UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

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

Commission file number 000-30684

OCLARO, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-1303994
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2584 Junction Avenue, San Jose, California 95134
(Address of principal executive offices, zip code)

(408) 383-1400
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o No þ

Number of shares of common stock outstanding as of April 30, 2010: 42,491,446 (post 1-for-5 reverse split of the registrant’s common stock, effective at 6:00 p.m., Eastern Time, on April 29, 2010. See Note 17, Subsequent Events, for additional details.)

 

 

OCLARO, INC.
TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of April 3, 2010 and June 27, 2009			3
Condensed Consolidated Statements of Operations for the three and nine months ended April 3, 2010 and March 28, 2009			4
Condensed Consolidated Statements of Cash Flows for the nine months ended April 3, 2010 and March 28, 2009			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			39
Item 6. Exhibits			55
Signature			56
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

OCLARO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		April 3, 2010				June 27, 2009
		(Thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents		$	51,476			$	44,561
Short-term investments			—				9,259
Restricted cash			4,310				4,208
Accounts receivable, net			77,685				58,483
Inventories			59,979				59,527
Prepaid expenses and other current assets			12,739				11,834
Assets held for sale			—				10,442
Total current assets			206,189				198,314
Property and equipment, net			34,741				29,875
Goodwill			25,219				—
Other intangible assets, net			9,025				1,951
Other non-current assets			2,155				3,248
Total assets		$	277,329			$	233,388
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	45,617			$	31,943
Accrued expenses and other liabilities			37,548				39,016
Borrowings under line of credit			2,500				—
Liabilities held for sale			—				2,028
Total current liabilities			85,665				72,987
Deferred gain on sale-leaseback			13,386				15,088
Other long-term liabilities			9,315				4,923
Total liabilities			108,366				92,998
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock (1): 1,000 shares authorized; none issued and outstanding			—				—
Common stock (1):
$0.01 par value per share; 90,000 shares authorized; 42,488 and 37,233 shares issued and outstanding at April 3, 2010 and June 27, 2009, respectively			425				372
Additional paid-in capital (1)			1,229,094				1,200,848
Accumulated other comprehensive income			29,700				30,905
Accumulated deficit			(1,090,256	)			(1,091,735	)
Total stockholders’ equity			168,963				140,390
Total liabilities and stockholders’ equity		$	277,329			$	233,388

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

OCLARO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended								Nine Months Ended
		April 3,				March 28,				April 3,				March 28,
		2010				2009				2010				2009
		(Thousands, except per share amounts)
Revenues		$	101,152			$	41,241			$	279,836			$	144,046
Cost of revenues			73,322				32,381				205,156				114,129
Gross profit			27,830				8,860				74,680				29,917
Operating expenses:
Research and development			11,288				5,260				29,977				17,875
Selling, general and administrative			14,451				7,601				42,249				24,240
Amortization of intangible assets			347				54				597				429
Restructuring, merger and related costs			1,610				54				6,149				1,669
Legal settlements			—				3,705				—				3,829
Impairment of goodwill and other intangible assets			—				1,252				—				9,133
(Gain) loss on sale of property and equipment			101				(16	)			(502	)			(8	)
Total operating expenses			27,797				17,910				78,470				57,167
Operating income (loss)			33				(9,050	)			(3,790	)			(27,250	)
Other income (expense):
Interest income			11				78				36				522
Interest expense			(134	)			(109	)			(255	)			(433	)
Gain (loss) on foreign currency translation			794				(598	)			311				15,764
Other income (expense)			—				(5	)			5,295				(700	)
Total other income (expense)			671				(634	)			5,387				15,153
Income (loss) from continuing operations before income taxes			704				(9,684	)			1,597				(12,097	)
Income tax provision (benefit)			499				19				1,246				(7	)
Income (loss) from continuing operations			205				(9,703	)			351				(12,090	)
Income (loss) from discontinued operations, net of tax			—				(3,578	)			1,420				(5,459	)
Net income (loss)		$	205			$	(13,281	)		$	1,771			$	(17,549	)
Basic net income (loss) per share: (1)
Income (loss) per share from continuing operations		$	—			$	(0.48	)		$	0.01			$	(0.61	)
Income (loss) per share from discontinued operations		$	—			$	(0.18	)		$	0.04			$	(0.27	)
Net income (loss) per share		$	—			$	(0.66	)		$	0.05			$	(0.88	)
Diluted net income (loss) per share: (1)
Income (loss) per share from continuing operations		$	—			$	(0.48	)		$	0.01			$	(0.61	)
Income (loss) per share from discontinued operations		$	—			$	(0.18	)		$	0.03			$	(0.27	)
Net income (loss) per share		$	—			$	(0.66	)		$	0.04			$	(0.88	)
Shares used in computing net income (loss) per share: (1)
Basic			41,095				20,084				38,752				20,056
Diluted			43,829				20,084				40,331				20,056

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

OCLARO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine Months Ended
		April 3, 2010				March 28, 2009
		(Thousands)
Cash flows from operating activities:
Net income (loss)		$	1,771			$	(17,549	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Accretion on short-term investments			22				(127	)
Amortization of deferred gain on sale-leaseback			(643	)			(698	)
Depreciation and amortization			8,667				9,833
Change in fair value of a value protection liability			(343	)			—
Gain on sale of property and equipment			(502	)			(8	)
Gain on bargain purchase			(5,267	)			—
Gain on sale of New Focus business			(1,420	)			—
Impairment of goodwill and other intangible assets			—				11,915
Impairment (recovery) of short-term investments			(28	)			706
Stock-based compensation expense			3,175				3,303
Changes in operating assets and liabilities:
Accounts receivable, net			(18,677	)			(1,181	)
Inventories			6,481				1,103
Prepaid expenses and other current assets			(16	)			2,010
Other non-current assets			1,559				(1,036	)
Accounts payable			10,788				(5,977	)
Accrued expenses and other liabilities			(7,213	)			1,849
Net cash provided by (used in) operating activities			(1,646	)			4,143
Cash flows from investing activities:
Purchases of property and equipment			(5,945	)			(8,475	)
Proceeds from sales of property and equipment			691				32
Purchases of available-for-sale investments			—				(6,945	)
Sales and maturities of available-for-sale investments			9,258				18,300
Transfer (to) from restricted cash			(103	)			566
Purchase of intangibles and equipment from an asset purchase			(250	)			—
Cash acquired from business combinations			3,277				—
Net cash provided by investing activities			6,928				3,478
Cash flows from financing activities:
Proceeds from issuance of common stock, net			137				—
Proceeds from borrowings under line of credit			2,500				—
Repayment of other liabilities			(52	)			(46	)
Net cash provided by (used in) financing activities			2,585				(46	)
Effect of exchange rate on cash and cash equivalents			(952	)			(8,607	)
Net increase (decrease) in cash and cash equivalents			6,915				(1,032	)
Cash and cash equivalents at beginning of period			44,561				32,863
Cash and cash equivalents at end of period		$	51,476			$	31,831
Supplemental disclosures of non-cash transactions:
Issuance of common stock, and incurrence of escrow liability and value protection liability for acquisition of Xtellus		$	32,690			$	—

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

OCLARO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Organization

Oclaro, Inc., a Delaware corporation (“Oclaro” or the “Company”), designs, manufactures and markets optical components, modules and subsystems that generate, detect, amplify, combine and separate light signals principally for use in high-performance fiber optics communications networks. Optical transmission has become the predominant technology for large-scale communications networks due to its advantages of higher capacity and transmission speed. For the three and nine months ended April 3, 2010, the Company’s primary operating segment is its telecommunications (“telecom”) segment, which addresses this optical communications market; and the Company’s remaining product lines, which address certain other optics and photonics markets, such as material processing, printing, medical and consumer applications, and which leverage the resources, infrastructure and expertise of its telecom segment, comprise its advanced photonics solutions segment.

On April 27, 2009, Oclaro, Inc., at the time named Bookham, Inc. (“Bookham”), and Avanex Corporation (“Avanex”) completed a merger of Avanex with and into a subsidiary of Bookham with Avanex being the surviving corporation as a wholly-owned subsidiary of Bookham.

In a separate transaction that also occurred on April 27, 2009, following the closing of the merger of Avanex into Bookham, Bookham changed its name to Oclaro, Inc. This name change was effected pursuant to Section 253 of the General Corporation Law of the State of Delaware by the merger of a wholly-owned subsidiary of Bookham (“the Subsidiary”) into Bookham. Bookham was the surviving corporation in this merger with the Subsidiary and, in connection with that merger, amended its Restated Certificate of Incorporation to change its name to Oclaro, Inc. pursuant to a Certificate of Ownership and Merger filed on April 27, 2009 with the Secretary of State of the State of Delaware.

References herein to the “Company” mean Bookham and its subsidiaries’ consolidated business activities prior to April 27, 2009 and Oclaro and its subsidiaries’ consolidated business activities since April 27, 2009. Subsequent to the merger, Avanex changed its name to Oclaro (North America), Inc. All references to “Avanex” in time periods after the merger refer to Oclaro (North America), Inc.

Note 2. Basis of Preparation

Basis of Presentation

On April 14, 2010, the Company announced that its Board of Directors had approved a 1-for-5 reverse split of its common stock, pursuant to previously obtained stockholder authorization. This reverse stock split became effective at 6:00 p.m., Eastern Time, on April 29, 2010, which reduced the number of shares of the Company’s common stock issued and outstanding from approximately 212 million to approximately 42 million and reduced the number of authorized shares of common stock from 450 million to 90 million. All share and per share amounts presented herein are reflected on a post-split basis.

The accompanying unaudited condensed consolidated financial statements as of April 3, 2010 and for the three and nine months ended April 3, 2010 and March 28, 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X, and include the accounts of the Company and all of its subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s consolidated financial position and operations have been included. The condensed consolidated results of operations for the three and nine months ended April 3, 2010 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending July 3, 2010.

The condensed consolidated balance sheet as of June 27, 2009 has been derived from the audited financial statements as of such date, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2009 (“2009 Form 10-K”).

The Company operates on a 52/53 week year ending on the Saturday closest to June 30. The fiscal year ended June 27, 2009 was a 52 week year. The fiscal year ending July 3, 2010 will be a 53 week year, with the quarter ended January 2, 2010 being a 14 week quarterly period.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. These judgments can be subjective and complex, and consequently, actual results could differ materially from those estimates and assumptions. Descriptions of these estimates and assumptions are included in the 2009 Form 10-K and we encourage you to read our 2009 Form 10-K for more information about such estimates and assumptions.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified as FASB Accounting Standards Codification (“ASC”) Topic 105, Generally Accepted Accounting Principles. ASC 105 establishes the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative U.S. GAAP. Under the Codification, all existing accounting standards and pronouncements are superseded and reorganized into a consistent structure arranged by topic, subtopic, section and paragraph. Since the Codification does not change or alter existing U.S. GAAP, it did not have any impact on the Company’s condensed consolidated financial statements; however, it changes the way references to accounting standards and pronouncements are presented. The provisions of ASC 105 were adopted by the Company in the first quarter of fiscal year 2010. References made to FASB guidance throughout this Quarterly Report on Form 10-Q refer to the Codification.

Reclassifications

For presentation purposes, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications do not affect the Company’s consolidated net income (loss), cash flows, cash and cash equivalents or stockholders’ equity, as previously reported.

On June 3, 2009 the Company entered into a definitive agreement to sell certain assets and liabilities of its Oclaro Photonics, Inc. (formerly “New Focus, Inc.”) subsidiary, which are referred to collectively herein as the New Focus business, to Newport Corporation (“Newport”). This sale was completed on July 4, 2009. The assets and liabilities sold to Newport are classified as assets held for sale and liabilities held for sale within current assets and current liabilities, respectively, on the condensed consolidated balance sheets for periods prior to the consummation of the sale. These notes to the Company’s condensed consolidated financial statements relate to the Company’s continuing operations only, unless otherwise indicated. See Note 4, Business Combinations, for additional details.

Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended April 3, 2010 that are of significance, or potential significance, to the Company.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires companies to: disclose separately the amounts of significant transfers into and out of Level 1 and Level 2 fair value measurements and to describe the reasons for such transfers. In addition, in the reconciliation for Level 3 fair value measurements, companies are to present separately information about purchases, sales, issuances, and settlements on a gross basis. The revised authoritative guidance for Level 1 and 2 fair value measurements is effective for interim and annual reporting periods beginning after December 15, 2009 and the revised authoritative guidance for Level 3 fair value measurements is effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years with early application permitted. The Company’s adoption of the revised guidance for Levels 1 and 2 during the three months ended April 3, 2010 did not have any effect on its consolidated financial position or results of operations. The Company intends to adopt the revised guidance for Level 3 in the first quarter of fiscal year 2011 and it does not expect the adoption to have a material effect on its consolidated financial position or results of operations.

In October 2009, the FASB issued ASU 2009-14, Software (Topic 985), Certain Revenue Arrangements that Include Software Elements amending ASC 985. ASU 2009-14 applies to vendors that sell or lease tangible products that contain software that is more than incidental to the tangible product as a whole. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides direction for measuring and allocating revenue between the deliverables within the arrangement. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially

modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact of ASU 2009-14, but does not expect its adoption to have a material impact on the Company’s consolidated financial position or results of operations.

In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements amending ASC 605. ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. ASU 2009-13 eliminates the residual method of revenue allocation and requires revenue to be allocated using the relative selling price method. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact of ASU 2009-13, but does not expect its adoption to have a material impact on the Company’s consolidated financial position or results of operations.

Note 3. Fair Value

In the first quarter of fiscal year 2009, the Company adopted ASC 820, Fair Value Measurements and Disclosures, for all financial assets and financial liabilities and for non-financial assets and non-financial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually. Effective with the first quarter of fiscal year 2010, the Company adopted the provisions of ASC 820 for all non-financial assets and non-financial liabilities. Under ASC 820, the Company is required to provide certain information according to a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. The three levels of inputs that may be used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices of identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets), or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company’s cash equivalents and short-term investment instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include investment-grade corporate bonds, mortgage-backed and asset-backed securities and foreign currency forward exchange contracts. Such instruments are generally classified within Level 2 of the fair value hierarchy.

The Company’s non-financial assets, such as other intangible assets, net, are classified within Level 3 of the fair value hierarchy because they are valued using a discounted cash flow model based on the Company’s estimates of future cash flows. The Company also classified a liability within Level 3 for a value protection guarantee issued in connection with the acquisition of Xtellus Inc. because it is primarily valued using management estimates of future operating results. During the third quarter of fiscal year 2010, the Company reassessed the fair value of the value protection liability determining that the fair value of this liability declined from $0.9 million at January 2, 2010 to $0.6 million at April 3, 2010. This $0.3 million change in fair value was recognized as income within “Restructuring, merger and related costs” during the three months ended April 3, 2010. See Note 4, Business Combinations, for additional details.

The Company’s derivative instruments are primarily classified as Level 2 as they are valued using pricing models that use observable market inputs.

Assets and Liabilities Measured at Fair Value

Assets and liabilities measured at fair value are shown in the table below by their corresponding balance sheet caption and consisted of the following types of instruments at April 3, 2010:

		Fair Value Measurement at April 3, 2010 Using
		Quoted Prices				Significant
		in Active				Other				Significant
		Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
						(Thousands)
Assets:
Cash and cash equivalents (1):
Money market funds		$	23,966			$	—			$	—			$	23,966
Total assets measured at fair value		$	23,966			$	—			$	—			$	23,966
Liabilities:
Accrued expenses and other liabilities:
Unrealized loss on currency instruments designated as hedges		$	—			$	423			$	—			$	423
Other long-term liabilities:
Value protection liability			—				—				603				603
Total liabilities measured at fair value		$	—			$	423			$	603			$	1,026

Derivative Financial Instruments

The Company’s operating results are subject to fluctuations based upon changes in the exchange rates between the currencies in which it collects revenues and pays expenses. A majority of the Company’s revenues are denominated in U.S. dollars, while a significant portion of its expenses are denominated in U.K. pounds sterling, the Chinese yuan, Swiss franc, Thai baht and the Euro, in which it pays expenses in connection with operating its facilities in Caswell, U.K.; Shenzhen, China; Zurich, Switzerland; Bangkok, Thailand and San Donato, Italy. The Company currently enters into foreign currency forward exchange contracts in an effort to mitigate a portion of its exposure to fluctuations between the U.S. dollar and the U.K. pound sterling.

The Company recognizes all derivatives, such as foreign currency forward exchange contracts, on its condensed consolidated balance sheets 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 “Accumulated other comprehensive income” until the hedged item is recognized in the condensed consolidated statements of operations.

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 “Accumulated other comprehensive income” until the underlying cash flow is settled and the contract is recognized in “Other income (expense)” in the condensed consolidated statements of operations. As of April 3, 2010, the Company held twelve outstanding foreign currency forward exchange contracts to sell U.S. dollars and buy U.K. pounds sterling. All of these contracts have been designated as cash flow hedges. These contracts had an aggregate notional value of approximately $12.0 million of put and call options which expire, or expired, at various dates ranging from April 2010 through December 2010. 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 April 3, 2010 will generally be reclassified into “Other income (expense)” within the next 12 months. As of April 3, 2010, each of the twelve designated cash flow hedges was determined to be fully effective; therefore, the Company has recorded an unrealized loss of $0.4 million to “Accumulated other comprehensive income” related to recording the fair value of these foreign currency forward exchange contracts for accounting purposes. For the three and nine months ended April 3, 2010, losses of nil and $0.7 million, respectively, were reclassified from “Accumulated other comprehensive income” into “Other income (expense).”

Note 4. Business Combinations

On July 4, 2009 the Company entered into a set of agreements with Newport Corporation (“Newport”), under which the Company transferred to Newport substantially all of the operating assets used or held for use in the Company’s New Focus business. In exchange, the Company received substantially all of the operating assets of Newport’s Tucson, Arizona facility, intellectual property of Newport’s high-power laser diodes business and $3.0 million in cash.

On December 17, 2009 the Company acquired Xtellus Inc. (“Xtellus”). Pursuant to the terms of the acquisition agreement, Oclaro issued 4.7 million shares (23.4 million shares pre-split) of its common stock, a portion of which is being held in escrow for 18 months to support indemnification obligations of the former Xtellus stockholders to Oclaro, which may be payable in cash, or, at the Company’s option, in newly issued shares of its Common stock, or a combination of cash and stock. Under the terms of the acquisition agreement, the Company also provides for a value protection guarantee under which former Xtellus stockholders could receive additional consideration subject to both the share price of Oclaro failing to achieve a certain price level at the end of calendar year 2010 and on the Xtellus business achieving certain revenue targets.

During the three and nine months ended April 3, 2010, the Company recorded $0.9 million and $2.5 million, respectively, in legal and other direct merger-related costs in connection with business combinations entered into in fiscal year 2010. These costs are recorded within “Restructuring, merger and related costs” in the condensed consolidated statement of operations.

As of June 27, 2009, the Company had capitalized $0.3 million in legal and other deal-related costs associated with the acquisition of the high-power laser diodes business. Upon the adoption of ASC 805, Business Combinations, on June 28, 2009, the Company wrote-off these deferred assets to retained earnings as a cumulative effect of a change in accounting principle.

Sale of the New Focus business

The Company’s estimate of the fair value of the assets and liabilities of the New Focus business transferred to Newport is $9.9 million. The carrying value of these assets and liabilities on the Company’s consolidated balance sheet as of July 4, 2009, the date of the exchange, was $8.5 million. In the nine months ended April 3, 2010, the Company recorded a $1.4 million gain in income from discontinued operations from the sale of the New Focus business.

The financial results of the New Focus business have been classified as discontinued operations for all periods presented. The assets and liabilities of the discontinued operation are presented as current assets and current liabilities, separately under the captions “Assets held for sale” and “Liabilities held for sale” in the accompanying condensed consolidated balance sheet at June 27, 2009 and consisted of the following:

		June 27, 2009
		(Thousands)
Assets held for sale:
Accounts receivable, net		$	3,556
Inventories			5,566
Prepaid expenses and other current assets			46
Property and equipment, net			1,274
		$	10,442

		June 27, 2009
		(Thousands)
Liabilities held for sale:
Accounts payable		$	1,197
Accrued expenses and other liabilities			831
		$	2,028

The following table presents the statements of operations for the discontinued operations of the New Focus business for the periods indicated:

		Three Months Ended								Nine Months Ended
		April 3,				March 28,				April 3,				March 28,
		2010				2009				2010				2009
						(Thousands)
Revenues		$	—			$	5,751			$	—			$	19,681
Cost of revenues			—				3,722				—				13,375
Gross profit			—				2,029				—				6,306
Operating expenses			—				5,598				—				11,719
Other income (expense), net			—				(9	)			1,420				4
Income (loss) from discontinued operations before income taxes			—				(3,578	)			1,420				(5,409	)
Income tax provision			—				—				—				50
Income (loss) from discontinued operations		$	—			$	(3,578	)		$	1,420			$	(5,459	)

Acquisition of the Newport high-power laser diodes business

In accordance with ASC 805, Business Combinations, the Company accounted for the assets acquired and liabilities assumed of Newport’s high-power laser diodes business using the purchase method of accounting. The total consideration given to Newport in connection with the exchange described above has been allocated to the assets acquired and liabilities assumed based on their fair values as of the date of the exchange.

The Company’s purchase price, based on the fair values of the assets acquired and liabilities assumed as of the date of the exchange, is as follows:

		Purchase Price
		(Thousands)
Cash		$	3,000
Accounts receivable			2,240
Inventories			4,863
Property and equipment			4,800
Other intangible assets			1,755
Accounts payable			(923	)
Accrued expenses and other current liabilities			(568	)
Fair value of net assets acquired			15,167
Gain on bargain purchase			(5,267	)
Total purchase price		$	9,900

Any excess of the fair value of assets acquired and liabilities assumed over the aggregate consideration given for such acquisition results in a gain on bargain purchase. In the first quarter of fiscal year 2010, the Company recorded a gain on bargain purchase of $5.3 million in connection with the acquisition of Newport’s high-power laser diodes business, which is included in “Other income (expense)” in the accompanying condensed consolidated statements of operations for the nine month period ended April 3, 2010. The gain on bargain purchase reflects the completion of the Company’s full valuation of the fair value of assets acquired and liabilities assumed. Adjustments resulting from the completion of the full valuation are presented retrospectively in the Company’s condensed consolidated financial statements as though they had been recorded as of the acquisition date.

Acquisition of Xtellus

The Company has also accounted for the assets acquired and liabilities assumed from Xtellus using the purchase method of accounting. Under the terms of this acquisition, Oclaro issued 3,693,181 shares (18,465,905 shares pre-split) of Oclaro common stock, valued at $24.7 million based on a price of $6.70 per share ($1.34 per share pre-split) of Oclaro common stock as of the acquisition closing date, December 17, 2009. Of the shares issued, 3,466,204 shares (17,331,021 shares

pre-split) were issued to former Xtellus stockholders and 226,977 shares (1,134,884 shares pre-split) were issued to certain former debt holders of Xtellus in order to extinguish outstanding Xtellus debt.

As part of the total consideration, the Company also issued 994,318 shares (4,971,591 shares pre-split) of Oclaro common stock into a third-party escrow account for 18 months as security for the indemnification obligations of the Xtellus stockholders under the acquisition agreement, which may be payable in cash, or, at the Company’s option, in newly issued shares of its Common stock, or a combination of cash and stock. In accordance with ASC 480, Distinguishing Liabilities from Equity, the Company recorded this obligation as a long-term liability in the condensed consolidated balance sheet as of April 3, 2010.

The Company also agreed to pay a valuation protection guarantee (“value protection liability”) whereby former stockholders of Xtellus are entitled to receive up to $7.0 million in additional consideration if Oclaro’s common stock trades below certain levels at the end of calendar year 2010 and if revenue from Xtellus products is more than $17.0 million in calendar year 2010. The estimated fair value of this valuation protection liability was $0.9 million at January 2, 2010. This estimate was determined using management estimates of future operating results and a Monte Carlo simulation model to determine the likelihood of achieving certain market conditions. During the third quarter of fiscal year 2010, the Company reassessed the fair value of the value protection liability, determining that the fair value of this liability declined from $0.9 million at January 2, 2010 to $0.6 million at April 3, 2010. This $0.3 million change in fair value was recognized as income within “Restructuring, merger and related costs” during the three months ended April 3, 2010. Subsequent changes to the fair value of the value protection liability will result in adjustments to the Company’s results of operations in the period of adjustment, up to a potential maximum of $6.4 million.

Under the terms of the acquisition agreement, the earliest these post-closing payments would be made is April 2011. The post-closing consideration, if any, is payable in cash or, at Oclaro’s option, newly issued shares of Oclaro common stock (or a combination of cash and stock).

For accounting purposes, the total consideration given in connection with the acquisition of Xtellus was $32.7 million, consisting of the following:

		Total Consideration
		(Thousands)
Common shares issued to Xtellus stockholders and debtholders		$	24,744
Estimated fair value of escrow liability			7,000
Estimated fair value of value protection liability			946
		$	32,690

This acquisition also provides for an employee retention program under which certain former Xtellus employees will receive up to an aggregate of $5.0 million in a combination of cash (up to a maximum of $1.0 million) and restricted stock awards which will generally be subject to time-based vesting over two years and partially subject to the achievement of certain revenue targets during calendar year 2010. The costs of this retention program are considered compensatory and are being recorded in the Company’s results of operations. During the three and nine months ended April 3, 2010, the Company recorded approximately $0.4 million and $1.0 million in “Restructuring, merger and related costs” in the condensed consolidated statements of operations related to cash payments due under the retention program.

The total consideration given to former stockholders of Xtellus has been allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of the acquisition. The Company’s preliminary purchase price, based on the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition, is as follows:

		Preliminary
		Purchase Price
		(Thousands)
Cash		$	277
Accounts receivable			75
Inventories			1,560
Property and equipment			2,297
Prepaid expenses and other current assets			1,339
Other non-current assets			477
Other intangible assets			5,340
Accounts payable			(1,683	)
Accrued expenses and other current liabilities			(1,730	)
Other long-term liabilities			(481	)
Fair value of net assets acquired			7,471
Goodwill			25,219
Total purchase price		$	32,690

The Company intends to finalize its purchase accounting with respect to the Xtellus acquisition by the fourth quarter of fiscal year 2010. Any adjustments recorded will be retrospectively presented in the Company’s condensed consolidated financial statements as though they had been recorded as of the acquisition date.

     Unaudited Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations, reflected on a post-split basis, have been prepared as if the acquisitions of the Newport high-power laser diodes business and Xtellus had occurred as of June 29, 2008, the first day of the Company’s fiscal year 2009:

		Nine Months Ended
		April 3, 2010				March 28, 2009
		(Thousands)
Revenues		$	282,814			$	169,962
Loss from continuing operations		$	(6,409	)		$	(21,918	)
Net loss		$	(4,989	)		$	(27,377	)
Net loss per share — basic and diluted		$	(0.12	)		$	(1.13	)
Shares used in computing net loss per share — basic and diluted			41,344				24,251

This unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time, nor is it intended to be a projection of future results.

Note 5. Balance Sheet Details

The following table provides details regarding the Company’s cash, cash equivalents and short-term investments at the dates indicated:

		April 3, 2010				June 27, 2009
		(Thousands)
Cash and cash equivalents:
Cash-in-bank		$	27,510			$	24,162
Money market funds			23,966				20,399
		$	51,476			$	44,561
Short-term investments:
United States agency securities		$	—			$	6,669
United States corporate bonds			—				2,590
		$	—			$	9,259

As of June 27, 2009, all of the Company’s short-term investments had a maturity of less than one year.

Throughout fiscal year 2009, the Company held a Lehman Brothers Holdings Inc. (“Lehman”) security with par value of $0.8 million. In September 2008, Lehman filed a petition under Chapter 11 of the U.S. Bankruptcy Code. During the nine months ended March 28, 2009, the Company recorded impairment charges for the Lehman security of $0.7 million, included in “Other income (expense)” in the condensed consolidated statements of operations. The Company subsequently sold the Lehman security during the second quarter of fiscal year 2010 for $0.1 million, recording a recovery of $28,000 for the nine months ended April 3, 2010, included in “Other income (expense)” in the condensed consolidated statements of operations.

The following table provides details regarding the Company’s inventories at the dates indicated:

		April 3, 2010				June 27, 2009
		(Thousands)
Inventories:
Raw materials		$	17,614			$	16,560
Work-in-process			29,830				29,825
Finished goods			12,535				13,142
		$	59,979			$	59,527

The following table provides details regarding the Company’s property and equipment, net at the dates indicated:

		April 3, 2010				June 27, 2009
		(Thousands)
Property and equipment, net:
Buildings		$	16,157			$	16,696
Plant and machinery			92,549				80,881
Fixtures, fittings and equipment			1,149				1,085
Computer equipment			11,849				12,936
			121,704				111,598
Less: Accumulated depreciation			(86,963	)			(81,723	)
		$	34,741			$	29,875

The following table presents details regarding the Company’s accrued expenses and other liabilities at the dates indicated:

		April 3, 2010				June 27, 2009
		(Thousands)
Accrued expenses and other liabilities:
Trade payables		$	7,099			$	3,826
Compensation and benefits related accruals			6,956				8,024
Warranty accrual			2,879				2,228
Current portion of restructuring accrual			5,899				9,485
Unrealized loss on currency instruments designated as hedges			423				545
Value protection liability for Xtellus acquisition			603				—
Other accruals			13,689				14,908
		$	37,548			$	39,016

The following table presents details regarding the Company’s other long-term liabilities at the dates indicated:

		April 3, 2010				June 27, 2009
		(Thousands)
Other long-term liabilities:
Escrow liability for Xtellus acquisition		$	7,000			$	—
Other long-term liabilities			2,315				4,923
		$	9,315			$	4,923

Note 6. Goodwill and Other Intangible Assets

In connection with the Company’s acquisition of the Newport high-power laser diodes business on July 4, 2009, the Company recorded $1.8 million in other intangible assets. The acquired other intangible assets from Newport consist of core and current technology assets of $1.1 million with a weighted average life of 6 years, customer relationships of $0.6 million with a weighted average life of 6 years, and contract backlog of $0.1 million with a weighted average life of 1.5 years.

In connection with the Company’s acquisition of Xtellus on December 17, 2009, the Company recorded $25.2 million in goodwill and $5.3 million in other intangible assets. The acquired other intangible assets from Xtellus consist of core and current technology assets of $4.9 million with a weighted average life of 10 years and customer relationships of $0.4 million with a weighted average life of 6 years. These amounts are subject to change upon the finalization of the Company’s purchase accounting for the Xtellus acquisition.

During the nine months ended March 28, 2009, the Company recorded an impairment charge of $7.9 million to goodwill in its condensed consolidated statements of operations as management concluded that the carrying value of the net assets assigned to the New Focus and Avalon Photonics AG (“Avalon”) reporting units exceeded the fair value of the respective reporting units.

During the third quarter of fiscal year 2009, in conjunction with its goodwill impairment analysis, the Company also evaluated the fair value of the intangible assets of these two reporting units, in accordance with ASC 360, Property, Plant and Equipment. Based on this testing, the Company determined that the intangibles of the Avalon reporting unit were impaired by $1.2 million and recorded this impairment loss during the three months ended March 28, 2009.

A summary of movement in the Company’s goodwill and other intangible assets follows:

						Other Intangible Assets
										Accumulated
		Goodwill				Cost				Amortization				Net Book Value
						(Thousands)
June 27, 2009		$	—			$	12,142			$	10,191			$	1,951
Acquired (1)			25,219				7,802				—				7,802
Amortization			—				—				597				(597	)
Exchange rate adjustment			—				(224	)			(93	)			(131	)
April 3, 2010		$	25,219			$	19,720			$	10,695			$	9,025

The following table reflects the components of other intangible assets, net at the dates indicated:

		April 3,				June 27,
		2010				2009
		(Thousands)
Supply agreements		$	3,102			$	3,253
Customer relationships			1,704				719
Customer databases			134				135
Core and current technology			13,296				6,650
Contract backlog			110				—
Patent portfolio			1,374				1,385
			19,720				12,142
Less accumulated amortization			(10,695	)			(10,191	)
Other intangible assets, net		$	9,025			$	1,951

Amortization of other intangible assets for the three and nine months ended April 3, 2010 was $0.3 million and $0.6 million, respectively. Amortization of other intangible assets for the three months and nine months ended March 28, 2009 was $0.1 million and $0.4 million, respectively. Amortization is recorded as an operating expense within the condensed consolidated statements of operations. Estimated future amortization expense of other intangible assets is $0.3 million for the remaining three months of fiscal year 2010 and $1.3 million for each of the fiscal years 2011 to 2015. Estimated future amortization expense is subject to the Company’s finalization of its purchase accounting for the Xtellus acquisition.

Note 7. Restructuring Liabilities

The following table summarizes activities related to the Company’s restructuring liabilities for the nine months ended April 3, 2010:

		Accrued												Adjustments				Accrued
		Restructuring Costs				Amounts Charged to				Amounts Paid or				and				Restructuring Costs
		at June 27, 2009				Restructuring Costs				Written-off				Reversals				at April 3, 2010
										(Thousands)
Lease cancellations and commitments and other charges		$	8,320			$	1,443			$	(4,165	)		$	(3	)		$	5,595
Termination payments to employees and related costs			4,719				2,555				(6,902	)			75				447
Total accrued restructuring charges			13,039			$	3,998			$	(11,067	)		$	72				6,042
Less non-current accrued restructuring charges			(3,554	)															(143	)
Accrued restructuring charges included within accrued expenses and other liabilities		$	9,485															$	5,899

During the three and nine months ended April 3, 2010, the Company accrued approximately $0.1 million and $0.4 million, respectively, in restructuring accruals for employee separation charges related to its acquisition of Newport’s high-power laser diodes business, and made payments of $0.2 million during the same periods. The Company expects to incur between $0.6 million and $0.9 million in total restructuring costs in fiscal year 2010 in connection with the transfer of the high-power laser diodes business’ manufacturing operations from Tucson, Arizona to the Company’s European manufacturing facilities.

During the three and nine months ended April 3, 2010, the Company accrued approximately $0.3 million and $2.2 million, respectively, in restructuring accruals for employee separation charges related to the overhead cost reduction plan initiated from the merger with Avanex. During the three and nine months ended April 3, 2010, the Company made payments of nil and $0.3 million, respectively, related to lease commitments and $0.9 million and $7.0 million, respectively, related to employee separation charges.

In addition, during the three and nine months ended April 3, 2010, the Company reduced its accrual by $0.3 million and increased its accrual by $0.1 million, respectively, for restructuring accruals related to facilities assumed from Avanex as part of the merger (“legacy facilities”), and made payments of $0.9 million and $2.6 million during the same respective time periods, to cover the costs of exiting these legacy facilities.

During the third quarter of fiscal year 2010, the Company also accrued approximately $0.9 million in inventory-related restructuring accruals resulting from its acquisition of Xtellus.

During the three and nine months ended April 3, 2010, the Company continued to make payments in connection with earlier plans of restructuring and cost reduction efforts, including payments of $0.4 million and $1.1 million, respectively, for lease commitments.

Note 8. Credit Facility

On August 2, 2006, the Company entered into a $25.0 million senior secured revolving credit agreement with Wells Fargo Foothill, Inc. and other lenders. On April 27, 2009, the Company, with Oclaro Technology plc, Oclaro Photonics, Inc. and Oclaro Technology, Inc., each a wholly-owned subsidiary, collectively the Borrowers, entered into an amendment to its existing credit agreement (“Amended Credit Agreement”) with Wells Fargo Foothill, Inc. and other lenders regarding the $25.0 million senior secured revolving credit facility, extending the term to August 1, 2012. Under the Amended Credit Agreement, advances are available based on 80 percent of “qualified accounts receivable,” as defined in the Amended Credit Agreement.

As of April 3, 2010, there was $2.5 million outstanding under the Amended Credit Agreement with an interest rate of 7.00 percent, which was based on the bank’s prime rate plus 3.50 percentage points. There was no amount outstanding as of June 27, 2009. As of April 3, 2010, the Company was in compliance with all covenants under the Amended Credit Agreement.

At April 3, 2010 and June 27, 2009, there were $1.0 million and $0.3 million, respectively, in outstanding standby letters of credit with a vendor secured under the Amended Credit Agreement. The outstanding standby letter of credit for $1.0 million expires in April 2010.

Note 9. Commitments and Contingencies

     Guarantees

The Company indemnifies its directors and certain employees as required by law, and has entered into indemnification agreements with its directors and certain senior officers. The Company has not recorded a liability associated with these indemnification arrangements as the Company historically has not incurred any costs associated with such indemnification arrangements and does not expect to in the future. Costs associated with such indemnification arrangements may be mitigated, in whole or only in part, 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 banks in favor of several of its suppliers. Additionally, the Company from time to time, in the normal course of business, indemnifies certain customers with whom it enters into contractual relationships. The Company has not historically paid out any amounts related to these indemnification obligations and does not expect to in the future, therefore no accrual has been made for these indemnification obligations.

     Warranty accrual

The Company accrues for the estimated costs to provide warranty services at the time revenue is recognized. The Company’s 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 Company’s warranty costs will increase, resulting in a decrease in gross profit.

The following table summarizes movements in the warranty accrual for the periods indicated:

		Three Months Ended								Nine Months Ended
		April 3,				March 28,				April 3,				March 28,
		2010				2009				2010				2009
		(Thousands)
Warranty provision — beginning of period		$	2,486			$	2,174			$	2,228			$	2,598
Warranties assumed in acquisitions			—				—				248				—
Warranties issued			1,162				558				2,862				2,180
Warranties utilized or expired			(687	)			(664	)			(2,351	)			(2,152	)
Currency translation adjustment			(82	)			(48	)			(108	)			(606	)
Warranty provision — end of period		$	2,879			$	2,020			$	2,879			$	2,020

     Litigation

On June 26, 2001, the first of a number of securities class actions was filed in the United States District Court for the Southern District of New York against New Focus, Inc., now known as Oclaro Photonics, Inc. (New Focus), certain of its officers and directors, and certain underwriters for New Focus’ initial and secondary public offerings. A consolidated amended class action complaint, captioned In re New Focus, Inc. Initial Public Offering Securities Litigation, No. 01 Civ. 5822, was filed on April 20, 2002. The complaint generally alleges that various underwriters engaged in improper and undisclosed activities related to the allocation of shares in New Focus’ initial public offering and seeks unspecified damages for claims under the Exchange Act on behalf of a purported class of purchasers of common stock from May 17, 2000 to December 6, 2000.

The lawsuit against New Focus is coordinated for pretrial proceedings with a number of other pending litigations challenging underwriter practices in over 300 cases, as In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS), including actions against Bookham Technology plc, now known as Oclaro Technology plc (Bookham Technology) and Avanex Corporation, now known as Oclaro (North America), Inc. (Avanex), and certain of each entity’s respective officers and

directors, and certain of the underwriters of their public offerings. In October 2002, the claims against the directors and officers of New Focus, Bookham Technology and Avanex were dismissed, without prejudice, subject to the directors’ and officers’ execution of tolling agreements.

In 2007, a settlement between certain parties in the litigation that had been pending with the Court since 2004 was terminated by stipulation of the parties to the settlement, after a ruling by the Second Circuit Court of Appeals in six “focus” cases in the coordinated proceeding (the actions involving Bookham Technology, New Focus and Avanex are not focus cases) made it unlikely that the settlement would receive final court approval. Plaintiffs filed amended master allegations and amended complaints in the six focus cases. In 2008, the Court largely denied the focus case defendants’ motion to dismiss the amended complaints.

The parties have reached a global settlement of the litigation. On October 5, 2009, the Court entered an order certifying a settlement class and granting final approval of the settlement. Under the settlement, the insurers will pay the full amount of the settlement share allocated to New Focus, Bookham Technology and Avanex, and New Focus, Bookham Technology and Avanex will bear no financial liability. New Focus, Bookham Technology and Avanex, as well as the officer and director defendants who were previously dismissed from the action pursuant to tolling agreements, will receive complete dismissals from the case. Certain objectors have appealed the Court’s October 5, 2009 order to the Second Circuit Court of Appeals. If for any reason the settlement does not become effective, we believe that Bookham Technology, New Focus and Avanex have meritorious defenses to the claims and therefore believe that such claims will not have a material effect on our financial position, results of operations or cash flows.

On February 13, 2009, Bijan Badihian filed a complaint against Avanex Corporation, its then-CEO Giovanni Barbarossa, then interim CFO Mark Weinswig and an administrative assistant (who has since been dismissed from the action), in the Superior Court for the State of California, Los Angeles County. On June 8, 2009, after defendants filed a demurrer, plaintiff filed a First Amended Complaint adding as defendants Oclaro, Inc. as successor to Avanex, and Paul Smith, who was Chairman of the Avanex Board of Directors. On April 28, 2010 Badihian filed a Second Amended Complaint, which names Avanex, Oclaro (as successor in interest), Greg Dougherty, Joel Smith III, Paul Smith, Barbarossa, and Weinswig. Messrs. Barbarossa, Dougherty and Smith III are current members of Oclaro’s Board of Directors. The Second Amended Complaint alleges that defendants failed to disclose material facts regarding Avanex’s operational performance and future prospects, or engaged in conduct which negatively impacted those future prospects. The Second Amended Complaint alleges causes of action for (1) breach of fiduciary duty; (2) intentional misrepresentation; (3) negligent misrepresentation; (4) concealment; (5) constructive fraud; (6) intentional infliction of emotional distress; and (7) negligent infliction of emotional distress. The Second Amended Complaint seeks at least $5 million in compensatory damages plus prejudgment interest, unspecified damages for emotional distress, punitive damages, and costs. The parties are currently engaged in discovery. The Superior Court has set a trial date of January 18, 2011.

On May 27, 2009, a patent infringement action captioned QinetiQ Limited v. Oclaro, Inc., Civil Action No. 1:09-cv-00372, was filed in the United States District Court for the District of Delaware. The action alleges infringement of United States Patent Nos. 5,410,625 and 5,428,698 and seeks a permanent injunction against all products found to infringe those patents, unspecified damages, costs, attorneys’ fees and other expenses. On July 16, 2009, Oclaro filed an answer to the complaint and stated counterclaims against QinetiQ Limited for judgments of invalidity and unenforceability of the patents-in-suit and seeking costs, attorney’s fees, and other expenses. On August 7, 2009, QinetiQ Limited requested that the District Court dismiss Oclaro’s unenforceability counterclaims and strike two of Oclaro’s affirmative defenses. On August 24, 2009, Oclaro filed its brief opposing QinetiQ’s request. QinetiQ Limited has since indicated to the Court that it plans to withdraw that request. On August 14, 2009, Oclaro filed a Motion to Transfer Venue, requesting that the action be transferred to the Northern District of California. On December 18, 2009, the District Court for the District of Delaware granted Oclaro’s Motion to Transfer Venue and transferred the action to the Northern District of California. Oclaro believes the claims asserted against it by QinetiQ are without merit and will continue to defend itself vigorously.

Note 10. Stockholders’ Equity

     Warrants

The following table summarizes activity relating to warrants to purchase the Company’s common stock on a post-split basis:

						Weighted-
		Warrants				Average
		Outstanding				Exercise Price
		(Thousands)
Balance at June 27, 2009			2,547			$	24.55
Expired on December 20, 2009			(400	)			30.00
Expired on March 8, 2010			(531	)			37.15
Balance at April 3, 2010			1,616			$	19.05

On April 27, 2009, in connection with the merger of Avanex and Oclaro, the Company issued approximately 531,000 replacement warrants (2,655,000 warrants pre-split) to existing Avanex warrant holders as of April 27, 2009. These warrants were exercisable during the period beginning on April 28, 2009 through March 8, 2010, at an exercise price of $37.15 per share ($7.43 per share pre-split). All of these warrants expired on March 8, 2010.

On March 22, 2007, the Company entered into a private placement agreement which included warrants to purchase up to 818,413 shares (4,092,066 shares pre-split) of common stock with certain institutional accredited investors. The warrants have a five year term and are exercisable beginning on September 23, 2007 at an exercise price of $14.00 per share ($2.80 per share pre-split), subject to adjustment based on a weighted average anti-dilution formula if the Company effects certain equity issuances in the future for consideration per share that is less than the then current exercise price per share of such warrants.

On August 31, 2006, the Company entered into a private placement agreement which included issuance of warrants to purchase up to 434,800 shares (2,174,000 shares pre-split) of common stock. On September 19, 2006, through a second closing of this private placement, the Company issued additional warrants to purchase up to 144,933 shares (724,667 shares pre-split) of common stock. In both cases, the warrants were issued and sold to certain institutional accredited investors. The warrants are exercisable during the period beginning on March 2, 2007 through September 1, 2011, at an exercise price of $20.00 per share ($4.00 per share pre-split).

On January 13, 2006, the Company issued warrants to investors to purchase 60,872 shares (304,359 shares pre-split) of common stock in connection with the conversion of a portion of the Company’s 7.0 percent senior unsecured convertible debentures issued in December 2004. On March 23, 2006, the Company issued warrants to purchase 19,092 shares (95,461 shares pre-split) of common stock to convert the remaining portion of the Company’s 7.0 percent senior unsecured convertible debentures. The warrants are exercisable from July 13, 2006 to January 13, 2011 at an exercise price per share of $35.00 ($7.00 per share pre-split).

On January 13, 2006, the Company issued warrants to purchase 137,200 shares (686,000 shares pre-split) of common stock to certain accredited institutional investors in connection with their purchase and subsequent retirement of other debt obligations. The warrants are exercisable from July 13, 2006 to January 13, 2011 at an exercise price per share of $35.00 ($7.00 per share pre-split).

On December 20, 2004, in connection with the sale of debentures, the Company provided holders thereof the right to purchase up to an aggregate of 400,393 shares (2,001,963 shares pre-split) of common stock, exercisable during the five years from the date of grant, at an initial exercise price of $30.00 per share ($6.00 per share pre-split). These warrants were exercisable from December 20, 2004 to December 20, 2009. All of these warrants expired on December 20, 2009.

During 2003, the Company assumed warrants to purchase 976 shares (4,881 shares pre-split) of common stock as part of the terms of its acquisition of Ignis Optics. The warrants have an exercise price of $200.00 per share ($40.00 per share pre-split), and began expiring in fiscal year 2008.

     Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income are as follows:

		April 3, 2010				June 27, 2009
		(Thousands)
Accumulated other comprehensive income:
Unrealized loss on currency instruments designated as hedges		$	(423	)		$	(545	)
Currency translation adjustments			30,123				31,443
Unrealized gain on short-term investments			—				7
		$	29,700			$	30,905

Note 11. Employee Stock Plans

Under the Company’s Amended and Restated 2004 Stock Incentive Plan there are approximately 1.1 million shares (5.3 million shares pre-split) of the Company’s common stock available for grant as of April 3, 2010. The Company generally grants stock options that vest over a four to five year service period, and restricted stock awards and units that vest over a one to four year service period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives as set by the Company’s Board of Directors.

On November 2, 2009, the Company filed a “Tender Offer Statement” on Schedule TO with the SEC, related to an offer by the Company to certain of its employees to exchange some or all of their outstanding options to purchase the Company’s common stock for fewer replacement stock options with exercise prices equal to $6.80 per share ($1.36 per share pre-split), which was the closing price per share of the Company’s common stock on December 2, 2009, the date of grant and the last day of the tender offer (“the Offer”). A stock option was eligible for exchange in the Offer if: (i) it had an exercise price of at least $10.00 per share ($2.00 per share pre-split); (ii) it was granted at least 12 months prior to the commencement of the Offer; (iii) it was held by an employee who was eligible to participate in the Offer and (iv) it remained outstanding (i.e., unexpired and unexercised) as of the date of grant of the replacement options (“Eligible Options”). The Company made the Offer to all of the U.S. and international employees of the Company and its subsidiaries who held Eligible Options (“Eligible Employees”), except for (i) members of the Company’s Board of Directors and (ii) the Company’s named executive officers. As of December 2, 2009, when the Offer expired. Eligible Employees surrendered approximately 0.8 million Eligible Options (3.9 million pre-split) with a weighted-average exercise price of $37.55 per share ($7.51 per share pre-split) in exchange for approximately 0.4 million replacement stock options (1.8 million pre-split) with an exercise price of $6.80 per share ($1.36 per share pre-split).

The fair value of the replacement options granted was measured as the total of the unrecognized compensation cost of the original options tendered and the incremental compensation cost of the new options granted. The incremental compensation cost of the new options granted was measured as the excess of the fair value of the new options granted over the fair value of the original options immediately before cancellation. The total remaining unrecognized compensation expense related to the original options tendered will be recognized over the remaining requisite service period of the original options. The incremental compensation cost of the new options granted was $20,000.

During the nine months ended April 3, 2010, the Company reduced its shares available for grant by 0.7 million shares (3.7 million shares pre-split), of which 0.6 million shares (3.0 million shares pre-split) available for grant were cancelled in connection with the Offer and 0.1 million shares (0.7 million shares pre-split) available for grant were cancelled upon the expiration of the Avanex Corporation 1998 Stock Plan in December 2009.

The following table summarizes the combined activity under all of the Company’s equity incentive plans for the nine months ended April 3, 2010 reflected on a post-split basis:

		Shares				Stock				Weighted-				Restricted Stock				Weighted-
		Available				Options				Average				Awards / Units				Average Grant
		For Grant				Outstanding				Exercise Price				Outstanding				Date Fair Value
		(Thousands)				(Thousands)								(Thousands)
Balances at June 27, 2009			2,561				3,235			$	21.00				431			$	4.15
Granted			(1,561	)			990				4.40				570				6.80
Granted in connection with tender offer			(354	)			354				6.80				—				—
Exercised or released			—				(45	)			3.70				(216	)			3.90
Cancelled or forfeited			463				(487	)			31.15				(32	)			4.15
Cancelled in connection with tender offer			704				(777	)			37.55				—				—
Reduction in available for grant			(744	)			—				—				—				—
Balances at April 3, 2010			1,069				3,270			$	9.15				753			$	6.25

Supplemental disclosure information about the Company’s stock options outstanding as of April 3, 2010 reflected on a post-split basis is as follows:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
		Shares				Exercise Price				Contractual Life				Value
		(Thousands)								(Years)				(Thousands)
Options exercisable at April 3, 2010			906			$	20.05				6.0			$	4,357
Options outstanding at April 3, 2010			3,270			$	9.15				8.0			$	25,667

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $13.95 ($2.79 pre-split) as of April 1, 2010, which would have been received by the option holders had all option holders exercised their options as of that date. There were approximately 0.6 million shares (2.8 million shares pre-split) of common stock subject to in-the-money options which were exercisable as of April 3, 2010. The Company settles employee stock option exercises with newly issued shares of common stock.

Note 12. Stock-based Compensation

The Company accounts for stock-based compensation under ASC 718, Compensation — Stock Compensation, which requires companies to recognize in their statement of operations all share-based payments, including grants of stock options, based on the grant date fair value of such share-based awards. The application of ASC 718 requires the Company’s management to make judgments in the determination of inputs into the Black-Scholes-Merton stock option pricing model which the Company uses to determine the grant date fair value of stock options it grants. This model requires assumptions to be made related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. While the risk-free interest rate is a less subjective assumption, typically based on factual data derived from public sources, the expected stock price volatility and option life assumptions require a greater level of judgment, which makes them critical accounting estimates.

The Company has not issued, and does not anticipate issuing, dividends to stockholders and accordingly uses a zero percent dividend yield assumption for all Black-Scholes-Merton stock option pricing calculations. The Company’s volatility is derived from an expected stock-price volatility assumption based on historical realized volatility of the underlying common stock during a period of time. The Company evaluates the exercise behavior of past grants as a basis to predict future activity to arrive at its expected life assumption.

The assumptions used to value stock option grants for the three and nine months ended April 3, 2010 and March 28, 2009 are as follows:

		Three Months Ended								Nine Months Ended
		April 3,				March 28,				April 3,				March 28,
		2010				2009				2010				2009
Expected life		4.5 years				4.5 years				4.5 years				4.5 years
Risk-free interest rate			2.2	%			1.9	%			2.3	%			2.8	%
Volatility			95.9	%			84.6	%			99.8	%			74.0	%
Dividend yield			—				—				—				—

The amounts included in cost of revenues and operating expenses for stock-based compensation expenses for the three and nine months ended April 3, 2010 and March 28, 2009 were as follows:

		Three Months Ended								Nine Months Ended
		April 3,				March 28,				April 3,				March 28,
		2010				2009				2010				2009
						(Thousands)
Stock-based compensation by category of expense:
Cost of revenues		$	226			$	265			$	640			$	889
Research and development			332				216				831				650
Selling, general and administrative			666				490				1,704				1,491
Income (loss) from discontinued operations			—				91				—				273
		$	1,224			$	1,062			$	3,175			$	3,303
Stock-based compensation by type of award:
Stock options		$	629			$	904			$	2,257			$	2,573
Restricted stock awards			741				136				1,178				566
Inventory adjustment to cost of revenues			(146	)			22				(260	)			164
		$	1,224			$	1,062			$	3,175			$	3,303

As of April 3, 2010 and June 27, 2009, the Company had capitalized approximately $0.4 million and $0.2 million, respectively, of stock-based compensation as inventory.

Note 13. Income Taxes

The Company’s total amount of unrecognized tax benefits as of April 3, 2010 and June 27, 2009 was approximately $2.7 million and $2.5 million, respectively. For the nine months ended April 3, 2010, the Company had $0.4 million in unrecognized tax benefits that, if recognized, would affect its effective tax rate. There are no unrecognized tax positions that presently exist for which it is reasonably possible there will be a significant increase or decrease within the next twelve months.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for (benefit from) income taxes. As of April 3, 2010, the Company has accrued approximately $49,000 for payment of interest and penalties related to unrecognized tax benefits.

The Company files U.S. federal, U.S. state and foreign tax returns and has determined its major tax jurisdictions are the United States, the United Kingdom, Italy, France and China. Certain jurisdictions remain open to examination by the appropriate governmental agencies; U.S. federal, Italy, France and China tax years 2004 to 2008, various U.S. states tax years 2004 to 2009, and the United Kingdom tax years 2003 to 2009. The Company is currently under audit in Canada, France and the United Kingdom. Management has accounted for approximately $0.1 million of potential examination exposure within its consolidated financial statements as of April 3, 2010. Management does not anticipate any significant adjustments to its financial position or results of operations as a result of any such examinations.

Note 14. Net Income (Loss) Per Share

The following table presents the calculation of basic and diluted net income (loss) per share reflected on a post-split basis:

		Three Months Ended								Nine Months Ended
		April 3,				March 28,				April 3,				March 28,
		2010				2009				2010				2009
					(Thousands,except per share amounts)
Net income (loss)		$	205			$	(13,281	)		$	1,771			$	(17,549	)
Weighted average shares — basic			41,095				20,084				38,752				20,056
Effect of dilutive potential common shares from:
Stock options			1,472				—				914				—
Restricted stock awards			760				—				473				—
Obligations under escrow agreement			502				—				192				—
Weighted average shares — diluted			43,829				20,084				40,331				20,056
Basic net income (loss) per share		$	—			$	(0.66	)		$	0.05			$	(0.88	)
Diluted net income (loss) per share		$	—			$	(0.66	)		$	0.04			$	(0.88	)

Basic earnings per share is computed using only the weighted-average number of shares of common stock outstanding for the applicable period, while diluted earnings per share is computed assuming conversion of all potentially dilutive securities, such as stock options, unvested restricted stock awards, warrants and obligations under escrow agreements during such period. For the three and nine months ended March 28, 2009, there were no stock options, unvested restricted stock awards, warrants or obligations under escrow agreements factored into the computation of diluted shares outstanding since the Company incurred a net loss in these periods which would have resulted in their inclusion having an anti-dilutive effect.

For the three and nine months ended April 3, 2010, the Company excluded 0.5 million (2.4 million pre-split) and 1.4 million (7.2 million pre-split), respectively, of outstanding stock options and warrants from the calculation of diluted net income per share because their effect would have been anti-dilutive.

Note 15. Comprehensive Income (Loss)

For the three and nine months ended April 3, 2010 and March 28, 2009, the Company’s comprehensive income (loss) primarily comprised of the Company’s net income (loss), the change in the unrealized gain (loss) on currency instruments designated as hedges, unrealized gain (loss) on short-term investments and foreign currency translation adjustments.

The components of comprehensive income (loss) were as follows:

		Three Months Ended								Nine Months Ended
		April 3,				March 28,				April 3,				March 28,
		2010				2009				2010				2009
						(Thousands)
Net income (loss)		$	205			$	(13,281	)		$	1,771			$	(17,549	)
Other comprehensive income (loss):
Unrealized gain (loss) on currency instruments designated as hedges			(210	)			1,635				121				(2,388	)
Currency translation adjustments			(1,766	)			(1,649	)			(1,320	)			(16,964	)
Unrealized gain (loss) on short-term investments			—				(33	)			(7	)			11
Comprehensive income (loss)		$	(1,771	)		$	(13,328	)		$	565			$	(36,890	)

Note 16. Operating Segments and Related Information

The Company is organized and operates as two operating segments: (i) telecom and (ii) advanced photonics solutions. The telecom segment is responsible for the design, development, chip and filter level manufacturing, marketing and selling of optical components products to telecommunications systems vendors. The advanced photonics solutions segment is

responsible for the design, manufacture, marketing and selling of optics and photonics solutions for markets including material processing, printing, medical and consumer applications.

The Company’s Chief Executive Officer is the Company’s chief operating decision maker, and as such, evaluates the performance of these segments and makes resource allocation decisions based on segment revenues and segment operating income (loss), after allocating manufacturing costs between these operating segments and allocating the Company’s corporate general and administration costs to these operating segments, exclusive of stock compensation, gains or losses on legal settlements, gain on sale of property and equipment and impairment of goodwill and other intangible assets, none of which are allocated to these operating segments.

Segment information, presented for continuing operations for the three and nine months ended April 3, 2010 and March 28, 2009 was as follows:

		Three Months Ended								Nine Months Ended
		April 3,				March 28,				April 3,				March 28,
		2010				2009				2010				2009
						(Thousands)
Net revenues:
Telecom		$	87,013			$	37,174			$	243,457			$	128,049
Advanced photonics solutions			14,139				4,067				36,379				15,997
Consolidated net revenues		$	101,152			$	41,241			$	279,836			$	144,046

		Three Months Ended								Nine Months Ended
		April 3,				March 28 ,				April 3,				March 28,
		2010				2009				2010				2009
						(Thousands)
Operating income (loss)
Telecom		$	1,957			$	482			$	(372	)		$	(6,691	)
Advanced photonics solutions			(599	)			(3,620	)			(745	)			(4,575	)
Total segment operating income (loss)			1,358				(3,138	)			(1,117	)			(11,266	)
Stock-based compensation			1,224				971				3,175				3,030
Legal settlements			—				3,705				—				3,829
(Gain) loss on sale of property and equipment			101				(16	)			(502	)			(8	)
Impairment of goodwill and other intangible assets			—				1,252				—				9,133
Consolidated operating income (loss)		$	33			$	(9,050	)		$	(3,790	)		$	(27,250	)

The following table shows revenues by geographic area based on the delivery locations of the Company’s products:

		Three Months Ended								Nine Months Ended
		April 3,				March 28,				April 3,				March 28,
		2010				2009				2010				2009
						(Thousands)
United States		$	19,542			$	8,064			$	54,529			$	30,014
Canada			3,563				3,804				12,302				11,610
Europe			23,424				12,083				66,417				36,843
Asia			47,234				17,290				125,792				55,473
Rest of world			7,389				—				20,796				10,106
		$	101,152			$	41,241			$	279,836			$	144,046