soon be replaced by pluggable modules.
New products or modification to existing products often take
many quarters to develop because of their complexity and because
customer specifications sometimes change during the development
cycle. We often incur substantial costs associated with the
research and development and sales and marketing activities in
connection with products that may be purchased long after we
have incurred the costs associated with designing, creating and
selling such products. In addition, due to the rapid
technological changes in
19
our market, a customer may cancel or modify a design project
before we begin large-scale manufacture of the product and
receive revenue from the customer. It is unlikely that we would
be able to recover the expenses for cancelled or unutilized
design projects. It is difficult to predict with any certainty,
particularly in the present economic climate, the frequency with
which customers will cancel or modify their projects, or the
effect that any cancellation or modification would have on our
results of operations.
If our
customers do not qualify our manufacturing lines or the
manufacturing lines of our subcontractors for volume shipments,
our operating results could suffer.
Most of our customers do not purchase products, other than
limited numbers of evaluation units, prior to qualification of
the manufacturing line for volume production. Our existing
manufacturing lines, as well as each new manufacturing line,
must pass through varying levels of qualification with our
customers. Our manufacturing lines have passed our qualification
standards, as well as our technical standards. However, our
customers may also require that we pass their specific
qualification standards and that we, and any subcontractors that
we may use, be registered under international quality standards.
In addition, we have in the past, and may in the future,
encounter quality control issues as a result of relocating our
manufacturing lines or introducing new products to fill
production. We may be unable to obtain customer qualification of
our manufacturing lines or we may experience delays in obtaining
customer qualification of our manufacturing lines. Such delays
would harm our operating results and customer relationships.
Delays,
disruptions or quality control problems in manufacturing could
result in delays in product shipments to customers and could
adversely affect our business.
We may experience delays, disruptions or quality control
problems in our manufacturing operations or the manufacturing
operations of our subcontractors. As a result, we could incur
additional costs that would adversely affect gross margins, and
product shipments to our customers could be delayed beyond the
shipment schedules requested by our customers, which would
negatively affect our revenues, competitive position and
reputation. Furthermore, even if we are able to deliver products
to our customers on a timely basis, we may be unable to
recognize revenues at the time of delivery based on our revenue
recognition policies.
We may
experience low manufacturing yields.
Manufacturing yields depend on a number of factors, including
the volume of production due to customer demand and the nature
and extent of changes in specifications required by customers
for which we perform design-in work. Higher volumes due to
demand for a fixed, rather than continually changing, design
generally result in higher manufacturing yields, whereas lower
volume production generally results in lower yields. In
addition, lower yields may result, and have in the past
resulted, from commercial shipments of products prior to full
manufacturing qualification to the applicable specifications.
Changes in manufacturing processes required as a result of
changes in product specifications, changing customer needs and
the introduction of new product lines have historically caused,
and may in the future cause, significantly reduced manufacturing
yields, resulting in low or negative margins on those products.
Moreover, an increase in the rejection rate of products during
the quality control process, either before, during or after
manufacture, results in lower yields and margins. Finally,
manufacturing yields and margins can also be lower if we receive
or inadvertently use defective or contaminated materials from
our suppliers.
We
depend on a number of suppliers who could disrupt our business
if they stopped, decreased or delayed shipments.
We depend on a number of suppliers of raw materials and
equipment used to manufacture our products. Some of these
suppliers are sole sources. We typically have not entered into
long-term agreements with our suppliers and, therefore, these
suppliers generally may stop supplying materials and equipment
at any time. The reliance on a sole supplier or limited number
of suppliers could result in delivery problems, reduced control
over product pricing and quality, and an inability to identify
and qualify another supplier in a timely manner. Any supply
deficiencies relating to the quality or quantities of materials
or equipment we use to manufacture our products could adversely
affect our ability to fulfill customer orders or our financial
results of operations.
20
Our
intellectual property rights may not be adequately
protected.
Our future success will depend, in large part, upon our
intellectual property rights, including patents, design rights,
trade secrets, trademarks, know-how and continuing technological
innovation. We maintain an active program of identifying
technology appropriate for patent protection. Our practice is to
require employees and consultants to execute non-disclosure and
proprietary rights agreements upon commencement of employment or
consulting arrangements. These agreements acknowledge our
exclusive ownership of all intellectual property developed by
the individuals during their work for us and require that all
proprietary information disclosed will remain confidential.
Although such agreements may be binding, they may not be
enforceable in all jurisdictions and any breach of a
confidentiality obligation could have a very serious effect on
our business and the remedy for such breach may be limited.
Our intellectual property portfolio is an important corporate
asset. The steps we have taken and may take in the future to
protect our intellectual property may not adequately prevent
misappropriation or ensure that others will not develop
competitive technologies or products. We cannot assure investors
that our competitors will not successfully challenge the
validity of our patents or design products that avoid
infringement of our proprietary rights with respect to our
technology. There can be no assurance that other companies are
not investigating or developing other similar technologies, that
any patents will be issued from any application pending or filed
by us or that, if patents are issued, the claims allowed will be
sufficiently broad to deter or prohibit others from marketing
similar products. In addition, we cannot assure investors that
any patents issued to us will not be challenged, invalidated or
circumvented, or that the rights under those patents will
provide a competitive advantage to us. Further, the laws of
certain regions in which our products are or may be developed,
manufactured or sold, including Asia-Pacific, Southeast Asia and
Latin America, may not protect our products and intellectual
property rights to the same extent as the laws of the United
States, the U.K. and continental European countries. This is
especially relevant as we transfer of our assembly and test
operations and
chip-on-carrier
operations from our facilities in the U.K. to Shenzhen, China
and as our competitors establish manufacturing operations in
China to take advantage of comparatively low manufacturing costs.
Our
products may infringe the intellectual property rights of others
which could result in expensive litigation, require us to obtain
a license to use the technology from third parties, or we may be
prohibited from selling certain products in the
future.
Companies in the industry in which we operate frequently receive
claims of patent infringement or infringement of other
intellectual property rights. In this regard, third parties may
in the future assert claims against us concerning our existing
products or with respect to future products under development.
We have entered into and may in the future enter into
indemnification obligations in favor of some customers that
could be triggered upon an allegation or finding that we are
infringing other parties proprietary rights. If we do
infringe a third partys rights, we may need to negotiate
with holders of patents relevant to our business. We have from
time to time received notices from third parties alleging
infringement of their intellectual property and where
appropriate have entered into license agreements with those
third parties with respect to that intellectual property. We may
not in all cases be able to resolve allegations of infringement
through licensing arrangements, settlement, alternative designs
or otherwise. We may take legal action to determine the validity
and scope of the third-party rights or to defend against any
allegations of infringement. In the course of pursuing any of
these means or defending against any lawsuits filed against us,
we could incur significant costs and diversion of our resources.
Due to the competitive nature of our industry, it is unlikely
that we could increase our prices to cover such costs. In
addition, such claims could result in significant penalties or
injunctions that could prevent us from selling some of our
products in certain markets or result in settlements that
require payment of significant royalties that could adversely
affect our ability to price our products profitably.
If we
fail to obtain the right to use the intellectual property rights
of others necessary to operate our business, our ability to
succeed will be adversely affected.
Certain companies in the telecommunications and optical
components 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 academic institutions
and our competitors. Optical component
21
suppliers may seek to gain a competitive advantage or other
third parties may seek an economic return on their intellectual
property portfolios by making infringement claims against us. In
the future, we may need to obtain license rights to patents or
other intellectual property held by others to the extent
necessary for our business. Unless we are able to obtain such
licenses on commercially reasonable terms, patents or other
intellectual property held by others could inhibit our
development of new products for our markets. Licenses granting
us the right to use third-party technology may not be available
on commercially reasonable terms, if at all. Generally, a
license, if granted, would include payments of up-front fees,
ongoing royalties or both. These payments or other terms could
have a significant adverse impact on our operating results. Our
larger competitors may be able to obtain licenses or
cross-license their technology on better terms than we can,
which could put us at a competitive disadvantage.
The
markets in which we operate are highly competitive, which could
result in lost sales and lower revenues.
The market for fiber optic components is highly competitive and
such competition could result in our existing customers moving
their orders to competitors. Certain of our competitors may be
able more quickly and effectively to:
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respond to new technologies or technical standards;
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react to changing customer requirements and expectations;
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devote needed resources to the development, production,
promotion and sale of products; and
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deliver competitive products at lower prices.
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Many of our current competitors, as well as a number of our
potential competitors, have longer operating histories, greater
name recognition, broader customer relationships and industry
alliances and substantially greater financial, technical and
marketing resources than we do. In addition, market leaders in
industries such as semiconductor and data communications, who
may also have significantly more resources than we do, may in
the future enter our market with competing products. All of
these risks may be increased if the market were to further
consolidate through mergers or other business combinations
between competitors.
We cannot assure investors that we will be able to compete
successfully with our competitors or that aggressive competition
in the market will not result in lower prices for our products
or decreased gross profit margins. Any such development would
have a material adverse effect on our business, financial
condition and results of operations.
We
generate a significant portion of our revenues internationally
and therefore are subject to additional risks associated with
the extent of our international operations.
For the year ended July 1, 2006, the year ended
July 2, 2005, the six months ended July 3, 2004, and
the year ended December 31, 2003, 21%, 28%, 26%, and 9% of
our revenues, respectively, were derived in the United States
and 79%, 72%, 74%, and 91%, respectively, were derived outside
the United States. We are subject to additional risks related to
operating in foreign countries, including:
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currency fluctuations, which could result in increased operating
expenses and reduced revenues;
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greater difficulty in accounts receivable collection and longer
collection periods;
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difficulty in enforcing or adequately protecting our
intellectual property;
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foreign taxes;
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political, legal and economic instability in foreign
markets; and
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foreign regulations.
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Any of these risks, or any other risks related to our foreign
operations, could materially adversely affect our business,
financial condition and results of operations.
22
Our
business will be adversely affected if we cannot manage the
significant changes in the number of our employees and the size
of our operations.
We have significantly reduced the number of employees and scope
of our operations because of declining demand for certain of our
products and continue to reduce our headcount in connection with
our on-going restructuring and cost reduction efforts. There is
a risk that, during periods of growth or decline, management
will not sufficiently coordinate the roles of individuals to
ensure that all areas of our operations receive appropriate
focus and attention. If we are unable to manage our headcount,
manufacturing capacity and scope of operations effectively, the
cost and quality of our products may suffer, we may be unable to
attract and retain key personnel and we may be unable to market
and develop new products. Further, the inability to successfully
manage the substantially larger and geographically more diverse
organization, or any significant delay in achieving successful
management, could have a material adverse effect on us and, as a
result, on the market price of our common stock.
We may
be faced with product liability claims.
Despite quality assurance measures, there remains a risk that
defects may occur in our products. The occurrence of any defects
in our products could give rise to liability for damages caused
by such defects and for consequential damages. They could,
moreover, impair the markets acceptance of our products.
Both could have a material adverse effect on our business and
financial condition. In addition, we may assume product warranty
liabilities related to companies we acquire which could have a
material adverse effect on our business and financial condition.
In order to mitigate the risk of liability for damages, we carry
product liability insurance with a $26 million aggregate
annual limit and errors and omissions insurance with a
$5 million annual limit. We cannot assure investors that
this insurance could adequately cover our costs arising from
defects in our products or otherwise.
If we
fail to attract and retain key personnel, our business could
suffer.
Our future depends, in part, on our ability to attract and
retain key personnel. Competition for highly skilled technical
people is extremely intense and we continue to face difficulty
identifying and hiring qualified engineers in many areas of our
business. We may not be able to hire and retain such personnel
at compensation levels consistent with our existing compensation
and salary structure. Our future also depends on the continued
contributions of our executive management team and other key
management and technical personnel, each of whom would be
difficult to replace. The loss of services of these or other
executive officers or key personnel or the inability to continue
to attract qualified personnel could have a material adverse
effect on our business.
Similar to other technology companies, we rely upon our ability
to use stock options and other forms of equity-based
compensation as key components of our executive and employee
compensation structure. Historically, these components have been
critical to our ability to retain important personnel and offer
competitive compensation packages. Without these components, we
would be required to significantly increase cash compensation
levels (or develop alternative compensation structures) in order
to retain our key employees. Accounting rules relating to the
expensing of equity compensation may cause us to substantially
reduce, modify, or even eliminate, all or portions of our equity
compensation programs.
Our
business and future operating results may be adversely affected
by events outside of our control.
Our business and operating results are vulnerable to
interruption by events outside of our control, such as
earthquakes, fire, power loss, telecommunications failures,
political instability, military conflict and uncertainties
arising out of terrorist attacks, including a global economic
slowdown, the economic consequences of additional military
action or additional terrorist activities and associated
political instability, and the effect of heightened security
concerns on domestic and international travel and commerce.
23
Risks
Related to Regulatory Compliance and Litigation
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results,
which may cause stockholders to lose confidence in the accuracy
of our financial statements.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. If we
cannot provide reliable financial reports or prevent fraud, our
brand and operating results could be harmed. In addition,
compliance with the internal control requirements, as well as
other financial reporting standards applicable to a public
company, including the Sarbanes-Oxley Act of 2002, has in the
past and will in the future continue to involve substantial cost
and investment of our managements time.
Included in this Annual Report on
Form 10-K
is managements report on our internal controls over our
financial reporting (See Item 9A.b) and Ernst &
Young LLPs attestation audit report thereon (See
Item 9A.c), both of which identify a material weakness in
our internal controls over financial reporting as of
July 1, 2006 related to the inconsistent classification of
intercompany loan translation between two subsidiaries which led
to an adjustment to translation gain/loss and to cumulative
translation adjustment. As of July 2, 2005, we also
reported on four additional material weaknesses in our systems
of internal control over financial reporting. While we have
implemented procedures to remediate these four material
weaknesses, we are currently undertaking efforts to remediate
the material weakness related to the inconsistent classification
of the intercompany loan translation.
In fiscal 2007, and beyond, we will continue to spend
significant time and incur significant costs to assess and
report on the effectiveness of internal controls over financial
reporting as required by Section 404 of the
Sarbanes-Oxley
Act. Discovering additional material weaknesses in the future
could make it more difficult for us to attract and retain
qualified persons to serve on our board of directors or as
executive officers, which could harm our business. In addition,
if we discover future material weaknesses, disclosure of that
fact could reduce the markets confidence in our financial
statements, which could harm our stock price and our ability to
raise capital.
Our
business involves the use of hazardous materials, and
environmental laws and regulations may expose us to liability
and increase our costs.
We historically handled small amounts of hazardous materials as
part of our manufacturing activities and now handle more and
different hazardous materials as a result of the manufacturing
processes related to New Focus, the optical components business
acquired from Nortel Networks and the product lines we acquired
from Marconi. Consequently, our operations are subject to
environmental laws and regulations governing, among other
things, the use and handling of hazardous substances and waste
disposal. We may be required to incur environmental costs to
comply with current or future environmental laws. As with other
companies engaged in manufacturing activities that involve
hazardous materials, a risk of environmental liability is
inherent in our manufacturing activities, as is the risk that
our facilities will be shut down in the event of a release of
hazardous waste. The costs associated with environmental
compliance or remediation efforts or other environmental
liabilities could adversely affect our business. In addition,
under applicable EU regulations, we, along with other
electronics component manufacturers, are prohibited from using
lead and certain other hazardous materials in our products. We
have incurred unanticipated expenses in connection with the
related reconfiguration of our products, and could lose business
or face product returns if we failed to implement these
requirements properly or on a timely basis.
Litigation
regarding Bookham Technology plcs initial public offering
and follow-on offering and any other litigation in which we
become involved, including as a result of acquisitions, may
substantially increase our costs and harm our
business.
On June 26, 2001, a putative securities class action
captioned Lanter v. New Focus, Inc. et al., Civil
Action
No. 01-CV-5822,
was filed against New Focus, Inc. and several of its officers
and directors, or the New Focus Individual Defendants, in the
United States District Court for the Southern District of New
York. Also named as defendants were Credit Suisse First Boston
Corporation, Chase Securities, Inc., U.S. Bancorp Piper
Jaffray, Inc. and CIBC World Markets Corp., or the Underwriter
Defendants, the underwriters in New Focuss initial public
offering. Three subsequent lawsuits were filed containing
substantially similar allegations. These complaints have been
24
consolidated. On April 19, 2002, plaintiffs filed an
amended class action complaint, described below, naming as
defendants the New Focus Individual Defendants and the
Underwriter Defendants.
On November 7, 2001, a class action complaint was filed
against Bookham Technology plc and others in the United States
District Court for the Southern District of New York. On
April 19, 2002, plaintiffs filed an amended complaint, or
the Amended Complaint. The Amended Complaint names as defendants
Bookham Technology plc, Goldman, Sachs & Co. and
FleetBoston Robertson Stephens, Inc., two of the underwriters of
Bookham Technology plcs initial public offering in April
2000, and Andrew G. Rickman, Stephen J. Cockrell and David
Simpson, or the Bookham Individual Defendants, each of whom was
an officer
and/or
director at the time of the initial public offering.
The Amended Complaint asserts claims under certain provisions of
the securities laws of the United States. It alleges, among
other things, that the prospectuses for Bookham Technology
plcs and New Focuss initial public offerings were
materially false and misleading in describing the compensation
to be earned by the underwriters in connection with the
offerings, and in not disclosing certain alleged arrangements
among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock,
in the case of New Focus, from the underwriters. The Amended
Complaint seeks unspecified damages (or in the alternative
rescission for those class members who no longer hold our or New
Focus common stock), costs, attorneys fees, experts
fees, interest and other expenses. In October 2002, the New
Focus Individual Defendants and the Bookham Individual
Defendants were dismissed, without prejudice, from the action.
In July 2002, all defendants filed motions to dismiss the
Amended Complaint. The motion was denied as to Bookham
Technology plc and New Focus in February 2003. Special
committees of the board of directors authorized the companies to
negotiate a settlement of pending claims substantially
consistent with a memorandum of understanding negotiated among
class plaintiffs, all issuer defendants and their insurers.
Plaintiffs and most of the issuer defendants and their insurers
have entered into a stipulation of settlement for the claims
against the issuer defendants, including Bookham and New Focus.
Under the stipulation of settlement, the plaintiffs will dismiss
and release all claims against participating defendants in
exchange for a payment guaranty by the insurance companies
collectively responsible for insuring the issuers in the related
cases, and the assignment or surrender to the plaintiffs of
certain claims the issuer defendants may have against the
underwriters. On February 15, 2005, the court issued an
Opinion and Order preliminarily approving the settlement
provided that the defendants and plaintiffs agree to a
modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to the
modification narrowing the scope of the bar order, and on
August 31, 2005, the court issued an order preliminarily
approving the settlement and setting a public hearing on its
fairness which took place on April 24, 2006. The judge has
yet to issue a decision on this hearing.
Litigation is subject to inherent uncertainties, and an adverse
result in these or other matters that may arise from time to
time could have a material adverse effect on our business,
results of operations and financial condition. Any litigation to
which we are subject may be costly and, further, could require
significant involvement of our senior management and may divert
managements attention from our business and operations.
A
variety of factors could cause the trading price of our common
stock to be volatile or decline.
The market price of our common stock has been, and is likely to
continue to be, highly volatile due to causes in addition to
publication of our business results, such as:
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announcements by our competitors and customers of their
historical results or technological innovations or new products;
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developments with respect to patents or proprietary rights;
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governmental regulatory action; and
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general market conditions.
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Since Bookham Technology plcs initial public offering in
April 2000, Bookham Technology plcs ADSs and ordinary
shares, our shares of common stock and the shares of our
customers and competitors have experienced substantial price and
volume fluctuations, in many cases without any direct
relationship to the affected companys
25
operating performance. An outgrowth of this market volatility is
the significant vulnerability of our stock price and the stock
prices of our customers and competitors to any actual or
perceived fluctuation in the strength of the markets we serve,
regardless of the actual consequence of such fluctuations. As a
result, the market prices for these companies are highly
volatile. These broad market and industry factors caused the
market price of Bookham Technology plcs ADSs and ordinary
shares, and our common stock to fluctuate, and may in the future
cause the market price of our common stock to fluctuate,
regardless of our actual operating performance or the operating
performance of our customers.
The
future sale of substantial amounts of our common stock could
adversely affect the price of our common stock.
As of July 1, 2006, affiliates of Nortel Networks held
3,999,999 shares of our common stock. Other stockholders or
groups of stockholders also hold significant percentages of our
shares of common stock. In January and March 2006, pursuant to a
series of transactions we issued an aggregate of
10,507,158 shares of common stock and warrants to purchase
an aggregate of 1,086,001 shares of common stock in
connection with the payment and subsequent cancellation of the
promissory notes we issued to Nortel Networks and the conversion
and subsequent cancellation of $25.5 million aggregate
principle amount of convertible debentures. On September 1,
2006, we entered into an agreement to sell 8,696,000 shares
of our common stock and warrants to purchase
2,174,00 shares of our common stock, in a private
placement. In connection with that private placement certain
institutional investors have the right to purchase, on or before
September 19, 2006, up to an additional
2,898,667 shares of common stock and additional warrants to
purchase up to 724,667 shares of common stock at the same
purchase price sold to the initial purchasers in the private
placement. Sales by Nortel Networks or other holders of
substantial amounts of shares of our common stock in the public
or private market could adversely affect the market price of our
common stock by increasing the supply of shares available for
sale compared to the demand in the public and private markets to
buy our common stock. These sales may also make it more
difficult for us to sell equity securities in the future at a
time and price that we deem appropriate to meet our capital
needs.
Some
anti-takeover provisions contained in our charter and under
Delaware laws could hinder a takeover attempt.
We are subject to the provisions of Section 203 of the
General Corporation Law of the State of Delaware prohibiting,
under some circumstances, publicly-held Delaware corporations
from engaging in business combinations with some stockholders
for a specified period of time without the approval of the
holders of substantially all of our outstanding voting stock.
Such provisions could delay or impede the removal of incumbent
directors and could make more difficult a merger, tender offer
or proxy contest involving us, even if such events could be
beneficial, in the short-term, to the interests of the
stockholders. In addition, such provisions could limit the price
that some investors might be willing to pay in the future for
shares of our common stock. Our certificate of incorporation and
bylaws contain provisions relating to the limitations of
liability and indemnification of our directors and officers,
dividing our board of directors into three classes of directors
serving three-year terms and providing that our stockholders can
take action only at a duly called annual or special meeting of
stockholders. These provisions also may have the effect of
deterring hostile takeovers or delaying changes in control or
management of us.
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Item 1B.
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Unresolved
Staff Comments
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None.
We lease our corporate headquarters in San Jose,
California, which has approximately 52,000 square feet, and
includes manufacturing, research and development and office
space, under a lease agreement that will expire at the end of
March, 2007. We also lease a facility of approximately
20,000 square feet in Abingdon, U.K., under a lease that
will expire at the end of June 2007. We also lease our wafer
fabricating facility in Zurich, Switzerland, which is
approximately 124,000 square feet, under a lease that will
expire in 2007. We lease a second facility in Zurich, which
houses our Avalon subsidiary, and is approximately
17,000 square feet, under leases that will expire in
26
December 2007 and September 2008. We lease a thin film
manufacturing facility in Santa Rosa, California, which has
approximately 33,000 square feet, under a lease that
expires on December 31, 2011. We lease a
183,000 square foot facility in Caswell, U.K., which
includes wafer fabricating, assembly and test capabilities,
manufacturing support functions and research and development
capabilities and office space, under a lease that expires in
March 2026, with options to extend an additional 5 years
immediately after 2026 and for 2 year increments
indefinitely after 2031. We own our facility in Paignton, U.K.,
which is approximately 240,000 square feet, comprising
manufacturing space including clean rooms, assembly and test
capabilities and supporting laboratories, office and storage
space. Having recently transitioned most of the manufacturing
activities from Paignton to Shenzhen, we have begun efforts to
sell this facility. We anticipate moving all remaining personnel
who are currently at our Paignton facility, primarily research
and development and support related employees, to a smaller
leased site, as yet not identified, of approximately 25,000 to
35,000 square feet early in calendar 2007. We also own our
facility in Shenzhen, China, which is approximately
247,000 square feet comprising manufacturing space,
including clean rooms, assembly and test capabilities,
packaging, storage and office space. All of these properties are
used by our optics segment. Our corporate headquarters in
San Jose, California, is also used by our research and
industrial segment. We also lease a facility of approximately
20,000 square feet in Abingdon, U.K., under a lease that
will expire in 2007. In addition, we lease approximately
275,000 square feet of facilities in San Jose and
Ventura Country California, of which 130,000 square feet
expires in 2007, and 145,000 square feet expires in April
2011, both of which we currently do not utilize.
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Item 3.
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Legal
Proceedings
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Settlement
of Yue Litigation
On April 3, 2006, we entered into a definitive settlement
agreement, or the Settlement Agreement, with Mr. Howard
Yue, or the Plaintiff, relating to the lawsuit the Plaintiff
filed against New Focus, Inc., which is one of our subsidiaries,
and several of its officers and directors in Santa Clara
County Superior Court. The lawsuit, which was originally filed
on February 13, 2002, is captioned Howard Yue v. New
Focus, Inc. et al, Case No. CV808031, or the Yue
Litigation, and relates to events that occurred prior to our
acquisition of New Focus, Inc.
The terms of the Settlement Agreement provided that we would
issue to the Plaintiff a $7.5 million promissory note, or
the Note, payable on or before April 10, 2006, of which
$5.0 million could be satisfied by the issuance of shares
of our common stock.
Pursuant to the Settlement Agreement, we issued the Note on
April 3, 2006 and paid the Note in full by issuing to the
Plaintiff 537,635 shares of common stock valued at
$5.0 million and paying $2.5 million in cash. The
Plaintiff filed dismissal papers in the Yue Litigation on
April 6, 2006.
The defense fees for the Yue Litigation have been paid by the
insurers under the applicable New Focus directors and officers
insurance policy. In addition, we have demanded that the
relevant insurers fully fund the amounts paid pursuant to this
settlement within policy limits. At this time, certain of the
insurers have not confirmed to us their definitive coverage
position on this matter.
We recorded $5.0 million, net of insurance recoveries, in
other operating expense in our results of operations during the
year ended July 1, 2006 in connection with the Settlement
Agreement. If and when additional insurers confirm their
definitive coverage position, we will record the additional
amounts paid by insurers as recoveries against operating
expenses in the corresponding future periods. There can be no
guarantee that these additional insurers will pay any such
amounts.
From time to time, we are involved in litigation relating to
claims arising out of our operations in the normal course of
business. We believe that such claims will not have a material
adverse effect on our results of operations, cash flows or
financial position.
Other
Litigation
On June 26, 2001, a putative securities class action
captioned Lanter v. New Focus, Inc. et al., Civil
Action
No. 01-CV-5822,
was filed against New Focus, Inc. and several of its officers
and directors, or the Individual Defendants, in the United
States District Court for the Southern District of New York.
Also named as defendants
27
were Credit Suisse First Boston Corporation, Chase Securities,
Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World
Markets Corp., or the Underwriter Defendants, the underwriters
in New Focuss initial public offering. Three subsequent
lawsuits were filed containing substantially similar
allegations. These complaints have been consolidated. On
April 19, 2002, plaintiffs filed an amended
class action complaint, described below, naming as
defendants the Individual Defendants and the Underwriter
Defendants.
On November 7, 2001, a class action complaint was
filed against Bookham Technology plc and others in the United
States District Court for the Southern District of New York. On
April 19, 2002, plaintiffs filed an Amended Complaint or,
the Amended Complaint. The Amended Complaint names as defendants
Bookham Technology plc, Goldman, Sachs & Co. and
FleetBoston Robertson Stephens, Inc., two of the underwriters of
Bookham Technology plcs initial public offering in April
2000, and Andrew G. Rickman, Stephen J. Cockrell and David
Simpson, each of whom was an officer
and/or
director at the time of Bookham Technology plcs initial
public offering.
The Amended Complaint asserts claims under certain provisions of
the securities laws of the United States. It alleges, among
other things, that the prospectuses for Bookham Technology
plcs and New Focuss initial public offerings were
materially false and misleading in describing the compensation
to be earned by the underwriters in connection with the
offerings, and in not disclosing certain alleged arrangements
among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock,
in the case of New Focus, from the underwriters. The Amended
Complaint seeks unspecified damages (or in the alternative
rescission for those class members who no longer hold our or New
Focus common stock), costs, attorneys fees, experts
fees, interest and other expenses. In October 2002, the
individual defendants were dismissed, without prejudice, from
the action. In July 2002, all defendants filed motions to
dismiss the Amended Complaint. The motion was denied as to
Bookham Technology plc and New Focus in February 2003. Special
committees of the board of directors authorized the companies to
negotiate a settlement of pending claims substantially
consistent with a memorandum of understanding negotiated among
class plaintiffs, all issuer defendants and their insurers.
Plaintiffs and most of the issuer defendants and their insurers
have entered into a stipulation of settlement for the claims
against the issuer defendants, including us. Under the
stipulation of settlement, the plaintiffs will dismiss and
release all claims against participating defendants in exchange
for a payment guaranty by the insurance companies collectively
responsible for insuring the issuers in the related cases, and
the assignment or surrender to the plaintiffs of certain claims
the issuer defendants may have against the underwriters. On
February 15, 2005, the court issued an Opinion and Order
preliminarily approving the settlement provided that the
defendants and plaintiffs agree to a modification narrowing the
scope of the bar order set forth in the original settlement
agreement. The parties agreed to the modification narrowing the
scope of the bar order, and on August 31, 2005, the court
issued an order preliminarily approving the settlement and
setting a public hearing on its fairness which took place on
April 24, 2006. The judge has yet to enter a decision on
this hearing. We believe that both Bookham Technology plc and
New Focus have meritorious defenses to the claims made in the
Amended Complaint and therefore believes that such claims will
not have a material effect on our financial position, results of
operations or cash flows.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of our security holders in
the fourth quarter of fiscal 2006.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Market
Information and Holders
Our common stock began trading on the NASDAQ National Market
under the symbol BKHM on September 10, 2004.
Prior to that date, there was no established public trading
market for our common stock. From April 11, 2000 through
September 10, 2004, the date of the closing of the scheme
of arrangement pursuant to which Bookham Technology plc became
our wholly-owned subsidiary, Bookham Technology plcs
ordinary shares were quoted on the Official List of the United
Kingdom Listing Authority under the symbol BHM and
its
28
American Depository Shares, or ADSs, were quoted on the NASDAQ
National Market under the symbol BKHM. Each ADS
represented one ordinary share. In connection with the scheme of
arrangement, every ten ordinary shares, and every ten ADSs, of
Bookham Technology plc were exchanged for one share of our
common stock. The closing price of our common stock on
September 1, 2006 was $3.09.
The following table sets forth the range of high and low sale
prices of (i) Bookham Technology plcs ordinary shares
and ADSs for the periods indicated through September 9,
2004 and (ii) our common stock beginning on
September 10, 2004 through the periods indicated (the sales
prices for periods prior to September 10, 2004 have been
adjusted to reflect the exchange ratio in the scheme of
arrangement):
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Per Ordinary
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Per Share of
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Share
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Per ADS
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Common Stock
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High
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Low
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High
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Low
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High
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Low
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(£)
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(£)
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($)
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($)
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($)
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($)
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Quarter Ended
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September 30, 2003
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14.00
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7.00
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25.70
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11.60
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December 31, 2003
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17.80
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10.70
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29.90
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19.80
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March 31, 2004
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19.40
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10.30
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35.50
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20.01
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July 3, 2004
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12.80
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4.50
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23.80
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7.70
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October 2, 2004
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5.29
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3.30
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9.70
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6.00
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7.75
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5.77
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January 1, 2005
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6.60
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4.08
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April 2, 2005
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4.95
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1.56
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July 2, 2005
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3.67
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2.51
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October 1, 2005
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5.08
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2.98
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December 31, 2005
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6.21
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4.37
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April 1, 2006
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9.75
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5.67
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July 1, 2006
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10.36
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2.87
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As of September 1, 2006, there were 44,620 holders of
record of our common stock. This number does not include
stockholders who hold their shares in street name or
through broker or nominee accounts.
Dividends
We have never paid cash dividends on our common stock or
ordinary shares. To the extent we generate earnings, we intend
to retain them for use in our business and, therefore, do not
anticipate paying any cash dividends on our common stock in the
foreseeable future.
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Item 6.
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Selected
Financial Data
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The selected financial data set forth below should be read in
conjunction with our consolidated financial statements and
related notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this Annual Report on
Form 10-K.
Prior to June 2004, Bookham Technology plc reported on a
December 31 fiscal year end basis. In June 2004, Bookham
Technology plc approved a change in its fiscal year end from
December 31 to the Saturday closest to June 30 which
matches the fiscal year end of Bookham Inc. Pursuant to a scheme
of arrangement under the laws of the United Kingdom, Bookham
Inc. assumed the financial reporting history of Bookham
Technology plc effective September 10, 2004. In addition,
in connection with the scheme of arrangement, Bookham changed
its corporate domicile from the United Kingdom to the United
States and changed its reporting currency from the U.K. pound
sterling to the U.S. dollar effective September 10,
2004. Subsequent to the scheme of arrangement, our common stock
is traded only on the NASDAQ Global Market whereas, previously,
our ordinary shares had been traded on the London Stock Exchange
and our ADSs had been traded on the NASDAQ National Market,
which is the former name of the NASDAQ Global Market.
The selected financial data set forth below at July 1, 2006
and July 2, 2005, and for the years ended July 1, 2006
and July 2, 2005, the twelve months ended July 3,
2004, and the year ended December 31, 2003 are derived from
our consolidated financial statements included elsewhere in this
report. The selected financial data at July 3, 2004,
December 31, 2003 and 2002 and 2001 and for the years ended
December 31, 2002 and 2001 are derived from our
transitional report on
Form 10-K,
as amended, for the six months ended July 3, 2004. The
selected financial data at
29
December 31, 2001 are derived from our annual report on
Form 20-F
and have been translated into U.S. dollars using the
historical exchange rate at each corresponding period end for
balance sheet data and a corresponding simple average rate for
statement of operations data.
Consolidated
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except for per share data)
|
|
|
Total revenues
|
|
$
|
231,649
|
|
|
$
|
200,256
|
|
|
$
|
158,198
|
|
|
$
|
146,197
|
|
|
$
|
51,905
|
|
|
$
|
31,566
|
|
Operating loss
|
|
$
|
(77,364
|
)
|
|
$
|
(243,987
|
)
|
|
$
|
(127,197
|
)
|
|
$
|
(131,095
|
)
|
|
$
|
(171,565
|
)
|
|
$
|
(179,932
|
)
|
Net loss
|
|
$
|
(87,497
|
)
|
|
$
|
(247,972
|
)
|
|
$
|
(125,078
|
)
|
|
$
|
(125,747
|
)
|
|
$
|
(164,938
|
)
|
|
$
|
(164,370
|
)
|
Net loss per share (basic and
diluted)
|
|
$
|
(1.87
|
)
|
|
$
|
(7.43
|
)
|
|
$
|
(5.17
|
)
|
|
$
|
(6.03
|
)
|
|
$
|
(10.92
|
)
|
|
$
|
(12.79
|
)
|
Weighted average of shares of
common stock outstanding
|
|
|
46,679
|
|
|
|
33,379
|
|
|
|
24,243
|
|
|
|
20,845
|
|
|
|
15,100
|
|
|
|
12,853
|
|
Consolidated
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands)
|
|
|
Total assets
|
|
$
|
236,797
|
|
|
$
|
238,578
|
|
|
$
|
468,025
|
|
|
$
|
269,498
|
|
|
$
|
351,616
|
|
|
$
|
342,936
|
|
Total stockholders equity
|
|
$
|
135,141
|
|
|
$
|
91,068
|
|
|
$
|
330,590
|
|
|
$
|
164,395
|
|
|
$
|
248,608
|
|
|
$
|
316,424
|
|
Long-term obligations
|
|
$
|
5,337
|
|
|
$
|
76,925
|
|
|
$
|
64,507
|
|
|
$
|
68,255
|
|
|
$
|
55,832
|
|
|
$
|
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with
Risk Factors appearing in Item 1A of this
Annual Report on
10-K,
Selected Financial Data appearing in Item 6 of
this Annual Report on
Form 10-K
and our consolidated financial statements and related notes
appearing elsewhere in this Annual Report on
Form 10-K,
including Note 1 to such financial statements, in which we
discuss our need for additional financing to continue as a going
concern. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated by the
forward-looking statements due to, among other things, our
critical accounting estimates discussed below and important
other factors set forth in this Annual Report on Form 10-K.
Overview
We design, manufacture and market optical components, modules
and subsystems that generate, detect, amplify, combine and
separate light signals principally for use in high-performance
fiber optics communications networks. We principally sell our
optical component products to optical systems vendors as well as
to customers in the data communications, military, aerospace,
industrial and manufacturing industries. Customers for our
photonics and microwave product portfolio include semiconductor
equipment manufacturers, academic and governmental research
institutions that engage in advanced research and development
activities. Our products typically have a long sales cycle. The
period of time between our initial contact with a customer to
the receipt of a purchase order is frequently a year or more. In
addition, many customers perform, and require us to perform,
extensive process and product evaluation and testing of
components before entering into purchase arrangements.
We operate in two business segments: (i) optics and
(ii) research and industrial. Optics relates to the design,
development, manufacture, marketing and sale of optical
solutions for telecommunications and industrial applications.
Research and industrial relates to the design, manufacture,
marketing and sale of photonics and microwave solutions.
30
Effective September 10, 2004, we changed our corporate
domicile from the United Kingdom to the United States and
our reporting currency from U.K. pounds sterling to
U.S. dollars. In contemplation of the scheme of
arrangement, Bookham Technology plc changed its fiscal year end
from December 31 to the Saturday closest to June 30,
which matches the fiscal year end of Bookham, Inc. Accordingly,
our financial statements have been prepared based on a
fifty-two/fifty-three week cycles going forward, including for
the years ended July 1, 2006 and July 2, 2005 and the
six-month period ended July 3, 2004, which are included in
this
Form 10-K.
Our consolidated financial statements for the periods up to and
including December 31, 2003, were reported in U.K. pounds
sterling prior to the scheme of arrangement, and have been
translated to U.S. dollars using the historical exchange
rate at each corresponding period end for balance sheet accounts
and a corresponding simple average rate for statement of
operations accounts.
In view of the change in our fiscal year, this Managements
Discussion and Analysis of Financial Condition and Results of
Operations compares the financial position and results of
operations as of and for the fiscal year ended July 1, 2006
with the fiscal year ended July 2, 2005, the financial
position and results of operations as of and for the fiscal year
ended July 2, 2005 with the unaudited twelve-month period
ended July 3, 2004, and the results of operations for the
unaudited twelve-month period ended July 3, 2004 with the
results of operations for the fiscal year ended
December 31, 2003. All data as of and for the twelve-month
period ended July 3, 2004 have been derived from unaudited
consolidated financial information disclosed in our consolidated
financial statements, including Note 18 to our consolidated
financial statements.
Since the beginning of 2002, we have acquired a total of eight
companies and businesses. In 2002, we acquired the optical
components businesses of Nortel Networks and Marconi. In 2003,
we purchased substantially all of the assets of Cierra Photonics
and acquired all of the outstanding capital stock of Ignis
Optics, Inc. During 2004, we acquired New Focus, Inc., and
Onetta, Inc. In fiscal 2006, we acquired Avalon Photonics AG and
City Leasing (Creekside) Limited, or Creekside.
Over the past five years, we have enacted a series of
restructuring plans and cost reduction plans designed to reduce
our manufacturing overhead and our operating expenses. In 2001,
we reduced manufacturing overhead and our operating expenses in
response to the initial decline in demand in the optics
components industry. In connection with our acquisitions of
Nortel Networks optical components business in November
2002 and New Focus in March 2004, we enacted restructuring plans
related to the consolidation of our operations, and which we
expanded in September 2004 to include the transfer of our main
corporate functions, including consolidated accounting,
financial reporting, tax and treasury, from Abingdon, U.K. to
our new U.S headquarters in San Jose, California.
In May and November of 2004, we adopted additional restructuring
plans, which included the transfer of our assembly and test
operations from Paignton, U.K. to Shenzhen, China, a process
that commenced in the quarter ended October 2, 2004. This
transition was substantially complete by the end of March 2006,
except for a chip-on-carrier assembly process we added to the
transition plan in November 2005, and which we expect to be
completed by the end of December 2006. In May 2006, we announced
our latest cost reduction plans, which included transitioning
all remaining manufacturing support and supply chain management,
along with pilot line production and production planning, from
Paignton to Shenzhen, also by the end of December, 2006.
With respect to the transfer of the operations described in the
previous paragraph, some of which are still in the process of
being transferred, we have spent $22.6 million as of July 1,
2006, and we anticipate spending a total of approximately $30
million to $37 million, including $6 million to $7 million on
the cost reduction plan announced in May 2006. The substantial
portion of the remaining spending relates to personnel and
personnel related costs. We expect the cost reduction plan
announced in May 2006 to reduce our costs by between $5.5
million and $6.5 million a quarter, when compared to the
expenses incurred in the quarter ended April 1, 2006, with
the cost savings expected to be realized in the March 2007
quarter.
A substantial portion of our revenues are, and have been,
denominated in U.S. dollars, while the majority of our
costs have been incurred in U.K. pounds sterling, and we
anticipate that a substantial portion of our cash will continue
to be incurred in U.K. pounds sterling for the forseeable
future. Declines in the value of the U.S. dollar in
comparison with the U.K. pound sterling have resulted, and we
expect will continue to result in, pressure on our cash flow,
margins and operating results, even though moving assembly and
testing to our facility in Shenzhen, China will help mitigate
our exposure to these fluctuations, but may expose us, to a
limited extent , to changes in
31
value of the U.S. dollar in comparison with the Chinese Yuan. We
also attempt to mitigate our currency exposure using foreign
exchange contracts as we consider appropriate. Regardless, any
weakness in the U.S. dollar versus the U.K. pounds sterling
will make it more difficult for us to achieve improvements in
our margins in the short term.
Recent
Developments
Credit
Facility
On August 2, 2006, we, with Bookham Technology plc, New
Focus and Bookham (US) Inc., each a wholly-owned subsidiary,
which we collectively refer to as the Borrowers, entered into a
credit agreement, or Credit Agreement, with Wells Fargo
Foothill, Inc. and other lenders regarding a three-year
$25,000,000 senior secured revolving credit facility. Advances
are available under the Credit Agreement based on a percentage
of accounts receivable at the time the advance is requested.
The obligations of the Borrowers under the Credit Agreement are
guaranteed by us, Onetta, Focused Research, Inc., Globe Y.
Technology, Inc., Ignis Optics, Inc., Bookham (Canada) Inc.,
Bookham Nominees Limited and Bookham International Ltd., each
also a wholly-owned subsidiary, (which we refer to collectively
as the Guarantors and together with the Borrowers, as the
Obligors), and are secured pursuant to a security agreement, or
the Security Agreement, by the assets of the Obligors, including
a pledge of the capital stock holdings of the Obligors in some
of their direct subsidiaries. Any new direct subsidiary of the
Obligors is required to execute a guaranty agreement in
substantially the same form and join in the Security Agreement.
Pursuant to the terms of the Credit Agreement, borrowings made
under the Credit Agreement bear interest at a rate based on
either the London Interbank Offered Rate (LIBOR) plus
2.75 percentage points or the prime rate plus
1.25 percentage points. In the absence of an event of
default, any amounts outstanding under the Credit Agreement may
be repaid and reborrowed anytime until maturity, which is
August 2, 2009. A termination of the commitment line
anytime prior to August 2, 2008 will subject the Borrowers
to a prepayment premium of 1.0% of the maximum revolver amount.
The obligations of the Borrowers under the Credit Agreement may
be accelerated upon the occurrence of an event of default under
the Credit Agreement, which includes customary events of
default, including payment defaults, defaults in the performance
of affirmative and negative covenants, the inaccuracy of
representations or warranties, a cross-default related to
indebtedness in an aggregate amount of $1,000,000 or more,
bankruptcy and insolvency related defaults, defaults relating to
such matters as ERISA, judgments, and a change of control
default. The Credit Agreement contains negative covenants
applicable to the Borrowers and their subsidiaries, including
financial covenants requiring the Borrowers to maintain a
minimum level of EBITDA (if the Borrowers have not maintained
specified levels of liquidity), as well as restrictions on
liens, capital expenditures, investments, indebtedness,
fundamental changes to the Borrowers business,
dispositions of property, making certain restricted payments
(including restrictions on dividends and stock repurchases),
entering into new lines of business, and transactions with
affiliates.
In connection with the Credit Agreement, we agreed to pay a
monthly servicing fee of $3,000 and an unused line fee equal to
0.375% per annum, payable monthly on the unused amount of
revolving credit commitments. To the extent there are letters of
credit outstanding under the Credit Agreement, the Borrowers
will pay to the administrative agent a letter of credit fee at a
rate equal to 2.75% per annum.
Private
Placement
On August 31, 2006, we entered into definitive agreement
for a private placement pursuant to which we issued, on
September 1, 2006, 8,696,000 shares of common stock,
which we refer to as the Shares, and warrants to purchase up to
2,174,000 shares of common stock, which we refer to as the
Warrants, with certain institutional accredited investors for
gross proceeds of approximately $23.5 million. The Warrants
are exercisable for a five year period beginning on
March 2, 2007 at an exercise price of $4.00 per share.
We have agreed to file a registration statement relating to the
resale of the Shares and the shares of common stock issued upon
the exercise of the Warrants. Up to an additional
2,898,667 shares of common stock and warrants to purchase
724,667 shares of common stock may be issued and sold to
additional institutional accredited investors at a subsequent
closing pursuant to a right of
32
participation under the Exchange Agreement, dated
January 13, 2006, by and among us, Bookham Technology plc
and the investors.
Recent
Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards, or SFAS,
No. 154, Accounting Changes and Error
Corrections (SFAS 154), which replaces
Accounting Principles Board, or APB, Opinion No. 20
(APB 20) and Statement of Financial Accounting
Standards No. 3, Reporting Accounting Changes in
Interim Financial Statements. SFAS 154 applies to all
voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in
accounting principle. APB 20 previously required that most
voluntary changes in accounting principle be recognized by
including in net income of the period of change a cumulative
effect of changing to the new accounting principle, whereas
SFAS 154 requires retrospective application to prior
periods financial statements of a voluntary change in
accounting principle unless it is impracticable. SFAS 154
is intended to enhance the consistency of financial information
between periods. SFAS 154 is effective for fiscal years
beginning after December 15, 2005, and we are required to adopt
it in the first quarter of fiscal 2007.
In November 2005, the FASB issued FASB Staff Position, or FSP,
Nos.
FAS 115-1
and
FAS 124-1,
The Meaning of
Other-Than-Temporary
Impairment and its Application to Certain Investments. FSP
Nos.
FAS 115-1
and
FAS 124-1
amend SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This guidance
nullifies certain requirements of Emerging Issues Task Force, or
EITF, 03-1,
The Meaning of
Other-Than-Temporary
Impairment and its Application to Certain Investments. FSP
Nos.
FAS 115-1
and
FAS 124-1
include guidance for evaluating and recording impairment losses
on debt and equity investments, as well as new disclosure
requirements for investments that are deemed to be temporarily
impaired. FSP Nos.
FAS 115-1
and
FAS 124-1
also require
other-than-temporary
impaired debt securities to be written down to impaired value,
which becomes the new cost basis. FSP Nos.
FAS 115-1
and
FAS 124-1
are effective for fiscal years beginning after December 15,
2005. We do not believe that adoption of FSP Nos.
FAS 115-1
and
FAS 124-1
on July 2, 2006 will have a material impact on our
financial position, results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments,
which amends SFAS 133 and SFAS 140. SFAS 155
permits hybrid financial instruments that contain an embedded
derivative that would otherwise require bifurcation to
irrevocably be accounted for at fair value, with changes in fair
value recognized in the statement of income. The fair value
election may be applied on an
instrument-by-instrument
basis. SFAS 155 also eliminates a restriction on the
passive derivative instruments that a qualifying special purpose
entity may hold. SFAS 155 is effective for those financial
instruments acquired or issued after December 1, 2006. At
adoption, any difference between the total carrying amount of
the individual components of the existing bifurcated hybrid
financial instrument and the fair value of the combined hybrid
financial instrument will be recognized as a cumulative-effect
adjustment to beginning retained earnings. We are currently
evaluating the potential impact of adopting SFAS 155.
In July 2006, the FASB issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of
SFAS No. 109. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with
SFAS 109 and prescribes a recognition threshold and
measurement attribute for financial statement disclosure of tax
positions taken or expected to be taken on a tax return.
Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006, with early
adoption permitted. We will adopt FIN 48 in fiscal 2007 and
are currently evaluating whether the adoption of FIN 48
will have a material effect on our consolidated financial
position, results of operations or cash flows.
Application
of Critical Accounting Policies
The discussion and analysis of our financial condition and
results of operations is based on our consolidated financial
statements contained elsewhere in this Annual Report on
Form 10-K,
which have been prepared in accordance with GAAP. The
preparation of our financial statements requires us to make
estimates and judgments
33
that affect our reported assets and liabilities, revenues and
expenses and other financial information. Actual results may
differ significantly from those based on our estimates or could
be materially different if we used using different assumptions,
estimates or conditions. In addition, our reported financial
condition and results of operations could vary due to a change
in the application of a particular accounting standard.
We regard an accounting estimate or assumption underlying our
financial statements as a critical accounting
estimate where:
|
|
|
|
|
the nature of the estimate or assumption is material due to the
level of subjectivity and judgment necessary to account for
highly uncertain matters or the susceptibility of such matters
to change; and
|
|
|
|
the impact of such estimates and assumptions on our financial
condition or operating performance is material.
|
Our significant accounting policies are more fully described in
Note 1 to our consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K.
Not all of these significant accounting policies, however,
require that we make estimates and assumptions that we believe
are critical accounting estimates. We have discussed
our accounting policies with the audit committee of our board of
directors, and we believe that the policies described below
involve critical accounting estimates.
Revenue
Recognition and Sales Returns
Revenue represents the amounts, excluding sales taxes, derived
from the provision of goods and services to third-party
customers during a given period. Our revenue recognition policy
follows Securities and Exchange Commission Staff Accounting
Bulletin, or SAB, No. 104, Revenue Recognition in
Financial Statements. Specifically, we recognize product
revenue when persuasive evidence of an arrangement exists, the
product has been shipped, title has transferred, collectibility
is reasonably assured, fees are fixed or determinable and there
are no uncertainties with respect to customer acceptance. For
certain sales, we are required to determine, in particular,
whether the delivery has occurred, whether items will be
returned and whether we will be paid under normal commercial
terms. For certain products sold to customers, we specify
delivery terms in the agreement under which the sale was made
and assess each shipment against those terms, and only recognize
revenue when we are certain that the delivery terms have been
met. For shipments to new customers and evaluation units,
including initial shipments of new products, where the customer
has the right of return through the end of the evaluation
period, we recognize revenue on these shipments at the end of an
evaluation period, if not returned, and when collection is
reasonably assured. We record a provision for estimated sales
returns in the same period as the related revenues are recorded
which is netted against revenue. These estimates are based on
historical sales returns, other known factors and our return
policy. Before accepting a new customer, we review publicly
available information and credit rating databases to provide
ourselves with reasonable assurance that the new customer will
pay all outstanding amounts in accordance with our standard
terms. For existing customers, we monitor historic payment
patterns to assess whether we can expect payment in accordance
with the terms set forth in the agreement under which the sale
was made.
We recognize royalty revenue when it is earned and
collectibility is reasonably assured.
Inventory
Valuation
In general, our inventory is valued at the cost to acquire or
manufacture our products, less write-offs of inventory we
believe could prove to be unsaleable. Manufacturing costs
include the cost of the components purchased to produce our
products and related labor and overhead. We review our inventory
on a monthly basis to determine if it is saleable. Products may
be unsaleable because they are technically obsolete due to
substitute products, specification changes or excess inventory
relative to customer forecasts. We currently reserve for
inventory using methods that take those factors into account. In
addition, if we find that the cost of inventory is greater than
the current market price, we will write the inventory down to
the selling price, less the cost to complete and sell the
product.
During 2002, in connection with the acquisition of the optical
components business of Nortel Networks, we recorded the fair
value of the inventory that was acquired. In accordance with
SFAS No. 141, or SFAS 141 Business
Combinations, an adjustment was made in the 2003 accounts
for amendments to those provisional
34
values. During 2003, a larger amount of acquired inventory was
sold than was expected at the time of the acquisition. As a
consequence, we increased the value of our inventory by
$20.2 million, increased current liabilities by
approximately $1.3 million, decreased intangible assets by
$9.1 million and increased property, plant and equipment by
$9.8 million.
Accounting
for Acquisitions and Goodwill
We account for acquisitions using the purchase accounting method
in accordance with SFAS No. 142 or SFAS 142,
Goodwill and Other Intangible Assets. SFAS 142
requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for
impairment at least annually or sooner whenever events or
changes in circumstances indicate they may be impaired.
Circumstances which could trigger an impairment test include,
but are not limited to, significant decreases in the market
price of the asset, significant adverse changes to the business
climate or legal factors, current period cash flow or operating
losses or a forecast of continuing losses associated with the
use of the asset and a current expectation that the asset will
more likely than not be sold or disposed of significantly below
carrying value before the end of its estimated useful life.
Under this method, the total consideration paid, excluding the
contingent consideration that has not been earned, is allocated
over the fair value of the net assets acquired, including
in-process research and development, with any excess allocated
to goodwill (defined as the excess of the purchase price over
the fair value allocated to the net assets). Our judgments as to
fair value of the assets will, therefore, affect the amount of
goodwill that we record. These judgments include estimating the
useful lives over which periods the fair values will be
amortized to expense. For tangible assets acquired in any
acquisition, such as plant and equipment, we estimate useful
lives by considering comparable lives of similar assets, past
history, the intended use of the assets and their condition. In
estimating the useful life of the acquired intangible assets
with definite lives, we consider the industry environment and
unique factors relating to each product relative to our business
strategy and the likelihood of technological obsolescence.
Acquired intangible assets primarily include core and current
technology, patents, supply agreements, capitalized licenses and
customer contracts. We are currently amortizing our acquired
intangible assets with definite lives over periods generally
ranging from three to six years and, in the case of one specific
customer contract, sixteen years.
Impairment
of Goodwill and Other Intangible Assets
Under SFAS 142, goodwill is tested annually for impairment,
in our case during the fourth quarter of each fiscal year, or
more often if an event or circumstance suggests impairment has
occurred. In addition, we review identifiable intangibles,
excluding goodwill, for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not
be recoverable. Circumstances which could trigger an impairment
test include, but are not limited to, significant decreases in
the market price of the asset, significant adverse changes to
the business climate or legal factors, current period cash flow
or operating losses or a forecast of continuing losses
associated with the use of the asset and a current expectation
that the asset will more likely than not be sold or disposed of
significantly below carrying value before the end of its
estimated useful life.
SFAS 142 requires that the first phase of testing goodwill
for impairment be based on a business units fair
value, which is generally determined through market
prices. In certain cases, due to the absence of market prices
for a particular element of our business, and as permitted by
SFAS 142, we have elected to base our testing on discounted
future expected cash flows. Although the discount rates and
other input variables may differ, the model we use in this
process is the same model we use to evaluate the fair value of
acquisition candidates and the fairness of offers to purchase
businesses that we are considering for divestiture. The
forecasted cash flows we use are derived from the annual
long-range planning process that we perform and present to our
board of directors. In this process, each business unit is
required to develop reasonable sales, earnings and cash flow
forecasts for the next three to seven years based on current and
forecasted economic conditions. For purposes of testing for
impairment, the cash flow forecasts are adjusted as needed to
reflect information that becomes available concerning changes in
business levels and general economic trends. The discount rates
used for determining discounted future cash flows are generally
based on our weighted average cost of capital and are then
adjusted for plan risk (the risk that a business
will fail to achieve its forecasted results) and country
risk (the risk that economic or political instability in
the countries in which we operate will cause a business
units projections to be inaccurate). Finally, a growth
factor beyond the three to seven-year period for which cash
flows are planned is selected based on expectations of future
35
economic conditions. Virtually all of the assumptions used in
our models are susceptible to change due to global and regional
economic conditions as well as competitive factors in the
industry in which we operate. In recent years, many of our cash
flow forecasts have not been achieved due in large part to the
unexpected length and depth of the downturn in our industry.
Unanticipated changes in discount rates from one year to the
next can also have a significant effect on the results of the
calculations. While we believe the estimates and assumptions we
use are reasonable in these circumstances, various economic
factors could cause the results of our goodwill testing to vary
significantly.
In the year ended July 1, 2006, our annual impairment
review of goodwill and other intangible assets led to the
recording of an impairment charge of $760,000 due to the
impairment of intangible assets of Ignis Optics. This charge was
entirely related to the optics segment.
In the year ended July 2, 2005, a continued decline in our
share price, and therefore market capitalization, combined with
continuing net losses and a history of not meeting revenue and
profitability targets, suggested that the goodwill related to
certain of our acquisitions may have been impaired as of the
third quarter of that fiscal year. As a result of these
triggering events, we performed a preliminary evaluation of the
related goodwill balances at that time. In the fourth quarter,
we finalized this evaluation during our annual evaluation of
goodwill, and also performed our annual evaluation of acquired
intangible assets. In total, in the year ended July 2,
2005, we recorded impairment charges of approximately
$114,226,000, approximately $113,592,000 related to goodwill
associated with New Focus, Ignis and Onetta, and approximately
$634,000 related to intangibles of New Focus, including patents
and other technology, for the year ended July 2, 2005.
Approximately, $83,326,000 of these charges related to the
research and industrial segment, and approximately $30,900,000
related to the optics segment.
Accounting
for Acquired In-Process Research and Development
In the year ended July 1, 2006, in connection with the
acquisition of Avalon Photonics AG, or Avalon, we recorded a
charge of $118,000 for in-process research and development. In
the six-month period ended July 3, 2004, in connection with
the acquisition of New Focus, we recorded a charge of
$5.9 million for in-process research and development. In
the year ended December 31, 2003, in connection with the
acquisition of Ignis Optics, we recorded a charge of
$1.9 million for in-process research and development. In
the year ended December 31, 2002, in connection with the
acquisition of the optical components businesses of Marconi and
Nortel Networks, we recorded charges of $5.9 million and
$7.3 million, respectively, for in-process research and
development. There were no charges for in-process research and
development related to the Cierra Photonics and Onetta
acquisitions. During the year ended December 31, 2003,
following the required review of the purchase price allocation
for the acquisition of the optical components business of Nortel
Networks, a credit of $1.7 million was made related to the
in-process research and development expensed as part of an
overall reallocation of the purchase price. Management is
responsible for estimating the fair values of in-process
research and development.
As of the dates of each in-process research and development
valuation, the projects assessed had not yet demonstrated
technological or commercial feasibility, and the technology did
not have an alternative future use. Therefore, the fair values
were expensed at the relevant date of acquisition. Expenses
related to development projects which, when using the technology
contribution approach, are deemed to have positive net present
value, are assigned a fair value, capitalized and amortized over
the expected useful lives.
For each acquisition, allocations of consideration were based on
the estimated fair values derived from calculating the
discounted cash flows required to develop each incomplete
research and development project into a commercially viable
product, taking into account the anticipated future revenues and
the remaining costs of completion. Consideration was also given
to the direct expenses incurred, contribution from other assets,
the implications of various jurisdictions of corporate tax, the
degrees of completion and the relative risks attributable to
each project. All forecasted future operating cash flows were
discounted at appropriate rates. The revenue estimates assumed
that the development and marketing of the projects would be
successful, and that their commercialization would correlate to
managements forecasts as of the date of the analysis, and
that forecasted sales would decline over each products
expected economic life as new versions were introduced either by
us or competitors.
In identifying the research and development programs to be
valued, we distinguish between two main areas of research and
development. Pure research of a given technology application is
referred to as technology research, or
36
TR. New product introduction, or NPI, follows from this stage,
and is the development of a known technology from initial
identification of an application with a market opportunity,
through design and testing, to implementation and delivery of
products to a customer.
Acquisition
of the Optical Components Business of Marconi Optical Components
Limited
In connection with the acquisition of the optical components
business of Marconi in February 2002, $5.9 million of the
$29.9 million total consideration was allocated to
in-process research and development projects.
At the time of the acquisition the remaining projects under
development at the acquisition date were expected to result in a
portfolio addressing tunability, bandwidth, integration,
amplification, and managed optical networks.
At the time of the acquisition, the expected dates of release of
these projects ranged from seven to seventeen months from the
date of acquisition. We acquired three main programs in the NPI
stage of development. All estimated costs to complete were to be
funded from our current cash reserves. The current status of
each category is given below:
|
|
|
|
|
Fast tuning, wide coverage, tunable lasers: We
initially suspended development of these products
post-acquisition in favor of alternative technologies. We did,
however, continue to work to eliminate many of the fundamental
limitations of the chip, and we recommenced a development
program of a laser and module product which is now available,
and which we expect to ramp to commercial production levels
through the second half of 2006.
|
|
|
|
10 gigabyte transmitters: We rephased this
program as a result of wafer fabrication and assembly and test
facility transfers. We have completed an integrated narrow band
tunable transmitter and began shipping this product in 2003. We
discontinued the wide band transmitter in 2003.
|
|
|
|
40 gigabyte transmitters and
receivers: Following the acquisition, we
suspended the program as the market conditions for acceptance of
this product had changed, and there was overlap with products
being developed/marketed by the optical components business
acquired from Nortel Networks. While we continue to believe that
this market will develop in the future, we do not plan to
continue with this program.
|
Acquisition
of the Optical Components Business of Nortel
Networks
Of the total $119.0 million consideration for the optical
components business of Nortel Networks in November 2002, the
initial allocation to acquired in-process research and
development was $7.3 million. This initial allocation was
subsequently adjusted following the required review of the
purchase price allocation during the second half of 2003,
resulting in a reduction of the allocated in-process research
and development by $1.7 million, which was recognized as a
credit in 2003.
At the time of the acquisition the projects remaining under
development at the acquisition date were expected to result in a
portfolio addressing tunability, bandwidth, integration,
amplification, and managed optical networks. These projects were
split into two distinct categories: NPI and TR. The TR projects,
which met the criteria for recognition as in-process research
and development, were assessed as requiring between one and one
and a half years before attaining NPI status. All estimated
costs to complete were to be funded from our current cash
reserves. The current status of each category is given below.
NPI
|
|
|
|
|
Amplifiers: The MiNi and Barolo platform
products were successfully released in 2003 and continue to be
shipped to customers.
|
|
|
|
Pumps: The next generation of pumps
incorporating the G07 higher power chip were successfully
launched in 2003.
|
|
|
|
Transmitters/Receivers: The majority of the
transmitters and receivers in the NPI stage at acquisition have
now been released to the market and are available to customers.
These include the 10 G/bs 8x50 GaAs laser, the 100mW UHP laser,
the Compact MZ laser, MSA receiver, a 10G uncooled DFB directly
modulated laser
|
37
|
|
|
|
|
and hot pluggable transponder modules. A couple of programs,
mainly comprised of modules including tunable lasers, have been
rephased due to slower market demand for the new technology.
|
TR
|
|
|
|
|
Amplifiers: Activity on these projects has
slowed significantly due to weakening market demand and pricing
pressure. Since the date of acquisition, substantially all of
the technology
work-in-progress
has been completed or absorbed into products.
|
|
|
|
Pumps: Since the date of acquisition,
substantially all of the technology
work-in-progress
has been completed or absorbed into products.
|
|
|
|
Transmitter/Receivers: Since the date of
acquisition, substantially all of the technology
work-in-progress
has been completed or absorbed into products.
|
Acquisition
of Ignis Optics
In connection with the acquisition of Ignis Optics in October
2003, $1.9 million of the $18 million total
consideration was allocated to in-process research and
development projects. The NPI projects under development at the
acquisition date were expected to result in small form factor
pluggable optical transceivers or component elements to these
products and address quality and reliability requirements.
Commercial shipments of the products began during the second
half of fiscal 2005, and to a large degree were discontinued in
fiscal 2006. There were no TR projects at the time of
acquisition.
Acquisition
of New Focus
In connection with the acquisition of New Focus in March 2004,
$5.9 million of the $211.0 million of total
consideration was allocated to in-process research and
development projects. The NPI projects at the acquisition date
were expected to result in the development of products to
support the New Focus OEM and catalog business. Catalog related
programs were focused on increasing the wavelength spectrum over
which modulator products can operate and developing detectors to
operate at higher frequency with lower noise over a broader
wavelength, with their first incorporation in shipments in
December 2004. Of the OEM related products, two have been
completed, namely a super luminous diode light source for use in
subsystems and a laser for use in high precision/high stability
labs. The final program for development of a small form factor
laser for use in fiber sensing applications continues but has
been slowed due to lower than expected emergence of market
opportunities. There were no TR programs at the time of
acquisition.
Acquisition
of Avalon
In connection with the acquisition of Avalon in March 2006,
$118,000 of the $6.7 million total consideration was
allocated to in-process research and development projects.
Accounting
for Share-Based Payments
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, or SFAS 123R, which
requires companies to recognize in their statement of operations
all share-based payments to employees, including grants of
employee stock options, based on their fair values. We adopted
SFAS 123R on July 3, 2005, using the
modified-prospective-transition method. Accounting for
share-based compensation transactions using the intrinsic method
supplemented by pro forma disclosures in the financial statement
footnotes is no longer permissible. The application of
SFAS 123R involves significant amounts of judgment in the
determination of inputs into the Black-Scholes-Merton valuation
model which we use to determine the fair value of share-based
awards. These inputs are based upon highly subjective
assumptions as to the volatility of the underlying stock, risk
free interest rates and the expected life of the options. As a
result of adopting SFAS 123R, our income before income
taxes and net income for the year ended July 1, 2006 are
$8.2 million lower and basic and diluted earnings per share
are $0.17 per share lower than they would have been had we
not adopted SFAS 123R. Judgement is also required in
estimating the number of share based awards that are expected to
be forfeited. If actual results or future changes in
38
estimates differ significantly from our current estimates,
stock-based compensation expense and our consolidated results of
operations could be materially impacted. During the year ended
July 1, 2006, we recognized $8.2 million of stock
compensation expense, of which $1.7 million relates to
certain performance based options for which the related
performance targets were met and recognized in the three months
ended October 2, 2005.
Results
of Operations
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
Twelve
|
|
|
|
|
|
|
Year
|
|
|
|
Year
|
|
Months
|
|
|
|
Months
|
|
Year
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
Ended
|
|
|
|
Ended
|
|
Ended
|
|
|
|
|
July 1,
|
|
July 2,
|
|
Percentage
|
|
July 2,
|
|
July 3,
|
|
Percentage
|
|
July 3,
|
|
December 31,
|
|
Percentage
|
|
|
2006
|
|
2005
|
|
Change
|
|
2005
|
|
2004
|
|
Change
|
|
2004
|
|
2003
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ Millions)
|
|
Total Revenues
|
|
$
|
231.6
|
|
|
$
|
200.3
|
|
|
|
16
|
%
|
|
$
|
200.3
|
|
|
$
|
158.2
|
|
|
|
27
|
%
|
|
$
|
158.2
|
|
|
$
|
146.2
|
|
|
|
8
|
%
|
Year
ended July 1, 2006 versus year ended July 2,
2005
Revenues for the year ended July 1, 2006 increased by
$31.3 million, or 16%, compared to the year ended
July 2, 2005. $21.0 million of this increase is due to
revenues from Nortel Networks, which increased to
$110.5 million in the year ended July 1, 2006 from
$89.5 million in the year ended July 2, 2005. This
increase in revenues from Nortel Networks was due to the amended
terms of our supply agreement with Nortel Networks. The second
addendum to the supply agreement, which we entered into in May
2005, provided for, among other things, Nortel Networks
obligation to purchase certain products from us, an increase in
the price of those products above those previously charged to
Nortel Networks, our grant to Nortel Networks of a security
interest on certain of our assets, and a waiver of certain
prepayment conditions. Under the second addendum, Nortel
Networks agreed to purchase approximately $100 million of
products from us, equally divided into two categories of
products: last-time buy products, and products that
we will continue to manufacture. The third addendum to the
supply agreement, among other things, (i) extends the term
of the supply agreement to the end of calendar 2006, and
(ii) requires Nortel Networks to purchase approximately
$72 million of products from us. Remaining obligations of
approximately $30 million under the supply agreement, as
amended, are expected to be fulfilled by the end of the December
2006 quarter. As of July 1, 2006, substantially all of
Nortel Networks last-time buy obligations have
been fulfilled. Non-last-time buy purchases will be
transacted at the then current market prices and not at the
increased prices which were agreed to in the second addendum to
the supply agreement. Our revenues from Nortel Networks
decreased in the quarter ended March 31, 2006 from the
quarter ended December 31, 2005, and decreased again in the
quarter ended July 1, 2006 from the quarter ended
March 31, 2006. We expect our revenues from Nortel Networks
may continue to decrease through the first two quarters of our
year ended June 30, 2007, and to potentially decline
further in future quarters, although we do expect Nortel
Networks to continue as a major customer for the foreseeable
future beyond that time.
Overall the revenues from our optics segment, which designs,
manufactures, markets and sells optical solutions for
telecommunications and industrial applications, increased by
$29.6 million, or by 17%, to $206.1 million in the
year ended July 1, 2006 from $176.5 million in the
year ended July 2, 2005. The increase in revenues,
excluding amounts related to Nortel Networks, was spread across
a large number of customers, none of which exceeded 10% of total
revenues in either year. From a products point of view, the
increases in optics segment revenues in the year ended
July 1, 2006 from the year ended July 2, 2005 was
derived from most major product categories, except for TOA/ROA
which were generally sold to Nortel Networks as part of the
last-time buy products and which decreased by
$10.0 million.
Our research and industrial segment, which designs,
manufactures, markets and sells photonic and microwave
solutions, primarily comprises the products and services of New
Focus. Revenues from the research and industrial segment
increased to $25.6 million in the year ended July 1,
2006 from $23.7 million in the year ended July 2, 2005
as a result of increased sales during the period.
39
Year
ended July 2, 2005 versus twelve months ended July 3,
2004
Revenues for the year ended July 2, 2005 increased by
$42.1 million, or 27%, as compared to the twelve months
ended July 3, 2004. The increase was primarily due to the
inclusion of a full year of revenue from New Focus and Onetta,
which we acquired during the twelve months ended July 3,
2004. Revenues from products and services acquired as part of
these acquisitions were $30.4 million for the year ended
July 2, 2005 compared to $8.7 million in revenues for
the twelve months ended July 3, 2004, which included only
approximately three months of revenues from New Focus and one
month of revenues from Onetta. In addition, sales of
products and services to customers other than Nortel Networks
and Marconi increased to $88.9 million in fiscal 2005 from
$52.2 million in the twelve months ended July 3, 2004.
Revenues from our optics segment increased to
$176.6 million in fiscal 2005 from $147.8 million in
the twelve months ended July 3, 2004, primarily as a result
of increased sales of products and services. Revenues from the
research and industrial segment increased to $23.7 million
in fiscal 2005 from $10.4 million in the twelve months
ended July 3, 2004, primarily as a result of these products
and services contributing sales for the entire year as a result
of a full year of revenue from New Focus.
Our largest customer for the year ended July 2, 2005 and
the twelve months ended July 3, 2004 was Nortel Networks.
Sales of products and services to Nortel Networks were
$89.5 million in fiscal 2005 compared to $81.4 million
in the twelve months ended July 3, 2004, representing 45%
and 52% of our revenues in the respective years. The increase in
revenue from the twelve months ended July 3, 2004 to fiscal
2005 was due to revisions to our supply agreement with Nortel
Networks in March 2005. Pursuant to the terms of the supply
agreement with Nortel Networks, Nortel Networks issued
non-cancelable purchase orders and last-time buys
totaling approximately $100 million, based on revised
pricing terms, to be delivered through March 2006. Through
July 2, 2005, we delivered products pursuant to these
purchase orders having an aggregate price of approximately
$34 million.
Twelve
months ended July 3, 2004 versus year ended
December 31, 2003
Revenues for the twelve months ended July 3, 2004 increased
by $12.0 million, to $158.2 million from
$146.2 million in the year ended December 31, 2003.
Revenues from New Focus, which we acquired in March 2004,
accounted for $10.4 million of this increase. The remaining
increase was the result of increased sales across our customer
base, consistent with our strategy of expanding revenues across
a broader customer base, offsetting reductions under supply
agreements with Nortel Networks, for which revenues decreased to
$81.4 million from $85.5 million in the twelve months
ended July 3, 2004 as compared to the year ended
December 31, 2003, respectively, and Marconi, for which
revenues decreased to $16.6 million from $18.1 million
in the twelve months ended July 3, 2004 compared to the
year ended December 31, 2003, respectively.
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
Months
|
|
|
|
|
|
Months
|
|
|
Year
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
Percentage
|
|
|
July 2,
|
|
|
July 3,
|
|
|
Percentage
|
|
|
July 3,
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
($ Millions)
|
|
|
Cost of Revenues
|
|
$
|
190.1
|
|
|
$
|
193.6
|
|
|
|
2
|
%
|
|
$
|
193.6
|
|
|
$
|
159.5
|
|
|
|
21
|
%
|
|
$
|
159.5
|
|
|
$
|
156.0
|
|
|
|
2
|
%
|
Our cost of revenues consists of the costs associated with
manufacturing our products, and includes the purchase of raw
materials, labor costs and related overhead, including stock
compensation expenses. It also includes the costs associated
with under-utilized production facilities and resources, as well
as the charges for the write-down of impaired manufacturing
assets or restructuring related costs, which are categorized as
Net Charges. Charges for inventory obsolescence, the
cost of product returns and warranty costs are also included in
cost of revenues. Costs and expenses related to our
manufacturing resources, which relate to the development of new
products, are included in research and development.
40
Year
ended July 1, 2006 versus year ended July 2,
2005
Our cost of revenues for the year ended July 1, 2006
decreased compared to the year ended July 2, 2005 primarily
due to the transition of our assembly and test facilities from
Paignton, U.K. to Shenzhen, China, which has a lower cost base.
The substantial portion of this transition was completed by the
end of March 2006. We expect to transfer the one remaining
assembly process before the end of December 2006, along all of
the manufacturing planning, supply chain management and related
activities. In addition, headcount reductions that were
implemented at our Paignton facility during the quarters ended
March 31, 2006 and July 1, 2006 were also responsible
for the overall decrease in cost of revenues. In May 2006, we
announced our latest cost reduction plan to reduce our total
costs and expenses by $5.5 million to $6.5 million a
quarter, compared to the quarter ended April 1, 2006,
largely related to the transition of the remaining Paignton
manufacturing activities to Shenzhen, along with cost reductions
in our Caswell U.K. wafer fabrication facility, which in total
are expected to result in cost of revenues reductions of
approximately $4.0 million per quarter, which we expect to
begin fully realizing in the March 2007 quarter.
During the year ended July 1, 2006, the reductions in our
cost of revenues were partially offset by $1.9 million of
stock based compensation expense recorded under SFAS 123R,
which we adopted on July 3, 2005. The year ended
July 2, 2005 included $14,000 of stock based compensation
expense recorded under previous accounting pronouncements.
Year
ended July 2, 2005 versus twelve months ended July 3,
2004
Our cost of revenues for the year ended July 2, 2005
increased compared to the prior year primarily due to the
inclusion of a full year of manufacturing costs associated with
the products of the New Focus and Onetta businesses which we
acquired in March and June of 2004, respectively.
Our cost of revenues for the year ended July 2, 2005 also
increased because cost of revenues for the year ended
July 3, 2004 included the impact of adverse movements in
foreign exchange rates. A substantial portion of our cost of
revenues during the period were incurred in U.K. pounds sterling
due to the manufacturing expenses associated with our facilities
in the United Kingdom. Relative to U.K. pounds sterling, the
U.S. dollar declined significantly during the year ended
July 2, 2005, with the rates moving from an average rate of
1.736 dollars per U.K. pound sterling for the twelve months
ended July 3, 2004 to 1.856 dollars per U.K. pound sterling
for the year ended July 2, 2005, reaching a peak of 1.926
dollars per U.K. pound sterling on December 31, 2004, and
ending at a rate of 1.792 dollars per U.K. pound sterling on
July 2, 2005.
Our cost of revenues also increased during the period due to the
costs of ramping up our manufacturing facility in Shenzhen,
China while transferring most of our assembly and test
operations from Paignton, U.K. to this facility in order to take
advantage of lower costs of production. Although we began
shipping products out of our Shenzhen facility during the
quarter ended October 2, 2004, we continued to operate both
the Paignton and Shenzhen facilities during the ramp up of
Shenzhen, and also to fulfill purchase orders and
last-time buys required pursuant to the Nortel
Networks supply agreement, as amended.
Twelve
months ended July 3, 2004 versus year ended
December 31, 2003
Our cost of revenues for the twelve months ended July 3,
2004 as compared to the year ended December 31, 2003
increased by $3.5 million. As part of the acquisition of
the optical components business of Nortel Networks, we undertook
a comprehensive restructuring plan, which involved closing
facilities, consolidating manufacturing operations and workforce
reductions. This plan began immediately after the acquisition
was completed on November 8, 2002 and was substantially
complete by the end of 2003. As a result of this restructuring
plan, following the acquisition, fixed overhead was
substantially lower for the twelve month period ended
July 3, 2004 compared with the year ended December 31,
2003. However, cost of revenues increased in the twelve month
period ended July 3, 2004 compared with the year ended
December 31, 2003 principally because of higher variable
production costs, including direct material and labor costs
related to increased revenues, which more than offset the lower
fixed manufacturing overhead.
41
Gross
Margin/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
Months
|
|
|
|
|
|
Months
|
|
|
Year
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
Percentage
|
|
|
July 2,
|
|
|
July 3,
|
|
|
Percentage
|
|
|
July 3,
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
($ Millions)
|
|
|
Gross Profit/(Loss)
|
|
$
|
41.6
|
|
|
$
|
6.6
|
|
|
|
530
|
%
|
|
$
|
6.6
|
|
|
$
|
(1.3
|
)
|
|
|
608
|
%
|
|
$
|
(1.3
|
)
|
|
$
|
(9.8
|
)
|
|
|
87
|
%
|
Gross Margin/(Loss)
|
|
|
18
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
(1
|
)%
|
|
|
(7
|
)%
|
|
|
|
|
Gross profit/(loss) is calculated as revenues less cost of
revenues. Gross margin/(loss) rate is gross profit/(loss)
reflected as a percentage of revenue.
Year
ended July 1, 2006 versus year ended July 2,
2005
For the year ended July 1, 2006, our gross margins improved
because of the positive impact of higher revenues spread across
our fixed costs, the lower cost base of our Shenzhen facility
compared to our Paignton U.K. facility, and favorable pricing
terms under the second amendment to our supply agreement with
Nortel Networks. We expect our gross margins for the year ended
June 30, 2007 to benefit from the additional cost
reductions and related cost savings under the cost reduction
plan announced in May 2006, which are expected to be fully
realized in the third quarter of fiscal 2007.
During the year ended July 1, 2006, we had revenues of
$9.5 million related to, and recognized profits on,
inventory that had been carried on our books at zero value. The
inventory had originally been acquired in connection with our
purchase of the optical components business of Nortel Networks.
While this inventory is on our books at zero value, and its sale
generates higher margins than most of our new products, we incur
additional costs to complete the manufacturing of these products
prior to sale. We believe revenues from this zero value
inventory will be negligible in the year ended June 30,
2007.
During the year ended July 1, 2006, the improvements in our
gross margins were partially offset by $1.9 million of
stock based compensation expense recorded to cost of revenues
under SFAS 123R, which we adopted on July 2, 2005.
Only $14,000 of stock based compensation expense was recorded to
cost of revenues in the year ended July 2, 2005, under
previous accounting pronouncements.
Year
ended July 2, 2005 versus twelve months ended July 3,
2004
Our gross margin rate improved in fiscal 2005 compared to the
twelve months ended July 3, 2004 primarily because of the
positive impact of higher revenues spread across our fixed
costs, despite the fact that we experienced a difficult
competitive environment which was exacerbated in fiscal 2005 by
the negative impact of currency fluctuations, and certain costs
of maintaining assembly and test facilities in both Paignton and
Shenzhen during the transition of these operations to Shenzhen.
During fiscal 2005, we had revenues of $19.5 million
related to our zero value inventory. While this inventory is on
our books at zero value, and its sale generated higher margins
than most of our new products during the period, we incurred
additional costs to complete the manufacturing of these products
prior to sale.
Twelve
months ended July 3, 2004 versus year ended
December 31, 2003
The improved gross loss and gross loss rate improvement for the
twelve month period ended July 3, 2004 compared with the
year ended December 31, 2003 was principally the result of
the lower fixed overhead costs in the twelve month period ended
July 3, 2004 and, to a lesser degree, the higher revenue
during the same twelve month period when compared to the year
ended December 31, 2003.
42
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
Months
|
|
|
|
|
|
Months
|
|
|
Year
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
Percentage
|
|
|
July 2,
|
|
|
July 3,
|
|
|
Percentage
|
|
|
July 3,
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
($ Millions)
|
|
|
R&D Expenses
|
|
$
|
42.6
|
|
|
$
|
44.8
|
|
|
|
(5
|
)%
|
|
$
|
44.8
|
|
|
$
|
50.8
|
|
|
|
(12
|
)%
|
|
$
|
50.8
|
|
|
$
|
50.4
|
|
|
|
1
|
%
|
% of Revenues
|
|
|
18
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
32
|
%
|
|
|
34
|
%
|
|
|
|
|
Research and development expense consists primarily of salaries
and related costs of employees engaged in research and design
activities, including stock compensation charges related to
those employees, costs of design tools and computer hardware,
and costs related to prototyping.
Year
ended July 1, 2006 versus year ended July 2,
2005
Research and development expense decreased in the year ended
July 1, 2006 compared to the year ended July 2, 2005
primarily due to the cost savings efforts implemented in fiscal
2005, under our 2004 restructuring plan, being in effect for the
full year. In May 2006, we announced a cost reduction plan,
which we expect will be fully implemented by the March 2007
quarter, that we expect will further reduce quarterly research
and development expenditures.
In the year ended July 1, 2006 decreases in research and
development expense were partially offset by $1.9 million
of stock based compensation expense recorded under
SFAS 123R, which we adopted on July 2, 2005. $8,000 of
stock based compensation expense was recorded in the year ended
July 2, 2005, as a research and development expense under
previous accounting pronouncements.
Year
ended July 2, 2005 versus twelve months ended July 3,
2004
Research and development expenses decreased in fiscal 2005
compared to the twelve months ended July 3, 2004 as a
result of the significant reductions made in connection with our
2004 restructuring plan, offsetting the increase in research and
development spending that resulted from acquiring New Focus and
Onetta and the negative effects of the weakness in the
U.S. dollar relative to the U.K. pound sterling and other
currencies in which we operate.
Twelve
months ended July 3, 2004 versus year ended
December 31, 2003
Research and development expenses rose by 1% in the twelve
months ended July 3, 2004 compared to the year ended
December 31, 2003 due to increased spending of
approximately $7.2 million that resulted from our
acquisition of New Focus and Ignis Optics, which was partially
offset by cost-cutting measures implemented in 2003 that
included the discontinuance of our research and development of
the ASOC product line.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
Months
|
|
|
|
|
|
Months
|
|
|
Year
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
Percentage
|
|
|
July 2,
|
|
|
July 3,
|
|
|
Percentage
|
|
|
July 3,
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
($ Millions)
|
|
|
SG&A Expenses
|
|
$
|
52.2
|
|
|
$
|
60.3
|
|
|
|
(13
|
)%
|
|
$
|
60.3
|
|
|
$
|
44.6
|
|
|
|
35
|
%
|
|
$
|
44.6
|
|
|
$
|
33.8
|
|
|
|
32
|
%
|
% of Revenues
|
|
|
23
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
30
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
28
|
%
|
|
|
23
|
%
|
|
|
|
|
Selling, general and administrative expenses consist primarily
of personnel-related expenses, including stock compensation
charges related to employees engaged in sales, general and
administrative functions, legal and professional fees,
facilities expenses, insurance expenses and certain information
technology costs.
43
Year
ended July 1, 2006 versus year ended July 2,
2005
Our selling, general and administrative expenses decreased in
fiscal 2006 compared to fiscal 2005, primarily due to cost
reductions implemented in fiscal 2005, which were in effect for
the full year ended July 1, 2006, reductions in the costs
associated with our compliance with the Sarbanes-Oxley Act of
2002, no replication of costs incurred in connection with our
moving administrative activities to a newly established
corporate headquarters in San Jose, California which were
incurred during fiscal 2005, and reductions in certain insurance
premiums.
In the year ended July 1, 2006 decreases in our selling,
general and administrative expenses were partially offset by
$4.4 million of stock based compensation expense recorded
under SFAS 123R, which we adopted on July 2, 2005.
$742,000 of stock based compensation expense was recorded as a
selling, general and administrative expense in the year ended
July 2, 2005, under previous accounting pronouncements.
Year
ended July 2, 2005 versus twelve months ended July 3,
2004
Selling, general and administrative expenses increased by
$15.7 million in fiscal 2005 compared to the twelve months
ended July 3, 2004. The increase was due to higher selling
costs to support revenue growth, the inclusion of the operations
of New Focus and Onetta for an entire year, the negative impact
of the weakness in the U.S. dollar relative to the U.K.
pound sterling, costs associated with compliance with the
Sarbanes-Oxley Act of 2002 and costs associated with moving
administrative activities to the newly established
U.S. headquarters in San Jose, California in the
second quarter of fiscal 2005. In total, these costs more than
offset the cost reductions attained in connection with the 2004
restructuring plan.
Twelve
months ended July 3, 2004 versus year ended
December 31, 2003
The increase of $10.8 million in selling, general and
administrative expense in the twelve month period ended
July 3, 2004 compared with the year ended December 31,
2003 resulted from the inclusion of the operations of New Focus
for only three months in the twelve month period ended
July 3, 2004 and, to a lesser extent, the inclusion of the
business acquired from Cierra Photonics, combined with higher
legal and professional fees relating to various corporate
development activities.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ Millions)
|
|
|
Lease cancellation and commitments
|
|
$
|
1.9
|
|
|
$
|
4.8
|
|
|
$
|
4.9
|
|
|
$
|
6.7
|
|
Termination payments to employees
and related costs
|
|
|
9.3
|
|
|
|
15.7
|
|
|
|
15.6
|
|
|
|
20.9
|
|
Write-off on disposal of assets
and related costs
|
|
|
|
|
|
|
0.4
|
|
|
|
2.6
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11.2
|
|
|
$
|
20.9
|
|
|
$
|
23.1
|
|
|
$
|
31.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over the past five years, we have enacted a series of
restructuring plans and cost reduction plans designed to reduce
our manufacturing overhead and our operating expenses. In 2001,
we reduced manufacturing overhead and our operating expenses in
response to the initial decline in demand in the optics
components industry. In connection with our acquisitions of
Nortel Networks optical components business in November
2002 and New Focus in March 2004, we enacted restructuring
plans related to the consolidation of our operations, and which
we expanded in September 2004 to include the transfer of our
main corporate functions, including consolidated accounting,
financial reporting, tax and treasury, from Abingdon, U.K. to
our new U.S headquarters in San Jose, California.
In May and November of 2004, we adopted additional restructuring
plans, which included the transfer of our assembly and test
operations from Paignton, U.K. to Shenzhen, China, a process
that commenced in the quarter ended October 2, 2004. This
transition was substantially complete by the end of March 2006,
except for a
chip-on-carrier
assembly process we added to the transition plan in November
2005, and which we expect to be
44
completed by the end of December 2006. In May 2006, we announced
our latest cost reduction plans, which included transitioning
all remaining manufacturing support and supply chain management,
along with pilot line production and production planning, from
Paignton to Shenzhen, also by the end of December, 2006.
With respect to the transfer of the operations described in the
previous paragraph, some of which are still in the process of
being transferred, we have spent $22.6 million as of
July 1, 2006, and we anticipate spending a total of
approximately $30 million to $37 million, including
$6 million to $7 million on the cost reduction plan
announced in May 2006. The substantial portion of the remaining
spending relates to personnel and personnel related costs. We
expect the cost reduction plan announced in May 2006 to reduce
our costs by between $5.5 million and $6.5 million a
quarter, when compared to the expenses incurred in the quarter
ended April 1, 2006, with the cost savings expected to be
realized in the March 2007 quarter.
Year
ended July 1, 2006
The restructuring charges of $11.2 million in the year
ended July 1, 2006 were primarily associated with those
employees in our assembly and test operations in Paignton
identified for termination and retained until the completion of
the transfer of the operations from Paignton, U.K. to Shenzhen,
China. Costs of their severance and retention were accrued over
their remaining service period. Restructuring charges in fiscal
2006 also included $1.9 million of additional accruals
related to revised assumptions as to subleases and final costs
associated with lease facilities exited. $1.5 million of
these addition lease accruals were incurred in our research and
industrial segment and all other restructuring charges in fiscal
2006 were incurred in our optics sector.
Year
ended July 2, 2005
The restructuring charges in the year ended July 2, 2005
were primarily associated with manufacturing, research and
development, and selling, general and administrative employees
identified for termination under the restructuring plans
referred to above, including the consolidation of operations,
the transfer of our main corporate functions to the U.S. and the
initial stages of the Paignton to Shenzhen transition. Costs of
the employees severance and retention were accrued over
their remaining service period. Restructuring charges in fiscal
2005 also include $2.6 million for costs associated with
lease facilities exited, and $2.2 million of additional
accruals related to revised assumptions as to subleases and
final costs associated with lease facilities exited.
Twelve
months ended July 3, 2004
The restructuring charges in the twelve months ended
July 3, 2004 were primarily associated with employees
identified for termination under plans that included the closure
of a semiconductor fabrication facility in Ottawa, Canada and
the transfer of related fabrication capabilities to Caswell,
U.K. We also closed a few smaller manufacturing-related sites in
Milton, U.K., Harlow, U.K. and Poughkeepsie, New York, and
consolidated certain production processes into new locations.
The transfer was completed in August 2003. In connection
with this transfer, certain products and research projects were
discontinued. Subsequent to its completion, we achieved
annualized cost savings in excess of $25 million related to
this plan. During the twelve months ended July 3, 2004, we
also assumed $16.8 million of restructuring charges related
to facility commitments previously entered into by companies we
acquired during that period, the substantial portion of which
represents lease commitments in the research and industrial
segment.
Year
ended December 31, 2003
In the year ended December 31, 2003, we recorded
restructuring charges primarily related to the closure of a
semiconductor fabrication facility in Ottawa, Canada and the
transfer of related fabrication capabilities to Caswell, U.K. We
also closed a few smaller manufacturing-related sites in Milton,
U.K., Harlow, U.K. and Poughkeepsie, New York, and consolidated
certain production processes into new locations. The transfer
was completed in August 2003. In connection with this transfer,
certain products and research projects were discontinued. All
charges recorded in the year ended December 31, 2003
related to the optics segment.
45
Amortization
of Other Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
Months
|
|
|
|
|
|
Months
|
|
|
Year
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
Percentage
|
|
|
July 2,
|
|
|
July 3,
|
|
|
Percentage
|
|
|
July 3,
|
|
|
December 31,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
2004
|
|
|
2003
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
($ Millions)
|
|
|
Amortization
|
|
$
|
10.0
|
|
|
$
|
11.1
|
|
|
|
(10
|
)%
|
|
$
|
11.1
|
|
|
$
|
9.4
|
|
|
|
18
|
%
|
|
$
|
9.4
|
|
|
$
|
8.5
|
|
|
|
11
|
%
|
Since 2001, we have acquired six optical components companies
and businesses, and one photonics and microwave company, and
amortization tends to increase in connection with the addition
of intangible assets purchased in connection with these
acquisitions. In the year ended December 31, 2002, we
acquired the optical components businesses of Nortel Networks
and Marconi. In the year ended December 31, 2003,
amortization of purchased intangible assets increased when
compared to the prior year due to the effect of including the
results of the optical components businesses of Nortel Networks
and Marconi for the full year, and of our acquisition of Ignis
Optics and the business of Cierra Photonics during the year.
Amortization of purchased intangible assets increased in the
twelve months ended June 3, 2004 compared to the year ended
December 31, 2003, due to our acquisition of New Focus in
March 2004 and Onetta in June 2004, and increased again in the
year ended July 2, 2005 as compared to the twelve months
ended July 3, 2004 due to the effect of amortizing the
purchased intangible assets of New Focus and Onetta for the full
year. In the year ended July 1, 2006, amortization of
purchased intangible assets decreased because purchased
intangible assets associated with our earliest acquisitions
became fully amortized, and because the additional amortization
related to our March 2006 acquisition of Avalon was not
significant enough to offset these reductions.
Impairment
of Goodwill and Other Intangible Assets
SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually, or sooner whenever
events or changes in circumstances indicate that they may be
impaired. In the fourth quarter of the year ended July 1,
2006, in connection with our annual review for impairment, we
recorded $760,000 of impairment charges related to purchased
intangible assets associated with our acquisition of Ignis
Optics. In the third quarter of the year ended July 2,
2005, the decline in our stock price, and therefore market
capitalization, combined with continuing net losses and a
history of not meeting revenue and profitability targets,
suggested that the goodwill related to certain of our
acquisitions may have been impaired at such time. As a result of
these triggering events, we performed a preliminary evaluation
of the related goodwill balances. In the fourth quarter of
fiscal 2005, we finalized this evaluation during our annual
evaluation of goodwill, and also performed our annual evaluation
of acquired intangible assets. As a result, for the year ended
July 2, 2005, we recorded charges of $114.2 million,
primarily related to the impairment of goodwill related to the
acquisitions of New Focus, Ignis Optics and Onetta, including
$0.6 million related to the impairment of certain
intangible assets related to the acquisition of New Focus. We
recorded no charges for the impairment of goodwill or intangible
assets during any of the other periods presented herein.
Impairment/(Recovery)
of Other Long-Lived Assets
In September 2005, we sold a parcel of land in Swindon, U.K.,
which had previously been accounted for as held for sale, and
for which the recorded book value had previously been written
down as impaired. The proceeds from the sale of this parcel of
land were $15.5 million, resulting in a recovery of
previous impairment of $1.3 million, net of transaction
costs. In the fourth quarter of fiscal 2006, in connection with
a review of our long-lived assets for impairment, we recorded
$433,000 of impairment charges, which offset the recovery
related to this land sale.
Legal
Settlement
On April 3, 2006, we entered into a settlement agreement
with Mr. Howard Yue relating to the lawsuit Mr. Yue
filed against New Focus, Inc., one of our subsidiaries, and
several of its officers and directors in Santa Clara County
Superior Court. This lawsuit was filed by Mr. Yue prior to our
acquisition of New Focus. The terms of the settlement provided
that we would issue to Mr. Yue a $7.5 million
promissory note, payable on or before April 10, 2006, of
46
which $5.0 million could be satisfied at our option through
the issuance of shares of common stock. In connection with this
settlement, we recorded $7.2 million ($7.5 million,
net of insurance recoveries expected as of that time) as an
other operating expense. In the fourth quarter of fiscal 2006,
we settled the promissory note for $2.5 million in cash and
$5.0 million of common stock valued on the date of the
payment. We also received $2.2 million from certain
insurance carriers in connection with this settlement, which
reduced our net expense for this settlement to
$5.0 million. If and when additional insurers confirm their
definitive coverage position, we may record the amounts of this
coverage as recoveries against operating expenses in the
corresponding future periods.
Loss
on Conversion and Early Extinguishment of Debt
On January 13, 2006, we entered into a series of
transactions to (i) retire $45.9 million aggregate
principal amount of outstanding notes payable to Nortel Networks
UK Limited and (ii) convert $25.5 million in outstanding
convertible debentures which were issued in December 2004. In
connection with the satisfaction of these debt obligations and
conversion of these convertible debentures we issued
approximately 10.5 million shares of common stock, warrants
to purchase approximately 1.1 million shares of common
stock, paid approximately $22.2 million in cash, and
recorded a charge of $18.8 million in the fiscal year ended
July 1, 2006 for loss on conversion and early
extinguishment of debt. See Note 17 - Debt to our
consolidated financial statements appearing elsewhere herein for
additional disclosures regarding the conversion of the
convertible debentures and early extinguishment of debt.
Interest
Income, Interest Expense, Other Income/(Expense) net,
Gain/(Loss) on Foreign Exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ Millions)
|
|
|
Other income/(expense), net
|
|
$
|
0.3
|
|
|
$
|
1.4
|
|
|
$
|
|
|
|
$
|
|
|
Interest income
|
|
|
0.3
|
|
|
|
1.1
|
|
|
|
6.0
|
|
|
|
9.4
|
|
Interest expense
|
|
|
(4.3
|
)
|
|
|
(5.4
|
)
|
|
|
(0.2
|
)
|
|
|
(3.2
|
)
|
Gain/(Loss) on foreign exchange
|
|
|
0.7
|
|
|
|
(1.0
|
)
|
|
|
7.3
|
|
|
|
(4.4
|
)
|
Other income/(expense), net in the year ended July 2, 2005
included a one-time gain of $1.1 million arising from the
release of an acquisition provision related to the closure of
the Bookham (Switzerland) AG pension arrangement.
Interest income decreased in the year ended July 1, 2006
from the year ended July 2, 2005 by $800,000, in the year
ended July 2, 2005 from the twelve months ended
July 3, 2004 by $4.9 million, and in the twelve months
ended July 3, 2004 from the year ended December 31,
2003 interest expense decreased by $3.4 million, due to
corresponding reductions in balances of cash and short-term
investments across those periods.
Interest expense in the years ended July 1, 2006 and
July 2, 2005 included interest on notes payable to Nortel
Networks and the amortization of interest costs related to the
issuance of $25.5 million of convertible notes in December
2004. Interest expense decreased in fiscal 2006 from fiscal 2005
by $1.1 million due to the conversion and extinguishment
of the convertible notes and payment of the promissory notes
issued to Nortel Networks pursuant to a series of agreements
entered into in January 2006. Interest expense in the twelve
months ended July 3, 2004 and in the year ended
December 31, 2003 was primarily related to the promissory
notes payable to Nortel Networks.
Gain/(loss) on foreign exchange includes the net impact of
translation of intercompany balances, translation of
U.S. dollar denominated monetary accounts in
non-U.S. dollar
functional currency subsidiaries, realized gains or losses on
foreign currency contracts designated as hedges, and realized
and unrealized gains or losses on foreign currency contracts not
designated as hedges. The net results are largely a function of
exchange rate changes between the U.S dollar and the U.K. pound
sterling. The $7.3 million gain and $4.4 million loss
on foreign exchange in the twelve months ended July 3, 2004
and in the year ended 2003, respectively, were primarily due to
translation of these balances and results which had been
previously reported in U.K. pounds sterling, restated for
comparative
47
period disclosure in U.S. dollars subsequent to our
September 2004 redomicile in the U.S., as described more fully
in the introduction to Item 6. Selected Financial Data.
Income
Tax Benefit/(Provision)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ Millions)
|
|
|
Income tax benefit/(provision)
|
|
$
|
11.7
|
|
|
$
|
|
|
|
$
|
3.6
|
|
|
$
|
3.4
|
|
We have incurred substantial losses to date and expect to incur
additional losses in the future. Based upon the weight of
available evidence, which includes our historical operating
performance and the recorded cumulative net losses in all prior
fiscal periods, we have provided a full valuation allowance
against our net deferred tax assets of $316.4 million at
July 1, 2006 and $330.4 million at July 2, 2005.
During fiscal 2006, in connection with our acquisition of
Creekside in August 2005, we recorded a one time tax gain of
$11.8 million related to our anticipated use of tax
attributes to offset deferred tax liabilities assumed. In the
twelve month period ended July 3, 2004, and in the year
ended December 31, 2003, we recognized a credit of
$3.7 million related to a payment received in 2002 from the
U.K. Inland Revenue as compensation for certain research and
development expenditures. As our business develops globally, we
may incur local tax charges which we will not be able to offset.
Liquidity,
Capital Resources and Contractual Obligations
Liquidity
and Capital Resources
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ Millions)
|
|
|
Net loss
|
|
$
|
(87.5
|
)
|
|
$
|
(248.0
|
)
|
|
$
|
(67.4
|
)
|
|
$
|
(125.8
|
)
|
Non-cash accounting charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
30.2
|
|
|
|
32.2
|
|
|
|
13.5
|
|
|
|
21.3
|
|
Impairments/(Recoveries) of long
lived assets, goodwill and other intangible assets
|
|
|
(0.1
|
)
|
|
|
114.2
|
|
|
|
|
|
|
|
|
|
Acquired IPR&D
|
|
|
0.1
|
|
|
|
|
|
|
|
5.9
|
|
|
|
0.2
|
|
Tax credits
|
|
|
(11.8
|
)
|
|
|
|
|
|
|
|
|
|
|
(3.7
|
)
|
Stock-based compensation expense
and expenses related to warrants
|
|
|
10.3
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Loss on conversion and early
extinguishment of debt
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal settlement
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sale of property and
equipment
|
|
|
(2.1
|
)
|
|
|
(0.7
|
)
|
|
|
(5.3
|
)
|
|
|
(3.1
|
)
|
Write back of acquisition expenses
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
Unrealized foreign currency
(gains)/losses
|
|
|
(0.6
|
)
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-cash accounting charges
|
|
|
49.8
|
|
|
|
151.3
|
|
|
|
14.2
|
|
|
|
14.7
|
|
Decrease/(increase) in working
capital
|
|
|
(17.9
|
)
|
|
|
(2.1
|
)
|
|
|
3.0
|
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
$
|
(55.6
|
)
|
|
$
|
(98.8
|
)
|
|
$
|
(50.2
|
)
|
|
$
|
(98.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
In the past five years, we have funded our operations from
several sources, including through public and private offerings
of equity, issuance of debt and convertible debentures, sale of
assets and net cash obtained in connection with recent
acquisitions. As of July 1, 2006, we held
$43.3 million in cash and cash equivalents (including
restricted cash of $5.5 million). On August 3, 2006,
we entered into a three year senior secured revolving credit
facility for $25 million with advances available based on a
percentage of accounts receivable at the time the advance is
requested. On September 1, 2006, we entered into an
agreement for the private placement of 8,696,000 shares of
common stock at $2.70 per share, and warrants to purchase
2,174,000 shares of common stock, with selected
institutional investors, for gross proceeds of approximately
$23.5 million. The warrants, which have a term of five
years and will become exercisable after March 1, 2007, have
an exercise price of $4.00 per share. Certain additional
institutional investors will have the right to purchase, on or
before September 19, 2006, up to 2,898,667 shares of
common stock and warrants to purchase up to 724,667 shares
of common stock at the same purchase price as the initial
institutional investors.
Based on our cash balances, and given our continuing and
expected losses for the foreseeable future, if we fail to meet
managements current cash flow forecasts, or we are unable
to draw sufficient amounts under the three year $25 million
senior secured revolving credit agreement with Wells Fargo
Foothill, Inc. and other lenders, which was entered into in
August 2006, for any reason, we will need to raise additional
funding of at least $10 million to $20 million through external
sources prior to July 2007 in order to maintain sufficient
financial resources in order to operate as a going concern
through the end of fiscal 2007. If necessary we will attempt to
raise additional funds by any one or a combination of the
following: (i) completing the sale of certain assets; (ii)
issuing equity, debt or convertible debt; (iii) selling certain
non core businesses. There can be no assurance of our ability to
raise sufficient capital through the above, or any other efforts.
Year
ended July 1, 2006
Net cash used in operating activities for the year ended
July 1, 2006 was $55.6 million, primarily resulting
from the net loss of $87.5 million, offset by non-cash
accounting charges of $49.8 million, primarily consisting
of an $18.8 million loss on conversion and early retirement
of debt, $8.2 million of expense related to stock based
compensation, $5.0 million of common stock issued to settle
a legal claim brought by Howard Yue, and $30.2 million
related to depreciation and amortization of certain assets, net
of an $11.8 million tax gain. Increases in working capital
of $17.9 million also contributed to the use of cash,
primarily due to decreases in accounts payables and accrued
expenses and other liabilities and an increase in accounts
receivable offset by a decrease in prepaid expenses and other
assets.
Year
ended July 2, 2005
Net cash used in operating activities for the year ended
July 2, 2005 was $98.8 million, primarily resulting
from the net loss of $248.0 million, offset by non-cash
accounting charges of $151.3 million, which includes
$114.2 million for the impairment of goodwill and certain
intangibles recorded in connection with past acquisitions,
primarily New Focus, and $32.2 million related to the
depreciation and amortization of certain assets. The increase in
working capital also resulted in a reduction in cash in the
amount of $2.1 million, primarily related to higher levels
of inventory required to support our increasing level of sales
through the period, and our expected sales in the first quarter
of fiscal 2006.
Six
months ended July 3, 2004
Net cash used in operating activities for the six-month period
ended July 3, 2004 was $50.2 million, primarily
resulting from the net loss of $67.4 million, offset by
non-cash accounting charges of $14.2 million, mainly
related to depreciation and amortization and a $3.0 million
decrease in working capital. The decrease in working capital was
the result of a reduction in inventory, primarily through the
sale of inventory purchased as part of the acquisition of the
optical components business from Nortel Networks.
49
Year
ended December 31, 2003
Net cash used in operating activities in 2003 was
$98.0 million, primarily resulting from the net loss of
$125.8 million, offset by non-cash accounting charges of
$14.7 million primarily for depreciation and amortization
and an $18.9 million decrease in working capital. The
decrease in working capital was the result of a reduction in
inventory, primarily through the sale of inventory purchased as
part of the acquisition of the optical components business from
Nortel Networks.
Return/(Loss)
on Investments
Return/(loss) on investments represents net interest, which is
the difference between interest received on our cash and
interest paid on our debts. Loss on investments were
$4.0 million in the year ended July 1, 2006,
$4.3 million in the year ended July 2, 2005,
$5.8 million in the twelve months ended July 3, 2004,
and $6.3 million in the year ended December 31, 2003.
From the year ended December 31, 2003 to the twelve months
ended July 3, 2004, and from the twelve months ended
July 3, 2004 to the year ended July 2, 2005,
decreasing returns on investment and the loss on investment have
been due to lower interest income earned on declining cash
balances, interest on balances outstanding from the
$50 million of notes issued to Nortel Networks in November
2002 and the amortization of interest, costs and warrants
associated with our issuance of $25.5 million of
convertible debt in December 2004, prior to converting such
convertible debt into common stock in January and March 2006.
The reduction in loss on investment in the year ended
July 1, 2006 compared to the year ended July 2, 2005
is due to the payment and retirements of notes issued to Nortel
Networks and the conversion of $25.5 million of convertible
debt into common stock both pursuant to a series of agreements
entered into on January 13, 2006.
Investing
Activities
We generated net cash of $42.7 million from investing
activities in the year ended July 1, 2006, primarily from
$14.7 million in proceeds, net of costs, from the sale of a
parcel of land in Swindon U.K. (as described further below),
$9.6 million of cash assumed in connection with the two
acquisitions completed during the year, $23.4 million from
the sale of land and building in Caswell pursuant to a
sale-leaseback transaction, and $2.4 million in proceeds
from the sale of property and equipment. These sources of cash
were partially offset by $10.1 million in capital
expenditures. A substantial portion of the capital spending
during this period was incurred in connection with the ramp up
of our Shenzhen assembly and test operations.
In the year ended July 2, 2005, we used $2.3 million
of cash in investing activities, primarily relating to
$16.0 million of capital expenditures, along with a
$1.7 million transfer of funds to restricted cash,
partially offset by proceeds of $7.0 million from the sale
of marketable securities, proceeds of $5.7 million from the
disposal of certain of our subsidiaries, net of costs, proceeds
of $1.4 million from the sale of property and equipment,
and proceeds of $1.2 million received from the settlement
of a loan note issued by a former New Focus executive officer. A
substantial portion of the capital spending during this period
was incurred in connection with the ramp up of our Shenzhen
assembly and test operations.
In the six months ended July 3, 2004, we generated
$87.4 million of cash, primarily consisting of
$88.6 million assumed in connection with our acquisitions
of New Focus and Onetta, along with $5.2 million in
proceeds from the sale of property and equipment, partially
offset by purchases of property and equipment of
$6.6 million.
In the year ended December 31, 2003, we used
$12.0 million of cash in financing activities, primarily
the result of purchasing $19.2 million of property and
equipment, partially offset by $7.1 million received in
connection with the sale of property and equipment. The
principal area of capital spending in 2003 was to upgrade the
Caswell, U.K. wafer fabrication site to a capability required to
produce products transferred from Ottawa, Canada.
Caswell
Sale-Leaseback
On March 10, 2006, Bookham Technology plc, our wholly-owned
subsidiary, entered into multiple agreements with a subsidiary
of Scarborough Development, which we refer to as Scarborough,
for the sale and leaseback of the land and facilities located at
our Caswell, United Kingdom, manufacturing site. The sale
transaction, which closed on March 30, 2006, resulted in
proceeds to Bookham Technology plc of £13.75 million
(approximately
50
U.S. $24.0 million using an exchange rate of
£1.00 to $1.7455). Under these agreements, Bookham
Technology plc leases back the Caswell site for an initial term
of 20 years, with options is renew the lease term for
5 years following the initial term and for rolling
2 year terms thereafter. Annual rent is
£1.1 million during the first 5 years of the
lease, approximately £1.2 million during the next
5 years of the lease, approximately £1.4 million
during the next 5 years of the lease and approximately
£1.6 million during the next 5 years of the
lease. Rent during the renewal terms will be determined
according to the then market rent for the site. We have
guaranteed the obligations of Bookham Technology plc under these
agreements. In addition, Scarborough, Bookham Technology plc and
Bookham, Inc. entered into a pre-emption agreement under which
Bookham Technology plc, within the next 20 years, has a
right to purchase of the Caswell site in whole or in part on
terms acceptable to Scarborough if Scarborough agrees to terms
with or receives an offer from a third party to purchase the
Caswell facility.
Acquisition
of Creekside
On August 10, 2005, Bookham Technology plc, our wholly
owned subsidiary, entered into a share purchase agreement
pursuant to which Bookham Technology plc purchased all of the
issued share capital of City Leasing (Creekside) Limited, a
subsidiary of Deutsche Bank, for consideration of £1.00,
plus professional fees of approximately £455,000
(approximately $837,000, based on an exchange rate of £1 to
$1.8403). The parties to the share purchase agreement are
Bookham Technology plc, Deutsche Bank and London Industrial
Leasing Limited, a subsidiary of Deutsche Bank, which we refer
to as London Industrial. Creekside was utilized by Deutsche Bank
in connection with the leasing of four aircraft to a third
party. The leasing arrangement is structured as follows: Phoebus
Leasing Limited, a subsidiary of Deutsche Bank, which we refer
to as Phoebus, leases the four aircraft to Creekside under the
primary leases and Creekside in turn
sub-leases
the aircraft to a third party. Under the sub-lease arrangement,
the third party lessee who utilizes the aircraft, whom we refer
to as the
Sub-Lessee,
makes sublease payments to Creekside, who in turn must make
lease payments to Phoebus under the primary leases. To insulate
Creekside from any risk that the
Sub-Lessee
will fail to make payments under the sub-lease arrangement,
prior to the execution of the share purchase agreement,
Creekside assigned its interest in the
Sub-Lessee
payments to Deutsche Bank in return for predetermined deferred
consideration amounts, which we refer to as Deferred
Consideration, which are paid directly from Deutsche Bank.
Additionally, on closing the transaction, Deutsche Bank loaned
Creekside funds to (i) pay substantially all of the rentals
under the primary lease with Phoebus, excluding an amount equal
to £400,000 (approximately $736,000), and (ii) repay
an existing loan made by another wholly owned subsidiary of
Deutsche Bank to Creekside. The obligation of Creekside to repay
the Deutsche Bank loans may be fully offset against the
obligation of Deutsche Bank to pay the Deferred Consideration to
Creekside.
As a result of these transactions, Bookham Technology plc will
have available through Creekside cash of approximately
£6.63 million (approximately $12.2 million, based
on an exchange rate of £1.00 to $1.8403). Under the terms
of the agreement, Bookham Technology plc received
£4.2 million (approximately $7.5 million) of
available cash when the transaction closed on August 10,
2005. An additional £1 million (approximately
$1.8 million) has since been received on October 14,
2005, £1 million (approximately $1.8 million) was
received on July 14, 2006 and the balance of approximately
£431,000 (approximately $793,000) is expected to be
available on July 16, 2007.
At the closing of this transaction, Creekside had receivables
(including services and interest charges) of
£73.8 million (approximately $135.8 million) due
from Deutsche Bank in connection with certain aircraft subleases
of Creekside and cash of £4.7 million (approximately
$8.6 million), of which £4.2 million was
immediately available. The assignment was made in exchange for
the receivables, which are to be paid by Deutsche Bank to
Creekside in three installments, with the last payment being
made on July 16, 2007. We have recorded these receivables
and payables as net assets on our balance sheet as of
July 1, 2006, which is included elsewhere in this Annual
Report on
Form 10-K.
Creekside and Deutsche Bank entered into two facility agreements
relating to a loan in the principal amount of
£18.3 million (approximately $33.7 million) and a
loan in the principal amount of £42.5 million
including interest (approximately $78.2 million), which
together will accrue approximately £3.6 million
(approximately $6.6 million) in interest during the term of
these loans. At the closing, Creekside used the loans to repay
amounts outstanding under a loan dated April 12, 2005
between Creekside, as borrower, and City Leasing (Donside)
Limited, a subsidiary of Deutsche Bank, as lender, and to pay
part of Creeksides rental obligations under the lease
agreements.
51
At August 10, 2005, Creekside had long-term liabilities to
Deutsche Bank under the loans, an agreement to pay Deutsche Bank
£8.3 million (approximately $15.3 million,
including principal and interest) to cover settlement of current
Creekside tax liabilities and £0.4 million
(approximately $0.7 million) of outstanding payments due to
Deutsche Bank under the lease agreements; we refer to these
collectively as the Obligations.
Creekside will use the Deferred Consideration to pay off the
Obligations over a period of two years, or the Term, such that
the Obligations will be offset in full by the receivables and
result in Bookham Technology plc having excess cash of
approximately £6.63 million (approximately
$12.2 million) available to it during the Term. Bookham
Technology plc expects to surrender certain of its tax losses
against any U.K. taxable income that may arise as a result of
the Deferred Consideration, to reduce any U.K. taxes that would
otherwise be due from Creekside.
The loans issued by Deutsche Bank may be prepaid in whole at any
time with 30 days prior written notice to Deutsche
Bank. The loan for £18.3 million plus interest was
repaid by Creekside on October 14, 2005, and the loan for
£42.5 million is repayable by Creekside in
installments: the first installment of £23.5 million
(approximately $43.2 million) was paid on July 14,
2006; and the second installment of £22.5 million
(approximately $41.4 million) is payable on July 16,
2007. The remaining loan accrues interest a rate of 5.68% per
year. Events of default under the loan includes failure by
Creekside to pay amounts under the loans when due, material
breach by Creekside of the terms of the lease agreements and
related documentation, a judgment or order made against
Creekside that is not stayed or complied with within seven days
or an attachment by creditors that is not discharged within
seven days, insolvency of Creekside or failure by Creekside to
make payments with respect to all or any class of its debts,
presentation of a petition for the winding up of Creekside, and
appointment of any administrative or other receiver with respect
to Creekside or any material part of Creeksides assets.
While Deutsche Bank may accelerate repayment under the facility
agreements upon an event of default, the loan will be fully
offset against the receivables, as described above.
Pursuant to the terms of the agreements governing this
transaction, we believe that we have not assumed any material
credit risk in connection with these arrangements. The material
cash flow obligations associated with Creekside are directly
related to Deutsche Banks obligations to pay Creekside the
Deferred Consideration, and Creeksides obligation to repay
the loans to Deutsche Bank. The obligations of Creekside to
repay the Deutsche Bank loan can be fully offset against
Deutsche Banks obligation to pay the Deferred
Consideration. Any
Sub-Lessee
default has no impact on Deutsche Banks obligation to pay
Creekside the Deferred Consideration. Regarding the primary
leases between Phoebus and Creekside, all but £400,000 has
been paid. For these reasons, we believe we do not bear a
material risk and have no substantial continuing payments or
obligations.
Under the share purchase agreement and related documents, London
Industrial and Deutsche Bank have indemnified us, Bookham
Technology plc and Creekside with respect to contractual
obligations and liabilities entered into by Creekside prior to
the closing of the transaction and certain tax liabilities of
Creekside that may arise in taxable periods both prior to and
after the closing.
Pursuant to an administration agreement between Creekside, City
Leasing Limited, a subsidiary of Deutsche Bank, and Deutsche
Bank, Creekside is to be administered during the Term by City
Leasing Limited to ensure Creekside complies with its
obligations under the lease agreements.
In accordance with the terms of the primary leases and the
sub-leases, Phoebus is ultimately entitled to the four aircraft
in the event of default by the
Sub-Lessee.
An event of default will not impact the payment obligations
described above.
Sale of
Real Property
In September 2005, our Bookham Technology plc subsidiary entered
into a contract with Abbeymeads LLP to sell a parcel of land in
Swindon, U.K., which had previously been accounted for as held
for sale, and for which the recorded book value had previously
been written down as impaired. Net proceeds from the sale were
$14.7 million, and we recorded a recovery of previous
impairment of $1.3 million in the first quarter of fiscal
2006.
52
Financing
Activities
In the year ended July 1, 2006, we generated
$25.2 million of cash from financing activities, primarily
consisting of $49.3 million of net proceeds from a public
offering of our common stock in October 2005, as described
below, offset by $24.3 million used in connection with the
early retirement of two promissory notes originally issued to
Nortel Networks in connection with our acquisition of their
optical components business and the payment of certain amounts
in connection with the conversion of our convertible debentures
which were issued in December 2004.
In the year ended July 2, 2005, we generated
$14.9 million of cash from financing activities. This
primarily consisted of net proceeds of $24.2 million from
the issuance of convertible debentures and warrants to purchase
common stock, offset by the repayment of $4.2 million due
to Nortel Networks under a promissory note and payments of
$5.1 million related to capital lease obligations assumed
primarily in connection with the Onetta acquisition.
In the six months ended July 3, 2004 and in the year ended
December 31, 2003, we generated $1.7 million and
$1.1 million, respectively, from financing activities,
primarily resulting from the issuance of common stock.
On January 13, 2006, we entered into a series of
transactions to (i) retire $45.9 million aggregate
principal amount of outstanding notes payable to Nortel Networks
UK Limited and (ii) convert $25.5 million in outstanding
convertible debentures which were issued in December 2004. In
connection with the satisfaction of these debt obligations and
conversion of these convertible debentures we issued
approximately 10.5 million shares of common stock, warrants
to purchase approximately 1.1 million shares of common
stock, paid approximately $22.2 million in cash, and
recorded a charge of $18.8 million in the fiscal year ended
July 1, 2006 for loss on conversion and early
extinguishment of debt. See Note 17 - Debt to our
consolidated financial statements appearing elsewhere herein for
additional disclosures regarding the conversion of the
convertible debentures and early extinguishment of debt.
On October 17, 2005, we completed a public offering of our
common stock, issuing a total of 11,250,000 shares at a
price per share to the public of $4.75, resulting in proceeds of
$53.4 million, of which we received $49.3 million net
of commissions to the underwriters and the payment of offering
costs and expenses.
Sources
of Cash
In the past five years, we have funded our operations from
several sources, including through public offerings of equity,
issuance of debt and convertible debt, sale of assets and net
cash from acquisitions. As of July 1, 2006, we held
$43.3 million in cash and cash equivalents (including
restricted cash of $5.5 million). On August 3, 2006,
we entered into a $25 million revolving credit line
facility with availability based on 80% of our accounts
receivable. On September 1, 2006, we entered into a
definitive agreement for the private placement of 8,696,000
shares of common stock at $2.70 per share, and warrants to
purchase 2,174,000 shares of common stock, with selected
institutional investors, for proceeds of approximately
$23.5 million. The warrants, which have a term of five
years and will become exercisable after March 1, 2007, have
an exercise price of $4.00 per share. Certain additional
institutional investors will have the right to purchase, on or
before September 19, 2006, up to 2,898,667 shares of
common stock and warrants to purchase up to 724,667 shares
of common stock at the same purchase price as the initial
investors.
Future
Cash Requirements
Based on our cash balances, and given our continuing and
expected losses for the foreseeable future, if we fail to meet
managements current cash flow forecasts, or we are unable
to draw sufficient funds under the three year $25 million
senior secured revolving credit agreement with Wells Fargo
Foothill, Inc. and other lenders, which was entered into in
August 2006, for any reason, we will need to raise additional
funding of at least $10 million to $20 million through
external sources prior to July 2007 in order to maintain
sufficient financial resources in order to operate as a going
concern through the end of fiscal 2007. If necessary we will
attempt to raise additional funds by any one or combination of
the following: (i) completing the sale of certain assets; (ii)
issuing equity, debt or convertible debt; (iii) selling certain
non core businesses. There can be no assurance of our ability to
raise sufficient capital through the above, or any other efforts.
53
From time to time, we have engaged in discussions with third
parties concerning potential acquisitions of product lines,
technologies and businesses. We continue to consider potential
acquisition candidates. Any of these transactions could involve
the issuance of a significant number of new equity securities,
debt, and/or
cash consideration. We may also be required to raise additional
funds to complete any such acquisition, through either the
issuance of equity securities or borrowings. If we raise
additional funds or acquire businesses or technologies through
the issuance of equity securities, our existing stockholders may
experience significant dilution.
Risk
Management Foreign Currency Risk
We are exposed to fluctuations in foreign currency exchange
rates and interest rates. As our business has grown and become
increasing multinational in scope, we have become increasingly
subject to fluctuations based upon changes in the exchange rates
between the currencies in which we collect revenues and pay
expenses. Despite our change in domicile from the United Kingdom
to the United States, in the future we expect that a substantial
portion of our revenues will be denominated in
U.S. dollars, while a substantial portion of our expenses
will continue to be denominated in U.K. pounds sterling.
Fluctuations in the exchange rate between the U.S. dollar
and the U.K. pound sterling and, to a lesser extent, other
currencies in which we collect revenues and pay expenses, could
affect our operating results. This includes the Chinese Yuan,
now that our Shenzhen, China facility is fully operational, in
which we pay local expenses. To the extent the exchange rate
between the U.S. dollar and the Chinese Yuan were to begin
to fluctuate more significantly than experienced to date, our
exposure would increase. We enter into foreign currency forward
exchange contracts in an effort to mitigate our exposure to such
fluctuations between the U.S. dollar and the U.K. pound,
and we may be required to convert currencies to meet our
obligations. Under certain circumstances, foreign currency
forward exchange contracts can have an adverse effect on our
financial condition. As of July 1, 2006, we held nine
foreign currency forward exchange contracts with a nominal value
of $19.5 million which include put and call options which
expire, or expired, at various dates from August 2006 to June
2007. During the year ended July 1, 2006, we recorded a net
gain of $0.8 million in our statement of operations in
connection with foreign exchange contracts. As of July 1,
2006, the fair value of our outstanding foreign currency forward
exchange contracts was an asset of $0.6 million and we
recorded the unrealized gain of $0.6 million to other
comprehensive income in connection with marking these contracts
to fair value.
Contractual
Obligations
Our contractual obligations at July 1, 2006, by nature of
the obligation and amount due over certain periods of time, are
set out in the table below:
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Payments Due by Period
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Less Than
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More Than
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Contractual Obligations
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Total
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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(In thousands)
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Long-term debt obligations
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$
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349
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$
|
49
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|
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$
|
99
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$
|
99
|
|
|
$
|
102
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Operating lease obligations
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65,500
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|
|
12,646
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|
|
8,087
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|
|
6,215
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|
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38,552
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Purchase obligations
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26,986
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|
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26,986
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Total contractual obligations
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$
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92,835
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|
|
$
|
39,681
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|
|
$
|
8,186
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|
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$
|
6,314
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|
|
$
|
38,654
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Operating leases are future annual commitments under
non-cancelable operating leases, including rents payable for
land and buildings. The purchase obligations consist of our
total outstanding purchase order commitments as at July 1,
2006.
Contractual obligations related to our acquisition of Creekside
are described above, under Investing Activities.
Off-Balance
Sheet Arrangements
In connection with the sale by New Focus, Inc. of its passive
component line to Finisar, Inc., New Focus agreed to indemnify
Finisar for claims related to the intellectual property sold to
Finisar. This indemnification expires in May 2009 and has no
maximum liability. In connection with the sale by New Focus of
its tunable laser technology to
54
Intel Corporation, New Focus has indemnified Intel against
losses for certain intellectual property claims. This
indemnification expires in May 2008 and has a maximum liability
of $7.0 million. We do not expect to pay out any amounts in
respect of these indemnifications, therefore no accrual has been
made.
We indemnify our directors and certain employees as permitted by
law, and have entered into indemnification agreements with our
directors. We have not recorded a liability associated with
these indemnification arrangements as we historically have not
incurred any costs associated with such indemnifications and
does not expect to in the future. Costs associated with such
indemnifications may be mitigated by insurance coverage that we
maintain.
We also have indemnification clauses in various contracts that
it enters into in the normal course of business, such as those
issued by its bankers in favor of several of our suppliers or
indemnification in favor of customers in respect of liabilities
they may incur as a result of purchasing our products should
such products infringe the intellectual property rights of a
third party. We have not historically paid out any amounts
related to these indemnifications and does not expect to in the
future, therefore no accrual has been made for these
indemnifications.
Other than as set forth above, we are not currently party to any
material off-balance sheet arrangements.
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Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
rates
We finance our operations through a mixture of
shareholders funds, finance leases and working capital. We
supplemented these sources after July 1, 2006 by entering
into the Credit Agreement, which is a three year
$25.0 million senior secured revolving credit facility, on
August 3, 2006 and by issuing, in an August 31, 2006
private placement, 8,696,000 shares of common stock at a price
of $2.70 per share, and warrants to purchase
2,174,000 shares of common stock, with selected
institutional investors, for gross proceeds of approximately
$23.5 million. Both of these transactions are described in
more detailed under Sources of Cash, above. Our only
exposure to interest rate fluctuations is on our cash deposits
and for amounts borrowed under the Credit Agreement.
We monitor our interest rate risk on cash balances primarily
through cash flow forecasting. Cash that is surplus to immediate
requirements is invested in short-term deposits with banks
accessible with one days notice and invested in overnight
money market accounts. We believe our interest rate risk is
immaterial.
Foreign
currency
Due to our multinational operations, we are subject to
fluctuations based upon changes in the exchange rates between
the currencies in which we collect revenue and pay expenses. Our
expenses are not necessarily incurred in the currency in which
revenue is generated, and, as a result, we may from time to time
have to exchange currency to meet our obligations. These
currency conversions are subject to exchange rate fluctuations,
in particular, changes in the value of the U.K. pound sterling
compared to the U.S. dollar. In an effort to mitigate exposure
to those fluctuations, we enter into foreign currency forward
exchange contracts with respect to portions of our forecasted
expenses denominated in U.K. pound sterling. At July 1,
2006, we held nine foreign currency forward exchange contracts,
including put and call options, to purchase U.K. pound sterling
with a nominal value of $19.5 million and a fair value of
$20.1 million at July 1, 2006, including our recording
of an unrealized gain of $0.6 million at that date. These
contracts include put and call options which expire, or expired,
on dates ranging from August 2006 to June 2007. It is estimated
that a 10% fluctuation in the dollar between July 1, 2006
and the maturity dates of the put and call instruments
underlying the contracts would lead to a profit of
$2.6 million (dollar weakening), or loss of
$2.3 million (dollar strengthening) on our outstanding
foreign currency forward exchange contracts, should they be held
to maturity.
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Item 8.
|
Financial
Statements and Supplementary Data
|
The information required by this item may be found on pages F-1
through F-58 of this Annual Report on
Form 10-K.
55
|
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Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
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Item 9A.
|
Controls
and Procedures
|
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(a)
|
Evaluation
of Disclosure Controls and Procedures
|
As of July 1, 2006, our management carried out an
evaluation under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures. The
term disclosure controls and procedures, as defined
in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act,
means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by
the company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated
and communicated to the companys management, including its
principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
As described below under Managements Report on Internal
Control over Financial Reporting, our Chief Executive Officer
and Chief Financial Officer have identified and reported to our
Audit Committee and Ernst &Young LLP, our independent
registered public accounting firm, a material weakness in our
internal control over financial reporting. As a result, our
Chief Executive Officer and Chief Financial Officer have
concluded that, as of July 1, 2006, our disclosure controls
and procedures were not effective based on the criteria in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
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(b)
|
Managements
Report on Internal Control Over Financial Reporting
|
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting, as such
term is defined in Exchange Act
Rule 13a-15(f).
Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our
financial statements for external reporting purposes in
accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
As of July 1, 2006, our management has assessed the
effectiveness of our internal control over financial reporting.
In making its assessment of internal control over financial
reporting, management used the criteria issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control Integrated Framework. A material
weakness is a significant deficiency (as defined in PCAOB
Auditing Standard No. 2), or combination of significant
deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial
statements will not be prevented or detected. Management has
identified a material weakness in internal control over
financial reporting as it relates to the inconsistent treatment
of translation/transaction gains and losses in respect to
intercompany loan balances. The lack of communication to certain
subsidiaries of the Corporate policy regarding the translation
of intercompany balances as well as the lack of a worldwide
oversight control did not reduce the likelihood that a material
misstatement of certain accounts in the financial statements
would be prevented or detected in a timely manner. This material
weakness resulted in adjustments to the companys gain/loss
on foreign exchange and accumulated other comprehensive income
accounts.
As a result, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of July 1, 2006, our system
of internal control over financial reporting was not effective
based on the criteria in COSOs Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Our independent registered public accounting firm,
Ernst & Young LLP, has issued an audit report on our
assessment of our internal control over financial reporting.
This report appears below.
56
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(c)
|
Report of
Independent Registered Public Accounting Firm
|
The Board of Directors and Stockholders
Bookham, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Bookham, Inc. did not maintain
effective internal control over financial reporting as of
July 1, 2006, because of the effect of the lack of
communication to certain subsidiaries of the Corporate policy
regarding the translation of intercompany balances as well as a
lack of a worldwide oversight control, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO control criteria).
Bookham Inc.s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weakness has been included in the
managements assessment. Management has identified a
material weakness in internal control over financial reporting
as it relates to the inconsistent treatment of
translation/transaction gains and losses in respect to
intercompany loan balances. The lack of communication to certain
subsidiaries of the Corporate policy regarding the translation
of intercompany balances as well as the lack of a worldwide
oversight control did not reduce the likelihood that a material
misstatement of certain accounts in the financial statements
would be prevented or detected in a timely manner. This material
weakness resulted in adjustments to the companys gain/loss
on foreign exchange and accumulated other comprehensive income
accounts. This material weakness was considered in determining
the nature, timing, and extent of the audit tests applied in our
audit of Bookham, Inc.s 2006 financial statements, and
this report does not affect our report dated September 11,
2006 on those financial statements.
In our opinion, managements assessment that Bookham, Inc.
did not maintain effective internal control over financial
reporting as of July 1, 2006, is fairly stated, in all
material respects, based on the COSO control criteria.
57
Also, in our opinion, because of the effect of the material
weakness described above on achievement of the objectives of the
control criteria, Bookham, Inc. has not maintained effective
internal control over financial reporting as of July 1,
2006, based on the COSO control criteria.
ERNST & YOUNG LLP
San Jose, California
September 11, 2006
|
|
(d)
|
Remediation
Efforts to Address Material Weakness
|
We have implemented a consistent and appropriate intercompany
loan translation methodology at all subsidiaries, and will
implement a centralized review of the reconciliation and
classification of related translation adjustments on a quarterly
basis.
|
|
(e)
|
Changes
in Internal Control over Financial Reporting
|
In our prior year Annual Report on
Form 10-K
for the year ended July 2, 2005, we identified four
material weaknesses related to: 1) shortage of, and
turnover in, qualified financial reporting personnel to ensure
complete application of GAAP; 2) insufficient management
review of analyses and reconciliations; 3) inaccurate
updating of accounting inputs for estimates of complex
non-routine transactions; and 4) accounting for foreign
currency exchange transactions. During the current fiscal year
ended July 1, 2006, we implemented processes, procedures
and personnel changes that we believe sufficiently remediated
these weaknesses.
There have been no changes in our internal controls over
financial reporting during the quarter ended July 1, 2006,
other than as discussed herein, that have materially affected,
or are reasonably likely to affect, internal controls over
financial reporting. See Item 9A(d) for a discussion of
remediation activities in connection with the material weakness
in internal control over financial reporting identified above.
Inherent
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and our
Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal control over financial
reporting are or will be capable of preventing or detecting all
errors and all fraud. Any control system, no matter how well
designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives
will be met. Further, because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any,
within Bookham, Inc. have been detected. These inherent
limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in
part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risks.
Item 9B. Other
Information
Not applicable.
58
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
Information required by this Item is incorporated by reference
to the information under the headings
Proposal I Election of Class II
Director and Executive Officers contained in
Bookhams definitive Proxy Statement for its 2006 annual
meeting of stockholders.
|
|
Item 11.
|
Executive
Compensation
|
Information required by this Item is incorporated by reference
to the information under the headings Executive
Compensation, Director Compensation,
Compensation Committee Interlocks and Insider
Participation, and Employment and Other
Agreements contained in Bookhams definitive Proxy
Statement for its 2006 annual meeting of stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information required by this Item is incorporated by reference
to the information under the headings Security Ownership
of Certain Beneficial Owners and Management and
Equity Compensation Plan Information contained in
Bookhams definitive Proxy Statement for its 2006 annual
meeting of stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Information required by this Item is incorporated by reference
to the information under the headings Certain
Relationships and Related Transactions and
Employment, Change of Control and Severance
Arrangements contained in Bookhams definitive Proxy
Statement for its 2006 annual meeting of stockholders.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information required by this Item is incorporated by reference
under the heading Principal Accountant Fees and
Services and Pre-Approval Policies and
Procedures contained in Bookhams definitive Proxy
Statement for its 2006 annual meeting of stockholders.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as part of or are
included in this
Form 10-K:
1. Financial Statements
See Index to Consolidated Financial Statements
2. Financial Statement Schedules
Financial statement schedule II: Valuation and Qualifying
Accounts that follows the Notes to Consolidated Financial
Statements is filed as part of this
Form 10-K.
Other financial statement schedules have been omitted since they
are either not required or the information is otherwise included.
3. List of Exhibits
The Exhibits filed as part of this Annual Report on
Form 10-K
are listed on the Exhibit Index immediately preceding such
Exhibits, which Exhibit Index is incorporated herein by
reference. Documents listed on such Exhibit Index, except
for documents identified by footnotes, are being filed as
exhibits herewith. Documents identified by footnotes are not
being filed herewith and, pursuant to
Rule 12b-32
under the Exchange Act, reference is made to such documents as
previously filed as exhibits with the Securities and Exchange
Commission. Bookhams file number under the Exchange Act is
000-30684.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BOOKHAM, INC.
Name: Giorgio Anania
|
|
|
|
Title:
|
Chief Executive Officer and President
|
September 14, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Giorgio
Anania
Giorgio
Anania
|
|
Chief Executive Officer, President
and Director (Principal Executive Officer)
|
|
September 14, 2006
|
|
|
|
|
|
/s/ Stephen
Abely
Stephen
Abely
|
|
Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
|
|
September 14, 2006
|
|
|
|
|
|
/s/ David
Simpson
David
Simpson
|
|
Director
|
|
September 14, 2006
|
|
|
|
|
|
/s/ Lori
Holland
Lori
Holland
|
|
Director
|
|
September 14, 2006
|
|
|
|
|
|
/s/ W.
Arthur Porter
W.
Arthur Porter
|
|
Director
|
|
September 14, 2006
|
|
|
|
|
|
/s/ Joseph
Cook
Joseph
Cook
|
|
Director
|
|
September 14, 2006
|
|
|
|
|
|
/s/ Peter
Bordui
Peter
Bordui
|
|
Director
|
|
September 14, 2006
|
60
BOOKHAM,
INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Bookham, Inc.
We have audited the accompanying consolidated balance sheet of
Bookham, Inc. as of July 1, 2006, and the related
consolidated statements of operations, stockholders
equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule for the 2006 year
listed in the Index at Item 15(a)2. These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Bookham, Inc. at July 1, 2006, and
the consolidated results of its operations and its cash flows
for the year ended July 1, 2006, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared
assuming that Bookham, Inc. will continue as a going concern. As
more fully described in Note 1, the entity has recurring
operating losses. Managements plans in regard to raising
sufficient funds are also described in Note 1. This
condition raises substantial doubt about the Companys
ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
As discussed in Note 1 to the Notes to Consolidated
Financial Statements, under the heading Stock Based
Compensation, in fiscal 2006 Bookham, Inc. changed its method of
accounting for stock based compensation.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Bookham, Inc.s internal control over
financial reporting as of July 1, 2006, based on criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated September 11, 2006
expressed an unqualified opinion on managements assessment
of the effectiveness of internal control over financial
reporting and an adverse opinion on the effectiveness of
internal control over financial reporting.
San Jose, California
September 11, 2006
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Bookham, Inc.
We have audited the accompanying consolidated balance sheets of
Bookham, Inc. as of July 2, 2005 and the related
consolidated statements of operations, stockholders
equity, and cash flows for the year ended July 2, 2005, the
six-month period ended July 3, 2004, and the year ended
December 31, 2003. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)2.
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Bookham, Inc. at July 2, 2005 and the
consolidated results of its operations and its consolidated cash
flows for the year ended July 2, 2005, the six-month period
ended July 3, 2004 and the year ended December 31,
2003, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared
assuming that Bookham, Inc. will continue as a going concern. As
more fully described in Note 1, the Company will need to raise
additional funding through external sources prior to December
2005 in order to maintain sufficient financial resources to
continue to operate its business. In addition, depending on the
amount of additional funding secured prior to December 2005, the
Company will also need to raise sufficient funds before June
2006 in order to maintain a cash balance of at least $25 million
in order to comply with the loan note covenants described in
Note 1. Management are taking actions to raise additional equity
capital and considering the disposal of selected assets or
businesses. These conditions raise substantial doubt about the
Companys ability to continue as a going concern. The
financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Reading, England
September 8, 2005
F-3
BOOKHAM,
INC.
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,750
|
|
|
$
|
24,934
|
|
Restricted cash
|
|
|
1,428
|
|
|
|
3,260
|
|
Accounts receivable (net of
allowances of $991 and $726, respectively)
|
|
|
26,280
|
|
|
|
20,257
|
|
Receivables from related party, net
|
|
|
7,499
|
|
|
|
7,262
|
|
Inventories
|
|
|
53,860
|
|
|
|
53,192
|
|
Current deferred tax asset
|
|
|
348
|
|
|
|
692
|
|
Prepaid expenses and other current
assets
|
|
|
11,436
|
|
|
|
11,190
|
|
Assets held for resale
|
|
|
|
|
|
|
13,694
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
138,601
|
|
|
|
134,481
|
|
Long-term restricted cash
|
|
|
4,119
|
|
|
|
4,119
|
|
Goodwill
|
|
|
8,881
|
|
|
|
6,260
|
|
Other intangible assets, net
|
|
|
19,667
|
|
|
|
28,010
|
|
Property and equipment, net
|
|
|
52,163
|
|
|
|
64,156
|
|
Non-current deferred tax asset
|
|
|
12,911
|
|
|
|
|
|
Investments and other long-term
assets
|
|
|
455
|
|
|
|
1,552
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
236,797
|
|
|
$
|
238,578
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
26,143
|
|
|
$
|
31,334
|
|
Liabilities to related party
|
|
|
4,250
|
|
|
|
722
|
|
Current deferred tax liability
|
|
|
12,911
|
|
|
|
|
|
Accrued expenses and other
liabilities
|
|
|
33,087
|
|
|
|
38,529
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
76,391
|
|
|
|
70,585
|
|
Deferred gain on sale-leaseback
|
|
|
19,928
|
|
|
|
|
|
Notes payable to related party
|
|
|
|
|
|
|
45,861
|
|
Convertible debentures
|
|
|
|
|
|
|
19,140
|
|
Non-current deferred tax liability
|
|
|
348
|
|
|
|
692
|
|
Other long-term liabilities
|
|
|
4,989
|
|
|
|
11,232
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
101,656
|
|
|
|
147,510
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 6)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
$0.01 par value; 175,000,000
authorized; 57,978,908 and 33,805,437 issued and outstanding at
July 1, 2006 and July 2, 2005, respectively
|
|
|
580
|
|
|
|
338
|
|
Additional paid-in capital
|
|
|
1,053,626
|
|
|
|
925,677
|
|
Deferred compensation
|
|
|
|
|
|
|
(808
|
)
|
Accumulated other comprehensive
income
|
|
|
35,460
|
|
|
|
32,889
|
|
Accumulated deficit
|
|
|
(954,525
|
)
|
|
|
(867,028
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
135,141
|
|
|
|
91,068
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
236,797
|
|
|
$
|
238,578
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of these
consolidated financial statements.
F-4
BOOKHAM,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 29,
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2003
|
|
|
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
121,138
|
|
|
$
|
110,751
|
|
|
$
|
35,846
|
|
|
$
|
18,346
|
|
|
$
|
42,457
|
|
|
|
|
|
Revenues from related parties
|
|
|
110,511
|
|
|
|
89,505
|
|
|
|
43,917
|
|
|
|
49,416
|
|
|
|
103,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
231,649
|
|
|
|
200,256
|
|
|
|
79,763
|
|
|
|
67,762
|
|
|
|
146,197
|
|
|
|
|
|
Cost of revenues
|
|
|
190,085
|
|
|
|
193,647
|
|
|
|
84,415
|
|
|
|
80,915
|
|
|
|
156,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit/(loss)
|
|
|
41,564
|
|
|
|
6,609
|
|
|
|
(4,652
|
)
|
|
|
(13,153
|
)
|
|
|
(9,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
42,587
|
|
|
|
44,833
|
|
|
|
26,915
|
|
|
|
26,469
|
|
|
|
50,371
|
|
|
|
|
|
Selling, general and administrative
|
|
|
52,167
|
|
|
|
60,250
|
|
|
|
29,660
|
|
|
|
18,795
|
|
|
|
33,849
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
10,004
|
|
|
|
11,107
|
|
|
|
5,677
|
|
|
|
4,746
|
|
|
|
8,487
|
|
|
|
|
|
Restructuring charges/(recoveries)
|
|
|
11,197
|
|
|
|
20,888
|
|
|
|
(664
|
)
|
|
|
7,631
|
|
|
|
31,392
|
|
|
|
|
|
Acquired in-process research and
development
|
|
|
118
|
|
|
|
|
|
|
|
5,890
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
Impairment of goodwill and other
intangible assets
|
|
|
760
|
|
|
|
114,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment/(Recovery) of other
long-lived assets
|
|
|
(832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of property and
equipment
|
|
|
(2,070
|
)
|
|
|
(708
|
)
|
|
|
(5,254
|
)
|
|
|
|
|
|
|
(3,060
|
)
|
|
|
|
|
Legal settlement
|
|
|
4,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
118,928
|
|
|
|
250,596
|
|
|
|
62,224
|
|
|
|
57,641
|
|
|
|
121,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(77,364
|
)
|
|
|
(243,987
|
)
|
|
|
(66,876
|
)
|
|
|
(70,794
|
)
|
|
|
(131,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on conversion and early
extinguishment of debt
|
|
|
(18,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense), net
|
|
|
298
|
|
|
|
1,382
|
|
|
|
126
|
|
|
|
185
|
|
|
|
32
|
|
|
|
|
|
Interest income
|
|
|
264
|
|
|
|
1,107
|
|
|
|
1,871
|
|
|
|
5,334
|
|
|
|
9,484
|
|
|
|
|
|
Interest expense
|
|
|
(4,279
|
)
|
|
|
(5,439
|
)
|
|
|
(1,651
|
)
|
|
|
(4,579
|
)
|
|
|
(3,162
|
)
|
|
|
|
|
Gain/(Loss) on foreign exchange
|
|
|
677
|
|
|
|
(1,020
|
)
|
|
|
(1,050
|
)
|
|
|
1,814
|
|
|
|
(4,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income/(expense), net
|
|
|
(21,882
|
)
|
|
|
(3,970
|
)
|
|
|
(704
|
)
|
|
|
2,754
|
|
|
|
1,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(99,246
|
)
|
|
|
(247,957
|
)
|
|
|
(67,580
|
)
|
|
|
(68,040
|
)
|
|
|
(129,186
|
)
|
|
|
|
|
Income tax (provision)/benefit
|
|
|
11,749
|
|
|
|
(15
|
)
|
|
|
209
|
|
|
|
|
|
|
|
3,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(87,497
|
)
|
|
$
|
(247,972
|
)
|
|
$
|
(67,371
|
)
|
|
$
|
(68,040
|
)
|
|
$
|
(125,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share (basic and
diluted)
|
|
$
|
(1.87
|
)
|
|
$
|
(7.43
|
)
|
|
$
|
(2.48
|
)
|
|
$
|
(3.32
|
)
|
|
$
|
(6.03
|
)
|
|
|
|
|
Weighted average shares of common
stock outstanding
|
|
|
46,678,696
|
|
|
|
33,379,453
|
|
|
|
27,198,838
|
|
|
|
20,495,259
|
|
|
|
20,844,793
|
|
|
|
|
|
The accompanying notes form an integral part of these
consolidated financial statements.
F-5
BOOKHAM,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash flows used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(87,497
|
)
|
|
$
|
(247,972
|
)
|
|
$
|
(67,371
|
)
|
|
$
|
(125,747
|
)
|
Adjustments to reconcile net
loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expenses
|
|
|
8,863
|
|
|
|
750
|
|
|
|
122
|
|
|
|
|
|
Depreciation and amortization
|
|
|
30,231
|
|
|
|
32,208
|
|
|
|
13,455
|
|
|
|
21,312
|
|
Impairment/(Recovery) of long-lived
assets
|
|
|
(832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and other
intangible assets
|
|
|
760
|
|
|
|
114,226
|
|
|
|
|
|
|
|
|
|
One time tax gain
|
|
|
(11,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and
development
|
|
|
118
|
|
|
|
|
|
|
|
5,890
|
|
|
|
245
|
|
Tax credit recognized for research
and development activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,719
|
)
|
Write off of investments
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
Legal settlement
|
|
|
4,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Amortization of interest expense
for warrants and beneficial conversion feature
|
|
|
1,292
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
Unrealized (gain)/loss on foreign
currency contracts
|
|
|
(573
|
)
|
|
|
1,687
|
|
|
|
|
|
|
|
|
|
Loss on conversion and early
extinguishment of debt
|
|
|
18,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency re-measurement of
notes payable
|
|
|
|
|
|
|
638
|
|
|
|
|
|
|
|
|
|
Gain on sale of property and
equipment
|
|
|
(2,070
|
)
|
|
|
(650
|
)
|
|
|
(5,254
|
)
|
|
|
(3,060
|
)
|
Changes in assets and
liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(5,834
|
)
|
|
|
622
|
|
|
|
2,406
|
|
|
|
4,087
|
|
Inventories
|
|
|
383
|
|
|
|
(5,813
|
)
|
|
|
2,790
|
|
|
|
19,674
|
|
Prepaid expenses and other current
assets
|
|
|
9,546
|
|
|
|
6,256
|
|
|
|
752
|
|
|
|
(2,208
|
)
|
Accounts payable
|
|
|
(6,487
|
)
|
|
|
2,416
|
|
|
|
6,199
|
|
|
|
(274
|
)
|
Accrued expenses and other
liabilities
|
|
|
(15,863
|
)
|
|
|
(3,813
|
)
|
|
|
(8,135
|
)
|
|
|
(2,517
|
)
|
Deferred rent
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange
adjustments
|
|
|
|
|
|
|
|
|
|
|
(1,071
|
)
|
|
|
(5,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(55,631
|
)
|
|
|
(98,776
|
)
|
|
|
(50,173
|
)
|
|
|
(97,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by/(used in)
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
|
|
Purchase of property and equipment
|
|
|
(10,113
|
)
|
|
|
(16,008
|
)
|
|
|
(6,648
|
)
|
|
|
(19,186
|
)
|
Proceeds from sale of property and
equipment
|
|
|
2,396
|
|
|
|
1,429
|
|
|
|
5,254
|
|
|
|
7,105
|
|
Acquisitions, net of cash acquired
|
|
|
9,575
|
|
|
|
|
|
|
|
88,598
|
|
|
|
65
|
|
Proceeds from long-term investments
|
|
|
|
|
|
|
|
|
|
|
(751
|
)
|
|
|
|
|
Proceeds from sale-leaseback of
Caswell facility
|
|
|
23,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of land held for
resale
|
|
|
14,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes receivable
|
|
|
|
|
|
|
|
|
|
|
1,233
|
|
|
|
|
|
Settlement of Westrick note
|
|
|
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of
subsidiaries, net of costs
|
|
|
|
|
|
|
5,736
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities
of available for sale investments
|
|
|
|
|
|
|
6,978
|
|
|
|
|
|
|
|
|
|
Transfers to restricted cash, net
|
|
|
2,656
|
|
|
|
(1,671
|
)
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in)
investing activities
|
|
|
42,692
|
|
|
|
(2,336
|
)
|
|
|
87,391
|
|
|
|
(12,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
49,548
|
|
|
|
3
|
|
|
|
2,152
|
|
|
|
1,369
|
|
Repayment of capital lease
obligations
|
|
|
|
|
|
|
(5,132
|
)
|
|
|
(417
|
)
|
|
|
(227
|
)
|
Proceeds from issuance of
convertible debentures and warrants to purchase common stock,
net of issuance costs
|
|
|
|
|
|
|
24,230
|
|
|
|
|
|
|
|
|
|
Cash paid in connection with
conversion of convertible debentures
|
|
|
(3,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in connection with early
extinguishment of debt
|
|
|
(21,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of loans
|
|
|
(49
|
)
|
|
|
(4,175
|
)
|
|
|
(57
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
25,217
|
|
|
|
14,926
|
|
|
|
1,678
|
|
|
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash
|
|
|
538
|
|
|
|
1,438
|
|
|
|
1,446
|
|
|
|
8,515
|
|
Net increase/(decrease) in cash and
cash equivalents
|
|
|
12,816
|
|
|
|
(84,748
|
)
|
|
|
40,342
|
|
|
|
(100,383
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
24,934
|
|
|
|
109,682
|
|
|
|
69,340
|
|
|
|
169,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
37,750
|
|
|
$
|
24,934
|
|
|
$
|
109,682
|
|
|
$
|
69,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
22
|
|
|
$
|
56
|
|
|
$
|
11
|
|
|
$
|
280
|
|
Cash paid for interest
|
|
$
|
7,481
|
|
|
$
|
4,196
|
|
|
$
|
1,658
|
|
|
$
|
3,131
|
|
Supplemental disclosure of
non-cash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with
debt and extinguishment of debt
|
|
$
|
4,385
|
|
|
$
|
5,354
|
|
|
$
|
229
|
|
|
$
|
21
|
|
The accompanying notes form an integral part of these
consolidated financial statements.
F-6
BOOKHAM,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
BOOKHAM,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Notes
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Receivable
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock-holders
|
|
|
Compensation
|
|
|
Income/(Loss)
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at December 31, 2002
|
|
|
20,495,087
|
|
|
$
|
205
|
|
|
$
|
662,670
|
|
|
$
|
|
|
|
$
|
(28
|
)
|
|
$
|
11,699
|
|
|
$
|
(425,938
|
)
|
|
|
|
|
|
$
|
248,608
|
|
Conversion of shares in respect of
Measurement Microsystems A-Z, Inc.
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares on the
acquisition of the Cierra Photonics business
|
|
|
307,148
|
|
|
|
3
|
|
|
|
3,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,669
|
|
Issuance of shares on the
acquisition of Ignis Optics, Inc.
|
|
|
802,082
|
|
|
|
8
|
|
|
|
17,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,748
|
|
Issuance of shares upon exercise of
common stock options
|
|
|
63,429
|
|
|
|
1
|
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,135
|
|
Exercise of common stock warrants
|
|
|
12,282
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on currency
transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
274
|
|
|
|
|
|
|
|
274
|
|
|
|
274
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,474
|
|
|
|
|
|
|
|
18,474
|
|
|
|
18,474
|
|
Net loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,747
|
)
|
|
|
(125,747
|
)
|
|
|
(125,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(106,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
21,680,901
|
|
|
$
|
217
|
|
|
$
|
685,444
|
|
|
$
|
|
|
|
$
|
(28
|
)
|
|
$
|
30,447
|
|
|
$
|
(551,685
|
)
|
|
|
|
|
|
$
|
164,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of these
consolidated financial statements.
F-7
BOOKHAM,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Notes
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Receivable
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock-holders
|
|
|
Compensation
|
|
|
Income/(Loss)
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at December 31, 2003
|
|
|
21,680,901
|
|
|
$
|
217
|
|
|
$
|
685,444
|
|
|
$
|
|
|
|
$
|
(28
|
)
|
|
$
|
30,447
|
|
|
$
|
(551,685
|
)
|
|
$
|
|
|
|
$
|
164,395
|
|
Conversion of shares in respect of
Measurement Microsystems A-Z, Inc.
|
|
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares on the
acquisition of New Focus, Inc.
|
|
|
7,866,600
|
|
|
|
78
|
|
|
|
197,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,710
|
|
Issuance of shares on the
acquisition of Onetta, Inc.
|
|
|
2,764,030
|
|
|
|
28
|
|
|
|
24,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,708
|
|
Issuance of shares upon exercise of
common stock options
|
|
|
299,943
|
|
|
|
3
|
|
|
|
2,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,152
|
|
Issuance of fully vested stock on
the acquisition of New Focus, Inc.
|
|
|
|
|
|
|
|
|
|
|
6,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,286
|
|
Assumption of stockholders
notes receivable from acquisition of New Focus, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,233
|
)
|
Assumption of unvested stock
options on the acquisition of New Focus, Inc.
|
|
|
|
|
|
|
|
|
|
|
1,464
|
|
|
|
|
|
|
|
(1,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments received on
stockholders notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,233
|
|
Amortization of deferred stock
compensation, net of cancellations
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Unrealized loss on currency
contract transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122
|
)
|
|
|
|
|
|
|
(122
|
)
|
|
|
(122
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,726
|
|
|
|
|
|
|
|
2,726
|
|
|
|
2,726
|
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,371
|
)
|
|
|
(67,371
|
)
|
|
|
(67,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(64,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 3, 2004
|
|
|
32,612,555
|
|
|
$
|
326
|
|
|
$
|
917,639
|
|
|
$
|
|
|
|
$
|
(1,354
|
)
|
|
$
|
33,035
|
|
|
$
|
(619,056
|
)
|
|
|
|
|
|
$
|
330,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of these
consolidated financial statements.
F-8
BOOKHAM,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Notes
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Receivable
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock-holders
|
|
|
Compensation
|
|
|
Income/(Loss)
|
|
|
Deficit
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
|
(In thousands, except share amounts)
|
|
|
Balance at July 3, 2004
|
|
|
32,612,555
|
|
|
$
|
326
|
|
|
$
|
917,639
|
|
|
$
|
|
|
|
$
|
(1,354
|
)
|
|
$
|
33,035
|
|
|
$
|
(619,056
|
)
|
|
|
|
|
|
$
|
330,590
|
|
Exercise of common stock warrants
by Nortel Networks
|
|
|
900,000
|
|
|
|
9
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
55
|
|
Issuance of restricted stock
|
|
|
249,859
|
|
|
|
3
|
|
|
|
779
|
|
|
|
|
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
Issuance of shares upon exercise of
common stock options
|
|
|
811
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Issuance of shares to CP Santa Rosa
Enterprises Corp.
|
|
|
38,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of shares in respect of
Measurement Microsystems A-Z Inc.
|
|
|
3,402
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Beneficial conversion feature
associated with convertible redeemable notes
|
|
|
|
|
|
|
|
|
|
|
1,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,969
|
|
Issuance of warrants in connection
with convertible redeemable notes
|
|
|
|
|
|
|
|
|
|
|
5,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,354
|
|
Amortization of deferred stock
compensation, net of cancellations
|
|
|
|
|
|
|
|
|
|
|
(364
|
)
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
660
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
7
|
|
Unrealized loss on financial
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153
|
)
|
|
|
|
|
|
|
(153
|
)
|
|
|
(153
|
)
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(247,972
|
)
|
|
|
(247,972
|
)
|
|
|
(247,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(248,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 2,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
33,805,437
|
|
|
$
|
338
|
|
|
$
|
925,677
|
|
|
$
|
|
|
|
$
|
(808
|
)
|
|
$
|
32,889
|
|
|
$
|
(867,028
|
)
|
|
|
|
|
|
$
|
91,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of these
consolidated financial statements.
F-9
BOOKHAM,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Balance at July 2, 2005
|
|
|
33,805,437
|
|
|
$
|
338
|
|
|
$
|
925,677
|
|
|
$
|
(808
|
)
|
|
$
|
32,889
|
|
|
$
|
(867,028
|
)
|
|
|
|
|
|
$
|
91,068
|
|
Issuance of shares upon the
exercise of common stock options
|
|
|
58,627
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303
|
|
Issuance of restricted stock
|
|
|
1,050,000
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Issuance of shares to CP Santa Rosa
Enterprises Corp.
|
|
|
5,100
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
Common stock issued in connection
with the settlement of Yue lawsuit
|
|
|
537,635
|
|
|
|
5
|
|
|
|
4,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
Common stock issued in public
offering
|
|
|
11,250,000
|
|
|
|
113
|
|
|
|
49,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,234
|
|
Common stock issued upon conversion
of convertible debt
|
|
|
5,386,365
|
|
|
|
54
|
|
|
|
25,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,210
|
|
Common stock issued in connection
with debt equity exchange
|
|
|
5,120,793
|
|
|
|
51
|
|
|
|
33,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,853
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,056
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,864
|
|
Common stock issued in connection
with Avalon acquisition
|
|
|
764,951
|
|
|
|
8
|
|
|
|
6,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on hedging
transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
573
|
|
|
|
|
|
|
|
573
|
|
|
|
573
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,998
|
|
|
|
|
|
|
|
1,998
|
|
|
|
1,998
|
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,497
|
)
|
|
|
(87,497
|
)
|
|
|
(87,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1, 2006
|
|
|
57,978,908
|
|
|
$
|
580
|
|
|
$
|
1,053,626
|
|
|
$
|
0
|
|
|
$
|
35,460
|
|
|
$
|
(954,525
|
)
|
|
|
|
|
|
$
|
135,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes form an integral part of these
consolidated financial statements.
F-10
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Summary
of Significant Accounting Policies
|
Description
of Business
Bookham Technology plc was incorporated under the laws of
England and Wales on September 22, 1988. On
September 10, 2004, pursuant to a scheme of arrangement
under the laws of the United Kingdom, Bookham Technology plc
became a wholly-owned subsidiary of Bookham, Inc., a Delaware
corporation (Bookham, Inc.). Bookham, Inc.
principally designs, manufactures and markets optical
components, modules and subsystems for the telecommunications
industry. Bookham, Inc. also manufactures high-speed electronic
components for the telecommunications, defense and aerospace
industries. References to the Company mean Bookham,
Inc. and its subsidiaries consolidated business activities since
September 10, 2004 and Bookham Technology plcs
consolidated business activities prior to September 10,
2004.
Basis
of Presentation
The Company assumed Bookham Technology plcs financial
reporting history effective September 10, 2004. As a
result, management deems Bookham Technology plcs
consolidated business activities prior to September 10,
2004 to represent the Companys consolidated business
activities as if the Company and Bookham Technology plc
historically had been the same entity. The consolidated
financial statements include Bookham, Inc. and its wholly-owned
subsidiaries. All intercompany transactions and balances have
been eliminated. The Company has included the results of
operations of its acquired entities from the date of acquisition.
Prior to July 3, 2004, Bookham Technology plcs fiscal
year ended on December 31. Effective June 30, 2004,
Bookham Technology plc changed its fiscal year end from
December 31 to the Saturday closest to June 30, which
matches the fiscal year end of the Company. Accordingly,
financial statements will be prepared for fifty-two/fifty-three
week cycles going forward.
In connection with the scheme of arrangement, the Company
changed its domicile from the United Kingdom to the United
States. In addition, effective September 10, 2004, the
Company changed its reporting currency from pounds sterling to
the United States dollar. During the year ended July 3,
2004, the Company purchased four companies with primary
operations in the United States. As a result of these
acquisitions, the Company increased both its revenues from
U.S. customers, as well as its operations and expenses
denominated in U.S. dollars. Because of the continuing
shift toward business denominated in U.S. dollars, the
Company also changed its headquarters to San Jose,
California in September 2004.
On August 2, 2006, the Company, as parent, with Bookham
Technology plc, New Focus, Inc. and Bookham (US) Inc., each a
wholly-owned subsidiary of the Company, (collectively, the
Borrowers), entered into a credit agreement (the
Credit Agreement) with Wells Fargo Foothill, Inc.
and other lenders regarding a three-year $25,000,000 senior
secured revolving credit facility. Advances are available under
the Credit Agreement based on a percentage of accounts
receivable at the time the advance is requested. See
Note 19 Subsequent Events, for additional
information regarding this credit agreement.
On August 31, 2006, the Company entered into definitive
agreement for a private placement pursuant to which it issued,
on September 1, 2006, 8,696,000 shares of common
stock, and warrants to purchase up to 2,174,000 shares of
common stock, with certain institutional accredited investors
for gross proceeds of approximately $23.5 million. The
warrants are exercisable beginning on March 2, 2007 during
the next five years at an exercise price of $4.00 per
share. Up to an additional 2,898,667 shares of common stock
and warrants to purchase 724,667 shares of common stock may
be issued and sold to additional institutional accredited
investors at a subsequent closing pursuant to a right of
participation under an exchange agreement between the Company
and those additional accredited institutional investors. See
Note 19 Subsequent Events, for additional
information regarding this private placement.
F-11
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Given the Companys recurring operating losses through July
1, 2006, if the Company fails to meet managements current
cash flow forecasts, or is unable to draw sufficient amounts
under the three year $25 million senior secured revolving
credit agreement with Wells Fargo Foothill, Inc. and other
lenders, which was entered into in August 2006, for any reason,
it will need to raise additional funding of at least
$10 million to $20 million through external sources
prior to July 2007 in order to maintain sufficient financial
resources in order to operate as a going concern through the end
of fiscal 2007. If necessary it will attempt to raise additional
funds by any one or combination of the following:
(i) completing the sale of certain assets;
(ii) issuing equity, debt or convertible debt;
(iii) selling certain non core businesses. There can be no
assurance of the Companys ability to raise sufficient
capital through the above, or any other efforts.
In the Companys Annual Report on Form 10-K for the fiscal
year ended July 2, 2005, the Company disclosed that based upon
managements September 2005 cash flow forecasts, the
Company needed to raise additional funding through external
sources prior to December 2005 in order to maintain sufficient
financial resources to continue to operate its business. In
addition, depending on the amount of additional funding secured
prior to December 2005, the Company may also have needed to
raise further funding before June 2006 in order to maintain a
cash balance of at least $25 million as required by the
terms of the notes payable to Nortel Networks U.K. Limited.
More specifically, the Company believed it needed to raise
between $20 million and $30 million by December 31,
2005 in order to maintain its planned level of operations, and
between $50 million and $60 million on a cumulative
basis by August 2006 in order to comply with certain minimum
cash requirements contained in the promissory notes issued by
Nortel Networks.
Between the date the Company filed its Annual Report on
Form 10-K for the year ended July 2, 2005 and
July 1, 2006, the Company has raised a total of
$101 million (net of estimated fees, and including
$3.7 million in proceeds payable and received in July 2006)
from the sale of common stock in an October 2005 public offering
described in Note 10 Stockholders Equity,
the sale of land in the U.K., the acquisition of Creekside
described in Note 13 Acquisition of Creekside,
and the sale-leaseback of its Caswell manufacturing facility
described in Note 6 Commitments and
Contingencies.
Foreign
Currency Transactions and Translation Gains and
Losses
The assets and liabilities of foreign operations are translated
from their respective functional currencies into
U.S. dollars at the rates in effect at the consolidated
balance sheet date, and revenue and expense amounts are
translated at the average rate during the applicable periods
reflected on the consolidated statements of operations. Foreign
currency translation adjustments are recorded as other
comprehensive income, except for the translation adjustment of
short-term intercompany loans which are recorded as other income
or expense. Gains and losses from foreign currency transactions,
realized and unrealized in the event of foreign currency
transactions not designated as hedges, and those transactions
denominated in currencies other than the Companys
functional currency, are recorded in the consolidated statements
of operations. See Note 1 Derivative Financial
Instruments.
Use of
Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Estimates are used for, but are not limited
to, the allowances for doubtful accounts; accruals for product
returns; inventory write-offs and warranty accruals; the useful
lives of fixed assets; impairment charges on long-lived assets,
goodwill and other intangible assets; losses on facility leases
and other charges; and accrued liabilities and other reserves.
Actual results could differ from these estimates and such
differences may be material to the financial statements.
F-12
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reclassifications
Certain reclassifications have been made to the balances as of
and for the periods end July 2, 2005 to conform to the
July 1, 2006 presentation. These reclassifications were not
material and had no impact on the Companys loss from
operations or net loss.
Cash
and Cash Equivalents
Cash and cash equivalents are recorded at market value. The
Company considers all liquid investment securities with an
original maturity date of three months or less to be cash
equivalents. Any realized gains and losses on liquid investment
securities are included in other income/(expense), net in the
consolidated statements of operations.
Restricted
Cash
The Company has provided irrevocable letters of credit totaling
$4.1 million as collateral for the performance of its
obligations under certain facility lease agreements. The letters
of credit expire at various dates through fiscal 2008, and they
are reflected in long-term restricted cash as of July 1,
2006. The Company also has $1.4 million of other letters of
credit and bank accounts otherwise restricted, which are
reflected as restricted cash within current assets.
Inventories
Inventories are stated at the lower of cost (determined using
the first in, first out method) or market value (determined
using the estimated net realizable value). The Company plans
production based on orders received and forecasted demand and
maintains a stock of certain items. The Company must order
components and build inventories in advance of product
shipments. These production estimates are dependent on the
Companys assessment of current and expected orders from
its customers, including consideration that orders are subject
to cancellation with limited advance notice prior to shipment.
Property
and Equipment
The Company records its property and equipment at cost less
accumulated depreciation. Depreciation is recorded when assets
are placed into service and is computed using the straight-line
method over the estimated useful lives of the assets as follows:
|
|
|
Buildings
|
|
Twenty years
|
Plant and machinery
|
|
Three to five years
|
Fixtures, fittings and equipment
|
|
Three to five years
|
Computer equipment
|
|
Three years
|
Assets
Held For Resale
Assets are classified as held for resale when the Company has a
plan for disposal of certain assets and those assets meet the
held for sale criteria of Statement of Financial Accounting
Standards (SFAS) No. 144
(SFAS 144), Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. At July 2, 2005, the Company had classified land
which was being actively marketed for sale as held for resale.
The Company evaluated the fair value of the land based on per
acre sales data for recent property transactions in the region.
On September 11, 2005, the Company sold the parcel of land
for net proceeds of $14.7 million, resulting in a recovery
of $1.3 million of previously impaired carrying value, net
of related costs.
F-13
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-Lived
Assets Including Goodwill and Other Acquired Intangible
Assets
The Company reviews property and equipment and certain
identifiable intangibles, excluding goodwill, for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable on an annual
basis. Recoverability of these assets is measured by comparison
of its carrying amounts to market prices or future discounted
cash flows the assets are expected to generate. If property and
equipment and certain identifiable intangibles are considered to
be impaired, the impairment to be recognized would equal the
amount by which the carrying value of the asset exceeds its fair
market value based on market prices or future discounted cash
flows.
The Company has adopted SFAS No. 142 (SFAS 142),
Goodwill and Other Intangible Assets. SFAS 142
requires that goodwill and intangible assets with indefinite
useful lives be tested for impairment at least annually or
sooner whenever events or changes in circumstances indicate that
they may be impaired.
SFAS 142 also requires that intangible assets with definite
lives be amortized over their estimated useful lives and
reviewed for impairment whenever events or changes in
circumstances indicate an assets carrying value may not be
recoverable in accordance with SFAS 144. The Company is
currently amortizing its acquired intangible assets with
definite lives over periods ranging from 3 to 6 years, and
16 years as to one specific customer contract.
In the year ended July 1, 2006, the Companys annual
review of goodwill and intangible assets led to the recording of
an impairment charge of $760,000, all of which related to
intangibles in the optics segment. A concurrent review of other
long-lived assets led to an additional impairment charge of
$433,000.
In the year ended July 2, 2005, the Company recorded
impairment charges of $114,226,000, of which $113,592,000
related to goodwill and $634,000 related to intangibles. Of
these charges, $83,326,000 related to the research and
industrial segment, and $30,900,000 related to the optics
segment. See Note 15 Goodwill and Other
Intangible Assets, for additional information regarding these
impairment charges.
Derivative
Financial Instruments
SFAS No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging
Activities, requires the Company to recognize all
derivatives, such as foreign currency forward exchange
contracts, on the consolidated balance sheet at fair value
regardless of the purpose for holding the instrument. If the
derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be
offset against the change in fair value of the hedged assets,
liabilities or firm commitments through operating results or
recognized in other comprehensive income/(loss), net until the
hedged item is recognized in operating results on the
consolidated statements of operations.
For derivative instruments that are designated and qualify as a
cash flow hedge, the purpose of which is to hedge the exposure
to variability in expected future cash flows that is
attributable to a particular risk, the effective portion of the
gain or loss on the derivative instrument is reported as a
component of other comprehensive income/(loss) on the
consolidated statements of operations and reclassified into
operating results in the same period or periods during which the
hedged transaction affects operating results. The remaining gain
or loss on the derivative instrument in excess of the cumulative
change in the present value of future cash flows of the hedged
item, if any, is recognized in current operating results on the
consolidated statements of operations during the period of
change. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized as other
income/(expense) during the period of change. The amounts
recognized due to the anticipated transactions failing to occur
or ineffective hedges were not material for all periods
presented.
The Company is exposed to fluctuations in foreign currency
exchange rates. As the business has grown and become
multinational in scope, the Company has become subject to
fluctuations based upon changes in the exchange rates between
the currencies in which the Company collects revenue and pays
expenses. The Company engages in currency hedging transactions
in an effort to minimize the effects of fluctuations in exchange
rates and
F-14
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company may be required to convert currencies to meet its
obligations. In the majority of these contracts the Company
agrees under certain circumstances to sell U.S. dollars in
exchange for U.K. pound sterling.
At the end of each accounting period, the Company
marks-to-market
all foreign currency forward exchange contracts that have been
designated as cash flow hedges and changes in fair value are
recorded in comprehensive income until the underlying cash flow
is settled and the contract is recognized in operating results.
As of July 1, 2006, there were nine outstanding foreign
currency forward exchange contracts amounting to an aggregate
nominal value of approximately $19.5 million of put and
call options expiring from August 2006 to June 2007. To date,
the Company has not entered into any such contracts for longer
than 12 months and accordingly, all amounts included in
accumulated other comprehensive income as of July 1, 2006
will generally be reclassified into earnings within the next
12 months. For the year ended July 1, 2006, the
Company recorded an unrealized gain of $573,000 to other
comprehensive income relating to the fair value of the nine
foreign currency forward exchange contracts designated as hedges
for accounting purposes. For the year ended July 2, 2005,
the Company recorded an unrealized loss of $1.7 million to
other expenses, relating to two contracts not designated as
hedges for accounting purposes that were outstanding as of
July 2, 2005.
Advertising
Expenses
The cost of advertising is expensed as incurred. The
Companys advertising costs for the year ended July 1,
2006, the year ended July 2, 2005, the six months ended
July 3, 2004 and the fiscal year ended December 31,
2003 were $302,000, $473,000, $138,000 and $0, respectively.
Revenue
Recognition
Revenue represents the amounts (excluding sales taxes) derived
from the provision of goods and services to third-party
customers during the period. The Companys revenue
recognition policy follows Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB)
No. 104 (SAB 104), Revenue
Recognition in Financial Statements. Specifically, the
Company recognizes product revenue when persuasive evidence of
an arrangement exists, the product has been shipped, title has
transferred, collectibility is reasonably assured, fees are
fixed or determinable and there are no uncertainties with
respect to customer acceptance. For shipments to new customers
and evaluation units, including initial shipments of new
products, where the customer has the right of return through the
end of the evaluation period, the Company recognizes revenue on
these shipments at the end of an evaluation period, if not
returned, and when collection is reasonably assured. The Company
records a provision for estimated sales returns in the same
period as the related revenues are recorded which is netted
against revenue. These estimates are based on historical sales
returns, other known factors and the Companys return
policy.
The Company recognizes royalty revenue when it is earned and
collectibility is reasonably assured.
The Company applies the same revenue recognition policy to both
of its operating segments.
Shipping and handling costs are included in costs of net
revenues.
Research
and Development
Company-sponsored research and development costs are expensed as
incurred.
Income
Taxes
The Company recognizes income taxes under the liability method.
Deferred income taxes are recognized for differences between the
financial reporting and tax bases of assets and liabilities at
enacted statutory tax rates in effect for the years in which the
differences are expected to reverse. The effect on deferred
taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-15
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based
Compensation
At July 1, 2006, the Company had five active stock-based
employee compensation plans, which are described more fully in
Note 10 Stockholders Equity. Prior to
July 3, 2005, the Company accounted for those plans under
the recognition and measurement provisions of Accounting
Principles Board Opinion (APB) No. 25
(APB 25), Accounting for Stock Issued to
Employees, and related Interpretations, as permitted by
FASB Statement No. 123 (SFAS 123),
Accounting for Stock-Based Compensation. Effective
July 3, 2005, the Company adopted the fair value
recognition provisions of FASB Statement No. 123R
(SFAS 123R), Share-Based Payment,
using the modified prospective transition method and
accordingly, the Company has not restated the consolidated
results of operations from prior fiscal years. Under that
transition method, Stock-based compensation cost recognized
during the year ended July 1, 2006 includes:
(a) compensation cost for all share-based payments granted
prior to, but not yet vested as of July 3, 2005, based on
the grant date fair value estimated in accordance with the
original provisions of SFAS 123, and (b) compensation
cost for all share-based payments granted subsequent to
July 3, 2005, based on the grant date fair value estimated
in accordance with the provisions of SFAS 123R. Stock
options generally vest over a four to five year service period,
and restricted stock awards generally vest over a one to four
year period, and in certain cases each may vest earlier based
upon the achievement of specific performance-based objectives as
set by the Board of Directors.
As a result of adopting SFAS 123R on July 3, 2005, the
Companys income before income taxes and net income for the
year ended July 1, 2006 are $8.2 million lower than if
it had continued to account for share-based compensation under
APB 25. Basic and diluted loss per share for the year ended
July 1, 2006 were $0.17 per share higher than they would
have been had the Company not adopted SFAS 123R. The Company had
no capitalized stock-based compensation costs at July 2,
2005. The Company has capitalized into inventory $650,000 of
stock-based compensation costs at July 1, 2006. Deferred
stock-based compensation of $808,000 as of July 2, 2005, which
was accounted for under APB 25 has been, reclassified into
additional paid-in-capital.
Prior to July 3, 2005 and under the intrinsic value method,
in accordance with APB 25, and as permitted by SFAS 123,
the Company had only recorded stock-based employee compensation
resulting from stock options granted at below fair market value.
Stock-based compensation expense reflected in the as reported
net loss includes expenses for compensation expense related to
the amortization of certain acquisition related deferred
compensation expense. No tax benefits were attributed to the
stock-based employee compensation expense and restricted stock
awards with exercise prices set below market prices on the date
of grant, during the periods presented because valuation
allowances were maintained on substantially all of the
Companys net deferred tax assets.
F-16
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the pro forma effect on net loss
and loss per share if the Company had applied the fair value
recognition provisions of SFAS 123 to share-based awards
granted under the Companys equity plans in all periods
presented. For purposes of this pro forma disclosure, the value
of the share-based awards was estimated using a
Black-Scholes-Merton option-pricing formula and amortized to
expense over the applicable vesting periods and forfeitures were
accounted for upon occurrence:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands except per share data)
|
|
|
Net loss as reported
|
|
$
|
(247,972
|
)
|
|
$
|
(67,371
|
)
|
|
$
|
(125,747
|
)
|
Add: Stock-based employee
compensation expense, included in the determination of net loss
as reported
|
|
|
750
|
|
|
|
122
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under the fair value method for
all awards
|
|
|
(6,826
|
)
|
|
|
(6,751
|
)
|
|
|
(3,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(254,048
|
)
|
|
$
|
(74,000
|
)
|
|
$
|
(129,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted as
reported
|
|
$
|
(7.43
|
)
|
|
$
|
(2.48
|
)
|
|
$
|
(6.03
|
)
|
Basic and diluted pro
forma
|
|
$
|
(7.61
|
)
|
|
$
|
(2.72
|
)
|
|
$
|
(6.21
|
)
|
In the course of adopting SFAS 123R, the Company evaluated
the Black-Scholes-Merton pricing model inputs previously applied
to valuing its stock options and determined that certain
volatility assumptions and amortization methods had been
inappropriately applied to certain of its stock option grants in
determining pro forma employee stock-based compensation expense
for the pro forma disclosures previously required under the
SFAS 123, as amended by SFAS 148, disclosure only
alternative. The Company has determined that for the year ended
July 2, 2005, pro forma stock-based compensation expense
previously reported as $9.1 million should have been
$6.8 million, that pro forma net loss previously reported
as $256.3 million should have been $254.0 million, and
that pro forma net loss per share (basic and diluted) previously
reported as $7.68 should have been $7.61. The previously
reported pro forma data was for footnote disclosure purposes
only, and had no impact on the Companys previously
reported results of operations, financial position or cash flows.
The weighted average fair value of stock options granted at fair
market value during the years ended July 1, 2006 and
July 2, 2005, the six months ended July 3, 2004 and
the year ended December 31, 2003 was $4.97, $6.15, $11.38, and
$20.80, respectively. The weighted-average fair value for stock
options granted was calculated using the Black-Scholes-Merton
option-pricing model based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Volatility
|
|
|
87
|
%
|
|
|
89
|
%
|
|
|
194
|
%
|
|
|
147
|
%
|
Weighted-average estimated life
|
|
|
4.0 years
|
|
|
|
4.0 years
|
|
|
|
4.1 years
|
|
|
|
3.8 years
|
|
Weighted-average risk-free
interest rate
|
|
|
4.5
|
%
|
|
|
2.9
|
%
|
|
|
2.9
|
%
|
|
|
3.4
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consistent with our valuation method for the disclosure-only
provisions of SFAS 123, we are using the
Black-Scholes-Merton option-pricing model to value the
compensation expense associated with our stock-based awards
under SFAS 123(R). In addition, we estimate forfeitures
when recognizing compensation expense, and we will adjust our
estimate of forfeitures over the requisite service period based
on the extent to which actual forfeitures differ, or are
expected to differ, from such estimates. Changes in estimated
forfeitures will be recognized through a
F-17
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cumulative catch-up adjustment in the period of change and will
also impact the amount of compensation expense to be recognized
in future periods.
Comprehensive
Income
For the years ended July 1, 2006, July 2, 2005, the
six months ended July 3, 2004 and the year ended
December 31, 2003, the Companys comprehensive income
is comprised of its net loss, unrealized gains/(losses) on
foreign currency forward exchange contracts designated as
hedges, foreign currency translation adjustments and unrealized
gains/(losses) on short-term investments.
The components of accumulated other comprehensive income are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Unrealized gains on currency
instruments
|
|
$
|
573
|
|
|
$
|
|
|
|
$
|
153
|
|
|
$
|
274
|
|
Currency translation adjustment
|
|
|
34,887
|
|
|
|
32,889
|
|
|
|
32,898
|
|
|
|
30,173
|
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income
|
|
$
|
35,460
|
|
|
$
|
32,889
|
|
|
$
|
33,035
|
|
|
$
|
30,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheme
of Arrangement
On August 16, 2004, at an extraordinary general meeting,
the Companys shareholders approved the scheme of
arrangement pursuant to which, effective September 10,
2004, Bookham Technology plc became a wholly owned subsidiary of
Bookham, Inc. Pursuant to the scheme of arrangement, Bookham
Technology plc ordinary shares were exchanged for shares of
common stock of Bookham, Inc. on a ten for one basis. All
references in the consolidated financial statements and notes
thereto with respect to the number of shares, per share amounts
and market prices have been restated to reflect the scheme of
arrangement.
Recent
Accounting Developments
In June 2005, FASB issued Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error
corrections (SFAS 154), which replaces
Accounting Principles Board Opinion No. 20 (APB 20)
and Statement of Financial Accounting Standards No. 3,
Reporting Accounting Changes in Interim Financial
Statements SFAS 154 applies to all voluntary changes in
accounting principle, and changes the requirements for
accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary
changes in accounting principle be recognized by including in
net income of the period of change a cumulative effect of
changing to the new accounting principle whereas SFAS 154
requires retrospective application to prior periods
financial statements of a voluntary change in accounting
principle unless it is impracticable. SFAS 154 enhances the
consistency of financial information between periods. SFAS 154
is effective for fiscal years beginning after December 15,
2005, and is required to be adopted by the Company in the first
quarter of the fiscal year ended June 30, 2007.
In November 2005, the FASB issued FASB Staff Position
(FSP) Nos.
FAS 115-1
and
FAS 124-1,
The Meaning of
Other-Than-Temporary
Impairment and its Application to Certain Investments. FSP
Nos.
FAS 115-1
and
FAS 124-1
amend SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. This guidance nullifies certain
requirements of
EITF 03-1,
The Meaning of
Other-Than-Temporary
Impairment and its Application to Certain Investments. FSP Nos.
FAS 115-1
and
FAS 124-1
include guidance for evaluating and recording impairment losses
on debt and equity investments, as well as new disclosure
requirements for investments that are deemed to be temporarily
impaired. FSP Nos.
FAS 115-1
and
FAS 124-1
also require
other-than-temporary
impaired debt securities to be written down to its impaired
value, which becomes the new cost basis. FSP Nos.
FAS 115-1
and
FAS 124-1
are effective for fiscal years beginning after December 15,
2005. The Company does not
F-18
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
believe that adoption of FSP Nos.
FAS 115-1
and
FAS 124-1
on July 2, 2006 will have a material impact on its
financial position, results of operations or cash flows.
In February 2006, the FASB issued SFAS No. 155
(SFAS 155), Accounting for Certain Hybrid
Financial Instruments, which amends SFAS 133 and
SFAS 140. SFAS 155 permits hybrid financial
instruments that contain an embedded derivative that would
otherwise require bifurcation to irrevocably be accounted for at
fair value, with changes in fair value recognized in the
statement of income. The fair value election may be applied on
an
instrument-by-instrument
basis. SFAS 155 also eliminates a restriction on the
passive derivative instruments that a qualifying special purpose
entity may hold. SFAS 155 is effective for those financial
instruments acquired or issued after December 1, 2006. At
adoption, any difference between the total carrying amount of
the individual components of the existing bifurcated hybrid
financial instrument and the fair value of the combined hybrid
financial instrument will be recognized as a cumulative-effect
adjustment to beginning retained earnings. The Company is
currently evaluating the potential impact of adopting
SFAS 155.
In July 2006, the FASB issued Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entitys
financial statements in accordance with Statement 109 and
prescribes a recognition threshold and measurement attribute for
financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Additionally,
Interpretation 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006, with early
adoption permitted. The Company will adopt FIN 48 in fiscal
2007 and is currently evaluating whether the adoption of
FIN 48 will have a material effect on its consolidated
financial position, results of operations or cash flows.
|
|
2.
|
Concentration
of Revenues and Credit and Other Risks
|
The Company places its cash and cash equivalents with and in the
custody of financial institutions with high credit standing and,
by policy, limits the amounts invested with any one institution,
type of security and issuer.
Nortel Networks accounted for 48% of our revenue in the year
ended July 1, 2006, 45% in the year ended July 2,
2005, 46% in the six-month period ended July 3, 2004, and
59% in the year ended December 31, 2003, respectively.
Marconi accounted for 13% of our revenue in the year ended
December 31, 2003. Revenues from both customers were
generated in the Companys optics segment. For the years
ended July 1, 2006 and July 2, 2005, the six months
ended July 3, 2004 and the year ended December 31,
2003, no other customer accounted for more than 10% of the
Companys total revenues.
At July 1, 2006 and July 2, 2005, Nortel Networks
accounted for 22% and 26% of the Companys net accounts
receivable balance, respectively. At July 1, 2006 and
July 2, 2005, Cisco Systems accounted for 9% and 16% of the
Companys gross accounts receivable balance, respectively.
At July 1, 2006 and July 2, 2005, Huawei accounted for
13% and 8% of the Companys gross accounts receivable
balance, respectively.
Trade receivables are recorded at the invoiced value. Allowances
for uncollectible trade receivables are based upon historical
loss patterns, the number of days that billings are past due and
an evaluation of the potential risk of loss associated with
specific problem accounts. The Company performs ongoing credit
evaluations of its customers and does not typically require
collateral or guarantees.
F-19
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
17,006
|
|
|
$
|
11,236
|
|
Work-in-progress
|
|
|
20,823
|
|
|
|
26,862
|
|
Finished goods
|
|
|
16,031
|
|
|
|
15,094
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,860
|
|
|
$
|
53,192
|
|
|
|
|
|
|
|
|
|
|
Inventory is valued at the lower of the cost to acquire or
manufacture the product or market value. The manufacturing cost
will include the cost of the components purchased to produce
products, the related labor and overhead. On a monthly basis,
inventory is reviewed to determine if it is believed to be
saleable. Products may be unsaleable because they are
technically obsolete, due to substitute products or
specification changes or because the Company holds an excessive
amount of inventory relative to customer forecasts. Inventory is
currently valued using methods that take these factors into
account. In addition, if it is determined that cost is greater
than selling price then inventory is written down to the selling
price less costs to complete and sell the product.
During the year ended July 1, 2006, the Company had
revenues of $9.5 million related to, and recognized
$3.5 million of profits on, inventory that had been carried
on our books at zero value. In the year ended July 2, 2005,
the Company recognized profits of $16.0 million on revenues
of $19.5 million related to inventory that had been carried
on the books at zero value. These inventories were originally
acquired in connection with the purchase of the optical
components business of Nortel Networks. While this inventory is
carried on our books at zero value, and its sale generates
higher margins than most of the new products, the Company incurs
additional costs to complete the manufacturing of these products
prior to sale. Revenues from this inventory is expected to be
insignificant in the future.
|
|
4.
|
Property,
Plant and Equipment
|
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
5,996
|
|
|
$
|
7,371
|
|
Buildings
|
|
|
22,409
|
|
|
|
22,691
|
|
Plant and machinery
|
|
|
64,357
|
|
|
|
61,453
|
|
Fixtures, fittings and equipment
|
|
|
228
|
|
|
|
1,596
|
|
Computer equipment
|
|
|
12,181
|
|
|
|
12,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,171
|
|
|
|
105,590
|
|
Less accumulated depreciation
|
|
|
(53,008
|
)
|
|
|
(41,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,163
|
|
|
$
|
64,156
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $20,227,000, $20,572,000, $7,755,000
and $9,222,000 for the year ended July 1, 2006,
July 2, 2005, the six months ended July 3, 2004, and
the year ended December 31, 2003, respectively.
F-20
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Accrued
Expenses and Other Liabilities
|
Accrued expenses and other current liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Accounts payable accruals
|
|
$
|
4,497
|
|
|
$
|
6,387
|
|
Compensation and benefits related
accruals
|
|
|
5,465
|
|
|
|
6,408
|
|
Other accruals
|
|
|
6,763
|
|
|
|
7,007
|
|
Warranty accrual
|
|
|
3,429
|
|
|
|
3,782
|
|
Current portion of restructuring
accrual
|
|
|
12,933
|
|
|
|
14,945
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,087
|
|
|
$
|
38,529
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Long-term portion of restructuring
accrual
|
|
$
|
3,196
|
|
|
$
|
9,888
|
|
Environmental liabilities
|
|
|
1,140
|
|
|
|
1,004
|
|
Other long-term liabilities
|
|
|
653
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,989
|
|
|
$
|
11,232
|
|
|
|
|
|
|
|
|
|
|
Warranty
accrual
The Company accrues for the estimated costs to provide warranty
services at the time revenue is recognized. The Companys
estimate of costs to service its warranty obligations is based
on historical experience and expectation of future conditions.
To the extent the Company experiences increased warranty claim
activity or increased costs associated with servicing those
claims, the Companys warranty costs will increase
resulting in increases to net loss.
F-21
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Movements in provisions for warranty are as follows:
|
|
|
|
|
|
|
Provision for
|
|
|
|
Warranties
|
|
|
|
(In thousands)
|
|
|
At January 1, 2003
|
|
$
|
1,752
|
|
Change in liability for
pre-existing warranties, including expiration
|
|
|
|
|
Fair value adjustment
|
|
|
1,968
|
|
Warranties issued
|
|
|
846
|
|
Arising on acquisition
|
|
|
65
|
|
Foreign exchange movements
|
|
|
430
|
|
Repairs and replacements
|
|
|
|
|
|
|
|
|
|
At December 31, 2003
|
|
|
5,061
|
|
|
|
|
|
|
Change in liability for
pre-existing warranties, including expiration
|
|
|
(1,096
|
)
|
Arising on acquisition
|
|
|
569
|
|
Fair value adjustment
|
|
|
|
|
Foreign exchange movements
|
|
|
155
|
|
Repairs and replacements
|
|
|
(83
|
)
|
|
|
|
|
|
At July 3, 2004
|
|
|
4,606
|
|
|
|
|
|
|
Change in liability for
pre-existing warranties, including expiration
|
|
|
(327
|
)
|
Warranties issued
|
|
|
838
|
|
Foreign exchange movements
|
|
|
(35
|
)
|
Repairs and replacements
|
|
|
(1,300
|
)
|
|
|
|
|
|
At July 2, 2005
|
|
|
3,782
|
|
|
|
|
|
|
Change in liability for
pre-existing warranties, including expiration
|
|
|
(610
|
)
|
Warranties issued
|
|
|
259
|
|
Foreign exchange movements
|
|
|
53
|
|
Repairs and replacements
|
|
|
(55
|
)
|
|
|
|
|
|
At July 1, 2006
|
|
$
|
3,429
|
|
|
|
|
|
|
Environmental
Liabilities
The Company has provided for potential environmental liabilities
at sites where the Company could be required to remove asbestos
from its facilities following a change in U.K. legislation. The
Company has an undiscounted provision relating to potential
costs of future remediation works of $1,140,000 at July 1,
2006. The provision is expected to be utilized in fiscal years
2007 and 2008.
|
|
6.
|
Commitments
and Contingencies
|
Operating
Leases
The Company leases certain of its facilities under
non-cancelable operating lease agreements that expire at various
dates from fiscal 2007 through 2026. Rent expense for these
leases was $2,372,000, $8,856,000, $1,998,000, and $5,565,000
during the years ended July 1, 2006, July 2, 2005, the
six months ended July 3, 2004 and the fiscal year ended
December 31, 2003, respectively.
F-22
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Caswell
Sale-Leaseback
On March 10, 2006, the Companys Bookham Technology
plc subsidiary entered into multiple agreements with a
subsidiary of Scarborough Development (Scarborough)
for the sale and leaseback of the land and facilities located at
its Caswell, United Kingdom, manufacturing site. The sale
transaction, which closed on March 30, 2006, resulted in
immediate proceeds to Bookham Technology plc of
£13.75 million (approximately
U.S. $24 million). Under these agreements, Bookham
Technology plc leases back the Caswell site for an initial term
of 20 years, with options to renew the lease term for
5 years following the initial term and for rolling
2 year terms thereafter. Annual rent is
£1.1 million during the first 5 years of the
lease, £1.2 million during the next 5 years of
the lease, £1.4 million during the next 5 years
of the lease and £1.6 million during the next
5 years of the lease. Rent during the renewal terms will be
determined according to the then market rent for the site. The
obligations of Bookham Technology plc under these agreements are
guaranteed by the Company. In addition, Scarborough, Bookham
Technology plc and the Company entered into a pre-emption
agreement with the buyer under which Bookham Technology plc,
within the next 20 years, has a right to purchase of the
Caswell site in whole or in part on terms acceptable to
Scarborough if Scarborough agrees to terms with or receives an
offer from a third party to purchase the Caswell facility. Under
the provisions of SFAS 13, Accounting for
Leases, the Company has deferred a related gain of
$20.4 million, which will be amortized ratably against rent
expense over the initial 20 year term of the lease. As of
July 1, 2006, the unamortized balance of this deferred gain
is $21.0 million. The Company is recognizing the rent
expense related to payments over the term of the lease.
The Companys future minimum lease payments under
non-cancelable operating leases, including the sale-leaseback of
the Caswell facility and $9.2 million related to unoccupied
facilities as a result of the Companys restructuring
activities, are as follows (in thousands):
|
|
|
|
|
For fiscal year ending on or about
June 30,
|
|
|
|
|
2007
|
|
$
|
11,394
|
|
2008
|
|
|
4,746
|
|
2009
|
|
|
3,240
|
|
2010
|
|
|
3,226
|
|
2011
|
|
|
2,989
|
|
Thereafter
|
|
|
9,216
|
|
|
|
|
|
|
Total
|
|
$
|
34,811
|
|
|
|
|
|
|
Guarantees
The Company adopted the provisions of FASB Interpretation
No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation
of FASB Statements No. 5, 57 and 107 and a rescission of
FASB Interpretation No. 34, effective
December 31, 2002. The Company has the following financial
guarantees:
|
|
|
|
|
In connection with the sale by New Focus, Inc. of its passive
component line to Finisar, Inc., New Focus agreed to indemnify
Finisar for claims related to the intellectual property sold to
Finisar. This
|
F-23
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
indemnification expires in May 2009 and has no maximum
liability. In connection with the sale by New Focus of its
tunable laser technology to Intel Corporation, New Focus has
indemnified Intel against losses for certain intellectual
property claims. This indemnification expires in May 2008 and
has a maximum liability of $7.0 million. The Company does
not expect to pay out any amounts in respect of these
indemnifications, therefore no accrual has been made.
|
|
|
|
|
|
The Company indemnifies its directors and certain employees as
permitted by law, and has entered into indemnification
agreements with its directors. The Company has not recorded a
liability associated with these indemnification arrangements as
the Company historically has not incurred any costs associated
with such indemnifications and does not expect to in the future.
Costs associated with such indemnifications may be mitigated by
insurance coverage that the Company maintains.
|
|
|
|
The Company also has indemnification clauses in various
contracts that it enters into in the normal course of business,
such as those issued by its bankers in favor of several of its
suppliers or indemnification in favor of customers in respect of
liabilities they may incur as a result of purchasing the
Companys products should such products infringe the
intellectual property rights of a third party. The Company has
not historically paid out any amounts related to these
indemnifications and does not expect to in the future, therefore
no accrual has been made for these indemnifications.
|
Litigation
Settlement
of Yue Litigation
On April 3, 2006, the Company entered into a definitive
settlement agreement, or the Settlement Agreement, with
Mr. Howard Yue, or the Plaintiff, relating to the lawsuit
the Plaintiff filed against New Focus, Inc., a subsidiary of the
Company, and several of its officers and directors in Santa
Clara County Superior Court. The lawsuit, which was originally
filed on February 13, 2002, is captioned Howard Yue v.
New Focus, Inc. et al, Case No. CV808031, or the Yue
Litigation, and relates to events that occurred prior to the
Companys acquisition of New Focus, Inc.
The terms of the Settlement Agreement provided that the Company
would issue to the Plaintiff a $7.5 million promissory
note, or the Note, payable on or before April 10, 2006, of
which $5.0 million could be satisfied by the Company, at
its option, through the issuance of shares of common stock.
Pursuant to the Settlement Agreement, the Company issued the
Note on April 3, 2006 and satisfied the terms of the Note
in full by issuing to the Plaintiff 537,635 shares of
common stock valued at $5.0 million on April 4, 2006
and paying $2.5 million in cash on April 5, 2006. The
Plaintiff filed dismissal papers in this litigation on
April 6, 2006.
The defense fees for this litigation have been paid by the
insurers under the applicable New Focus directors and officers
insurance policy. The Company and New Focus, Inc. have demanded
that the relevant insurers fully fund this settlement within
policy limits. At the time of the settlement, certain of the
insurers had not confirmed to the Company their definitive
coverage position on this matter. As the terms of this
settlement had been reached prior to April 1, 2006, the
Company recorded $7.2 million ($7.5 million, net of
insurance recoveries expected as of that time) as an other
operating expense in the Companys results of operations
for the three months and nine months ended April 1, 2006.
During the quarter ended July 1, 2006, the Company received
$2.2 million in insurance settlements. Net of these
recoveries, the expense for the year ended July 1, 2006
related to this litigation settlement was $5.0 million. If
and when additional insurers confirm their definitive coverage
position, the Company will record the amounts of this coverage
as recoveries against operating expenses in the corresponding
future periods.
Other
Litigation
On June 26, 2001, a putative securities class action
captioned Lanter v. New Focus, Inc. et al., Civil
Action
No. 01-CV-5822,
was filed against New Focus, Inc. and several of its officers
and directors, or the Individual
F-24
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Defendants, in the United States District Court for the Southern
District of New York. Also named as defendants were Credit
Suisse First Boston Corporation, Chase Securities, Inc.
U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets
Corp., or the Underwriter Defendants, the underwriters in New
Focuss initial public offering. Three subsequent lawsuits
were filed containing substantially similar allegations. These
complaints have been consolidated. On April 19, 2002,
plaintiffs filed an amended class action complaint,
described below, naming as defendants the Individual Defendants
and the Underwriter Defendants.
On November 7, 2001, a class action complaint was
filed against Bookham Technology plc and others in the United
States District Court for the Southern District of New York. On
April 19, 2002, plaintiffs filed an amended complaint, or
the Amended Complaint. The Amended Complaint names as defendants
Bookham Technology plc, Goldman, Sachs & Co. and
FleetBoston Robertson Stephens, Inc., two of the underwriters of
Bookham Technology plcs initial public offering in April
2000, and Andrew G. Rickman, Stephen J. Cockrell and David
Simpson, each of whom was an officer
and/or
director at the time of Bookham Technology plcs initial
public offering.
The Amended Complaint asserts claims under certain provisions of
the securities laws of the United States. It alleges, among
other things, that the prospectuses for Bookham Technology
plcs and New Focuss initial public offerings were
materially false and misleading in describing the compensation
to be earned by the underwriters in connection with the
offerings, and in not disclosing certain alleged arrangements
among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock,
in the case of New Focus, from the underwriters. The Amended
Complaint seeks unspecified damages (or in the alternative
rescission for those class members who no longer hold shares of
the Companys common stock), costs, attorneys fees,
experts fees, interest and other expenses. In October
2002, the individual defendants were dismissed, without
prejudice, from the action. In July 2002, all defendants filed
motions to dismiss the Amended Complaint. The motion was denied
as to Bookham Technology plc and New Focus in February 2003.
Special committees of the board of directors authorized the
companies to negotiate a settlement of pending claims
substantially consistent with a memorandum of understanding
negotiated among class plaintiffs, all issuer defendants and
their insurers.
Plaintiffs and most of the issuer defendants and their insurers
have entered into a stipulation of settlement for the claims
against the issuer defendants, including the Company. Under the
stipulation of settlement, the plaintiffs will dismiss and
release all claims against participating defendants in exchange
for a payment guaranty by the insurance companies collectively
responsible for insuring the issuers in the related cases, and
the assignment or surrender to the plaintiffs of certain claims
the issuer defendants may have against the underwriters. On
February 15, 2005, the court issued an Opinion and Order
preliminarily approving the settlement provided that the
defendants and plaintiffs agree to a modification narrowing the
scope of the bar order set forth in the original settlement
agreement. The parties agreed to the modification narrowing the
scope of the bar order, and on August 31, 2005, the court
issued an order preliminarily approving the settlement and
setting a public hearing on its fairness which took place on
April 24, 2006. The judge has yet to enter a decision on
this hearing. The Company believes that both Bookham Technology
plc and New Focus have meritorious defenses to the claims made
in the Amended Complaint and therefore believes that such claims
will not have a material effect on its financial position,
results of operations or cash flows.
The Company does not believe that the results of these pending
legal matters will have a material impact on its financial
position, results of operations or cash flows, although it will
incur legal fees in their defense.
In May 2004, the Company announced a plan of restructuring,
primarily related to the transfer of the Companys assembly
and test operations from Paignton, U.K. to Shenzhen, China,
along with reductions in research and development and selling,
general and administrative expenses. In September 2004, the
Company announced the inclusion in the plan of the transfer of
the Companys main corporate functions, including
consolidated accounting, financial reporting, tax and treasury,
from Abingdon, U.K. to the Companys U.S. headquarters
in San Jose. In December 2004, the Company announced cost
reduction measures designed to expand the savings under the plan
to
F-25
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
within a range of $16 million to $20 million per
quarter, primarily affecting the manufacturing, and also the
research and development and selling, general and administrative
lines in the Companys statement of operations. In the
third and fourth fiscal quarters of 2005, the Company recorded
additional restructuring charges, primarily personnel and other
costs needed to operate the Paignton assembly and test facility
for approximately six months longer than originally intended,
into the third quarter of fiscal 2006, in order to fulfill the
level of product demand under the Second Addendum to the Supply
Agreement with Nortel Networks. In the fourth fiscal quarter of
2005, the Company also incurred charges related to revising
certain assumptions on its accrual for lease commitments. In
November 2005, the Company announced an extension of this plan
to include the transfer of its
chip-on-carrier
assembly from Paignton to Shenzhen. This extended the plan,
which otherwise would have been substantially complete during
the quarter ended July 1, 2006, into at least the quarter
ended December 31, 2006, in regards to the additional
personnel identified for termination in connection with the
transfer of
chip-on-carrier.
As of July 1, 2006, the Company has spent
$22.4 million on the plan overall, and in total anticipates
spending approximately $24 million to $30 million
(approximately 90% related to personnel and 10% related to lease
commitments).
In addition, on May 4, 2006, the Company announced an
extension of this cost reduction plan to include more extensive
reductions in personnel and the transfer of additional
functions, primarily manufacturing and supply chain related,
from its Paignton U.K facility to its Shenzhen China facility.
The Company expects the implementation of this plan extension to
result in the recognition of approximately $6.0 million to
$7.0 million in additional restructuring costs, of which
$2.8 million was recorded in the quarter ended July 1,
2006, with the remainder expected to be paid over the next two
fiscal quarters, the substantial portion being cash for
personnel related charges. The Company expects the plan to
reduce the Companys costs by between $5.5 million and
$6.5 million a quarter, with the cost savings expected to
be realized in the March 2007 fiscal quarter.
Prior to May 2004, the Company engaged in other restructuring
plans. In the year ended December 31, 2003, the Company
recorded charges for a separate major restructuring program, the
main element of which was the closure of a semiconductor
fabrication facility in Ottawa, Canada and the transfer of
related fabrication capabilities to Caswell, UK. In the six
months ended July 3, 2004, the Company recorded
restructuring credits related to the completion of the closure
of its Ottawa, Canada facility at less cost than anticipated.
The transfer was completed in August 2003. In connection with
this transfer, certain products and research projects were
discontinued. The Company achieved annualized cost savings in
excess of $25 million related to this plan, primarily
related to the manufacturing and research and development lines
in the Companys income statement. In the year ended
December 31, 2003, the Company achieved additional
annualized savings in excess of $20 million as a result of
the final decommissioning of the ASOC product line; a decision
made in connection with the year ended 2002, and for which
charges were recorded in 2002. Substantially all cash
expenditures related to the 2003 restructuring plan had been
incurred prior to July 3, 2004.
Related to this restructuring plan, the Company also assumed
$16.8 million of restructuring charges primarily related to
facilities commitments previously entered into by companies
acquired by the Company, the substantial portion of which
represents lease commitments in the research and industrial
segment. The related operating lease commitments outstanding as
of July 1, 2006 are reflected in the disclosures in
Note 6 Commitments and Contingencies to these
financial statements.
For all periods presented, separation payments were accrued and
charged to restructuring in the period that both the benefit
amounts were determined and the amounts had been communicated to
the affected employees.
F-26
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity related to the
restructuring liability for the year ended July 1, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Restructuring
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
|
Costs at
|
|
|
Charged to
|
|
|
|
|
|
Amounts
|
|
|
Costs at
|
|
|
|
July 2,
|
|
|
Restructuring
|
|
|
|
|
|
Paid or
|
|
|
July 1,
|
|
|
|
2005
|
|
|
Accrual
|
|
|
Adjustments
|
|
|
Written Off
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Lease cancellations and commitments
|
|
$
|
18,533
|
|
|
$
|
1,997
|
|
|
$
|
(62
|
)
|
|
$
|
(9,030
|
)
|
|
$
|
11,438
|
|
Termination payments to employees
and related costs
|
|
|
6,300
|
|
|
|
9,157
|
|
|
|
(60
|
)
|
|
|
(10,706
|
)
|
|
|
4,691
|
|
Write-off on disposal of assets
and related costs
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring accrual and
other
|
|
|
24,833
|
|
|
$
|
11,197
|
|
|
$
|
(122
|
)
|
|
$
|
(19,779
|
)
|
|
|
16,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued
restructuring charges
|
|
|
(9,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges
included within other accrued liabilities
|
|
$
|
14,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount charged to restructuring in the statement of
operations for the year ended July 1, 2006 is $11,197,000.
Charges for termination payments are primarily in connection
with the transfer of assembly and test and related operations
from Paignton to Shenzhen. Charges for lease cancellations and
commitments are primarily related to changing assumptions as to
sub-lease assumptions regarding previously exited buildings.
Adjustments primarily relate to accruals previously recorded for
anticipated costs of selling the Companys Swindon U.K.
land, reclassified to be applied to the gain on the sale which
transpired during the year ended July 1, 2006, and which is
reflected as a recovery of previous asset impairment.
F-27
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity related to the
restructuring liability for the year ended July 2, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Restructuring
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
|
Costs at
|
|
|
Charged to
|
|
|
|
|
|
Amounts
|
|
|
Costs at
|
|
|
|
July 3,
|
|
|
Restructuring
|
|
|
|
|
|
Paid or
|
|
|
July 2,
|
|
|
|
2004
|
|
|
Accrual
|
|
|
Adjustments
|
|
|
Written Off
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Lease cancellations and commitments
|
|
$
|
19,579
|
|
|
$
|
7,462
|
|
|
$
|
(1,008
|
)
|
|
$
|
(7,500
|
)
|
|
$
|
18,533
|
|
Termination payments to employees
and related costs
|
|
|
1,127
|
|
|
|
16,256
|
|
|
|
(535
|
)
|
|
|
(10,548
|
)
|
|
|
6,300
|
|
Write-off on disposal of assets
and related costs
|
|
|
|
|
|
|
449
|
|
|
|
|
|
|
|
(449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring accrual and
other
|
|
|
20,706
|
|
|
$
|
24,167
|
|
|
$
|
(1,543
|
)
|
|
$
|
(18,497
|
)
|
|
|
24,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued
restructuring charges
|
|
|
(12,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges
included within other accrued liabilities
|
|
$
|
8,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The ending restructuring accrual as of July 2, 2005, and
the amounts in restructuring costs for the year ended
July 2, 2005, include $1,738,000 related to a revision of
accruals for building leases commitments assumed on acquisition,
resulting in a purchase price adjustment directly to goodwill.
Excluding this amount, the net restructuring charge to the
statement of operations for the year ended July 2, 2005 was
$20,888,000 (charges of $24,167,000 less the purchase price
adjustment of $1,738,000 less the adjustments of $1,543,000).
The adjustments principally relate to the closure of the Milton,
U.K. site at costs less than initially anticipated. Amounts paid
or written off in the year ended July 2, 2005 includes
$5,330,000 paid on lease accruals assumed on acquisition and
$449,000 of assets written off, with the remainder of
$12,718,000 being the cash paid under one of the Companys
restructuring plans.
F-28
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity related to the
restructuring liability for the six month period ended
July 3, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Restructuring
|
|
|
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
|
Costs at
|
|
|
Amounts
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
Costs at
|
|
|
|
January 1,
|
|
|
Assumed on
|
|
|
Restructuring
|
|
|
|
|
|
Amounts
|
|
|
July 3,
|
|
|
|
2004
|
|
|
Acquisition
|
|
|
Accrual
|
|
|
Adjustments
|
|
|
Paid
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Lease cancellations and commitments
|
|
$
|
5,030
|
|
|
$
|
16,815
|
|
|
$
|
|
|
|
$
|
(1,953
|
)
|
|
$
|
(313
|
)
|
|
$
|
19,579
|
|
Termination payments to employees
and related costs
|
|
|
3,222
|
|
|
|
24
|
|
|
|
1,411
|
|
|
|
(122
|
)
|
|
|
(3,408
|
)
|
|
|
1,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring accrual and
other
|
|
|
8,252
|
|
|
$
|
16,839
|
|
|
$
|
1,411
|
|
|
$
|
(2,075
|
)
|
|
$
|
(3,721
|
)
|
|
|
20,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued
restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges
included within other accrued liabilities
|
|
$
|
8,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount charged to restructuring in the statement of
operations for the six month period ended July 3, 2004 is a
credit of $664,000, which represent charges of $1,411,000 less
adjustments of $2,075,000.
The following table summaries the activity related to the
restructuring liability for the year ended December 31,
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Restructuring
|
|
|
Amounts
|
|
|
|
|
|
Restructuring
|
|
|
|
Costs at
|
|
|
Charged to
|
|
|
Amounts
|
|
|
Costs at
|
|
|
|
January 1,
|
|
|
Restructuring
|
|
|
Paid or
|
|
|
December 31,
|
|
|
|
2003
|
|
|
Accrual
|
|
|
Written Off
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Lease cancellations and commitments
|
|
$
|
2,898
|
|
|
$
|
6,703
|
|
|
$
|
(4,571
|
)
|
|
$
|
5,030
|
|
Termination payments to employees
and related costs
|
|
|
1,127
|
|
|
|
20,888
|
|
|
|
(18,793
|
)
|
|
|
3,222
|
|
Write-off on disposal of assets
and related costs
|
|
|
4,830
|
|
|
|
3,801
|
|
|
|
(8,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring accrual and
other
|
|
|
8,855
|
|
|
$
|
31,392
|
|
|
$
|
(31,995
|
)
|
|
|
8,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued
restructuring charges
|
|
|
(8,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges
included within other accrued liabilities
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
cancellations and commitments
In the year ended July 1, 2006, the Company charged
$1,997,000 of additional restructuring costs relating to
facilities, primarily in regards to revised assumptions as to
sublease expectations regarding closed facilities in the
F-29
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
United States. In the year ended July 2, 2005, additional
restructuring accruals of $7,462,000 also related to revised
assumptions regarding subleasing facilities. Of this total,
$1,738,000 of this related to a New Focus facility and was
accounted for as a purchase price adjustment to goodwill
recorded at the time of the acquisition, rather than as
additional restructuring expense. In the six months ended
July 3, 2004, the Company assumed $16,815,000 of lease
commitments upon its acquisition of New Focus related to
facilities it was not going to use. In the same period the
Company also reversed approximately $1,953,000 of amounts
previously accrued for its Ottawa site, based on the closure
costs coming through at less than originally accounted for. In
the year ended December 31, 2003, the Company accrued for
closure costs of $6,703,000 related to facilities in Canada, the
United States and the United Kingdom.
Termination
payments to employees and related costs
The Company incurred restructuring charges for separation pay of
approximately $9,157,000, $15,721,000, $1,289,000, and
$20,888,000 for the years ended July 1, 2006 and
July 2, 2005, the six months ended July 3, 2004 and
the year ended December 31, 2003, respectively. The
separation payments were accrued and charged to restructuring
expense in the period that both the benefit amounts were
determined and such amounts were communicated to the affected
employees. The employee reductions occurred in substantially all
areas of the Companys operations. Each of the employees to
be terminated had been notified prior to the recording of the
related charges. As of July 1, 2006, the majority of
personnel related restructuring activity is related to
completing the transfer of the Companys assembly and test
operations from Paignton to Shenzhen, including extensions of
the related plan to include the transfer of its
chip-on-carrier
assembly and substantially all manufacturing and supply chain
management activities from Paignton to Shenzhen. This extends
such plan, which otherwise would have been substantially
complete during the year ended July 1, 2006, into at least
the quarter ended December 31, 2006.
Write-off
on disposal of assets and related costs
The Company incurred restructuring charges of $43,000, $449,000,
$0, and $3,801,000 for the years ended July 1, 2006 and
July 2, 2005, the six months ended July 3, 2004 and
the year ended December 31, 2003, respectively, related to
the carrying values of equipment abandoned at the Milton U.K.
facility in connection with one of the Companys
restructuring plans. Included in the assets disposed of and
charged to restructuring costs are office equipment and
manufacturing equipment.
In the United States, the Company sponsors a 401(k) plan that
allows voluntary contributions by eligible employees, who may
elect to contribute up to the maximum allowed under the
U.S. Internal Revenue Service regulations. The Company
generally makes 25% matching contributions (up to a maximum of
$2,000 per eligible employee per year) and it recorded related
expenses of $491,000, $642,000, $140,000, and $101,000 in the
years ended July 1, 2006, July 2, 2005, the six months
ended July 3, 2004 and the year ended December 31,
2003, respectively.
The Company also contributes to a United Kingdom based defined
contribution pension scheme for directors and employees, and an
additional defined contribution plan for the benefit of one
director. Contributions, and the related expenses, under these
plans were $2.7 million, $859,000, $696,000 and $989,000 in
respect for the years ended July 1, 2006 and July 2,
2005, the six month period ended July 3, 2004, and the year
ended December 31, 2003, respectively.
In March 2006, in connection with the acquisition of Avalon
Photonics AG (Avalon), the Company assumed the
Avalon pension plan. The following disclosures as of
July 1, 2006, in accordance with SFAS No 87,
Employers Accounting for Pensions, related to
this plan.
F-30
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The actuarial basis for the obligations were based on the
following assumptions:
|
|
|
Actuarial method
|
|
The calculated cost shown in the
report are computed using the projected unit credit cost method.
|
Discount rate
|
|
An annual discount rate of 3.5%
has been applied.
|
Expected return on plan assets
|
|
Expected net return of 4.6% across
all investments.
|
Salary increase
|
|
2.0% per annum.
|
Pension increase
|
|
Currently estimated at 0%.
|
Mortality and disability
|
|
As per Swiss Federal Pension Fund
tables.
|
Balance
Sheet
|
|
|
|
|
|
|
July 1,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Market value of plan assets
|
|
$
|
2,542
|
|
Projected benefit obligation
|
|
|
(2,668
|
)
|
Fund status
|
|
|
(126
|
)
|
Unrecognized actuarial loss
|
|
|
171
|
|
|
|
|
|
|
Net asset
|
|
$
|
45
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
2,422
|
|
|
|
|
|
|
For financial reporting purposes, the Companys pre-tax
loss from continuing operations includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(43,817
|
)
|
|
$
|
(66,981
|
)
|
|
$
|
(18,335
|
)
|
|
$
|
(7,929
|
)
|
Foreign
|
|
|
(55,428
|
)
|
|
|
(180,976
|
)
|
|
|
(49,245
|
)
|
|
|
(121,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(99,245
|
)
|
|
$
|
(247,957
|
)
|
|
$
|
(67,580
|
)
|
|
$
|
(129,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
23
|
|
|
|
11
|
|
|
|
(209
|
)
|
|
|
(3,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
15
|
|
|
|
(209
|
)
|
|
|
(3,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(11,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(11,749
|
)
|
|
$
|
15
|
|
|
$
|
(209
|
)
|
|
$
|
(3,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliations of the income tax provision at the statutory
rate to the Companys provision for income tax are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Tax benefit at federal statutory
rate
|
|
$
|
(34,736
|
)
|
|
$
|
(86,784
|
)
|
|
$
|
(22,977
|
)
|
|
$
|
(43,923
|
)
|
Unbenefitted domestic losses and
credits
|
|
|
12,131
|
|
|
|
13,996
|
|
|
|
2,891
|
|
|
|
|
|
Unbenefitted foreign losses and
credits
|
|
|
10,856
|
|
|
|
72,803
|
|
|
|
20,086
|
|
|
|
43,923
|
|
Benefitted foreign research and
development credits
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|
|
(3,720
|
)
|
Foreign capital taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (benefit from)
income taxes
|
|
$
|
(11,749
|
)
|
|
$
|
15
|
|
|
$
|
(209
|
)
|
|
$
|
(3,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
taxation
Deferred income taxes reflect the tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
260,042
|
|
|
$
|
252,018
|
|
Depreciation, capital losses, and
other
|
|
|
72,308
|
|
|
|
66,863
|
|
Inventory valuation
|
|
|
2,025
|
|
|
|
2,968
|
|
Accruals and reserves
|
|
|
3,926
|
|
|
|
5,233
|
|
Capitalized research and
development
|
|
|
3,650
|
|
|
|
4,470
|
|
Tax credit carry forwards
|
|
|
9,261
|
|
|
|
10,180
|
|
Stock-based compensation
|
|
|
1,320
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
352,532
|
|
|
|
341,732
|
|
Valuation allowance
|
|
|
(316,392
|
)
|
|
|
(330,433
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
36,140
|
|
|
|
11,299
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Investment in foreign subsidiaries
|
|
|
(36,140
|
)
|
|
|
(11,299
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(36,140
|
)
|
|
|
(11,299
|
)
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Companys valuation allowance decreased by $14,041,000
and increased by $47,572,000 for the years ended July 1,
2006 and July 2, 2005, respectively.
Recognition of deferred tax assets is appropriate when
realization of such assets is more likely than not. Based upon
the weight of available evidence, which includes the
Companys historical operating performance and the recorded
cumulative net losses in all prior fiscal periods, the Company
has provided a full valuation allowance against its net deferred
tax assets.
As of July 1, 2006, the Company had foreign net operating
loss carry forwards of approximately $540,411,000, $50,608,000,
$34,995,000 and $12,980,000 in the U.K., Switzerland, China, and
Canada, respectively. The U.K. and Canada net operating losses
do not expire, the Switzerland net operating loss will expire in
various years through 2013 if unused, and the China net
operating loss will expire in various years through 2009 if
unused. The Company also has U.S. federal and state net
operating losses of approximately $207,333,000 and $179,158,000
respectively, which will expire in various years through 2026 if
unused.
As of July 1, 2006, the Company has U.S. federal,
state, and foreign research and investment tax credit carry
forwards of approximately $173,000, $10,772,000 and $2,086,000
respectively. The federal credit will expire in various years
through 2026 if unused. The state research and development
credits can be carried forward indefinitely. The foreign credits
will expire in various years through 2016 if unused.
Utilization of net operating loss carry forwards and credit
carry forwards are subject to substantial annual limitations due
to ownership changes as provided in the Internal Revenue Code of
1986, as amended, as well as similar state and foreign tax laws.
F-33
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has not provided for U.S. federal income and
state income taxes on all of the
non-U.S. subsidiaries
undistributed earnings as of July 1, 2006 because such
earnings are intended to be indefinitely reinvested. Upon
distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to applicable
U.S. federal and state income taxes.
In July 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109. This
Interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109. It
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods and disclosures. It will be effective for fiscal years
beginning after December 15, 2006. Earlier application of
the provisions of this Interpretation is encouraged if the
enterprise has not yet issued financial statements, including
interim financial statements, in the period this Interpretation
is adopted. The provisions of this Interpretation apply to all
tax positions upon initial adoption of this Interpretation. Only
tax positions that meet the recognition threshold criteria at
the effective date may be recognized or continue to be
recognized upon adoption of this Interpretation. The cumulative
effect of applying the provisions of this Interpretation will be
reported as an adjustment to the opening balance of retained
earnings for that fiscal year, presented separately. The Company
is currently evaluating the accounting and disclosure
requirements of this Interpretation and expects to adopt it as
required at the beginning of its fiscal year 2007.
On April 3, 2006, the Company entered into the Settlement
Agreement with Mr. Howard Yue relating to a lawsuit
Mr. Yue filed against New Focus, Inc., a subsidiary of the
Company, and several of its officers and directors in
Santa Clara County Superior Court. The lawsuit, which was
originally filed on February 13, 2002, relates to events
that occurred prior to the Companys acquisition of New
Focus, Inc. The terms of the Settlement Agreement provided that
the Company would issue to Mr. Yue a $7.5 million
promissory note however, $5.0 million of this promissory
note could be satisfied by the Company, at its option, through
the issuance of its common stock. Pursuant to the Settlement
Agreement, on April 4, 2006, the Company issued
537,635 shares of its common stock to Mr. Yue with a then
current market value of $5.0 million and, on April 5,
2006, the Company paid the remaining $2.5 million due under
the promissory note in cash.
On March 22, 2006, the Company acquired all of the
outstanding share capital of Avalon Photonics AG for
764,951 shares of its common stock. Subject to the
achievement of certain future integration and revenue
milestones, the Avalon shareholders and their designees will be
entitled to receive up to 347,705 additional shares of common
stock. See Note 14 Business Combinations, for
additional disclosures regarding this acquisition.
On January 13, 2006, the Company entered into a series of
transactions to (i) retire $45.9 million aggregate
principal amount of outstanding notes payable to Nortel Networks
UK Limited and (ii) convert $25.5 million in outstanding
convertible debentures which were issued in December 2004. In
connection with the satisfaction of these debt obligations and
conversion of convertible debentures the Company issued
approximately 10.5 million shares of common stock, warrants
to purchase approximately 1.1 million shares of common
stock, paid approximately $22.2 million in cash, and
recorded a charge of $18.8 million in the fiscal year ended
July 1, 2006 for loss on conversion and early
extinguishment of debt. See Note 17 Debt. The
issuance of 1,285,466 of these shares of common stock and
warrants to purchase 95,461 of these shares had been subject to
stockholder approval which was received on March 22, 2006.
In November 2005, the Company granted options to purchase
4,762,500 shares of common stock and issued
1,100,000 shares of restricted stock (including 50,000
restricted stock units) under existing plans. The options have
an exercise price of $4.91, a term of ten years and they vest
ratably over 48 months with the first 12 months of
vesting deferred until the one year anniversary of the grant.
The restricted stock grants vest as to 50% ratably over
F-34
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
48 months, as to 25% when the Company achieves earnings
before interest, taxes, depreciation and amortization, excluding
restructuring charges, one-time items and charges for
stock-based compensation cumulatively greater than zero for two
successive quarters, and as to 25% when the Company achieves
earnings before interest, taxes, depreciation and amortization,
excluding restructuring charges, one-time items and charges for
stock-based compensation cumulatively greater than 8% of
revenues for two successive quarters.
On October 27, 2005, at the Companys annual meeting
of stockholders, the stockholders of the Company approved the
2004 stock incentive plan and authorization of
4,000,000 shares of common stock for issuance under that
plan, the 2004 employee stock option plan and the
2004 share save scheme and the authorization of
500,000 shares of common stock for issuance under each of
those plans, and the authorization of an additional
5,000,000 shares of common stock for issuance under the
2004 stock incentive plan.
On October 17, 2005, the Company completed a public
offering of its common stock, issuing a total of
11,250,000 shares at a price per share of $4.75, raising
$53.4 million and receiving $49.3 million net of
commissions to the underwriters and the payment of offering
costs and expenses.
On February 9, 2005, the Company granted an aggregate of
249,859 shares of restricted common stock to the Chief
Executive Officer and the Chief Financial Officer (the
Participants) under the Companys 2004 Stock
Incentive Plan. In connection with the grant, the Participants
surrendered outstanding options for an aggregate of
853,406 shares of common stock. Pursuant to the terms of
the award, the shares vested in their entirety and became free
from transfer restrictions on the one year anniversary of the
grant date based on the achievement of the following criteria:
(A) the Participant had been continuously employed by the
Company during the period, (B) on or before the
anniversary, the Company had filed on a timely basis any report
required pursuant to Item 308 of
Regulation S-K
of the Securities Act of 1933, as amended and (C) on the
anniversary date, the Company did not have any material weakness
that had not been remedied to the satisfaction of the Audit
Committee of the Companys board of directors. Prior to the
Companys adopting of SFAS 123(R), the Company
recorded deferred compensation of approximately $782,000
representing the fair market value of the restricted shares on
the date of the grant. The deferred compensation was amortized
over the term of the agreement as a charge to compensation
expense, with the grants revalued at each reporting period, with
the deferred compensation adjusted accordingly. During the
fiscal year ended July 2, 2005, prior to the Companys
adoption of SFAS 123R, the Company recorded an expense of
$307,000 related to these shares. During the fiscal year ended
July 1, 2006, the Company applied the provisions of
SFAS 123R to these shares, and recorded an expense of
$447,000 during that period related to these shares. On
February 9, 2006, these shares of restricted common stock
vested.
On September 22, 2004, options to purchase
1,730,950 shares of common stock of the Company were
granted to employees at an exercise price of $6.73 per share.
One half of the options vest on a time based schedule
(twenty-five percent vests one year from the grant date, with
the remaining seventy-five percent vesting monthly over the next
three years) and the remaining half vest on a performance based
schedule. The performance based schedule options vest as
follows: (i) fifty percent of the performance based shares
vest when the Company achieves cash flow break-even (which is
defined as the point when the Company generates earnings before
interest, taxes, depreciation and amortization (excluding
one-time items) that are greater than zero in any fiscal
quarter) and (ii) the remaining fifty percent of these
performance based shares vest upon the Company achieving
profitability (which is defined as the point at which the
Company generates a profit before interest and taxes (excluding
one-time items) that is greater than zero in any fiscal
quarter). As of July 1, 2006, 380,288 of these options
which are still outstanding have vested. Any unvested
performance based options shall vest in full on
September 22, 2009, regardless of the achievement of the
underlying performance targets.
New Focus
Stock Option Plans
In March 2004, the Company granted New Focus employees options
to purchase 605,797 shares of its common stock upon the
assumption of outstanding options granted under the 1999 and
2000 New Focus Stock Plans. In connection with the issuance of
these options, the Company determined an intrinsic value related
to future services
F-35
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of $1,463,000 and recorded this amount as deferred stock
compensation to be expensed over the vesting periods, $122,000
of which was recorded as stock compensation expense in the six
months ended July 3, 2004 and $443,000 of which was
recorded as stock compensation expense in the year ended
July 2, 2005. Upon the Companys adoption of
SFAS 123R in the first quarter of the fiscal year ended
July 1, 2006, the remaining deferred compensation balance
related to these options of $340,000 was netted against
additional paid-in capital. During the year ended July 1,
2006, 24,729 of these options were exercised. At July 1,
2006, there were outstanding options to purchase
77,621 shares of Company common stock under the 1999 and
2000 New Focus Stock Plans. The Company does not intend to grant
additional options under these plans.
In addition to the significant stock option grants described
above, the following summarizes all stock option activity for
the periods provided below:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Outstanding at December 31,
2002
|
|
|
2,187,918
|
|
|
$
|
33.85
|
|
Granted
|
|
|
993,363
|
|
|
|
21.11
|
|
Exercised
|
|
|
(63,429
|
)
|
|
|
19.84
|
|
Cancelled
|
|
|
(576,930
|
)
|
|
|
51.14
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2003
|
|
|
2,540,922
|
|
|
|
26.57
|
|
Granted
|
|
|
640,195
|
|
|
|
11.56
|
|
Assumed on acquisition of New Focus
|
|
|
605,797
|
|
|
|
2.90
|
|
Exercised
|
|
|
(299,943
|
)
|
|
|
9.41
|
|
Cancelled
|
|
|
(280,359
|
)
|
|
|
27.05
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 3, 2004
|
|
|
3,206,612
|
|
|
|
15.21
|
|
Granted
|
|
|
2,002,178
|
|
|
|
6.70
|
|
Exercised
|
|
|
(811
|
)
|
|
|
4.74
|
|
Cancelled
|
|
|
(1,960,727
|
)
|
|
|
13.90
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 2, 2005
|
|
|
3,247,252
|
|
|
|
13.87
|
|
Granted
|
|
|
5,130,660
|
|
|
|
4.97
|
|
Exercised
|
|
|
(58,627
|
)
|
|
|
5.15
|
|
Cancelled
|
|
|
(997,591
|
)
|
|
|
12.70
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 1, 2006
|
|
|
7,321,694
|
|
|
|
7.79
|
|
|
|
|
|
|
|
|
|
|
F-36
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes option information relating to options
outstanding under the Companys stock option plans as of
July 1, 2006. Because the Company tracks options issued
under plans established while a U.K. domicile company separately
from those issued under plans established with a
U.S. domicile company, the following information in
presented in two separate sets of exercise price ranges (in U.S.
dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Weighted Average
|
|
|
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercisable Price
|
|
|
|
|
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.06- 4.70
|
|
|
81,141
|
|
|
|
9.26
|
|
|
$
|
3.48
|
|
|
|
12,335
|
|
|
$
|
3.04
|
|
|
|
|
|
4.91- 4.91
|
|
|
4,628,200
|
|
|
|
9.40
|
|
|
|
4.91
|
|
|
|
64,890
|
|
|
|
4.91
|
|
|
|
|
|
4.99- 6.65
|
|
|
204,154
|
|
|
|
9.34
|
|
|
|
5.95
|
|
|
|
24,238
|
|
|
|
5.00
|
|
|
|
|
|
6.73- 6.73
|
|
|
1,076,344
|
|
|
|
8.26
|
|
|
|
6.73
|
|
|
|
380,325
|
|
|
|
6.73
|
|
|
|
|
|
6.96- 57.67
|
|
|
670,056
|
|
|
|
6.30
|
|
|
|
16.15
|
|
|
|
498,909
|
|
|
|
17.14
|
|
|
|
|
|
88.72-510.28
|
|
|
1,527
|
|
|
|
4.61
|
|
|
|
177.40
|
|
|
|
1,527
|
|
|
|
177.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.06-510.28
|
|
|
6,661,422
|
|
|
|
8.90
|
|
|
|
6.39
|
|
|
|
982,224
|
|
|
|
12.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.99- 9.81
|
|
|
34,100
|
|
|
|
8.06
|
|
|
|
9.09
|
|
|
|
15,924
|
|
|
|
9.10
|
|
|
|
|
|
10.63- 10.63
|
|
|
206,282
|
|
|
|
7.92
|
|
|
|
10.63
|
|
|
|
103,270
|
|
|
|
10.63
|
|
|
|
|
|
12.71- 14.17
|
|
|
196,347
|
|
|
|
6.36
|
|
|
|
14.06
|
|
|
|
178,482
|
|
|
|
14.05
|
|
|
|
|
|
14.17- 24.57
|
|
|
188,018
|
|
|
|
6.54
|
|
|
|
22.46
|
|
|
|
155,606
|
|
|
|
22.31
|
|
|
|
|
|
24.57-181.63
|
|
|
24,375
|
|
|
|
5.01
|
|
|
|
57.80
|
|
|
|
23,125
|
|
|
|
59.54
|
|
|
|
|
|
181.63-295.87
|
|
|
10,290
|
|
|
|
4.37
|
|
|
|
294.71
|
|
|
|
10,290
|
|
|
|
294.71
|
|
|
|
|
|
295.87-654.77
|
|
|
800
|
|
|
|
4.12
|
|
|
|
654.77
|
|
|
|
800
|
|
|
|
654.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 8.99-654.77
|
|
|
660,272
|
|
|
|
6.90
|
|
|
|
21.89
|
|
|
|
487,497
|
|
|
|
24.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,321,694
|
|
|
|
|
|
|
$
|
7.79
|
|
|
|
1,469,721
|
|
|
$
|
16.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
and Other Stock Rights Issued to Non-Employees
On March 22, 2006, the Company acquired all of the
outstanding share capital of Avalon for 764,951 shares of
its common stock. Subject to the achievement of certain future
integration and revenue milestones, the Avalon shareholders and
their designees will be entitled to receive up to 347,705
additional shares of common stock, the value of which would be
recorded as additional goodwill.
On January 13, 2006, the Company entered into a series of
transactions to (i) retire $45.9 million aggregate
principal amount of outstanding notes payable to Nortel Networks
UK Limited and (ii) convert $25.5 million in outstanding
convertible debentures which were issued in December 2004. In
connection with the satisfaction of these debt obligations and
conversion of the convertible debentures, the Company issued
approximately 10.5 million shares of common stock, warrants
to purchase approximately 1.1 million shares of common
stock, paid approximately $22.2 million in cash, and
recorded a charge of $18.8 million in the fiscal year ended
July 1, 2006 for loss on conversion and early
extinguishment of debt. See Note 17 Debt. The
issuance of 1,285,466 of these shares of common stock and
warrants to purchase 95,461 of these shares had been subject to
stockholder approval which was received on March 22, 2006.
In December 2004, in connection with the 7% convertible
note private placement as described in Note 16- Related
Party Transactions, the Company issued warrants to purchase
2,001,963 shares of its common stock. These warrants are
exercisable, they have an exercise price of $6.00 per share
and expire on December 20, 2009.
F-37
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2003, the Company assumed warrants to purchase
4,881 shares of common stock as part of the terms of
acquisition of Ignis Optics. The warrants, which have an
exercise price of $40.00 per share, were exercisable
immediately and expire beginning in April 2008. As of
July 1, 2006, all of these warrants remained outstanding.
In 2002, the Company issued a warrant to purchase
900,000 shares of common stock to Nortel Networks as part
of the purchase price for the acquisition of the optical
components business of Nortel Networks. The Company valued the
warrants at $6,685,000 based on the fair market value of the
Companys common stock as of the announcement date of the
acquisition. The warrant was exercised in full on
September 7, 2004 at the exercise price of approximately
$0.06 per share.
Common
Stock Reserved
Common stock is reserved for future issuance as follows:
|
|
|
|
|
|
|
July 1,
|
|
|
|
2006
|
|
|
Stock option plan:
|
|
|
|
|
Outstanding options
|
|
|
7,321,694
|
|
Warrants
|
|
|
3,087,963
|
|
Reserved for contingent purchase
consideration
|
|
|
347,705
|
|
Reserved for future option grants
|
|
|
11,946,401
|
|
|
|
|
|
|
Total
|
|
|
22,703,763
|
|
|
|
|
|
|
If the Company had reported net income, as opposed to a net
loss, the calculation of diluted earnings per share would have
included an additional 11,509,657, 10,140,319, 4,145,000, and
2,275,000 common equivalent shares related to outstanding share
options and warrants (determined using the treasury stock
method) for the years ended July 1, 2006, July 2,
2005, the six months ended July 3, 2004 and for the year
ended December 31, 2003, respectively.
|
|
12.
|
Segments
of an Enterprise and Related Information
|
The Company is currently organized and operates as two operating
segments: (i) optics and (ii) research and industrial. The
optics segment designs, develops, manufactures, markets and
sells optical solutions for telecommunications and industrial
applications. The research and industrial segment designs,
manufactures, markets and sells photonic and microwave
solutions. The Company evaluates the performance of its segments
and allocates resources based on consolidated revenues and
overall profitability.
Segment and geographic information for the years ended
July 1, 2006 and July 2, 2005, the six months ended
July 3, 2004 and the year ended December 31, 2003 is
presented below. Revenues are attributed to countries based on
the location of customers.
F-38
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information on reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics
|
|
$
|
206,019
|
|
|
$
|
176,598
|
|
|
$
|
69,315
|
|
|
$
|
146,197
|
|
Research and industrial
|
|
|
25,630
|
|
|
|
23,658
|
|
|
|
10,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenues
|
|
$
|
231,649
|
|
|
$
|
200,256
|
|
|
$
|
79,763
|
|
|
$
|
146,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics
|
|
$
|
(82,760
|
)
|
|
$
|
(159,154
|
)
|
|
$
|
(59,321
|
)
|
|
$
|
(125,747
|
)
|
Research and industrial
|
|
|
(4,737
|
)
|
|
|
(88,818
|
)
|
|
|
(8,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(87,497
|
)
|
|
$
|
(247,972
|
)
|
|
$
|
(67,371
|
)
|
|
$
|
(125,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of
tangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics
|
|
$
|
20,072
|
|
|
$
|
20,532
|
|
|
$
|
11,941
|
|
|
$
|
17,709
|
|
Research and industrial
|
|
|
155
|
|
|
|
221
|
|
|
|
1,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and
amortization
|
|
$
|
20,227
|
|
|
$
|
20,753
|
|
|
$
|
13,432
|
|
|
$
|
17,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenditures for long-lived
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics
|
|
$
|
9,920
|
|
|
$
|
15,913
|
|
|
$
|
6,592
|
|
|
$
|
19,186
|
|
Research and industrial
|
|
|
193
|
|
|
|
95
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total expenditures
for long-lived assets
|
|
$
|
10,113
|
|
|
$
|
16,008
|
|
|
$
|
6,648
|
|
|
$
|
19,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding the Companys operations by
geographic area is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Canada
|
|
$
|
107,445
|
|
|
$
|
85,006
|
|
|
$
|
35,529
|
|
|
$
|
78,373
|
|
United States
|
|
|
47,762
|
|
|
|
54,660
|
|
|
|
20,446
|
|
|
|
13,584
|
|
China
|
|
|
27,781
|
|
|
|
19,420
|
|
|
|
9,426
|
|
|
|
14,155
|
|
Europe other than United Kingdom
|
|
|
18,896
|
|
|
|
19,274
|
|
|
|
8,797
|
|
|
|
13,356
|
|
Asia other than China
|
|
|
15,655
|
|
|
|
5,019
|
|
|
|
1,449
|
|
|
|
840
|
|
United Kingdom
|
|
|
9,857
|
|
|
|
15,727
|
|
|
|
4,023
|
|
|
|
25,069
|
|
Rest of the World
|
|
|
4,253
|
|
|
|
1,150
|
|
|
|
93
|
|
|
|
820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenues
|
|
$
|
231,649
|
|
|
$
|
200,256
|
|
|
$
|
79,763
|
|
|
$
|
146,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the Companys long-lived
tangible assets by geographic region as of the dates indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2006
|
|
|
2005
|
|
|
United Kingdom
|
|
$
|
30,319
|
|
|
$
|
40,813
|
|
China
|
|
|
14,529
|
|
|
|
14,905
|
|
Europe other than United Kingdom
|
|
|
4,806
|
|
|
|
5,312
|
|
United States
|
|
|
1,893
|
|
|
|
2,229
|
|
Canada
|
|
|
616
|
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
Total long-lived tangible assets
|
|
$
|
52,163
|
|
|
$
|
64,156
|
|
|
|
|
|
|
|
|
|
|
For the year ended July 3, 2004, JCA Technology,
Inc.s results consolidated in the research and industrial
segment amounted to $2,400,000 of revenue and a loss of $500,000
and, at July 3, 2004, net assets of $1,600,000. The Company
sold JCA Technology to Endwave Corporation in July 2004 and its
results from July 3, 2004 to the date of sale were
immaterial.
|
|
13.
|
Acquisition
of Creekside
|
On August 10, 2005, the Companys Bookham Technology
plc subsidiary acquired all of the share capital of City Leasing
(Creekside) Limited (Creekside) for consideration of
approximately £1, plus transaction costs. The following is
the purchase price allocation related to this business
combination (in thousands):
|
|
|
|
|
|
|
Purchase
|
|
|
|
Price
|
|
|
|
Allocation
|
|
|
Purchase price:
|
|
|
|
|
Cash
|
|
$
|
|
|
Transaction costs
|
|
|
685
|
|
|
|
|
|
|
|
|
$
|
685
|
|
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
Cash, including restricted cash
|
|
$
|
8,378
|
|
Net monetary assets
|
|
|
4,092
|
|
Deferred tax liabilities
|
|
|
(11,785
|
)
|
|
|
|
|
|
|
|
$
|
685
|
|
|
|
|
|
|
The net monetary assets acquired primarily represent lease
receivables and loans payable to and from parties related to the
entity from which Bookham Technology plc acquired Creekside.
Bookham Technology plc has the right to offset these balances,
and in accordance with FIN 39, Offsetting of Amounts
Related to Certain Contracts is reflecting these amounts
net on its balance sheet. The contracts underlying the
receivables and loans are denominated in United Kingdom
pounds sterling. These loans, in principal amounts of
$32 million and $75 million based on the
October 1, 2005 exchange rate of 1.76 U.S. dollars per
UK pound sterling, accrue interest at annual rates of 5.54% and
5.68%, respectively. The first loan was paid in full on
October 14, 2005 and the second loan is due in equal
installments on July 14, 2006 and October 16, 2007,
with the lease receivables substantially concurrent with this
schedule as to timing and exceeding the amounts due in
magnitude. The Company anticipates applying capital allowances
of Bookham Technology plc to reduce tax liabilities assumed from
Creekside. Accordingly, as a result of the acquisition of
Creekside, in the year ended July 1, 2006 the Company has
recognized a one time tax gain of $11.8 million related to
the expected realization of these tax assets. No results of
Creekside have been
F-40
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
included in the Companys results of operations for periods
prior to August 10, 2005, after which point Creekside is
included in the Companys consolidated results of
operations.
|
|
14.
|
Business
Combinations
|
During the years ended July 1, 2006 and July 2, 2005,
the six months ended July 3, 2004 and the year ended
December 31, 2003, the Company completed a total of seven
strategic acquisitions. The Company also completed the
acquisition of Creekside on August 10, 2005, in a
transaction which was primarily financing in nature. The
Creekside acquisition is described separately in
Note 13 Acquisition of Creekside, to these
consolidated financial statements. Each of the remaining
strategic acquisitions was accounted for under the purchase
method of accounting. The allocation of the purchase price to
the assets acquired and liabilities assumed, as determined by
the Company, was conducted at the date of acquisition, with the
assistance of third-party valuation experts, except for the
acquisitions of the business of C.P. Santa Rosa Enterprises
Corp., or Cierra Photonics, and Onetta, Inc. The methodologies
used to value intangible assets acquired were consistently
applied to each of the acquisitions.
To determine the value of the developed technology, the expected
future cash flow attributed to all existing technology was
discounted, taking into account risks related to the
characteristics and application of the technology, existing and
future markets and assessments of the lifecycle stage of the
technology.
The value of in-process research and development, or IPR&D,
was determined based on the expected cash flow attributed to
in-process projects, taking into account revenue that is
attributable to previously developed technology, the level of
effort to date in the IPR&D, the percentage of completion of
the project and the level of risk associated with the in-process
technology. The projects identified as in-process are those that
were underway at each of the acquired companies at the time of
the acquisition and that required additional efforts in order to
establish technological feasibility. The value of IPR&D was
included in the Companys results of operations during the
period of the acquisition.
The value of the acquired patent portfolio was determined based
on the income approach, as it most accurately reflected the fair
value associated with unique assets such as a patent.
Specifically, the relief from royalty method was utilized to
arrive at an estimate of fair value. This methodology estimates
the amount of hypothetical royalty income that could be
generated if the patents were licensed by an independent,
third-party owner to the business currently using the patents in
an arms-length transaction. Conversely, this is the
royalty savings enjoyed by the owners of the patent portfolio in
that the owner is not required to pay a royalty for the use of
the patents.
The value of supply contracts was determined based on discounted
cash flows. The discounted cash flow method was considered to be
the most appropriate methodology, as it reflects the present
value of the operating cash flows generated by the contracts
over their returns.
Avalon
Photonics, AG
Avalon is a producer of multimode and single mode short
wavelength VCSEL or VCSEL-arrays. On March 22, 2006, the
Company acquired all of the outstanding share capital of Avalon,
a company organized under the laws of Switzerland, under an
agreement pursuant to which it issued 764,951 shares of
common stock to the Avalon shareholders and their designees,
valued at $5,500,000 as of the date of acquisition. In addition,
subject to the achievement of certain future integration and
revenue milestones, the Avalon shareholders and their designees
will be entitled to receive up to 347,705 additional shares of
common stock. As 139,082 shares related to the integration
milestones are fixed as to number, the value of the shares,
$1,000,000 as of the date of acquisition, is being included as
part of the consideration in the allocation of the purchase
price. The issuance of the remaining 208,623 shares are
contingent based upon Avalon achieving certain revenue criteria
over a two-year period. Any additional contingent consideration
resulting from the achievement of the revenue criteria will be
accounted for as additional goodwill. $118,000 of the proceeds
was allocated to IPR&D projects. The pro forma results of
operations of Avalon prior to March 22, 2006 were
immaterial to the Company.
F-41
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Onetta,
Inc.
Onetta, Inc., or Onetta, designs and manufacturers optical
amplifier modules and subsystems for communications networks.
Their Erbium Doped Fiber Amplifiers (EDFA) incorporate advanced
optics, control electronics and firmware for current and
next-generation optical communication networks. On June 10,
2004, under the terms of the purchase agreement, the Company
acquired the entire issued share capital of Onetta. The
consideration for the acquisition was 2,764,030 shares of
common stock valued at $24,708,000 at the time of the
acquisition. As part of the agreement, the Onetta stockholders
agreed to settle liabilities of Onetta in the amount of
$6,083,000. In connection with the acquisition, there was no
value allocated to IPR&D projects.
New
Focus, Inc.
New Focus, Inc., or New Focus, provides photonics and microwave
solutions to non-telecom diversified markets, including the
semiconductor, defense, research, industrial, biotech/medical
and telecom test and measurement industries. On March 8,
2004, under the terms of the merger agreement, the Company
acquired New Focus by a merger of a wholly-owned subsidiary with
and into New Focus, with New Focus surviving as the
Companys wholly-owned subsidiary. Pursuant to the merger
agreement, immediately prior to the merger, each New Focus
stockholder received a cash distribution from New Focus in the
amount of $2.19 per share of New Focus common stock held on
that date. The consideration paid by the Company for New Focus
consisted of 7,866,600 shares of common stock, valued at
$197,710,000 at the time of the acquisition, and the assumption
of options with a value of $6,286,000 at the time of the
acquisition. Each of the assumed options became an option to
purchase a unit consisting of 1.2015 shares of common
stock. New Focus made a cash distribution of $2.19 for each
share of New Focus common stock immediately prior to the merger.
The exercise price of the assumed options was adjusted to
reflect the cash distribution.
In connection with the acquisition of New Focus,
$5.9 million of the $211.0 million total consideration
was allocated to IPR&D projects. The new product
introduction (NPI) projects at the acquisition date
were expected to result in the development of products to
support the New Focus OEM and Catalog business. Catalog-related
programs were focused on increasing the wavelength spectrum over
which modulator products can operate and the development of
detectors to operate at higher frequency with lower noise over a
broader wavelength. Their first incorporation in shipments was
in December 2004. Of the OEM related products: two have been
completed, namely the development of a super luminous diode
light source for use in subsystems and a laser development for
use high precision/high stability labs, and the final program
for development of a small form factor laser for use in fiber
sensing applications continues but has been slowed down due to
lower than expected market opportunities emerging. There were no
technology research (TR) programs at the time of
acquisition.
Ignis
Optics, Inc.
Ignis Optics, Inc., or Ignis, designs and manufactures small
form-factor, pluggable, single-mode optical transceivers for
current and next generation optical datacom and telecom
networks. On October 6, 2003, the Company acquired the
entire share capital of Ignis in exchange for
802,081 shares of common stock and the assumption of
warrants to purchase 4,880 shares of common stock, valued
at $17,748,000 at the time of the acquisition. In addition,
subject to certain performance criteria, 78,084 additional
shares of common stock were issuable in fiscal 2005. However,
the performance criteria were not met and no additional shares
were issued. In connection with the acquisition of Ignis,
$1.9 million of the $18.0 million total consideration
was allocated to IPR&D projects. The NPI projects under
development at the acquisition date were expected to result in
small form factor pluggable optical transceivers or component
elements to these products and address quality and reliability
requirements. Commercial shipments of the products began
shipping during the second half of fiscal 2005. There were no TR
projects at the time of acquisition.
F-42
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cierra
Photonics, Inc.
Cierra Photonics, Inc., or Cierra, designs and manufactures
thin-film filters and other components for the fiber optic
telecommunications industry. Cierra Photonics Advanced Energetic
Deposition (AED) technology is a specialized process for
wafer-scale deposition of extremely well-controlled films that
results in thin-film components that have lower costs, high
yields and advanced optical performance. On July 4, 2003,
the Company acquired substantially all of the assets and certain
liabilities of Cierra. The consideration for the acquisition
consisted of 307,148 shares of common stock valued at
$3,669,000 at the time of the acquisition. In addition, and
subject to the satisfactory achievement of specific sales
milestones over the next two years, 420,000 additional shares of
common stock could be issued to Cierra in 2004 and 2005. In the
year ended July 1, 2006, 5,100 shares of such common
stock, and in the year ended July 2, 2005,
38,810 shares of such common stock were issued. In
connection with the acquisition, there was no value allocated to
IPR&D projects.
A summary of the purchase price allocations pertaining to the
above acquisitions and the amortization periods of the
intangible assets acquired is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avalon
|
|
|
Onetta
|
|
|
New Focus
|
|
|
Ignis
|
|
|
Cierra
|
|
|
|
(In thousands)
|
|
|
Purchase price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary stock issued
|
|
$
|
6,500
|
|
|
$
|
24,708
|
|
|
$
|
197,710
|
|
|
$
|
17,748
|
|
|
$
|
3,669
|
|
Stock options assumed
|
|
|
|
|
|
|
|
|
|
|
6,286
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
|
|
24,708
|
|
|
|
203,996
|
|
|
|
17,748
|
|
|
|
3,669
|
|
Transaction and other direct
acquisition costs
|
|
|
200
|
|
|
|
274
|
|
|
|
7,261
|
|
|
|
300
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,700
|
|
|
$
|
24,982
|
|
|
$
|
211,257
|
|
|
$
|
18,048
|
|
|
$
|
3,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,858
|
|
|
$
|
1,238
|
|
|
$
|
111,325
|
|
|
$
|
3,139
|
|
|
$
|
|
|
Accounts receivable
|
|
|
125
|
|
|
|
1,004
|
|
|
|
2,588
|
|
|
|
75
|
|
|
|
560
|
|
Inventory
|
|
|
117
|
|
|
|
1,897
|
|
|
|
3,871
|
|
|
|
648
|
|
|
|
102
|
|
Fixed Assets
|
|
|
375
|
|
|
|
847
|
|
|
|
15,645
|
|
|
|
1,883
|
|
|
|
1,673
|
|
Other assets
|
|
|
295
|
|
|
|
9,180
|
|
|
|
9,896
|
|
|
|
127
|
|
|
|
60
|
|
Accounts payable and other
liabilities
|
|
|
(966
|
)
|
|
|
(10,386
|
)
|
|
|
(37,138
|
)
|
|
|
(1,417
|
)
|
|
|
(1,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
1,804
|
|
|
|
3,780
|
|
|
|
106,187
|
|
|
|
4,455
|
|
|
|
761
|
|
Supply contracts and customer
relationships
|
|
|
539
|
|
|
|
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
Customer database
|
|
|
|
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
Patent portfolio
|
|
|
|
|
|
|
|
|
|
|
2,317
|
|
|
|
913
|
|
|
|
216
|
|
Core and current technology
|
|
|
1,695
|
|
|
|
|
|
|
|
6,597
|
|
|
|
775
|
|
|
|
2,941
|
|
In-process research and development
|
|
|
118
|
|
|
|
|
|
|
|
5,890
|
|
|
|
1,878
|
|
|
|
|
|
Goodwill
|
|
|
2,544
|
|
|
|
21,202
|
|
|
|
89,525
|
|
|
|
10,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
6,700
|
|
|
$
|
24,982
|
|
|
$
|
211,257
|
|
|
$
|
18,048
|
|
|
$
|
3,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization period (in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply contracts/customer
relationships
|
|
|
7
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Customer database
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Patent portfolio
|
|
|
|
|
|
|
|
|
|
|
6-10
|
|
|
|
5
|
|
|
|
6
|
|
Core & current technology
|
|
|
4-6
|
|
|
|
|
|
|
|
3-6
|
|
|
|
5
|
|
|
|
5
|
|
F-43
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of July 1, 2006, the weighted average amortization
period for intangibles is 7.3 years, including
16 years for supply contracts, 5 years for customer
database, 6.4 years for patents and 5.9 for core and
current technologies.
On November 8, 2002, the Company acquired the trade and
assets of the optical components business of Nortel Networks
(NNOC), the net assets of which were initially
valued in 2002. In accordance with SFAS No. 141
(SFAS 141), Business Combinations,
an adjustment was made in 2003 for adjustments to those initial
values.
During 2003, a larger amount of inventory was sold than was
expected at the time the acquisition of NNOC was completed in
2003. As a consequence, the Company increased the value of the
inventory by $20,227,000, reduced intangible assets by
$9,134,000 and decreased other net assets by $11,093,000 as part
of the allocation fair value of the remaining assets as
summarized below.
The warranty provision recognized on acquisition was increased
by $1,968,000 following a review of the level of expected
warranty costs in 2003. In addition, the initial value
recognized for historic employee-related costs was reduced by
$590,000 as a result of a revised valuation and settlement of
the pension scheme in Switzerland.
In accordance with SFAS 141, Business Combinations, the
Company revises the value of acquired net assets when the
initial assigned valuation is provisional. The final revision of
the purchase price allocation related to the acquisition of NNOC
led to the following changes in the year ended December 31,
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Purchase
|
|
|
Purchase Price
|
|
|
Revised Purchase
|
|
|
|
Price Allocation
|
|
|
Adjustments
|
|
|
Price Allocation
|
|
|
|
(In thousands)
|
|
|
Purchase price
|
|
$
|
111,201
|
|
|
$
|
|
|
|
$
|
111,201
|
|
Transaction and other direct
acquisition costs
|
|
|
7,800
|
|
|
|
|
|
|
|
7,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119,001
|
|
|
$
|
|
|
|
$
|
119,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible assets acquired
|
|
$
|
76,827
|
|
|
$
|
9,134
|
|
|
$
|
85,961
|
|
Intangible assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply contracts
|
|
|
8,862
|
|
|
|
(1,984
|
)
|
|
|
6,878
|
|
Patent portfolio
|
|
|
9,988
|
|
|
|
(2,082
|
)
|
|
|
7,906
|
|
Core and current technology
|
|
|
16,034
|
|
|
|
(3,435
|
)
|
|
|
12,599
|
|
In-process research and development
|
|
|
7,290
|
|
|
|
(1,633
|
)
|
|
|
5,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119,001
|
|
|
$
|
|
|
|
$
|
119,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The final revision of the purchase price allocation of proceeds
related to the acquisition of New Focus led to the following
changes in the year ended July 2, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Purchase
|
|
|
Purchase Price
|
|
|
Revised Purchase
|
|
|
|
Price Allocation
|
|
|
Adjustments
|
|
|
Price Allocation
|
|
|
|
(In thousands)
|
|
|
Purchase price
|
|
$
|
203,996
|
|
|
$
|
|
|
|
$
|
203,996
|
|
Transaction and other direct
acquisition costs
|
|
|
6,969
|
|
|
|
292
|
|
|
|
7,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
210,965
|
|
|
$
|
292
|
|
|
$
|
211,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical net tangible assets
acquired
|
|
$
|
101,665
|
|
|
$
|
4,522
|
|
|
$
|
106,187
|
|
Intangible assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Supply contracts
|
|
|
625
|
|
|
|
(19
|
)
|
|
|
606
|
|
Customer database
|
|
|
606
|
|
|
|
(471
|
)
|
|
|
135
|
|
Patent portfolio
|
|
|
2,317
|
|
|
|
|
|
|
|
2,317
|
|
Core and current technology
|
|
|
10,563
|
|
|
|
(3,966
|
)
|
|
|
6,597
|
|
In-process research and development
|
|
|
5,890
|
|
|
|
|
|
|
|
5,890
|
|
Goodwill
|
|
|
89,299
|
|
|
|
226
|
|
|
|
89,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
210,965
|
|
|
$
|
292
|
|
|
$
|
211,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended July 2, 2005, the Company finalized
the allocation of the proceeds of the acquisition of New Focus
prior to the Companys evaluation of goodwill for
impairment. The adjustments to the purchase price allocation, as
summarized above, arose from two principal areas; namely, the
completion of the anticipated sale of JCA; and the finalization
of certain judgments as to the realization of other acquired
assets and liabilities.
The JCA sale impacted the purchase price allocation as follows:
Net tangible assets acquired were increased through the receipt
of cash of $5.9 million; intangible assets were decreased
through the sale of $4.6 million of supply contracts,
customer database and the patent portfolio; and a resultant
decrease in goodwill of $1.3 million.
The finalization of certain judgments as to the realization of
other acquired assets and liabilities included: an increase of
$0.4 million of refunds due from the lessor of certain of
the Companys leased premises; a $1.7 million increase
in building lease liabilities relating to acquired premises; a
$0.9 million saving in expected acquisition related tax
expenses; a $0.6 million reduction in the expected
settlement of a note due from a former New Focus officer; and a
reduction of $0.4 million in the carrying value of an
investment acquired in connection with acquiring New Focus.
These adjustments impacted the purchase price allocation as
follows: net tangible assets acquired were decreased by
$5.9 million; and goodwill was increased by
$1.5 million.
F-45
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Goodwill
and Other Intangible Assets
|
The following is a summary of the goodwill and other intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Intangibles
|
|
|
|
(In thousands)
|
|
|
Cost
|
|
|
|
|
|
|
|
|
January 1, 2003
|
|
$
|
|
|
|
$
|
48,923
|
|
Fair value adjustment to NNOC
|
|
|
|
|
|
|
(7,501
|
)
|
Acquired
|
|
|
10,027
|
|
|
|
4,845
|
|
Disposals
|
|
|
|
|
|
|
(605
|
)
|
Exchange rate adjustment
|
|
|
647
|
|
|
|
4,380
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
10,674
|
|
|
|
50,042
|
|
Acquired
|
|
|
110,501
|
|
|
|
14,209
|
|
Exchange rate adjustment
|
|
|
(1,222
|
)
|
|
|
1,078
|
|
|
|
|
|
|
|
|
|
|
July 3, 2004
|
|
|
119,953
|
|
|
|
65,329
|
|
Acquired
|
|
|
226
|
|
|
|
|
|
Disposals
|
|
|
|
|
|
|
(6,568
|
)
|
Impairment
|
|
|
(113,592
|
)
|
|
|
(634
|
)
|
Exchange rate adjustment
|
|
|
(327
|
)
|
|
|
(579
|
)
|
|
|
|
|
|
|
|
|
|
July 2, 2005
|
|
|
6,260
|
|
|
|
57,548
|
|
Acquired
|
|
|
2,621
|
|
|
|
2,234
|
|
Disposals
|
|
|
|
|
|
|
(929
|
)
|
Impairment
|
|
|
|
|
|
|
(760
|
)
|
Exchange rate adjustment
|
|
|
|
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
$
|
8,881
|
|
|
$
|
58,832
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
January 1, 2003
|
|
|
|
|
|
|
6,382
|
|
Fair value adjustment
|
|
|
|
|
|
|
(190
|
)
|
Charged
|
|
|
|
|
|
|
8,487
|
|
Disposals
|
|
|
|
|
|
|
(518
|
)
|
Exchange rate adjustment
|
|
|
|
|
|
|
1,325
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
|
|
|
|
15,486
|
|
Charged
|
|
|
|
|
|
|
5,677
|
|
Exchange rate adjustment
|
|
|
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
July 3, 2004
|
|
|
|
|
|
|
21,480
|
|
Charged
|
|
|
|
|
|
|
11,107
|
|
Disposals
|
|
|
|
|
|
|
(2,413
|
)
|
Exchange rate adjustment
|
|
|
|
|
|
|
(636
|
)
|
|
|
|
|
|
|
|
|
|
July 2, 2005
|
|
|
|
|
|
|
29,538
|
|
Charged
|
|
|
|
|
|
|
10,004
|
|
Disposals
|
|
|
|
|
|
|
(929
|
)
|
Exchange rate adjustment
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
|
|
|
|
$
|
39,165
|
|
|
|
|
|
|
|
|
|
|
F-46
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
Intangibles
|
|
|
|
(In thousands)
|
|
|
Net Book Value
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
$
|
10,674
|
|
|
$
|
34,556
|
|
July 3, 2004
|
|
$
|
119,953
|
|
|
$
|
43,849
|
|
July 2, 2005
|
|
$
|
6,260
|
|
|
$
|
28,010
|
|
July 1, 2006
|
|
$
|
8,881
|
|
|
$
|
19,667
|
|
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Translation
|
|
|
Balance at
|
|
|
|
July 2, 2005
|
|
|
Impairment
|
|
|
Disposals
|
|
|
Additions
|
|
|
Adjustment
|
|
|
July 1, 2006
|
|
|
|
(In thousands)
|
|
|
Supply agreements
|
|
$
|
4,157
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56
|
|
|
$
|
4,213
|
|
Customer relationships
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
539
|
|
|
|
25
|
|
|
|
1,051
|
|
Customer databases
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
|
|
Core and current technology
|
|
|
34,750
|
|
|
|
(760
|
)
|
|
|
(929
|
)
|
|
|
1,695
|
|
|
|
373
|
|
|
|
35,129
|
|
Patent portfolio
|
|
|
14,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235
|
|
|
|
14,612
|
|
Customer contracts
|
|
|
3,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
3,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,548
|
|
|
|
(760
|
)
|
|
|
(929
|
)
|
|
|
2,234
|
|
|
|
739
|
|
|
|
58,832
|
|
Less accumulated amortization
|
|
|
(29,538
|
)
|
|
|
|
|
|
|
929
|
|
|
|
(10,004
|
)
|
|
|
(552
|
)
|
|
|
(39,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
28,010
|
|
|
$
|
(760
|
)
|
|
$
|
|
|
|
$
|
(7,770
|
)
|
|
$
|
187
|
|
|
$
|
19,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
Translation
|
|
|
Balance at
|
|
|
|
July 3, 2004
|
|
|
(JCA)
|
|
|
Impairment
|
|
|
Disposals
|
|
|
Additions
|
|
|
Adjustment
|
|
|
July 2, 2005
|
|
|
|
(In thousands)
|
|
|
Supply agreements
|
|
$
|
5,482
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,242
|
)
|
|
$
|
|
|
|
$
|
(83
|
)
|
|
$
|
4,157
|
|
Customer relationships
|
|
|
617
|
|
|
|
(10
|
)
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487
|
|
Customer databases
|
|
|
599
|
|
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
|
|
Core and current technology
|
|
|
36,660
|
|
|
|
(620
|
)
|
|
|
(156
|
)
|
|
|
(870
|
)
|
|
|
|
|
|
|
(264
|
)
|
|
|
34,750
|
|
Patent portfolio
|
|
|
14,951
|
|
|
|
(41
|
)
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
(175
|
)
|
|
|
14,377
|
|
Capitalized licenses
|
|
|
3,318
|
|
|
|
(3,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts
|
|
|
3,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
3,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,329
|
|
|
|
(4,456
|
)
|
|
|
(634
|
)
|
|
|
(2,112
|
)
|
|
|
|
|
|
|
(579
|
)
|
|
|
57,548
|
|
Less accumulated amortization
|
|
|
(21,480
|
)
|
|
|
|
|
|
|
|
|
|
|
2,413
|
|
|
|
(11,107
|
)
|
|
|
636
|
|
|
|
(29,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
43,849
|
|
|
$
|
(4,456
|
)
|
|
$
|
(634
|
)
|
|
$
|
301
|
|
|
$
|
(11,107
|
)
|
|
$
|
57
|
|
|
$
|
28,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
Translation
|
|
|
Balance at
|
|
|
|
2004
|
|
|
Additions
|
|
|
Acquisitions
|
|
|
Adjustment
|
|
|
July 3, 2004
|
|
|
|
(In thousands)
|
|
|
Supply agreements
|
|
$
|
5,361
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
121
|
|
|
$
|
5,482
|
|
Customer relationships
|
|
|
|
|
|
|
|
|
|
|
625
|
|
|
|
(8
|
)
|
|
|
617
|
|
Customer databases
|
|
|
|
|
|
|
|
|
|
|
606
|
|
|
|
(7
|
)
|
|
|
599
|
|
Core and current technology
|
|
|
25,569
|
|
|
|
|
|
|
|
10,563
|
|
|
|
528
|
|
|
|
36,660
|
|
Patent portfolio
|
|
|
12,342
|
|
|
|
|
|
|
|
2,317
|
|
|
|
292
|
|
|
|
14,951
|
|
Capitalized licenses
|
|
|
3,148
|
|
|
|
98
|
|
|
|
|
|
|
|
72
|
|
|
|
3,318
|
|
Customer contracts
|
|
|
3,622
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
3,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,042
|
|
|
|
98
|
|
|
|
14,111
|
|
|
|
1,078
|
|
|
|
65,329
|
|
Less accumulated amortization
|
|
|
(15,486
|
)
|
|
|
(5,677
|
)
|
|
|
|
|
|
|
(317
|
)
|
|
|
(21,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
34,556
|
|
|
$
|
(5,579
|
)
|
|
$
|
14,111
|
|
|
$
|
761
|
|
|
$
|
43,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Reclassifications
|
|
|
Translation
|
|
|
December 31,
|
|
|
|
2003
|
|
|
Additions
|
|
|
Acquisitions
|
|
|
Adjustment
|
|
|
and Disposals
|
|
|
Adjustment
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Supply agreements
|
|
$
|
5,926
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,057
|
)
|
|
$
|
|
|
|
$
|
492
|
|
|
$
|
5,361
|
|
Core and current technology
|
|
|
23,086
|
|
|
|
|
|
|
|
3,716
|
|
|
|
(3,435
|
)
|
|
|
|
|
|
|
2,202
|
|
|
|
25,569
|
|
Patent portfolio
|
|
|
12,249
|
|
|
|
|
|
|
|
1,129
|
|
|
|
(2,082
|
)
|
|
|
|
|
|
|
1,046
|
|
|
|
12,342
|
|
Capitalized licenses
|
|
|
2,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
3,148
|
|
Customer contracts
|
|
|
4,220
|
|
|
|
|
|
|
|
|
|
|
|
(927
|
)
|
|
|
|
|
|
|
329
|
|
|
|
3,622
|
|
Capitalized professional fees
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(605
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,923
|
|
|
|
|
|
|
|
4,845
|
|
|
|
(7,501
|
)
|
|
|
(605
|
)
|
|
|
4,380
|
|
|
|
50,042
|
|
Less accumulated amortization
|
|
|
(6,382
|
)
|
|
|
(8,487
|
)
|
|
|
|
|
|
|
190
|
|
|
|
518
|
|
|
|
(1,325
|
)
|
|
|
(15,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
42,541
|
|
|
$
|
(8,487
|
)
|
|
$
|
4,845
|
|
|
$
|
(7,311
|
)
|
|
$
|
(87
|
)
|
|
$
|
3,055
|
|
|
$
|
34,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
On March 22, 2006, Bookham acquired Avalon for total
consideration valued at $5.7 million, plus contingent
consideration valued at $1,000,000 (Note 14
Business Combinations). The goodwill arising from this
combination was $2,544,000.
On June 10, 2004, Bookham acquired Onetta for a total
consideration valued at $24,982,000 (Note 14
Business Combinations). The goodwill arising from this
combination was $21,202,000.
On March 8, 2004, Bookham acquired New Focus for a total
consideration valued at $211,257,000 (Note 14
Business Combinations). The goodwill arising from the
acquisition was $89,525,000.
On October 6, 2003, Bookham acquired Ignis for a total
consideration valued at $18,048,000 (Note 14
Business Combinations). The goodwill arising from this
combination was $10,027,000.
No other acquisitions by the Company resulted in recognition of
goodwill in the years ended July 1, 2006 and July 2,
2005, or the six month period ended July 3, 2004 or the
year ended December 31, 2003.
F-48
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill recorded as part of the New Focus acquisition was
recorded to the research and industrial segment and the goodwill
from all other acquisitions was recorded in the optics segment.
Intangible
Assets
Intangible assets have primarily been acquired through business
combinations and are being amortized on a straight line basis
over the estimated useful life of the related asset, generally
three to six years, except for sixteen years as to a specific
customer contract.
The expected future annual amortization expense of the other
intangible assets is as follows (in thousands):
|
|
|
|
|
For the fiscal year ending on or
about June 30,
|
|
|
|
|
2007
|
|
$
|
6,547
|
|
2008
|
|
|
3,465
|
|
2009
|
|
|
1,495
|
|
2010
|
|
|
1,263
|
|
2011
|
|
|
822
|
|
Thereafter
|
|
|
2,879
|
|
|
|
|
|
|
Total expected future amortization
|
|
$
|
16,471
|
|
|
|
|
|
|
Impairment
of Goodwill and Other Intangible Assets
The Company has adopted SFAS No. 142
(SFAS 142), Goodwill and Other Intangible
Assets. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least
annually or sooner whenever events or changes in circumstances
indicate that they may be impaired. SFAS 142 generally
requires these impairment tests to be based on a business
units fair value, which is generally
determined through market prices, although in certain cases, in
the event of an absence of market prices for particular elements
of the relevant business, SFAS 142 also permits the use of
discounted future expected cash flows as a basis for testing.
The Company has applied both approaches, as appropriate.
In the year ended July 1, 2006, the Companys annual
impairment review of goodwill and other intangibles led to the
recording of an impairment charge of $760,000 due to the
impairment of intangibles related to Ignis. This charge was
entirely related to the optics segment.
In the year ended July 2, 2005, a continued decline in the
Companys share price, and therefore market capitalization,
combined with continuing net losses and a history of not meeting
revenue and profitability targets, suggested that the goodwill
related to certain of its acquisitions may have been impaired as
of the third quarter. As a result of these triggering events,
the Company performed a preliminary evaluation of the related
goodwill balances at that time. In the fourth quarter, the
Company finalized this evaluation during its annual evaluation
of goodwill, and also performed its annual evaluation of
acquired intangible assets. In total, in the year ended
July 2, 2005, the Company recorded impairment charges of
approximately $114,226,000, approximately $113,592,000 related
to goodwill associated with New Focus, Ignis and Onetta, and
approximately $634,000 related to intangibles of New Focus,
including patents and other technology, for the year ended
July 2, 2005. Approximately, $83,326,000 of these charges
related to the research and industrial segment, and
approximately $30,900,000 related to the optics segment.
Other
During the year ended July 2, 2005, the Company finalized
the allocation of the proceeds of the acquisition of New Focus,
which involved removing the net assets of JCA from the
allocation due to JCA being sold as previously contemplated,
increasing accruals and goodwill by $1,738,000 related to
revised assumptions on a building lease
F-49
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assumed from New Focus, and increased the purchase price to be
allocated by $292,000 for additional professional fees.
During 2003, the Company conducted a Purchase Price Allocation
review of its acquisition of NNOC, and identified the need to
adjust the original fair value of the fixed assets and
inventory. This resulted in an adjustment of the values of all
the remaining assets and consequential adjustments of the
amortization and depreciation thereof. This adjustment reduced
the value of the intangible assets by $7,501,000 and created a
reversal of depreciation of $207,000 (Note 14
Business Combinations).
|
|
16.
|
Related
Party Transactions
|
At July 1, 2006 and July 2, 2005, Nortel Networks
owned 6.9% and 11.8% of the outstanding shares of common stock,
respectively, in the Company.
Prior to January 13, 2006, Nortel Networks, and
subsidiaries of Nortel Networks, also held promissory notes with
an aggregate principal amount of $45.9 million. In
connection with a series of transactions entered into on
January 13, 2006, the promissory notes were settled in full
on January 13, 2006 (See Note 17 Debt).
On January 13, 2006, the Company entered into a third
addendum to the Optical Components Supply Agreement dated
November 8, 2002 with Nortel Networks Limited (the
Supply Agreement). The latest addendum obligates
Nortel Networks to purchase $72 million of the
Companys product during the 2006 calendar year. The
addendum also eliminated provisions requiring the Company to
grant a license for the assembly, test, post-processing and test
intellectual property (excluding wafer technology) of certain
critical products to Nortel Networks Limited and to any
designated alternative supplier if the Companys cash
balance was less than $25 million, as well as the
provisions giving Nortel Networks Limited the right to buy all
Nortel Networks Limited inventory then held by the Company and
requiring the Company to grant a license to Nortel Networks
Limited or any alternative supplier for the manufacture of all
products covered by the first addendum to the Supply Agreement
if the Companys cash balance was less than
$10 million.
These January 13, 2006 transactions were the culmination of
a series of transactions since the Companys acquisition of
Nortel Networks Optical Components in 2002 under which
obligations to Nortel Networks Limited were created and amended,
and a supply agreement similarly was entered into and amended.
The following describes this series of transactions:
|
|
|
|
|
At the time of the Companys acquisition of NNOC in
November 2002, a subsidiary of the Company issued a
$30 million secured loan note due November 8, 2005
(the $30m Note) and a $20 million unsecured
loan note due November 8, 2007 (the Original $20m
Note) to affiliates of Nortel Networks. In connection with
the issuance of these notes, the Company and Nortel Networks
entered into security agreements with respect to certain assets
of the Company. In September 2004, the Original $20m Note was
exchanged for a $20 million note convertible into shares of
the Companys common stock (the New $20m Note);
|
|
|
|
On December 2, 2004, (i) the $30m Note was amended and
restated to, among other things, extend the final maturity date
by one year from November 8, 2005 to November 8, 2006
and (ii) the New $20m Note was amended and restated to,
among other things, provide that it will not convert into the
Companys common stock (collectively, the Amended and
Restated Notes). The Amended and Restated Notes were each
secured by the assets that secured the $30m Note, as well as
certain additional property, plant and equipment of the Company.
The Amended and Restated Notes also contained certain
limitations, including restrictions on asset sales and a
requirement that the Company maintain a cash balance of at least
$25 million;
|
|
|
|
On February 7, 2005, the Company, Bookham Technology plc
and certain of the Companys other subsidiaries entered
into a Notes Amendment and Waiver Agreement with Nortel
Networks Corporation and Nortel Networks UK Limited, relating to
the $25 million cash balance covenant set forth in the
|
F-50
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Amended and Restated Notes. Under the waiver, the obligation to
maintain this cash balance was waived until August 7,
2006; and
|
|
|
|
|
|
On February 7, 2005, the Company also entered into an
addendum (the The First Addendum) to the Supply
Agreement. The First Addendum effected the following changes to
the Supply Agreement:
|
|
|
|
|
|
The term of the Supply Agreement was extended by one year to
November 2006, provided that Nortel Networks obligation to
purchase a percentage of certain optical components from the
Company was to expire in accordance with the terms of the Supply
Agreement in November 2005;
|
|
|
|
Nortel Networks provided the Company with a purchase commitment
for last time buys, or certain of the Companys
discontinued products, which Nortel Networks was obligated to
purchase as these products were manufactured and delivered. If
the Company failed meet milestones set out in an agreed upon
delivery schedule for last-time buy products by more
than 10% in aggregate revenue for three consecutive weeks, and
did not rectify the failure within 30 days, those products
would have been deemed critical products, subject to the
relevant provisions of the Supply Agreement described below;
|
|
|
|
At Nortel Networks request, the Company agreed to increase
its manufacturing would critical product wafer in-feeds against
a Nortel Networks agreed upon manufacturing schedule. Upon
manufacture and placement into inventory, Nortel Networks agreed
to pay a holding and inventory fee pending Nortel Networks
outright purchase of such wafers. In addition, Nortel Networks
could at its election supply any capital equipment required in
connection with the requisite inventory buildup or extend the
time period for meeting its demand if its demand required the
Company to increase its capital equipment to meet the demand in
the required time period;
|
|
|
|
If at any time the Company (a) had a cash balance of less
than $25 million; (b) was unable to manufacture
critical products in any material respect, and that inability
continued uncured for a period of six weeks, or (c) was
subject to an insolvency event, such as a petition or assignment
in bankruptcy, appointment of a trustee, custodian or receiver,
or entrance into an arrangement for the general benefit of
creditors, then the Company would have to grant a license for
the assembly, post-processing and test intellectual property
(but excluding wafer technology) of certain critical products to
Nortel Networks and to any designated alternative supplier;
|
|
|
|
If the Companys cash balance were less than
$10 million or there were an insolvency event, Nortel
Networks Limited would have had the right to buy all Nortel
Networks inventory held by the Company, and the Company would
have had to grant a license to Nortel Networks Limited or any
alternative supplier for the manufacture of all products covered
by the First Addendum;
|
|
|
|
The Companys licensing and related obligations would
terminate on February 7, 2007, unless the license had been
exercised, in which case they would terminate 24 months
from the date the license was exercised, provided that at that
time, among other things, the Company had a cash balance of
$25 million and had been able to meet Nortel Networks
demand for the subject products; and
|
|
|
|
|
|
Pursuant to the First Addendum, the Company was obligated to
make prepayments under the $30 million note and the
$20 million note issued to Nortel Networks UK Limited on a
pro rata basis in the following amounts upon the occasion of any
one of the events described below:
|
|
|
|
|
|
$1.0 million if the Company failed to deposit intellectual
property relating to all covered products in escrow and its cash
balance was below $10 million;
|
|
|
|
$1.0 million in each case if (a) the Company failed to
deliver 90% of scheduled last time buys through April 2005,
subject to cure provisions (b) the Company failed to meet
90% of scheduled critical component wafer manufacturing through
August 2005, subject to cure provisions, or (c) the Company
|
F-51
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
failed to use commercially reasonable efforts to provide for an
alternative supplier of two identified product lines when
obligated to do so under the agreement; and
|
|
|
|
|
|
$2.0 million in each case if (a) the Company failed to
deliver 75% of scheduled last time buys through August 2005,
subject to cure provisions, or (b) the Company failed to
meet 75% of scheduled critical product deliveries through
November 2005, subject to cure provisions.
|
|
|
|
|
|
On March 28, 2005, the Company entered into a letter
agreement (the Letter Agreement) with Nortel
Networks pursuant to which the Company and Nortel Networks
agreed to enter into definitive documentation further amending
certain terms of the supply agreement, the Amended and Restated
Notes and documentation related to the Amended and Restated
Notes, including the security agreements entered into in
connection with the Amended and Restated Notes;
|
|
|
|
On May 2, 2005, the Company and Nortel Networks entered
into definitive agreements formally documenting the arrangements
contemplated by the Letter Agreement. The terms of the
definitive agreements were effective April 1, 2005 and
include, among other agreements including a security agreement,
a further Addendum (the Second Addendum) to the
supply agreement and a Second Notes Amendment and Waiver
Agreement between the Company and Nortel Networks relating to
the Amended and Restated Notes (the
Notes Agreement);
|
|
|
|
The Second Addendum, which amended the terms and provisions of
the Supply Agreement as amended by the First Addendum, increased
the prices and adjusted the payment terms of certain products
shipped to Nortel Networks under the Supply Agreement. The
increased prices and adjusted payment terms continued for one
year beginning April 1, 2005. Such prices and payment terms
were subject to termination if an event of default occurred and
continued under the Amended and Restated Notes or if a change in
control or bankruptcy event occurred;
|
|
|
|
Pursuant to the Second Addendum, Nortel Networks confirmed the
arrangements in the Letter Agreement to issue non-cancelable
purchase orders for last-time buys for certain
products and other non last-time buy products. The
products were to be delivered to Nortel Networks Limited over
the next 12 months beginning on April 1, 2005. This
resulted in the issuance of a non-cancelable purchase order for
such products valued at approximately $100 million with
approximately $50 million of last-time buy
products and $50 million for other non last-time
buy products. A specific delivery schedule was agreed for
the last-time buy products, however, the delivery
schedule and composition of the non last-time buy
products was subject to change as agreed between the parties.
The Addendum also formally confirmed increases in the prices and
adjustments in the payment terms of certain products shipped to
Nortel Networks under the Supply Agreement. Pursuant to the
Notes Agreement, Nortel Networks UK Limited waived through
May 2, 2006 the terms of the Amended and Restated Notes
requiring prepayment in the event the Company raised additional
capital. This waiver applied to net proceeds of up to
$75 million in the aggregate, provided that the Company
used such proceeds for working capital purposes in the ordinary
course of business. The waiver would have terminated prior to
May 2, 2006 if an event of default had occurred and were
continuing under the Amended and Restated Notes or if a change
in control or bankruptcy event occurred; and
|
|
|
|
The Notes Agreement further amended the Amended and
Restated Notes to provide that an event of default under the
Supply Agreement would constitute an event of default under the
Amended and Restated Notes. An event of default would occur
under the Supply Agreement (and therefore the Amended and
Restated Notes) upon:
|
|
|
|
|
|
the Companys intentional cessation of shipment of products
to Nortel Networks against an agreed delivery schedule;
|
F-52
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
the Companys failure to deliver products pursuant to the
Supply Agreement to the extent that Nortel Networks would be
entitled to cancel all or part of an order, provided that Nortel
Networks provided written notice of such default;
|
|
|
|
the Companys failure to meet a milestone for a last time
buy product, provided that Nortel Networks provided written
notice of such default;
|
|
|
|
the Companys breach of or default under any one of its
material obligations under the Supply Agreement which continued
for more than 10 calendar days;
|
|
|
|
Any other default by the Company which would entitle Nortel
Networks to terminate the Supply Agreement; or
|
|
|
|
Any event of default under the Amended and Restated Notes.
|
|
|
|
|
|
Pursuant to the Notes Agreement, the Company and certain of
its subsidiaries entered into security agreements securing the
obligations of the Company and its subsidiaries under the
Amended and Restated Notes and the Supply Agreement. These
obligations were secured by the assets already securing the
obligations of the Company and its subsidiaries under the
Amended and Restated Notes as of December 2, 2004, as well
as by Nortel Networks specific inventory and accounts
receivable under the Supply Agreement and the Companys
real property located in Swindon, United Kingdom. However, the
Company was permitted to sell the Swindon property provided that
no event of default had occurred and was continuing under the
Amended and Restated Notes, and provided that the Company used
the proceeds of such sale for working capital purposes in the
ordinary course of business.
|
In the ordinary course of business, the Company has entered into
the following transactions with Nortel Networks for the years
ended July 1, 2006 and July 2, 2005, for the six
months ended July 3, 2004, and for the year ended
December 31, 2003, and had the following trading balances
outstanding at July 1, 2006, July 2, 2005,
July 3, 2004 and December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
Purchases from
|
|
|
Receivables from
|
|
|
Liabilities to
|
|
|
|
Party
|
|
|
Related Party
|
|
|
Related Party
|
|
|
Related Party
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Related
party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nortel Networks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2006
|
|
$
|
110,511
|
|
|
$
|
|
|
|
$
|
7,499
|
|
|
$
|
4,250
|
|
July 2, 2005
|
|
|
89,505
|
|
|
|
508
|
|
|
|
7,271
|
|
|
|
722
|
|
July 3, 2004
|
|
|
36,532
|
|
|
|
818
|
|
|
|
11,553
|
|
|
|
628
|
|
December 31, 2003
|
|
$
|
85,593
|
|
|
$
|
9,499
|
|
|
$
|
15,133
|
|
|
$
|
739
|
|
Other
Related Parties
During the quarter ended January 1, 2005, the Company
settled a $5.9 million promissory note due from a former
Officer and Director of New Focus, which the former Officer and
Director had entered into with New Focus in connection with a
separation agreement in July 2002. The note, including accrued
interest of $0.6 million was settled for a cash payment of
$1.2 million. At the time of the acquisition of New Focus,
the note had been assumed and recorded on the Companys
books at a value of $1.75 million, and in the quarter ended
January 1, 2005 the Company recorded the $0.55 million
difference between book value and the payment amount as a
purchase price adjustment increasing the goodwill recorded in
connection with the New Focus acquisition.
F-53
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 13, 2006, the Company entered into a series of
transactions to (i) retire $45.9 million aggregate
principal amount of outstanding notes payable to Nortel Networks
UK Limited and (ii) convert $25.5 million in outstanding
convertible debentures which were issued in December 2004. In
connection with the satisfaction of these debt obligations and
conversion of these convertible debentures, the Company issued
approximately 10.5 million shares of common stock, warrants
to purchase approximately 1.1 million shares of common
stock, paid approximately $22.2 million in cash in the
fiscal year ended July 1, 2006 for loss on conversion and
early extinguishment of debt.
The transactions were accounted for under the provisions of
APB 26, Early Extinguishments of Debt, except
for the conversion of the convertible debentures, which have
been accounted for in accordance with SFAS 84,
Induced Conversions of Convertible Debt an
amendment of APB Opinion No. 26. In accordance with
these transactions, the Company has recorded in other expense a
loss of $18.8 million in the year ended July 1, 2006.
|
|
|
|
|
On January 13, 2006, the Company paid Nortel Networks (UK)
Limited (NNUKL) all $20 million outstanding
principal of, plus all accrued interest on, the Amended and
Restated Series
A-2 Senior
Secured Note Due 2007 issued by the Company to NNUKL (the
Series A Note), and the Series A Note was retired
and cancelled. The Registrant also paid NNUKL all of the accrued
interest on the Amended and Restated Series
B-1 Senior
Secured Note Due 2006 issued by Bookham Technology plc to NNUKL,
the payment of which and performance of all obligations under
which had been fully and unconditionally guaranteed by the
Registrant (the Series B Note).
|
|
|
|
|
|
On January 13, 2006, the Company, Bookham Technology plc
and certain subsidiaries of Bookham Technology plc entered into
a Release Agreement (the Release Agreement) with
Nortel Networks, NNKUL, and certain of their affiliates
(collectively, Nortel). Pursuant to the Release
Agreement, Nortel released its security interests in the
collateral securing the obligations of the Company and Bookham
Technology plc under the Series A Note, the Series B Note
and the Optical Components Supply Agreement dated
November 8, 2002 (the Supply Agreement) between
Bookham Technology plc and Nortel Networks Limited
(NNL).
|
|
|
|
|
|
On January 13, 2006, certain accredited institutional
investors entered into separate purchase agreements to purchase
portions of the Series B Note (the Note Purchasers)
from NNUKL. Pursuant to the terms of an Exchange Agreement,
dated as of January 13, 2006 (the Exchange
Agreement), by and among the Company, Bookham Technology
plc and the Note Purchasers, the Company issued an aggregate of
5,120,793 shares of common stock and warrants to purchase
an aggregate of up to 686,000 shares of common stock (the
Note Exchange Warrants) to the Note Purchasers in
exchange for the Series B Note, which was retired and cancelled.
The Note Exchange Warrants are exercisable from July 13,
2006 to January 13, 2011 at an exercise price per share of
$7.00.
|
|
|
|
Pursuant to the terms of a Securities Exchange Agreement, dated
as of January 13, 2006 (the Securities Exchange
Agreement), by and among the Company and the investors
named therein (the Debenture Holders), each of the
Debenture Holders exercised its rights to convert a portion of
the Companys 7.0% Senior Unsecured Convertible Debentures
held by such Debenture Holder (the Debentures) into
shares of common stock, resulting in the issuance of an
aggregate of 3,529,887 shares of common stock. Also
pursuant to the Securities Exchange Agreement, the Company paid
the Debenture Holders an aggregate of $1,717,663.16 in cash and
issued to the Debenture Holders an aggregate of 571,011
additional shares of common stock and warrants (the
Initial Warrants) to purchase up to
304,359 shares of common stock. The Initial Warrants are
exercisable from July 13, 2006 to January 13, 2011 at
an exercise price per share of $7.00. Subject to the approval
of the Companys stockholders pursuant to the rules of the
NASDAQ Stock Market and the terms of the Securities Exchange
Agreement, each of the Debenture Holders agreed to exercise its
rights to convert the remaining portion of the Debentures, which
would result in the issuance of an aggregate of 178,989
additional shares of common stock. Also pursuant to the
Securities Exchange
|
F-54
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Agreement, at the time of such subsequent conversion, the
Company agreed to pay the Debenture Holders an aggregate of
$538,408,51 in cash and issue to the Debenture Holders an
aggregate of 1,106,477 shares of common stock to the Debenture
Holders and warrants to purchase an aggregate of up to
95,461 shares of common stock, which would be exercisable
on the same terms as the Initial Warrants. The requisite
stockholder approval was received on March 22, 2006 and the
transactions described in the preceding two sentences were
consummated on March 23, 2006.
|
|
|
|
|
|
In connection with these transactions, the Company paid
$1.8 million in fees to a third party broker.
|
In determining the accounting loss from these transactions, the
Company applied the fair value of the consideration paid, which
in the case of the warrants to purchase shares of the
Companys common stock, was based on applying the
Black-Scholes-Merton model assuming variables of 84% volatility,
zero dividend yield, an expected life of 5 years, and a
risk free interest rate of 4.34%.
The original terms of the Nortel Networks promissory notes are
described in Note 16 Related Party Transactions.
The terms and accounting for the Debentures, prior to the
January 13, 2006 were as follows:
|
|
|
|
|
On December 20, 2004, the Company closed a private
placement of $25.5 million of 7.0% senior unsecured
convertible debentures and warrants to purchase common stock
which resulted in net proceeds of $21.5 million. The
Company forwarded $4.2 million of the proceeds to Nortel
Networks, paying a portion of the Series B Note owed as
part of the acquisition of NNOC. The Debentures were convertible
into shares of common stock at the option of the holder prior to
the maturity of the Debentures on December 20, 2007. The
initial conversion price of the debentures was $5.50, which
represented a premium of approximately 16% over the closing
price of our common stock on December 20, 2004. The holder
also had a right of mandatory redemption of unpaid principle and
accrued and unpaid interest in the event of a change in control
or default, including penalties in the event of a change in
control ranging from ten percent to twenty percent of the unpaid
principle, as determined based on the timing of the triggering
event. The Company had a right to convert the Debentures into
shares of common stock under certain circumstances. The warrants
provided holders thereof the right to purchase up to
2,001,963 shares of common stock and were exercisable
during the five years from the date of grant at an initial
exercise price of $6.00 per share, which represents a
premium of approximately 26% over the closing price of common
stock on December 20, 2004.
|
|
|
|
The valuation of the financial instruments issued in connection
with this private placement involved judgment affected the
carrying value of each instrument on the balance sheet and the
periodic interest expense recorded. In order to determine the
valuation of these instruments the Company applied the guidance
in Emerging Issues Task Force, EITF Issue 98-5,
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios and EITF
Issue 00-27,
Application of Issue 98-5 to Certain Convertible
Instruments to value the Debentures, the accompanying
warrants and the value of the convertibility element of the
Debentures. The Company first determined the fair value of the
warrant and its value relative to the Debenture. The Company
chose to use the Black-Scholes-Merton model to determine the
value of the warrant which requires the determination of the
Companys stocks volatility and the life of the
instrument, among other factors. The Company determined that its
stocks historic volatility of 97% was representative of
its stocks future volatility and used the contractual term
of five years for the life of the instrument and a risk free
interest rate of 2.89%. The valuation independently derived from
the Black-Scholes-Merton model for the warrant was then compared
to the face value of the Debenture and a relative value of
$5.4 million was assigned to the warrant. The value of the
conversion element of the Debenture was determined based on the
difference between the relative value of the Debenture per share
of $4.35 of the 4.6 million shares, which the Debenture
could have converted into, compared to the fair market value per
share of $4.77 per share of the Companys common stock
on the date on which the Debentures were entered into. The value
of the conversion feature of the
|
F-55
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Debenture was thereby determined to be $2.0 million. The
value of the warrants and the conversion feature were recorded
as a discount to the debt liability on the balance sheet and
were amortized to interest expense based on the life of the
convertible debenture of three years. In addition, the Company
capitalized $1.9 million related to issuance costs
associated with the debentures and warrants, which was being
amortized as part of interest expense for the term of the
debentures, prior to the January 13, 2006 settlement of the
debt, as described above.
|
The warrants issued to the holders of the Debentures on
December 20, 2004 are still outstanding.
Other
Debt
As of July 1, 2006, the Company has an unsecured loan
payable to Scheappi Grundstke Verwaltungen KG for $296,000
which is repayable in equal monthly installments until December
2013. This loan bears interest at 5% per annum, which is
payable monthly in arrears.
|
|
18.
|
Quarter
Summaries (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
July 1,
|
|
|
April 1,
|
|
|
Dec. 31,
|
|
|
Oct. 1
|
|
|
July 2,
|
|
|
April 2,
|
|
|
Jan. 1,
|
|
|
Oct. 2,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
54,993
|
|
|
$
|
53,360
|
|
|
$
|
60,726
|
|
|
$
|
62,571
|
|
|
$
|
61,002
|
|
|
$
|
49,939
|
|
|
$
|
45,751
|
|
|
$
|
43,564
|
|
Cost of revenues
|
|
|
50,281
|
|
|
|
47,561
|
|
|
|
44,049
|
|
|
|
48,196
|
|
|
|
49,295
|
|
|
|
49,392
|
|
|
|
49,298
|
|
|
|
45,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit/(loss)
|
|
|
4,712
|
|
|
|
5,799
|
|
|
|
16,677
|
|
|
|
14,375
|
|
|
|
11,707
|
|
|
|
547
|
|
|
|
(3,547
|
)
|
|
|
(2,098
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,264
|
|
|
|
10,914
|
|
|
|
10,007
|
|
|
|
10,401
|
|
|
|
9,754
|
|
|
|
10,648
|
|
|
|
12,046
|
|
|
|
12,377
|
|
Selling, general and administrative
|
|
|
12,858
|
|
|
|
13,204
|
|
|
|
12,949
|
|
|
|
13,156
|
|
|
|
13,913
|
|
|
|
13,957
|
|
|
|
14,195
|
|
|
|
17,443
|
|
Amortization of intangible assets
|
|
|
2,494
|
|
|
|
2,326
|
|
|
|
2,491
|
|
|
|
2,693
|
|
|
|
2,789
|
|
|
|
2,855
|
|
|
|
2,837
|
|
|
|
2,626
|
|
IPR&D
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
5,188
|
|
|
|
2,441
|
|
|
|
1,763
|
|
|
|
1,805
|
|
|
|
4,860
|
|
|
|
3,777
|
|
|
|
7,938
|
|
|
|
4,313
|
|
Legal settlement/(recovery)
|
|
|
(2,153
|
)
|
|
|
7,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of fixed assets
|
|
|
(124
|
)
|
|
|
(313
|
)
|
|
|
(685
|
)
|
|
|
(947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(644
|
)
|
Impairment/(Recovery) of goodwill,
other intangible and long-lived assets
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
|
|
(1,263
|
)
|
|
|
16,090
|
|
|
|
98,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
30,719
|
|
|
|
35,840
|
|
|
|
26,525
|
|
|
|
25,845
|
|
|
|
47,565
|
|
|
|
129,662
|
|
|
|
37,132
|
|
|
|
36,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(26,007
|
)
|
|
|
(30,041
|
)
|
|
|
(9,848
|
)
|
|
|
(11,470
|
)
|
|
|
(35,858
|
)
|
|
|
(129,115
|
)
|
|
|
(40,679
|
)
|
|
|
(38,335
|
)
|
Loss on conversion and early
extinguishment of debt
|
|
|
(250
|
)
|
|
|
(18,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other
income/(expense), net
|
|
|
(729
|
)
|
|
|
621
|
|
|
|
(2,079
|
)
|
|
|
(850
|
)
|
|
|
(3,171
|
)
|
|
|
(460
|
)
|
|
|
(429
|
)
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(26,986
|
)
|
|
|
(48,012
|
)
|
|
|
(11,927
|
)
|
|
|
(12,320
|
)
|
|
|
(39,029
|
)
|
|
|
(129,575
|
)
|
|
|
(41,108
|
)
|
|
|
(38,245
|
)
|
Income tax benefit/(provision)
|
|
|
3
|
|
|
|
(36
|
)
|
|
|
(2
|
)
|
|
|
11,785
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(26,983
|
)
|
|
$
|
(48,048
|
)
|
|
$
|
(11,929
|
)
|
|
$
|
(535
|
)
|
|
$
|
(39,029
|
)
|
|
$
|
(129,575
|
)
|
|
$
|
(41,107
|
)
|
|
$
|
(38,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.47
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(3.86
|
)
|
|
$
|
(1.23
|
)
|
|
$
|
(1.16
|
)
|
Shares used to compute basic net
loss per share
|
|
|
56,917
|
|
|
|
53,246
|
|
|
|
42,836
|
|
|
|
33,805
|
|
|
|
33,555
|
|
|
|
33,555
|
|
|
|
33,535
|
|
|
|
32,867
|
|
F-56
BOOKHAM,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Credit
Agreement
On August 2, 2006, the Company, with Bookham Technology
plc, New Focus, Inc. and Bookham (US) Inc., each a wholly-owned
subsidiary of the Company, (collectively, the
Borrowers), entered into a credit agreement (the
Credit Agreement) with Wells Fargo Foothill, Inc.
and other lenders regarding a three-year $25,000,000 senior
secured revolving credit facility. Advances are available under
the Credit Agreement based on a percentage of accounts
receivable at the time the advance is requested.
The obligations of the Borrowers under the Credit Agreement are
guaranteed by the Company, Onetta, Inc., Focused Research, Inc.,
Globe Y. Technology, Inc., Ignis Optics, Inc., Bookham (Canada)
Inc., Bookham Nominees Limited and Bookham International Ltd.,
each a wholly-owned subsidiary of the Company (together, the
Guarantors and together with the Borrowers, the
Obligors), and are secured pursuant to a security
agreement (the Security Agreement) by the assets of
the Obligors, including a pledge of the capital stock holdings
of the Obligors in some of their direct subsidiaries. Any new
direct subsidiary of the Obligors is required to execute a
guaranty agreement in substantially the same form and join in
the Security Agreement.
Pursuant to the terms of the Credit Agreement, borrowings made
under the Credit Agreement bear interest at a rate based on
either the London Interbank Offered Rate (LIBOR) plus
2.75 percentage points or the prime rate plus
1.25 percentage points. In the absence of an event of
default, any amounts outstanding under the Credit Agreement may
be repaid and borrowed again anytime until maturity, which is
August 2, 2009. A termination of the commitment line
anytime prior to August 2, 2008 will subject the Borrowers
to a prepayment premium of 1.0% of the maximum revolver amount.
The obligations of the Borrowers under the Credit Agreement may
be accelerated upon the occurrence of an event of default under
the Credit Agreement, which includes customary events of
default, including payment defaults, defaults in the performance
of affirmative and negative covenants, the inaccuracy of
representations or warranties, a cross-default related to
indebtedness in an aggregate amount of $1,000,000 or more,
bankruptcy and insolvency related defaults, defaults relating to
such matters as ERISA, judgments, and a change of control
default. The Credit Agreement contains negative covenants
applicable to the Company, the Borrowers and their subsidiaries,
including financial covenants requiring the Borrowers to
maintain a minimum level of EBITDA (if the Borrowers have not
maintained specified levels of liquidity), as well as
restrictions on liens, capital expenditures, investments,
indebtedness, fundamental changes, dispositions of property,
making certain restricted payments (including restrictions on
dividends and stock repurchases), entering into new lines of
business, and transactions with affiliates.
Private
Placement
On August 31, 2006, the Company entered into definitive
agreement for a private placement pursuant to which it issued,
on September 1, 2006, 8,696,000 shares of common
stock, and warrants to purchase up to 2,174,000 shares of
common stock, with certain institutional accredited investors
for gross proceeds of approximately $23.5 million. The
warrants are exercisable beginning on March 2, 2007 during
the next five years at an exercise price of $4.00 per
share. The Company has agreed to file a registration statement
relating to the resale of the shares of common stock and the
shares of common stock issued upon the exercise of the warrants.
Up to an additional 2,898,667 shares of common stock and
warrants to purchase 724,667 shares of common stock may be
issued and sold to additional institutional accredited investors
at a subsequent closing pursuant to a right of participation
under the Exchange Agreement, dated January 13, 2006, by
and among us, Bookham Technology plc and the parties listed on
Exhibit A thereto.
F-57
Schedule II:
Valuation and Qualifying Accounts
Years
Ended July 1, 2006, July 2, 2005, Six Months Ended
July 3, 2004 and
Year
Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance of
|
|
|
Exchange
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Rate
|
|
|
Costs and
|
|
|
Deductions
|
|
|
Balance at
|
|
Description
|
|
Year
|
|
|
Movements
|
|
|
Expenses
|
|
|
Write Offs
|
|
|
End of Year
|
|
|
|
(In thousands)
|
|
|
Year Ended July 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
445
|
|
|
$
|
|
|
|
$
|
386
|
|
|
$
|
(239
|
)
|
|
$
|
592
|
|
Product returns
|
|
|
281
|
|
|
|
|
|
|
|
289
|
|
|
|
(171
|
)
|
|
|
398
|
|
Year Ended July 2, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
858
|
|
|
|
(2
|
)
|
|
|
113
|
|
|
|
(524
|
)
|
|
|
445
|
|
Product returns
|
|
|
402
|
|
|
|
|
|
|
|
212
|
|
|
|
(333
|
)
|
|
|
281
|
|
Six Months Ended July 3, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
396
|
|
|
|
9
|
|
|
|
548
|
|
|
|
(95
|
)
|
|
|
858
|
|
Product returns
|
|
|
191
|
|
|
|
4
|
|
|
|
886
|
|
|
|
(679
|
)
|
|
|
402
|
|
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
322
|
|
|
|
38
|
|
|
|
36
|
|
|
|
|
|
|
|
396
|
|
Product returns
|
|
$
|
641
|
|
|
$
|
27
|
|
|
$
|
|
|
|
$
|
(477
|
)
|
|
$
|
191
|
|
F-58
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
3
|
.1
|
|
Amended and Restated Bylaws of
Bookham, Inc. (previously filed as Exhibit 3.2 to
Transition Report on
Form 10-K
(file
no. 000-30684)
for the transition period from January 1, 2004 to
July 3, 2004, and incorporated herein by reference).
|
|
3
|
.2
|
|
Restated Certificate of
Incorporation of Bookham, Inc. (previously filed as
Exhibit 3.1 to Current Report on
Form 8-K
(file no.
000-30684)
dated September 10, 2004, and incorporated herein by
reference).
|
|
10
|
.1
|
|
Agreement and Plan of Merger,
dated September 21, 2003, by and among Bookham Technology
plc, Budapest Acquisition Corp. and New Focus, Inc. (previously
filed as Appendix A to Registration Statement on
Form F-4,
as amended (file
no. 333-109904)
dated February 3, 2004, and incorporated herein by
reference).
|
|
10
|
.2
|
|
Acquisition Agreement dated as of
October 7, 2002 between Nortel Networks Corporation and
Bookham Technology plc (previously filed as Exhibit 1 to
Schedule 13D filed by Nortel Networks Corporation on
October 17, 2002, and incorporated herein by reference).
|
|
10
|
.3*
|
|
Letter Agreement dated
November 8, 2002 between Nortel Networks Corporation and
Bookham Technology plc amending the Acquisition Agreement
referred to in Exhibit 10.2 (previously filed as
Exhibit 4.2 to Amendment No. 2 to Annual Report on
Form 20-F
(file no.
000-30684)
for the year ended December 31, 2002, and incorporated
herein by reference).
|
|
10
|
.4*
|
|
Optical Components Supply
Agreement dated November 8, 2002, by and between Nortel
Networks Limited and Bookham Technology plc (previously filed as
Exhibit 4.3 to Amendment No. 1 to Annual Report on
Form 20-F
(file
no. 000-30684)
for the year ended December 31, 2002, and incorporated
herein by reference).
|
|
10
|
.5
|
|
Relationship Deed dated
November 8, 2002 between Nortel Networks Corporation and
Bookham Technology plc (previously filed as Exhibit 4.4 to
Annual Report on
Form 20-F
(file
no. 000-30684)
for the year ended December 31, 2002, and incorporated
herein by reference).
|
|
10
|
.6
|
|
Registration Rights Agreement
dated as of November 8, 2002 among Nortel Networks
Corporation, the Nortel Subsidiaries listed on the signature
pages and Bookham Technology plc (previously filed as
Exhibit 4.5 to Annual Report on
Form 20-F
(file
no. 000-30684)
for the year ended December 31, 2002, and incorporated
herein by reference).
|
|
10
|
.7
|
|
Agreement relating to the Sale and
Purchase of the Business of Marconi Optical Components Limited,
dated December 17, 2001, among Bookham Technology plc,
Marconi Optical Components Limited and Marconi Corporation plc
(previously filed as Exhibit 4.1 to Annual Report on
Form 20-F
(file
no. 000-30684)
for the year ended December 31, 2001, and incorporated
herein by reference).
|
|
10
|
.8
|
|
Supplemental Agreement to the
Agreement relating to the Sale and Purchase of the Business of
Marconi Optical Components Limited, dated January 31, 2002,
among Bookham Technology plc, Marconi Optical Components Limited
and Marconi Corporation plc (previously filed as
Exhibit 4.2 to Annual Report on
Form 20-F
(file no.
000-30684)
for the year ended December 31, 2001, and incorporated
herein by reference).
|
|
10
|
.9(1)
|
|
Service Agreement dated
July 23, 2001 between Bookham Technology plc and Giorgio
Anania (previously filed as Exhibit 4.5 to Annual Report on
Form 20-F
(file
no. 000-30684)
for the year ended December 31, 2001, and incorporated
herein by reference).
|
|
10
|
.10
|
|
Lease dated May 21, 1997,
between Bookham Technology plc and Landsdown Estates Group
Limited, with respect to 90 Milton Park, Abingdon, England
(previously filed as Exhibit 10.1 to Registration Statement
on
Form F-1,
as amended (file
no. 333-11698)
dated April 11, 2000, and incorporated herein by reference).
|
|
10
|
.11
|
|
Lease dated December 23, 1999
by and between Silicon Valley Properties, LLC and New Focus,
Inc., with respect to 2580 Junction Avenue, San Jose,
California (previously filed as Exhibit 10.32 to Amendment
No. 1 to Transition Report on
Form 10-K
(file no.
000-30684)
for the for the transition period from January 1, 2004 to
July 3, 2004, and incorporated herein by reference).
|
|
10
|
.12(1)
|
|
2004 Employee Stock Purchase Plan
(previously filed as Exhibit 10.18 to Transition Report on
Form 10-K
(file
no. 000-30684)
for the transition period from January 1, 2004 to
July 3, 2004, and incorporated herein by reference).
|
|
10
|
.13(1)
|
|
2004 Sharesave Scheme
(previously filed as Exhibit 10.20 to Transition Report on
Form 10-K
(file
no. 000-30684)
for the transition period from January 1, 2004 to
July 3, 2004, and incorporated herein by reference).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
10
|
.14(1)
|
|
Directors Fee Agreement
dated as of August 1, 2002, between Bookham Technology plc
and Lori Holland (previously filed as Exhibit 4.23 to
Annual Report on
Form 20-F
(file no. 000-30684) for
the year ended December 31, 2003, and incorporated herein
by reference).
|
|
10
|
.15(1)
|
|
Bonus Scheme dated July 20,
2004 between Bookham Technology plc and Giorgio Anania
(previously filed as Exhibit 10.23 to Transition Report on
Form 10-K
(file
no. 000-30684)
for the transition period from January 1, 2004 to
July 3, 2004, and incorporated herein by reference).
|
|
10
|
.16(1)
|
|
Bonus Scheme dated July 20,
2004 between Bookham Technology plc and Stephen Abely
(previously filed as Exhibit 10.25 to Transition Report on
Form 10-K
(file
no. 000-30684)
for the transition period from January 1, 2004 to
July 3, 2004, and incorporated herein by reference).
|
|
10
|
.17(1)
|
|
Bonus Scheme dated July 20,
2004 between Bookham Technology plc and Stephen Turley
(previously filed as Exhibit 10.26 to Transition Report on
Form 10-K
(file
no. 000-30684)
for the transition period from January 1, 2004 to
July 3, 2004, and incorporated herein by reference).
|
|
10
|
.18(1)
|
|
Principal Statement of Terms and
Conditions dated September 13, 2001 between Bookham
Technology plc and Stephen Abely, as amended on July 1,
2003 (previously filed as Exhibit 10.29 to Transition
Report on
Form 10-K
(file
no. 000-30684)
for the transition period from January 1, 2004 to
July 3, 2004, and incorporated herein by reference).
|
|
10
|
.19(1)
|
|
Principal Statement of Terms and
Conditions dated August 15, 2001 between Bookham Technology
plc and Stephen Turley (previously filed as Exhibit 10.30
to Transition Report on
Form 10-K
(file no.
000-30684)
for the transition period from January 1, 2004 to
July 3, 2004, and incorporated herein by reference).
|
|
10
|
.20
|
|
Securities Purchase Agreement,
dated as of December 20, 2004, by and between Bookham, Inc.
and the Investors (as such term is defined therein) (previously
filed as Exhibit 99.1 to Current Report on
Form 8-K
(file
no. 000-30684)
dated December 10, 2004, and incorporated herein by
reference).
|
|
10
|
.21
|
|
Registration Rights Agreement,
dated as of December 20, 2004, by and between Bookham, Inc.
and the Investors (as such term is defined therein) (previously
filed as Exhibit 99.2 to Current Report on
Form 8-K
(file
no. 000-30684)
dated December 10, 2004, and incorporated herein by
reference).
|
|
10
|
.22
|
|
Form of Warrant (previously filed
as Exhibit 99.4 to Current Report on
Form 8-K
(file
no. 000-30684)
dated December 10, 2004, and incorporated herein by
reference).
|
|
10
|
.23*
|
|
Addendum to Optical Components
Supply Agreement, dated as of February 7, 2005, by and
between Bookham Technology plc and Nortel Networks Limited
(previously filed as Exhibit 10.1 to Quarterly Report on
Form 10-Q
for the quarter ended April 2, 2005, and incorporated
herein by reference).
|
|
10
|
.24(1)
|
|
UK Subplan to the 2004 Stock
Incentive Plan (previously filed as Exhibit 10.4 to
Quarterly Report on
Form 10-Q
for the quarter ended April 2, 2005, and incorporated
herein by reference).
|
|
10
|
.25(1)
|
|
Restricted Stock Agreement dated
February 9, 2005 between Bookham, Inc. and Giorgio Anania
(previously filed as Exhibit 10.5 to Quarterly Report on
Form 10-Q
for the quarter ended April 2, 2005, and incorporated
herein by reference).
|
|
10
|
.26(1)
|
|
Restricted Stock Agreement dated
February 9, 2005 between Bookham, Inc. and Stephen Abely
(previously filed as Exhibit 10.6 to Quarterly Report on
Form 10-Q
for the quarter ended April 2, 2005, and incorporated
herein by reference).
|
|
10
|
.27(1)
|
|
Bonus Agreement dated
February 9, 2005 between Bookham, Inc. and Giorgio Anania
(previously filed as Exhibit 10.7 to Quarterly Report on
Form 10-Q
for the quarter ended April 2, 2005, and incorporated
herein by reference).
|
|
10
|
.28(1)
|
|
Bonus Agreement dated
February 9, 2005 between Bookham, Inc. and Stephen Abely
(previously filed as Exhibit 10.8 to Quarterly Report on
Form 10-Q
for the quarter ended April 2, 2005, and incorporated
herein by reference).
|
|
10
|
.29*
|
|
Addendum to Optical Components
Supply Agreement, dated as of April 1, 2005, by and between
Bookham Technology plc and Nortel Networks Limited (previously
filed as Exhibit 10.36 to Annual Report on
Form 10-K
for the year ended July 2, 2005, and incorporated herein by
reference).
|
|
10
|
.30(1)
|
|
Contract of Employment between
Bookham Technology plc and Jim Haynes (previously filed as
Exhibit 10.38 to Annual Report on
Form 10-K
for the year ended July 2, 2005, and incorporated herein by
reference).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
10
|
.31
|
|
Share Purchase Agreement dated
August 10, 2005 among London Industrial Leasing Limited,
Deutsche Bank AG (acting through its London Branch) and Bookham
Technology plc (previously filed as Exhibit 10.1 to
Quarterly Report on
Form 10-Q
for the quarter ended October 1, 2005, and incorporated
herein by reference).
|
|
10
|
.32
|
|
Loan Facility Agreement dated
August 10, 2005 between City Leasing (Creekside) Limited
and Deutsche Bank AG, Limited, for a facility of up to
£18,348,132.33 (previously filed as Exhibit 10.2 to
Quarterly Report on
Form 10-Q
for the quarter ended October 1, 2005, and incorporated
herein by reference).
|
|
10
|
.33
|
|
Loan Facility Agreement dated
August 10, 2005 between City Leasing (Creekside) Limited
and Deutsche Bank AG, Limited for a facility of up to
£42,500,000.00 (previously filed as Exhibit 10.3 to
Quarterly Report on
Form 10-Q
for the quarter ended October 1, 2005, and incorporated
herein by reference).
|
|
10
|
.34
|
|
2004 Stock Incentive Plan, as
amended, including forms of stock option agreement for incentive
and nonstatutory stock options, forms of restricted stock unit
agreement and forms of restricted stock agreement (previously
filed as Exhibit 10.1 to Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2005, and incorporated
herein by reference).
|
|
10
|
.35(1)
|
|
Restricted Stock Agreement dated
November 11, 2005 between Bookham, Inc. and Giorgio Anania
(previously filed as Exhibit 10.2 to Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2005, and incorporated
herein by reference).
|
|
10
|
.36(1)
|
|
Restricted Stock Agreement dated
November 11, 2005 between Bookham, Inc. and Stephen Abely
(previously filed as Exhibit 10.3 to Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2005, and incorporated
herein by reference).
|
|
10
|
.37(1)
|
|
Restricted Stock Agreement dated
November 11, 2005 between Bookham, Inc. and Stephen Turley
(previously filed as Exhibit 10.4 to Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2005, and incorporated
herein by reference).
|
|
10
|
.38(1)
|
|
Restricted Stock Agreement dated
November 11, 2005 between Bookham, Inc. and Jim Haynes
(previously filed as Exhibit 10.5 to Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2005, and incorporated
herein by reference).
|
|
10
|
.39(1)
|
|
Restricted Stock Agreement dated
November 11, 2005 between Bookham, Inc. and Stephen Turley
(previously filed as Exhibit 10.6 to Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2005, and incorporated
herein by reference).
|
|
10
|
.40(1)
|
|
Bookham, Inc. Cash Bonus Program
(previously filed as Exhibit 10.7 to Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2005, and incorporated
herein by reference).
|
|
10
|
.41(1)
|
|
Summary of Director Compensation
(previously filed as Exhibit 10.8 to Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2005, and incorporated
herein by reference).
|
|
10
|
.42(1)
|
|
Form of Indemnification Agreement,
dated October 26, 2005, between Bookham, Inc. and each of
Giorgio Anania, Peter Bordui, Joseph Cook, Lori Holland, Liam
Nagle, W. Arthur Porter and David Simpson (previously filed
as Exhibit 99.1 to Current Report on
Form 8-K
filed on November 1, 2005, and incorporated herein by
reference).
|
|
10
|
.43*
|
|
Addendum and Amendment to Optical
Components Supply Agreement, dated January 13, 2006,
between Nortel Networks Limited and Bookham Technology plc
(previously filed as Exhibit 10.1 to Quarterly Report on
Form 10-Q
for the quarter ended April 1, 2006, and incorporated
herein by reference).
|
|
10
|
.44
|
|
Registration and Lock-Up
Agreement, dated as of January 13, 2006, among Bookham
Technology plc, Bookham, Inc. and Nortel Networks Corporation
(previously filed as Exhibit 10.2 to Quarterly Report on
Form 10-Q
for the quarter ended April 1, 2006, and incorporated
herein by reference).
|
|
10
|
.45
|
|
Agreement for Sale and Leaseback
dated as of March 10, 2006, by and among Bookham Technology
plc, Coleridge (No. 24) Limited and Bookham, Inc.
(previously filed as Exhibit 10.3 to Quarterly Report on
Form 10-Q
for the quarter ended April 1, 2006, and incorporated
herein by reference).
|
|
10
|
.46
|
|
Pre-emption Agreement dated as of
March 10, 2006, by and among Bookham Technology plc,
Coleridge (No. 24) Limited and Bookham, Inc.
(previously filed as Exhibit 10.4 to Quarterly Report on
Form 10-Q
for the quarter ended April 1, 2006, and incorporated
herein by reference).
|
|
10
|
.47
|
|
Lease dated as of March 10,
2006, by and among Bookham Technology plc, Coleridge
(No. 24) Limited and Bookham, Inc. (previously filed
as Exhibit 10.5 to Quarterly Report on
Form 10-Q
for the quarter ended April 1, 2006, and incorporated
herein by reference).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
|
|
10
|
.48
|
|
Exchange Agreement, dated as of
January 13, 2006, by and among Bookham, Inc., Bookham
Technology plc and the Investors (as defined therein)
(previously filed as exhibit 99.1 to Current Report on
Form 8-K
filed on January 17, 2006, and incorporated herein by
reference)
|
|
10
|
.49
|
|
Form of Warrant (previously filed
as exhibit 99.2 to Current Report on
Form 8-K
filed on January 17, 2006, and incorporated herein by
reference)
|
|
10
|
.50
|
|
Securities Exchange Agreement,
dated as of January 13, 2006, by and between Bookham, Inc.
and the Investors (as such term is defined therein) (previously
filed as exhibit 99.3 to Current Report on
Form 8-K
filed on January 17, 2006, and incorporated herein by
reference)
|
|
10
|
.51
|
|
Registration Rights Agreement,
dated as of January 13, 2006, by and between Bookham, Inc.
and the Investors (as such term is defined therein) (previously
filed as exhibit 99.4 to Current Report on
Form 8-K
filed on January 17, 2006, and incorporated herein by
reference)
|
|
10
|
.52
|
|
Form of Warrant (previously filed
as exhibit 99.5 to Current Report on
Form 8-K
filed on January 17, 2006, and incorporated herein by
reference)
|
|
10
|
.53
|
|
Credit Agreement, dated as of
August 2, 2006, among Bookham, Inc., Bookham Technology
plc, New Focus, Inc. and Bookham (US), Inc., Wells Fargo
Foothill, Inc. and other lenders party thereto
|
|
10
|
.54
|
|
Security Agreement, dated as of
August 2, 2006, among Bookham, Inc., Onetta, Inc., Focused
Research, Inc., Globe Y. Technology, Inc., Ignis Optics, Inc.,
Bookham (Canada) Inc., Bookham Nominees Limited and Bookham
International Ltd., Wells Fargo Foothill, Inc. and other secured
parties party thereto.
|
|
21
|
.1
|
|
List of Bookham, Inc. subsidiaries.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
23
|
.2
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
31
|
.1
|
|
Rule 13a-14(a)/15(d)-14(a)
Certification of Chief Executive Officer.
|
|
31
|
.2
|
|
Rule 13a-14(a)/15(d)-14(a)
Certification of Chief Financial Officer.
|
|
32
|
.1
|
|
Section 1350 Certification of
Chief Executive Officer.
|
|
32
|
.2
|
|
Section 1350 Certification of
Chief Financial Officer.
|
|
|
|
* |
|
Confidential treatment requested as to certain portions, which
portions have been omitted and filed separately with the
Commission. |
|
** |
|
The exhibits and schedules to this agreement were omitted by
Bookham, Inc. Bookham, Inc. agrees to furnish any exhibit or
schedule to this agreement supplementally to the Securities and
Exchange Commission upon written request. |
|
(1) |
|
Management contract or compensatory plan or arrangement. |