e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 1, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________ to ________________
Commission file number 000-30684
OCLARO, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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20-1303994
(I.R.S. Employer Identification Number) |
2560 Junction Avenue, San Jose, California 95134
(Address of principal executive offices, zip code)
(408) 383-1400
(Registrants telephone number, including area code)
2584 Junction Avenue, San Jose, California 95134
(Former address of principal executive offices, zip code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes
þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act
(Check one):
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company o |
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 February 4, 2011: 49,941,880
OCLARO, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
OCLARO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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January 1, 2011 |
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July 3, 2010 |
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(Thousands, except par value) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
77,279 |
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$ |
107,176 |
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Restricted cash |
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845 |
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4,458 |
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Accounts receivable, net |
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105,715 |
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93,412 |
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Inventories |
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82,840 |
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62,570 |
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Prepaid expenses and other current assets |
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15,858 |
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14,905 |
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Total current assets |
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282,537 |
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282,521 |
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Property and equipment, net |
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54,086 |
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37,516 |
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Other intangible assets, net |
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21,060 |
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10,610 |
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Goodwill |
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30,904 |
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20,000 |
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Other non-current assets |
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10,094 |
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10,148 |
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Total assets |
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$ |
398,681 |
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$ |
360,795 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
61,763 |
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$ |
50,103 |
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Accrued expenses and other liabilities |
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45,520 |
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35,404 |
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Total current liabilities |
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107,283 |
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85,507 |
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Deferred gain on sale-leaseback |
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12,899 |
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12,969 |
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Other non-current liabilities |
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14,631 |
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9,785 |
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Total liabilities |
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134,813 |
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108,261 |
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Commitments and contingencies (Note 9) |
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Stockholders equity: |
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Preferred stock: 1,000 shares authorized; none issued
and outstanding |
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Common stock: $0.01 par value per share; 90,000 shares
authorized;
49,931 and 49,396 shares issued and outstanding at January 1,
2011 and July 3, 2010, respectively |
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499 |
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494 |
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Additional paid-in capital |
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1,308,538 |
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1,304,779 |
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Accumulated other comprehensive income |
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34,334 |
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26,907 |
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Accumulated deficit |
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(1,079,503 |
) |
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(1,079,646 |
) |
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Total stockholders equity |
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263,868 |
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252,534 |
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Total liabilities and stockholders equity |
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$ |
398,681 |
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$ |
360,795 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
3
OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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January 1, |
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January 2, |
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January 1, |
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January 2, |
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2011 |
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2010 |
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2011 |
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2010 |
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(Thousands, except per share amounts) |
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Revenues |
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$ |
120,299 |
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$ |
93,574 |
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$ |
241,646 |
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$ |
178,684 |
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Cost of revenues |
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84,556 |
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68,715 |
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171,077 |
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131,834 |
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Gross profit |
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35,743 |
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24,859 |
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70,569 |
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46,850 |
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Operating expenses: |
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Research and development |
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15,696 |
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9,675 |
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29,407 |
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18,689 |
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Selling, general and administrative |
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15,149 |
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14,835 |
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29,962 |
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27,798 |
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Amortization of intangible assets |
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739 |
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125 |
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1,358 |
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250 |
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Restructuring, acquisition and related costs |
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903 |
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3,040 |
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1,573 |
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4,539 |
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Legal settlements |
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1,678 |
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1,678 |
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Gain on sale of property and equipment |
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(48 |
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(71 |
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(69 |
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(603 |
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Total operating expenses |
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34,117 |
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27,604 |
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63,909 |
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50,673 |
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Operating income (loss) |
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1,626 |
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(2,745 |
) |
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6,660 |
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(3,823 |
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Other income (expense): |
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Interest income |
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9 |
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2 |
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16 |
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25 |
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Interest expense |
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(479 |
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(33 |
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(1,052 |
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(121 |
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Gain (loss) on foreign currency translation |
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(1,119 |
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793 |
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(4,706 |
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(483 |
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Other income |
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28 |
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5,295 |
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Total other income (expense) |
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(1,589 |
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790 |
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(5,742 |
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4,716 |
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Income (loss) from continuing operations
before income taxes |
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37 |
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(1,955 |
) |
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918 |
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893 |
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Income tax provision |
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250 |
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524 |
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775 |
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747 |
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Income (loss) from continuing operations |
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(213 |
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(2,479 |
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143 |
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146 |
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Income from discontinued operations, net of tax |
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1,420 |
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Net income (loss) |
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$ |
(213 |
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$ |
(2,479 |
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$ |
143 |
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$ |
1,566 |
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Basic net income (loss) per share: |
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Income (loss) per share from continuing operations |
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$ |
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$ |
(0.07 |
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$ |
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$ |
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Income per share from discontinued operations |
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$ |
0.04 |
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Basic net income (loss) per share |
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$ |
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$ |
(0.07 |
) |
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$ |
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$ |
0.04 |
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Diluted net income (loss) per share: |
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Income (loss) per share from continuing operations |
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$ |
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$ |
(0.07 |
) |
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$ |
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$ |
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Income per share from discontinued operations |
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$ |
0.04 |
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Diluted net income (loss) per share |
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$ |
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$ |
(0.07 |
) |
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$ |
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$ |
0.04 |
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Shares used in computing net income (loss) per share: |
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Basic |
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48,262 |
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37,980 |
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48,189 |
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37,624 |
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Diluted |
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48,262 |
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37,980 |
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51,109 |
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38,830 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
4
OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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January 1, 2011 |
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January 2, 2010 |
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(Thousands) |
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Cash flows from operating activities: |
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Net income |
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$ |
143 |
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$ |
1,566 |
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Adjustments to reconcile net income to net cash used
in operating activities: |
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Amortization of deferred gain on sale-leaseback |
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(458 |
) |
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(466 |
) |
Depreciation and amortization |
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8,053 |
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5,736 |
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Gain on bargain purchase |
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(5,267 |
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Gain on sale of discontinued operations |
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(1,420 |
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Stock-based compensation expense |
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3,032 |
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1,951 |
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Other non-cash adjustments |
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(70 |
) |
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(609 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(6,135 |
) |
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(10,238 |
) |
Inventories |
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(14,450 |
) |
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5,462 |
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Prepaid expenses and other current assets |
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(238 |
) |
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(1,201 |
) |
Other non-current assets |
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105 |
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1,590 |
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Accounts payable |
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8,033 |
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6,634 |
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Accrued expenses and other liabilities |
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(5,348 |
) |
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(7,295 |
) |
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Net cash used in operating activities |
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(7,333 |
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(3,557 |
) |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(18,681 |
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(2,368 |
) |
Proceeds from sales of property and equipment |
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69 |
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691 |
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Sales and maturities of available-for-sale investments |
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9,258 |
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Transfer (to) from restricted cash |
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3,693 |
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(95 |
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Cash (paid for) received from business combinations |
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(10,482 |
) |
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3,277 |
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Net cash provided by (used in) investing activities |
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(25,401 |
) |
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10,763 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net |
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625 |
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Repayment of loans |
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(52 |
) |
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Net cash provided by (used in) financing activities |
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625 |
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(52 |
) |
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Effect of exchange rate on cash and cash equivalents |
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2,212 |
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16 |
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Net increase (decrease) in cash and cash equivalents |
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(29,897 |
) |
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7,170 |
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Cash and cash equivalents at beginning of period |
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107,176 |
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|
44,561 |
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Cash and cash equivalents at end of period |
|
$ |
77,279 |
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$ |
51,731 |
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|
The accompanying notes form an integral part of these condensed consolidated financial statements.
5
OCLARO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Preparation
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Oclaro, Inc., a Delaware
corporation, (Oclaro, we, us or our) as of January 1, 2011 and for the three and six months
ended January 1, 2011 and January 2, 2010 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 Oclaro 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 our consolidated
financial position and results of operations have been included. The condensed consolidated results
of operations for the three and six months ended January 1, 2011 are not necessarily indicative of
results that may be expected for any other interim period or for the full fiscal year ending July
2, 2011.
The condensed consolidated balance sheet as of July 3, 2010 has been derived from our 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 our
audited financial statements included in our Annual Report on Form 10-K for the year ended July 3,
2010 (2010 Form 10-K).
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 and the
disclosure of contingent assets and liabilities at the date of the financial statements, as well as
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 some of the key estimates and assumptions are included
in our 2010 Form 10-K.
Fiscal Years
We operate on a 52/53 week year ending on the Saturday closest to June 30. Our fiscal year
ended July 3, 2010 was a 53 week year, with the quarter ended January 2, 2010 being a 14 week
quarterly period. Our fiscal year ended July 2, 2011 will be a 52 week year, with the quarter
ended January 1, 2011 being a 13 week quarterly period.
Reclassifications
For presentation purposes, we have reclassified certain prior period amounts to conform to the
current period financial statement presentation. With the exception of those discussed below, these
reclassifications did not affect our consolidated net income, cash flows, cash and cash equivalents
or stockholders equity, as previously reported.
During the second quarter of fiscal year 2010, we finalized the purchase accounting with respect to
our acquisition of Newport Corporations (Newport) high power laser diodes business and the
disposition of our New Focus business. Our final assessment resulted in the gain on bargain
purchase increasing from $0.7 million as originally reported to $5.3 million and the income from
discontinued operations increasing from $1.3 million as originally reported to $1.4 million during
the second quarter of fiscal year 2010.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during
the three or six months ended January 1, 2011 that are of significance, or potential significance,
to us.
6
Comprehensive Income (Loss)
For the three and six months ended January 1, 2011 and January 2, 2010, comprehensive income (loss)
is primarily comprised of our net income (loss), changes in the unrealized gain (loss) on currency
instruments designated as cash flow hedges, unrealized loss on short-term investments and currency
translation adjustments.
The components of comprehensive income (loss) were as follows for the periods indicated:
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Three Months Ended |
|
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Six Months Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
Net income (loss) |
|
$ |
(213 |
) |
|
$ |
(2,479 |
) |
|
$ |
143 |
|
|
$ |
1,566 |
|
Other comprehensive income (loss): |
|
|
|
|
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|
|
|
Unrealized gain (loss) on currency instruments
designated as cash flow hedges |
|
|
(288 |
) |
|
|
354 |
|
|
|
35 |
|
|
|
331 |
|
Currency translation adjustments |
|
|
1,779 |
|
|
|
(1,101 |
) |
|
|
7,392 |
|
|
|
446 |
|
Unrealized loss on short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
1,278 |
|
|
$ |
(3,226 |
) |
|
$ |
7,570 |
|
|
$ |
2,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 2. Fair Value
We define fair value as the price that would be received from selling an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. When
determining fair value measurements for assets and liabilities which are required to be recorded at
fair value, we consider the principal or most advantageous market in which we would transact and
the market-based risk measurements or assumptions that market participants would use in pricing the
asset or liability, such as inherent risk, transfer restrictions and credit risk. We apply the
following fair value hierarchy, which ranks the quality and reliability of the information used to
determine fair values:
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; and
Level 3 unobservable inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or liabilities.
Our 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.
We have classified an escrow liability issued in connection with our acquisition of Xtellus Inc.
(Xtellus) within Level 2 of the fair value hierarchy, as its value was derived by discounting the
total liability of $7.0 million due 18 months after the acquisition to its present value using our
incremental borrowing cost.
7
During the first quarter of fiscal year 2011, we classified $15.3 million in earnout liabilities
arising from our acquisition of Mintera Corporation (Mintera) within Level 3 of the fair value
hierarchy because their values were primarily derived from management estimates of future operating
results. See Note 3, Business Combinations, for additional details regarding these liabilities.
We have a defined benefit pension plan in Switzerland whose assets are classified within Level 1 of
the fair value hierarchy for plan assets of cash, equity investments and fixed income investments,
and Level 3 of the fair value hierarchy for plan assets of real estate and alternative investments.
These pension plan assets are not reflected in the accompanying condensed consolidated balance
sheets, and are thus not included in the tables below.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
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 January 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date 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 |
|
$ |
48,196 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
48,196 |
|
Prepaid expenses and other current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on currency instruments
designated as cash flow hedges |
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
48,196 |
|
|
$ |
84 |
|
|
$ |
|
|
|
$ |
48,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrow liability for Xtellus
acquisition (2) |
|
$ |
|
|
|
$ |
6,767 |
|
|
$ |
|
|
|
$ |
6,767 |
|
Earnout liability for Mintera
acquisition (2) |
|
|
|
|
|
|
|
|
|
|
4,465 |
|
|
|
4,465 |
|
Other non-current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnout liability for Mintera
acquisition (2) |
|
|
|
|
|
|
|
|
|
|
11,134 |
|
|
|
11,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
|
|
|
$ |
6,767 |
|
|
$ |
15,599 |
|
|
$ |
22,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $29.1 million in cash held in our bank accounts at January 1, 2011. |
|
(2) |
|
Includes interest expense accrued during the six months ended January 1, 2011. |
8
The following table provides details regarding the changes in assets and liabilities classified
within Level 3 from July 3, 2010 to January 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measured and
Recorded Using Significant Unobservable Inputs (Level 3) |
|
|
|
Accrued Expenses |
|
|
Other |
|
|
|
and Other |
|
|
Non-Current |
|
|
|
Liabilities |
|
|
Liabilities |
|
|
|
(Thousands) |
|
Balance at July 3, 2010 |
|
$ |
|
|
|
$ |
|
|
Earnout liabilities from Mintera acquisition |
|
|
4,338 |
|
|
|
10,810 |
|
Interest expense on Mintera earnout liabilities |
|
|
127 |
|
|
|
324 |
|
|
|
|
|
|
|
|
Balance at January 1, 2011 |
|
$ |
4,465 |
|
|
$ |
11,134 |
|
|
|
|
|
|
|
|
Derivative Financial Instruments
At the end of each accounting period, we mark-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 our condensed consolidated statements of operations. As
of January 1, 2011, we held sixteen 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 $17.5 million of put
and call options which expire, or expired, at various dates ranging from January 2011 through
November 2011. To date, we have not entered into any such contracts for longer than 12 months and,
accordingly, all amounts included in accumulated other comprehensive income as of January 1, 2011
will generally be reclassified into other income (expense) within the next 12 months. As of January
1, 2011, each of the sixteen designated cash flow hedges was determined to be fully effective;
therefore, we recorded an unrealized gain of $0.1 million to accumulated other comprehensive income
related to recording the fair value of these foreign currency forward exchange contracts.
Note 3. Business Combinations
During the three and six months ended January 1, 2011, we recorded nil and $0.1 million,
respectively, in legal and other direct acquisition-related costs in connection with business
combinations. During the three and six months ended January 2, 2010, we recorded $1.2 million and
$1.6 million, respectively, in legal and other direct acquisition-related costs in connection with
business combinations. These costs are recorded within restructuring, acquisition and related
costs in our condensed consolidated statement of operations.
Sale of the New Focus Business and Acquisition of Newports High Power Laser Diodes Business
On July 4, 2009, we sold the net assets of our New Focus business to Newport in exchange for the
net assets of Newports high power laser diodes business and $3.0 million in cash proceeds. This
transaction resulted in the recording of $1.4 million in income from discontinued operations from
the sale of the New Focus business and a $5.3 million gain on bargain purchase of Newports high
power laser diodes business during the quarter ended September 26, 2009.
9
Acquisition of Xtellus
On December 17, 2009, we acquired Xtellus and accounted for the assets acquired and liabilities
assumed from this acquisition using the purchase method of accounting. During the first quarter of
fiscal year 2011, we completed our fair value assessment of the Xtellus acquisition, which resulted
in no change to the estimated fair values of the assets acquired and liabilities assumed from the
amounts we previously reported in our 2010 Form 10-K.
During the three and six months ended January 1, 2011, we recorded $0.1 million and $0.4 million in
interest expense related to the Xtellus escrow liability. During the first quarter of fiscal year
2011, we reclassified this escrow liability from other non-current liabilities to accrued expenses
and other liabilities.
We also reassessed the fair value of the Xtellus valuation protection guarantee during the current
quarter. Based on the criteria established in the merger agreement for the guarantee with Xtellus,
no liability is due. The guarantee expired in December 2010.
Further description of the Xtellus acquisition is included in Note 3, Business Combinations, of our
2010 Form 10-K.
Acquisition of Mintera
On July 21, 2010, we acquired Mintera, a privately-held company providing high-performance optical
transport sub-systems solutions. We accounted for the assets acquired and liabilities assumed from
this acquisition using the purchase method of accounting. Under the terms of this agreement, we
paid $10.5 million in cash to the former security holders and creditors of Mintera at the time of
close and assumed $1.5 million in liabilities due by the security holders of Mintera, which we paid
during the three months ended October 2, 2010. We also agreed to pay additional revenue-based
consideration whereby former security holders of Mintera are entitled to receive up to $20.0
million, determined based on a set of sliding scale formulas, to the extent revenue from Mintera
products is more than $29.0 million in the 12 months following the acquisition and/or more than
$40.0 million in the 18 months following the acquisition. The earnout consideration, if any, will
be payable in cash or, at our option, newly issued shares of our common stock, or a combination of
cash and stock. Achieving cumulative revenues of $40.0 million over the next 12 month period and
$70.0 million over the next 18 month period would lead to the maximum $20.0 million in additional
consideration. The estimated fair value of this obligation was determined using management
estimates of the total amounts expected to be paid based on estimated future operating results,
discounted to its present value using our incremental borrowing cost. The estimated fair value of
this obligation was $15.1 million at the acquisition date, and has been recorded in accrued
expenses and other liabilities and other non-current liabilities in our condensed consolidated
balance sheet at January 1, 2011. We reassessed the fair value of this obligation during the
current quarter determining that its value should remain at $15.1 million (plus accrued interest
from the acquisition date) as of January 1, 2011. During the three and six months ended January 1,
2011, we recorded $0.3 million and $0.5 million in interest expense related to this liability.
For accounting purposes, the total fair value of consideration given in connection with the
acquisition of Mintera was $25.6 million, consisting of the following:
|
|
|
|
|
|
|
Total Consideration |
|
|
|
(Thousands) |
|
Consideration to security holders and creditors of Mintera |
|
$ |
12,000 |
|
Less: Unpaid liabilities of Mintera security holders assumed by Oclaro |
|
|
(1,518 |
) |
|
|
|
|
Net cash paid to security holders and
creditors of Mintera |
|
|
10,482 |
|
Estimated fair value for the 12-month earnout liability |
|
|
4,338 |
|
Estimated fair value for the 18-month earnout liability |
|
|
10,810 |
|
|
|
|
|
Total estimated fair value for the earnouts |
|
|
15,148 |
|
|
|
|
|
Total consideration |
|
$ |
25,630 |
|
|
|
|
|
10
Our allocation of the purchase price of Mintera, based on the estimated fair values of the assets
acquired and liabilities assumed as of the acquisition date, is as follows:
|
|
|
|
|
|
|
Purchase Price |
|
|
|
(Thousands) |
|
Restricted cash |
|
$ |
41 |
|
Accounts receivable, net |
|
|
3,053 |
|
Inventories |
|
|
2,592 |
|
Prepaid expenses and other current assets |
|
|
130 |
|
Property and equipment, net |
|
|
3,202 |
|
Other intangible assets |
|
|
11,740 |
|
Accounts payable |
|
|
(1,947 |
) |
Accrued expenses and other current liabilities |
|
|
(4,085 |
) |
|
|
|
|
Fair value of assets acquired and liabilities assumed |
|
|
14,726 |
|
Goodwill |
|
|
10,904 |
|
|
|
|
|
Total purchase price |
|
$ |
25,630 |
|
|
|
|
|
During the current quarter, we completed our fair value assessment of the Mintera acquisition,
which resulted in no change to the estimated fair values of the assets acquired and liabilities
assumed from the amounts we previously reported in our Form 10-Q for the period ended October 2,
2010.
Unaudited Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations have been prepared as if the
acquisition of Mintera had occurred as of June 28, 2009, the first day of our fiscal year 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1, 2011 |
|
|
January 2, 2010 |
|
|
January 1, 2011 |
|
|
January 2, 2010 |
|
|
|
(Thousands) |
|
|
(Thousands) |
|
Revenues |
|
$ |
120,299 |
|
|
$ |
100,436 |
|
|
$ |
242,114 |
|
|
$ |
192,408 |
|
Loss from continuing operations |
|
$ |
(213 |
) |
|
$ |
(3,926 |
) |
|
$ |
(2,215 |
) |
|
$ |
(2,748 |
) |
Net loss |
|
$ |
(213 |
) |
|
$ |
(3,926 |
) |
|
$ |
(2,215 |
) |
|
$ |
(1,328 |
) |
Net loss per share basic |
|
$ |
|
|
|
$ |
(0.10 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
Net loss per share diluted |
|
$ |
|
|
|
$ |
(0.10 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.04 |
) |
Shares used in computing net loss
per share basic |
|
|
48,262 |
|
|
|
37,980 |
|
|
|
48,189 |
|
|
|
37,624 |
|
Shares used in computing net loss
per share diluted |
|
|
48,262 |
|
|
|
37,980 |
|
|
|
48,189 |
|
|
|
37,624 |
|
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 Mintera acquisition been consummated as of that time, nor is it intended to be a projection of
future results. In addition, this unaudited pro forma financial information does not include the
impact of additional acquisitions completed in fiscal year 2010.
11
Note 4. Balance Sheet Details
The following table provides details regarding our cash and cash equivalents at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
January 1, 2011 |
|
|
July 3, 2010 |
|
|
|
(Thousands) |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash-in-bank |
|
$ |
29,083 |
|
|
$ |
23,962 |
|
Money market funds |
|
|
48,196 |
|
|
|
83,214 |
|
|
|
|
|
|
|
|
|
|
$ |
77,279 |
|
|
$ |
107,176 |
|
|
|
|
|
|
|
|
The following table provides details regarding our inventories at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
January 1, 2011 |
|
|
July 3, 2010 |
|
|
|
(Thousands) |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
33,530 |
|
|
$ |
17,732 |
|
Work-in-process |
|
|
32,503 |
|
|
|
32,491 |
|
Finished goods |
|
|
16,807 |
|
|
|
12,347 |
|
|
|
|
|
|
|
|
|
|
$ |
82,840 |
|
|
$ |
62,570 |
|
|
|
|
|
|
|
|
The following table provides details regarding our property and equipment, net at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
January 1, 2011 |
|
|
July 3, 2010 |
|
|
|
(Thousands) |
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Buildings |
|
$ |
16,547 |
|
|
$ |
16,104 |
|
Plant and machinery |
|
|
118,903 |
|
|
|
97,186 |
|
Fixtures, fittings
and equipment |
|
|
1,368 |
|
|
|
1,142 |
|
Computer equipment |
|
|
13,063 |
|
|
|
12,232 |
|
|
|
|
|
|
|
|
|
|
|
149,881 |
|
|
|
126,664 |
|
Less: Accumulated
depreciation |
|
|
(95,795 |
) |
|
|
(89,148 |
) |
|
|
|
|
|
|
|
|
|
$ |
54,086 |
|
|
$ |
37,516 |
|
|
|
|
|
|
|
|
The following table presents details regarding our accrued expenses and other liabilities at
the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
January 1, 2011 |
|
|
July 3, 2010 |
|
|
|
(Thousands) |
|
Accrued expenses and other liabilities: |
|
|
|
|
|
|
|
|
Trade payables |
|
$ |
5,975 |
|
|
$ |
4,464 |
|
Compensation and
benefits related
accruals |
|
|
7,806 |
|
|
|
8,688 |
|
Warranty accrual |
|
|
2,241 |
|
|
|
2,437 |
|
Restructuring accrual |
|
|
1,379 |
|
|
|
4,338 |
|
Escrow liability for
Xtellus acquisition
(1) |
|
|
6,767 |
|
|
|
|
|
Earnout liability
for Mintera
acquisition (2) |
|
|
4,465 |
|
|
|
|
|
Other accruals |
|
|
16,887 |
|
|
|
15,477 |
|
|
|
|
|
|
|
|
|
|
$ |
45,520 |
|
|
$ |
35,404 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interest expense accrued during the six months ended January 1, 2011. During
the first quarter of fiscal year 2011, we reclassified this escrow liability from other
non-current liabilities to accrued expenses and other
liabilities. |
|
(2) |
|
Includes interest expense accrued during the six months ended January 1, 2011. |
12
The following table presents details regarding our other non-current liabilities at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
January 1, 2011 |
|
|
July 3, 2010 |
|
|
|
(Thousands) |
|
Other non-current liabilities |
|
|
|
|
|
|
|
|
Escrow liability for Xtellus acquisition (1) |
|
$ |
|
|
|
$ |
6,324 |
|
Earnout liability for Mintera acquisition (2) |
|
|
11,134 |
|
|
|
|
|
Other non-current liabilities |
|
|
3,497 |
|
|
|
3,461 |
|
|
|
|
|
|
|
|
|
|
$ |
14,631 |
|
|
$ |
9,785 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the first quarter of fiscal year 2011, we reclassified this escrow liability from
other non-current liabilities to accrued expenses and other
liabilities. |
|
(2) |
|
Includes interest expense accrued during the six months ended January 1, 2011. |
The following table presents the components of accumulated other comprehensive income at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
January 1, 2011 |
|
|
July 3, 2010 |
|
|
|
(Thousands) |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized gain on currency
instruments designated as cash flow
hedges |
|
$ |
84 |
|
|
$ |
49 |
|
Currency translation adjustments |
|
|
35,403 |
|
|
|
28,011 |
|
Swiss defined benefit plan |
|
|
(1,153 |
) |
|
|
(1,153 |
) |
|
|
|
|
|
|
|
|
|
$ |
34,334 |
|
|
$ |
26,907 |
|
|
|
|
|
|
|
|
Note 5. Goodwill and Other Intangible Assets
In connection with our acquisition of Mintera on July 21, 2010, we recorded $10.9 million in
goodwill and $11.7 million in other intangible assets. The other intangible assets acquired from
Mintera consist of core and current technology assets of $6.0 million with a weighted-average life
of 6 years, development agreement of $3.4 million with a weighted-average life of 7 years, customer
relationships of $1.4 million with a weighted-average life of 8.5 years, manufacturing software of
$0.7 million with a weighted-average life of 6 years, patents of $0.1 million with a
weighted-average life of 5.5 years, trade names of $80,000 with a weighted-average life of 1.5
years and backlog of $30,000 with a weighted-average life of 1.5 years.
The following table provides details regarding the changes in our goodwill and other intangible
assets from July 3, 2010 to January 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
Goodwill |
|
|
Cost |
|
|
Amortization |
|
|
Value |
|
|
|
(Thousands) |
|
Balance at July 3, 2010 |
|
$ |
20,000 |
|
|
$ |
12,815 |
|
|
$ |
(2,205 |
) |
|
$ |
10,610 |
|
Acquired |
|
|
10,904 |
|
|
|
11,740 |
|
|
|
|
|
|
|
11,740 |
|
Amortization |
|
|
|
|
|
|
|
|
|
|
(1,358 |
) |
|
|
(1,358 |
) |
Exchange rate adjustment |
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1,
2011 |
|
$ |
30,904 |
|
|
$ |
24,623 |
|
|
$ |
(3,563 |
) |
|
$ |
21,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
The following table reflects the components of other intangible assets, net at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
July 3, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
Other intangible assets, net |
|
|
|
|
|
|
|
|
Supply agreements |
|
$ |
3,124 |
|
|
$ |
3,056 |
|
Customer relationships |
|
|
3,200 |
|
|
|
1,760 |
|
Core and current technology |
|
|
10,939 |
|
|
|
4,909 |
|
Patent portfolio |
|
|
2,910 |
|
|
|
2,780 |
|
Development agreement |
|
|
3,350 |
|
|
|
|
|
Manufacturing software |
|
|
680 |
|
|
|
|
|
Backlog |
|
|
140 |
|
|
|
110 |
|
Tradename |
|
|
280 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
24,623 |
|
|
|
12,815 |
|
Less: Accumulated amortization |
|
|
(3,563 |
) |
|
|
(2,205 |
) |
|
|
|
|
|
|
|
|
|
$ |
21,060 |
|
|
$ |
10,610 |
|
|
|
|
|
|
|
|
Amortization of other intangible assets for the three and six months ended January 1, 2011 was
$0.7 million and $1.4 million, respectively. Amortization of other intangible assets for the three
and six months ended January 2, 2010 was $0.1 million and $0.3 million, respectively. Amortization
is recorded as an operating expense within our condensed consolidated statements of operations.
Estimated future amortization expense of other intangible assets is $1.4 million for the remaining
six months of fiscal year 2011, $3.3 million for each of the fiscal years 2012 to 2015 and $3.0
million for fiscal year 2016.
Note 6. Restructuring Liabilities
The following table summarizes activities related to our restructuring liabilities for the six
months ended January 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
Accrued |
|
|
Amounts |
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
|
Restructuring |
|
|
Charged to |
|
|
|
|
|
|
|
|
|
|
Costs at |
|
|
|
Costs at July |
|
|
Restructuring |
|
|
Amounts |
|
|
|
|
|
|
January 1, |
|
|
|
3, 2010 |
|
|
Costs |
|
|
Paid |
|
|
Adjustments |
|
|
2011 |
|
|
|
(Thousands) |
|
Lease cancellations and commitments
and other charges |
|
$ |
4,107 |
|
|
$ |
|
|
|
$ |
(2,951 |
) |
|
$ |
(257 |
) |
|
$ |
899 |
|
Termination payments to employees
and related costs |
|
|
231 |
|
|
|
1,103 |
|
|
|
(865 |
) |
|
|
11 |
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued restructuring charges |
|
$ |
4,338 |
|
|
$ |
1,103 |
|
|
$ |
(3,816 |
) |
|
$ |
(246 |
) |
|
$ |
1,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We accrued $0.2 million and $0.5 million in additional employee separation costs during the
three and six months ended January 1, 2011 in connection with cost reduction and restructuring
plans initiated prior to fiscal year 2011. During the first quarter of fiscal year 2011, we
initiated a new restructuring plan in connection with our acquisition of Mintera. We incurred $0.2
million and $0.6 million in employee separation charges under the Mintera plan during the three and
six months ended January 1, 2011 and do not expect to incur significant additional restructuring
costs under this plan. During the three and six months ended January 1, 2011, we also recorded
reductions to our restructuring reserve of $0.1 million and $0.2 million resulting from revised
estimates for lease cancelation and commitment and other charges.
14
Note 7. Credit Facility
As of January 1, 2011, we had a $25.0 million senior secured revolving credit facility with Wells
Fargo Capital Finance, Inc. and other lenders with an expiration date of August 1, 2012. As of
January 1, 2011 and July 3, 2010, there were no amounts outstanding under the credit facility. At
January 1, 2011, we had a standby letter of credit in the amount of $1.5 million with a vendor
secured under the credit facility. This standby letter of credit expires in March 2011.
Note 8. Post-Retirement Benefits
Switzerland Defined Benefit Plan (Swiss Plan)
Net periodic pension costs associated with our Swiss Plan for the three and six months ended
January 1, 2011 included the following components:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
January 1, |
|
|
January 1, |
|
|
|
2011 |
|
|
2011 |
|
|
|
(Thousands) |
|
Service cost |
|
$ |
436 |
|
|
$ |
855 |
|
Interest cost |
|
|
183 |
|
|
|
359 |
|
Expected return on plan assets |
|
|
(241 |
) |
|
|
(473 |
) |
|
|
|
|
|
|
|
Net periodic
pension costs |
|
$ |
378 |
|
|
$ |
741 |
|
|
|
|
|
|
|
|
During the three and six months ended January 1, 2011, we contributed $0.5 million and $1.0
million, respectively, to our Swiss Plan. We currently anticipate contributing an additional $0.5
million to this pension plan in the remainder of fiscal year 2011.
Note 9. Commitments and Contingencies
Guarantees
We indemnify our directors and certain employees as permitted by law, and have entered into
indemnification agreements with our directors and executive officers. We have not recorded a
liability associated with these indemnification arrangements, as we historically have not incurred
any material costs associated with such indemnification obligations. Costs associated with such
indemnification obligations may be mitigated by insurance coverage that we maintain, however, such
insurance may not cover any, or may cover only a portion of, the amounts we may be required to pay.
In addition, we may not be able to maintain such insurance coverage in the future.
We also have indemnification clauses in various contracts that we enter into in the normal course
of business, such as those issued by our bankers in favor of certain 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 material amounts related to these indemnifications, therefore, no
accrual has been made for these indemnifications.
Warranty accrual
We accrue for the estimated costs to provide warranty services at the time revenue is recognized.
Our estimate of costs to service our warranty obligations is based on historical experience and
expectation of future conditions. To the extent we experience increased warranty claim activity or
increased costs associated with servicing those claims, our warranty costs would increase,
resulting in a decrease in gross profit.
15
The following table summarizes movements in the warranty accrual for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
Warranty provision beginning of period |
|
$ |
2,736 |
|
|
$ |
2,317 |
|
|
$ |
2,437 |
|
|
$ |
2,228 |
|
Warranties assumed in acquisitions |
|
|
|
|
|
|
93 |
|
|
|
357 |
|
|
|
248 |
|
Warranties issued |
|
|
444 |
|
|
|
928 |
|
|
|
876 |
|
|
|
1,700 |
|
Warranties utilized or expired |
|
|
(916 |
) |
|
|
(821 |
) |
|
|
(1,480 |
) |
|
|
(1,664 |
) |
Currency translation adjustment |
|
|
(23 |
) |
|
|
(31 |
) |
|
|
51 |
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty provision end of period |
|
$ |
2,241 |
|
|
$ |
2,486 |
|
|
$ |
2,241 |
|
|
$ |
2,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Ltd (Bookham Technology) and Avanex Corporation, now known as
Oclaro (North America), Inc. (Avanex), and certain of each entitys 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.
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 Courts 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 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. QinetiQs original complaint alleged infringement of United States Patent Nos. 5,410,625
and 5,428,698, and sought a permanent injunction, money damages, costs, and attorneys fees.
Oclaro filed an answer to the complaint and stated counterclaims against QinetiQ for judgments that
the patents-in-suit are invalid and unenforceable. Additionally, we filed a motion to transfer
venue to the Northern District of California, which was granted on December 18, 2009. After
transfer, the litigation was assigned Civil Action No. 4:10-cv-00080-SBA by the Northern District
Court. On June 21, 2010, QinetiQ amended its complaint to allege infringement of a third patent,
U.S. Patent No. 5,379,354. We answered QinetiQs amended complaint and asserted fraud
counterclaims against QinetiQ. In December 2010, we entered into a binding memorandum of
understanding with QinetiQ.
On December 6, 2010, a bankruptcy preferential transfer avoidance action was filed by Nortel
Networks Inc. et al.
16
against Oclaro Technology Ltd. (formerly Bookham Technology, Plc.) and Oclaro (North America), Inc.
(formerly Avanex Corporation) in the United States Bankruptcy Court for the District of Delaware,
Adversary Proceeding No. 10-55919-KG. The complaint alleges, among other things, that Nortel
Networks Inc., and/or its affiliated debtors in the Chapter 11 bankruptcy cases also pending before
the Delaware Bankruptcy Court (Jointly Administered Case No. 09-10138-KG), made at least $4,593,152
in preferential transfers to the defendants predecessors, Bookham Technology Plc. and Avanex
Corporation, in the 90 days prior to the commencement of the Nortel Chapter 11 bankruptcy cases on
January 14, 2009. We intend to vigorously contest the claims set forth in the complaint.
Note 10. Employee Stock Plans
Our Amended and Restated 2004 Stock Incentive Plan (Plan) was amended by stockholder approval on
October 27, 2010. The primary changes to the Plan resulting from this amendment include: (1) an
increase in the number of shares available under the Plan from 3,800,000 shares to 7,800,000
shares, (2) issuance of full value awards being counted as 1.25 share of common stock for purposes
of the share limit, and (3) a prohibition on recycling of repurchased shares in cases where shares
are used to exercise an award or shares are withheld for taxes. As amended, the Plan now expires
on October 26, 2020.
As of January 1, 2011, there were approximately 4.0 million shares of our common stock available
for grant under the Plan. We generally grant stock options that vest over a four 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 our board of directors.
The following table summarizes the combined activity under all of our equity incentive plans for
the six months ended January 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 July 3, 2010 |
|
|
1,089 |
|
|
|
3,186 |
|
|
$ |
8.78 |
|
|
|
703 |
|
|
$ |
6.42 |
|
Granted |
|
|
(1,095 |
) |
|
|
718 |
|
|
|
11.13 |
|
|
|
354 |
|
|
|
11.28 |
|
Exercised or released |
|
|
|
|
|
|
(84 |
) |
|
|
3.64 |
|
|
|
(254 |
) |
|
|
5.61 |
|
Cancelled or forfeited |
|
|
41 |
|
|
|
(84 |
) |
|
|
6.84 |
|
|
|
(90 |
) |
|
|
6.91 |
|
Increase in available for grant |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2011 |
|
|
4,035 |
|
|
|
3,736 |
|
|
$ |
8.84 |
|
|
|
713 |
|
|
$ |
9.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure information about our stock options outstanding as of January 1, 2011
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Remaining |
|
Intrinsic |
|
|
Shares |
|
Exercise Price |
|
Contractual Life |
|
Value |
|
|
(Thousands) |
|
|
|
|
|
(Years) |
|
(Thousands) |
Options exercisable at January 1, 2011 |
|
|
1,546 |
|
|
$ |
11.14 |
|
|
|
6.6 |
|
|
$ |
9,632 |
|
Options outstanding at January 1, 2011 |
|
|
3,736 |
|
|
|
8.84 |
|
|
|
7.7 |
|
|
|
22,829 |
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value,
based on the closing price of our common stock of $13.15 on December 31, 2010, which would have
been received by the option holders had all option holders exercised their options as of that date.
There were approximately 1.2 million shares of common stock subject to in-the-money options which
were exercisable as of January 1, 2011. We settle employee stock option exercises with newly issued
shares of common stock.
17
Note 11. Stock-based Compensation
We recognize compensation expense in our statement of operations related to all share-based awards,
including grants of stock options, based on the grant date fair value of such share-based awards.
Estimating the grant date fair value of such share-based awards requires us to make judgments in
the determination of inputs into the Black-Scholes stock option pricing model which we use to
arrive at an estimate of the grant date fair value for such awards. The assumptions used in this
model to value stock option grants for the three and six months ended January 1, 2011 and January
2, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
January 1, |
|
January 2, |
|
January 1, |
|
January 2, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Expected life |
|
4.5 years |
|
4.5 years |
|
4.5 years |
|
4.5 years |
Risk-free interest rate |
|
|
1.0 |
% |
|
|
2.1 |
% |
|
|
1.2 |
% |
|
|
2.2 |
% |
Volatility |
|
|
97.2 |
% |
|
|
95.6 |
% |
|
|
96.7 |
% |
|
|
99.9 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts included in cost of revenues and operating expenses for stock-based compensation
for the three and six months ended January 1, 2011 and January 2, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
Stock-based compensation by category of expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
$ |
350 |
|
|
$ |
219 |
|
|
$ |
660 |
|
|
$ |
414 |
|
Research and development |
|
|
391 |
|
|
|
290 |
|
|
|
709 |
|
|
|
499 |
|
Selling, general and administrative |
|
|
933 |
|
|
|
522 |
|
|
|
1,663 |
|
|
|
1,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,674 |
|
|
$ |
1,031 |
|
|
$ |
3,032 |
|
|
$ |
1,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation by type of award: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
907 |
|
|
$ |
838 |
|
|
$ |
1,670 |
|
|
$ |
1,628 |
|
Restricted stock awards |
|
|
828 |
|
|
|
258 |
|
|
|
1,470 |
|
|
|
437 |
|
Inventory adjustment to cost of revenues |
|
|
(61 |
) |
|
|
(65 |
) |
|
|
(108 |
) |
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,674 |
|
|
$ |
1,031 |
|
|
$ |
3,032 |
|
|
$ |
1,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2011 and July 3, 2010, we had capitalized approximately $0.3 million and $0.2
million, respectively, of stock-based compensation as inventory.
Note 12. Income Taxes
The total amount of our unrecognized tax benefits as of January 1, 2011 and July 3, 2010 was
approximately $8.4 million. For the three and six months ended January 1, 2011, we had $0.5 million
in unrecognized tax benefits that, if recognized, would affect our effective tax rate. While it is
often difficult to predict the final outcome of any particular uncertain tax position, management
does not expect that changes to our unrecognized tax benefits will be significant in the next
twelve months. We are currently under audit in France and Canada. We do not anticipate any
significant adjustment to our financial position or results of operations as a result of these
examinations.
18
Note 13. Net Income (Loss) Per Share
The following table presents the calculation of basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands,except per share amounts) |
|
Net income (loss) |
|
$ |
(213 |
) |
|
$ |
(2,479 |
) |
|
$ |
143 |
|
|
$ |
1,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares basic |
|
|
48,262 |
|
|
|
37,980 |
|
|
|
48,189 |
|
|
|
37,624 |
|
Effect of dilutive potential common shares from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
1,615 |
|
|
|
791 |
|
Restricted stock awards |
|
|
|
|
|
|
|
|
|
|
773 |
|
|
|
335 |
|
Obligations under escrow agreement |
|
|
|
|
|
|
|
|
|
|
532 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted |
|
|
48,262 |
|
|
|
37,980 |
|
|
|
51,109 |
|
|
|
38,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
|
|
|
$ |
(0.07 |
) |
|
$ |
|
|
|
$ |
0.04 |
|
Diluted net income (loss) per share |
|
$ |
|
|
|
$ |
(0.07 |
) |
|
$ |
|
|
|
$ |
0.04 |
|
Basic net income (loss) per share is computed using only the weighted-average number of shares
of common stock outstanding for the applicable period, while diluted net income (loss) 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 months ended January 1, 2011, we excluded 5.1 million of outstanding stock options,
warrants and restricted stock units from the calculation of diluted net income per share because
their effect would have been anti-dilutive. For the three months ended January 2, 2010, we excluded
5.4 million of outstanding stock options, warrants and restricted stock units from the calculation
of diluted net income per share because their effect would have been anti-dilutive. For the six
months ended January 1, 2011, we excluded 1.9 million of outstanding stock options and warrants
from the calculation of diluted net income per share because their effect would have been
anti-dilutive. For the six months ended January 2, 2010, we excluded 4.5 million of outstanding
stock options and warrants from the calculation of diluted net income per share because their
effect would have been anti-dilutive.
Note 14. Operating Segments and Related Information
We are organized and operate as two operating segments: (i) telecom and (ii) advanced photonics
solutions. Our telecom segment is responsible for the design, development, chip and filter level
manufacturing, marketing and selling of high performance core optical network components, module
and subsystem products to telecommunications systems vendors. Our 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.
Our Chief Executive Officer is our chief operating decision maker, and as such, evaluates the
performance of these segments and makes resource allocation decisions based on segment revenues. We
previously reported segment operating income (loss) for each of our segments. Beginning in fiscal
year 2011, we are no longer presenting this information. Due to our integration of the activities
of recent acquisitions into our existing operations and our recent efforts to streamline certain
existing operations along geographic lines, the discrete financial information necessary to present
segment operating income (loss) is no longer available.
19
Segment revenues for the three and six months ended January 1, 2011 and January 2, 2010 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom |
|
$ |
108,274 |
|
|
$ |
82,178 |
|
|
$ |
216,096 |
|
|
$ |
156,444 |
|
Advanced photonics solutions |
|
|
12,025 |
|
|
|
11,396 |
|
|
|
25,550 |
|
|
|
22,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
120,299 |
|
|
$ |
93,574 |
|
|
$ |
241,646 |
|
|
$ |
178,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows revenues by geographic area based on the delivery locations of our
products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
United States |
|
$ |
17,892 |
|
|
$ |
17,462 |
|
|
$ |
37,556 |
|
|
$ |
34,987 |
|
Canada |
|
|
2,783 |
|
|
|
3,748 |
|
|
|
6,184 |
|
|
|
8,739 |
|
Europe |
|
|
34,859 |
|
|
|
22,840 |
|
|
|
70,283 |
|
|
|
42,993 |
|
Asia |
|
|
56,333 |
|
|
|
42,998 |
|
|
|
110,662 |
|
|
|
78,558 |
|
Rest of world |
|
|
8,432 |
|
|
|
6,526 |
|
|
|
16,961 |
|
|
|
13,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
120,299 |
|
|
$ |
93,574 |
|
|
$ |
241,646 |
|
|
$ |
178,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Customers and Concentration of Credit Risk
For the three months ended January 1, 2011, Huawei Technologies Co., Ltd. (Huawei) accounted for
17 percent, Ciena Corporation (Ciena) accounted for 12 percent and Alcatel-Lucent accounted for
11 percent of our revenues. For the six months ended January 1, 2011, Huawei accounted for 16
percent, Alcatel-Lucent accounted for 12 percent and Ciena accounted for 10 percent of our
revenues. For the three months ended January 2, 2010, Huawei accounted for 15 percent of our
revenues. For the six months ended January 2, 2010, Huawei accounted for 14 percent of our
revenues.
As of January 1, 2011, Huawei accounted for 18 percent and Alcatel-Lucent accounted for 14 percent
of our accounts receivable. As of July 3, 2010, Alcatel-Lucent accounted for 15 percent and Huawei
accounted for 14 percent of our accounts receivable.
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains 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 future expectations, plans or prospects and our business. You
can identify these statements by the fact that they do not relate strictly to historical or current
events, and contain words such as anticipate, estimate, expect, project, intend, will,
plan, believe, should, outlook, could, target and other words of similar meaning in
connection with discussion of future operating or financial performance. These forward-looking
statements include statements concerning (i) potential future financial results, (ii) the impact of
mergers or acquisitions on our financial performance, including without limitation, accretion or
dilution, gross margin, operating income and cash usage, (iii) future expense levels and sources
for improvement of gross margin and operating expenses, including supply chain synergies,
optimizing mix of product offerings, transition to higher margin product offerings, benefits of
combined research and development and sales organizations, (iv) the expected financial
opportunities after mergers or acquisitions and the expected synergies related thereto, (v)
opportunities to grow in adjacent markets, (vi) our organizational restructuring with the formation
of two new business units focused on photonic components and networks solutions and (vii) the
assumptions underlying such statements. We have based our forward looking statements on our
managements beliefs and assumptions based on information available to our management at the time
the statements are made. There are a number of important factors that could cause our actual
results or events to differ materially from those indicated by such forward-looking statements,
including the impact of continued uncertainty in world financial markets and any resulting or other
reduction in demand for our products, our ability to maintain our gross margin, our ability to
respond to evolving technologies and customer requirements, our dependence on a limited number of
customers for a significant percentage of our revenues, our ability to effectively compete with
companies that have greater name recognition, broader customer relationships and substantially
greater financial, technical and marketing resources than we do, the effect of fluctuating product
mix, currency prices and consumer demand on our financial results, our performance following the
closing of acquisitions, our potential inability to realize the expected benefits and synergies
from our acquisitions, increased costs related to downsizing and compliance with regulatory
requirements in connection with such downsizing, and the potential lack of availability of credit
or opportunity for equity-based financing and the risks associated with our international
operations. 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. The factors discussed in the
sections captioned Managements Discussion and Analysis of Financial Condition and Results of
Operations and Risk Factors in this Quarterly Report on Form 10-Q also identify important
factors that may cause our actual results to differ materially from the expectations we describe in
our forward-looking statements.
Overview
We are a leading provider of high-performance core optical network components, modules and
subsystems to global telecom equipment manufacturers. We leverage our proprietary core technologies
and vertically integrated product development to provide our customers with cost-effective and
innovative optical solutions in metro and long-haul network applications, which we refer to as our
telecom segment. In addition, we utilize our optical expertise to address new and emerging optical
product opportunities in selective non-telecom markets, such as materials processing, consumer,
medical, industrial, printing and biotechnology, which we refer to as our advanced photonics
solutions (APS) segment. We offer our customers a differentiated solution that is designed to
make it easier for our customers to do business by combining optical technology innovation,
photonic integration, and a vertical approach to manufacturing and product development.
In late 2010, we aligned our APS portfolio to more completely leverage the assets of our telecom
business. This was the culmination of our 2009 transaction to acquire the laser diodes assets of
Newport Corporation in exchange for our New Focus photonics tools business. Our APS products,
strategies and infrastructure support are now more closely aligned with the rest of our telecom
business, and we will be operating the business accordingly, under the same management. As a
result, in future periods we will not be reporting APS as a separate segment. In January 2011, we
also announced the further realignment of our four telecom business units into two business units,
one of which will contain our former APS product lines. The intent is to simplify our
organizational structure to focus on
ramping new products, simplifying our customer interface, strengthening our execution of product
development and
21
other key initiatives. Our new photonics components business unit will be focused
on delivering component level solutions to our customers, and it will include our former APS
products. Our new optical networks solutions business unit will be focused on delivering module and
subsystem level solutions to substantially the same telecom customers. A single sales and a single
operations function will support all of the products in each business unit.
Effective January 3, 2011, our common stock is now traded on the NASDAQ Global Select Market under
the symbol OCLR. We previously traded on the NASDAQ Global Market under the same symbol.
Results of Operations
The following tables set forth our condensed consolidated results of operations for the three and
six month periods indicated, along with amounts expressed as a percentage of revenues, and
comparative information regarding the absolute and percentage changes in these amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Increase |
|
|
|
January 1, 2011 |
|
|
January 2, 2010 |
|
|
Change |
|
|
(Decrease) |
|
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
Revenues |
|
$ |
120,299 |
|
|
|
100.0 |
|
|
$ |
93,574 |
|
|
|
100.0 |
|
|
$ |
26,725 |
|
|
|
28.6 |
|
Cost of revenues |
|
|
84,556 |
|
|
|
70.3 |
|
|
|
68,715 |
|
|
|
73.4 |
|
|
|
15,841 |
|
|
|
23.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
35,743 |
|
|
|
29.7 |
|
|
|
24,859 |
|
|
|
26.6 |
|
|
|
10,884 |
|
|
|
43.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
15,696 |
|
|
|
13.0 |
|
|
|
9,675 |
|
|
|
10.3 |
|
|
|
6,021 |
|
|
|
62.2 |
|
Selling, general and
administrative |
|
|
15,149 |
|
|
|
12.6 |
|
|
|
14,835 |
|
|
|
15.9 |
|
|
|
314 |
|
|
|
2.1 |
|
Amortization of intangible assets |
|
|
739 |
|
|
|
0.6 |
|
|
|
125 |
|
|
|
0.1 |
|
|
|
614 |
|
|
|
491.2 |
|
Restructuring, acquisition and related costs |
|
|
903 |
|
|
|
0.8 |
|
|
|
3,040 |
|
|
|
3.3 |
|
|
|
(2,137 |
) |
|
|
(70.3 |
) |
Legal settlements |
|
|
1,678 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
1,678 |
|
|
|
n/m |
(1) |
Gain on sale of property and
equipment |
|
|
(48 |
) |
|
|
|
|
|
|
(71 |
) |
|
|
(0.1 |
) |
|
|
23 |
|
|
|
(32.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
34,117 |
|
|
|
28.4 |
|
|
|
27,604 |
|
|
|
29.5 |
|
|
|
6,513 |
|
|
|
23.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
1,626 |
|
|
|
1.4 |
|
|
|
(2,745 |
) |
|
|
(2.9 |
) |
|
|
4,371 |
|
|
|
n/m |
(1) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
9 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
7 |
|
|
|
350.0 |
|
Interest expense |
|
|
(479 |
) |
|
|
(0.4 |
) |
|
|
(33 |
) |
|
|
|
|
|
|
(446 |
) |
|
|
1,351.5 |
|
Gain (loss) on foreign currency
translation |
|
|
(1,119 |
) |
|
|
(0.9 |
) |
|
|
793 |
|
|
|
0.8 |
|
|
|
(1,912 |
) |
|
|
n/m |
(1) |
Other income |
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
(28 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(1,589 |
) |
|
|
(1.3 |
) |
|
|
790 |
|
|
|
0.8 |
|
|
|
(2,379 |
) |
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
before income taxes |
|
|
37 |
|
|
|
|
|
|
|
(1,955 |
) |
|
|
(2.1 |
) |
|
|
1,992 |
|
|
|
n/m |
(1) |
Income tax provision |
|
|
250 |
|
|
|
0.2 |
|
|
|
524 |
|
|
|
0.5 |
|
|
|
(274 |
) |
|
|
(52.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(213 |
) |
|
|
(0.2 |
) |
|
|
(2,479 |
) |
|
|
(2.6 |
) |
|
|
2,266 |
|
|
|
(91.4 |
) |
Income from discontinued operations,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(213 |
) |
|
|
(0.2 |
) |
|
$ |
(2,479 |
) |
|
|
(2.6 |
) |
|
$ |
2,266 |
|
|
|
(91.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
Increase |
|
|
|
January 1, 2011 |
|
|
January 2, 2010 |
|
|
Change |
|
|
(Decrease) |
|
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
Revenues |
|
$ |
241,646 |
|
|
|
100.0 |
|
|
$ |
178,684 |
|
|
|
100.0 |
|
|
$ |
62,962 |
|
|
|
35.2 |
|
Cost of revenues |
|
|
171,077 |
|
|
|
70.8 |
|
|
|
131,834 |
|
|
|
73.8 |
|
|
|
39,243 |
|
|
|
29.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
70,569 |
|
|
|
29.2 |
|
|
|
46,850 |
|
|
|
26.2 |
|
|
|
23,719 |
|
|
|
50.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
29,407 |
|
|
|
12.2 |
|
|
|
18,689 |
|
|
|
10.4 |
|
|
|
10,718 |
|
|
|
57.3 |
|
Selling, general and administrative |
|
|
29,962 |
|
|
|
12.4 |
|
|
|
27,798 |
|
|
|
15.6 |
|
|
|
2,164 |
|
|
|
7.8 |
|
Amortization of intangible assets |
|
|
1,358 |
|
|
|
0.5 |
|
|
|
250 |
|
|
|
0.1 |
|
|
|
1,108 |
|
|
|
443.2 |
|
Restructuring, acquisition and related
costs |
|
|
1,573 |
|
|
|
0.6 |
|
|
|
4,539 |
|
|
|
2.5 |
|
|
|
(2,966 |
) |
|
|
(65.3 |
) |
Legal settlements |
|
|
1,678 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
1,678 |
|
|
|
n/m |
(1) |
Gain on sale of property and
equipment |
|
|
(69 |
) |
|
|
|
|
|
|
(603 |
) |
|
|
(0.3 |
) |
|
|
534 |
|
|
|
(88.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
63,909 |
|
|
|
26.4 |
|
|
|
50,673 |
|
|
|
28.3 |
|
|
|
13,236 |
|
|
|
26.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
6,660 |
|
|
|
2.8 |
|
|
|
(3,823 |
) |
|
|
(2.1 |
) |
|
|
10,483 |
|
|
|
n/m |
(1) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
16 |
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
(9 |
) |
|
|
(36.0 |
) |
Interest expense |
|
|
(1,052 |
) |
|
|
(0.4 |
) |
|
|
(121 |
) |
|
|
(0.1 |
) |
|
|
(931 |
) |
|
|
769.4 |
|
Loss on foreign exchange |
|
|
(4,706 |
) |
|
|
(2.0 |
) |
|
|
(483 |
) |
|
|
(0.3 |
) |
|
|
(4,223 |
) |
|
|
874.3 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
5,295 |
|
|
|
3.0 |
|
|
|
(5,295 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
(5,742 |
) |
|
|
(2.4 |
) |
|
|
4,716 |
|
|
|
2.6 |
|
|
|
(10,458 |
) |
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
918 |
|
|
|
0.4 |
|
|
|
893 |
|
|
|
0.5 |
|
|
|
25 |
|
|
|
2.8 |
|
Income tax provision |
|
|
775 |
|
|
|
0.3 |
|
|
|
747 |
|
|
|
0.4 |
|
|
|
28 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
143 |
|
|
|
0.1 |
|
|
|
146 |
|
|
|
0.1 |
|
|
|
(3 |
) |
|
|
(2.1 |
) |
Income from discontinued operations,
net of tax |
|
|
|
|
|
|
|
|
|
|
1,420 |
|
|
|
0.8 |
|
|
|
(1,420 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
143 |
|
|
|
0.1 |
|
|
$ |
1,566 |
|
|
|
0.9 |
|
|
$ |
(1,423 |
) |
|
|
(90.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues for the three months ended January 1, 2011 increased by $26.7 million, or 29 percent,
compared to the three months ended January 2, 2010. Revenues by operating segments increased by
$26.1 million in our telecom segment and $0.6 million in our APS segment during the three months
ended January 1, 2011, compared to the three months ended January 2, 2010. The increases were
primarily from increased product sales attributable to improved market conditions, as compared to
the market conditions of calendar year 2009 as a result of the economic downturn, in both of our
operating segments, and from our acquisitions of Mintera Corporation (Mintera) in July 2010 and
Xtellus, Inc. (Xtellus) in December 2009.
For the three months ended January 1, 2011, Huawei Technologies Co., Ltd. (Huawei) accounted for
$20.9 million, or 17 percent, Ciena Corporation (Ciena) accounted for $14.7 million, or 12
percent, and Alcatel-Lucent accounted for $13.5 million, or 11 percent, of our revenues. For the
three months ended January 2, 2010, Huawei accounted for $13.6 million, or 15 percent, of our
revenues.
Revenues for the six months ended January 1, 2011 increased by $63.0 million, or 35 percent,
compared to the six months ended January 2, 2010. Revenues by operating segments increased by $59.7
million in our telecom segment and $3.3 million in our APS segment during the six months ended
January 1, 2011, compared to the six months ended January 2, 2010. The increases were primarily
from increased product sales attributable to improved market
23
conditions, as compared to the market conditions of calendar year 2009 as a result of the economic
downturn, in both of our operating segments, and from our acquisitions of Mintera and Xtellus.
For the six months ended January 1, 2011, Huawei accounted for $39.1 million, or 16 percent,
Alcatel-Lucent accounted for $29.5 million, or 12 percent, and Ciena accounted for $25.0 million,
or 10 percent, of our revenues. For the six months ended January 2, 2010, Huawei accounted for
$24.7 million, or 14 percent, of our revenues.
Cost of Revenues
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-based compensation
charges, and the costs charged by our contract manufacturers on the products they manufacture for
us. Charges for excess and obsolete inventory, including inventories procured by contract
manufacturers on our behalf, the cost of product returns and warranty costs are also included in
cost of revenues. Costs and expenses related to our manufacturing resources incurred in connection
with the development of new products are included in research and development expense.
Our cost of revenues for the three months ended January 1, 2011 increased by $15.8 million, or 23
percent, compared to the three months ended January 2, 2010. The increase was primarily related to
costs associated with increased product sales resulting from improved market conditions in calendar
year 2010 and realizing the benefits of previous cost reduction efforts described more fully in
Note 6, Restructuring Liabilities. Our cost of revenues were favorably impacted by approximately
$0.5 million as a result of the U.K. pound sterling weakening relative to the U.S. dollar and
unfavorably impacted by approximately $0.2 million as a result of the Swiss franc strengthening
relative to the U.S. dollar.
Our cost of revenues for the six months ended January 1, 2011 increased by $39.2 million, or 30
percent, compared to the six months ended January 2, 2010. The increase was primarily related to
costs associated with increased product sales resulting from improved market conditions in calendar
year 2010 and realizing the benefits of previous cost reduction efforts. Our cost of revenues were
favorably impacted by approximately $0.6 million as a result of the U.K. pound sterling weakening
relative to the U.S. dollar and unfavorably impacted by approximately $0.3 million as a result of
the Swiss franc strengthening relative to the U.S. dollar.
Gross Profit
Gross profit is calculated as revenues less cost of revenues. Gross margin rate is gross profit
reflected as a percentage of revenues.
Our gross margin rate increased to 30 percent for the three months ended January 1, 2011, compared
to 27 percent for the three months ended January 2, 2010. The increase in gross margin rate was
primarily due to operating leverage from higher revenue volumes, synergies from the Avanex merger,
including related cost reductions and the internal sourcing of Oclaro components into Avanex
products, as well as the impact of other cost reduction efforts during the second quarter of fiscal
year 2011 and earlier.
Our gross margin rate increased to 29 percent for the six months ended January 1, 2011, compared to
26 percent for the six months ended January 2, 2010. The increase in gross margin rate was
primarily due to operating leverage from higher revenue volumes, synergies from the Avanex merger,
including related cost reductions and the internal sourcing of Oclaro components into Avanex
products, as well as the impact of other cost reduction efforts during the first half of fiscal
year 2011 and earlier.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related costs of employees
engaged in research and design activities, including stock-based compensation charges related to
those employees, costs of design tools and computer hardware, costs related to prototyping and
facilities costs for certain research and development focused sites.
24
Research and development expenses increased by $6.0 million, or 62 percent, for the three months
ended January 1, 2011, compared to the three months ended January 2, 2010. During the current
quarter, we continued to increase our investment in research and development resources, primarily
personnel-related, as we are investing to match the rate of our anticipated revenue growth. The
increase was also due to our acquisition of Mintera in July 2010 and Xtellus in December 2009. The
increase was offset in part by having an additional week of expenses during the three months ended
January 2, 2010 compared to the three months ended January 1, 2011. Personnel-related costs
increased to $8.8 million for the three months ended January 1, 2011, compared with $6.6 million
for the three months ended January 2, 2010. Other costs, including the costs of design tools and
facilities-related costs increased to $6.9 million for the three months ended January 1, 2011,
compared with $3.1 million for the three months ended January 2, 2010. Research and development
expenses were favorably impacted by approximately $0.4 million as a result of the U.K. pound
sterling weakening relative to the U.S. dollar.
Research and development expenses increased by $10.7 million, or 57 percent, for the six months
ended January 1, 2011, compared to the six months ended January 2, 2010. The increase was
primarily due to increased investment in research and development resources, primarily
personnel-related, as we are investing to match the rate of our anticipated revenue growth. The
increase was also due to our acquisitions of Mintera and Xtellus. The increase was offset in part
by having an additional week of expenses during the six months ended January 2, 2010 compared to
the six months ended January 1, 2011. Personnel-related costs increased to $17.1 million for the
six months ended January 1, 2011, compared with $12.4 million for the six months ended January 2,
2010. Other costs, including the costs of design tools and facilities-related costs increased to
$12.3 million for the six months ended January 1, 2011, compared with $6.3 million for the six
months ended January 2, 2010. Research and development expenses were favorably impacted by
approximately $0.9 million as a result of the U.K. pound sterling weakening relative to the U.S.
dollar.
Over the coming year, we intend to increase our research and development expenditures consistent
with the rate of our anticipated revenue growth, with a bias towards investing in low cost regions
where practical.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel-related expenses,
including stock-based compensation charges related to employees engaged in sales, general and
administrative functions, legal and professional fees, facilities expenses (excluding research and
development focused sites), insurance expenses and certain information technology costs.
Selling, general and administrative expenses increased by $0.3 million, or 2 percent, for the three
months ended January 1, 2011, compared to the three months ended January 2, 2010. The increase was
primarily due to the increase in costs incurred in connection with recent acquisitions, offset in
part by acquisition-related synergies and from the additional week of expenses during the three
months ended January 2, 2010. Personnel-related costs increased to $8.3 million for the three
months ended January 1, 2011, compared with $8.0 million for the three months ended January 2,
2010. Other costs, including legal and professional fees, facilities expenses and other
miscellaneous expenses, decreased to $6.8 million for the three months ended January 1, 2011,
compared with $6.9 million for the three months ended January 2, 2010. Selling, general and
administrative expenses were favorably impacted by approximately $0.5 million as a result of the
U.K. pound sterling weakening relative to the U.S. dollar.
Selling, general and administrative expenses increased by $2.2 million, or 8 percent, for the six
months ended January 1, 2011, compared to the six months ended January 2, 2010. The increase was
primarily due to the increase in costs incurred in connection with recent acquisitions, offset in
part by acquisition-related synergies and from the additional week of expenses during the six
months ended January 2, 2010. Personnel-related costs increased to $16.2 million for the six months
ended January 1, 2011, compared with $15.1 million for the six months ended January 2, 2010. Other
costs, including legal and professional fees, facilities expenses and other miscellaneous expenses,
increased to $13.8 million for the six months ended January 1, 2011, compared with $12.7 million
for the six months ended January 2, 2010. Selling, general and administrative expenses were
favorably impacted by approximately $1.0 million as a result of the U.K. pound sterling weakening
relative to the U.S. dollar.
25
Restructuring, Acquisition and Related Costs
We accrued $0.4 million in employee separation charges in connection with cost reduction and
restructuring plans, offset by reductions to our restructuring reserve of $0.1 million from revised
estimates for lease cancellation and commitments and other charges, during the three months ended
January 1, 2011. We do not expect to incur significant additional restructuring costs in
connection with these plans. We also incurred $0.6 million during the three months ended January 1,
2011 in external consulting charges associated with the next phase of optimization of past
acquisitions as we focus on the associated infrastructure and process required to support
sustainable growth.
For the three months ended January 2, 2010, we accrued $1.8 million in expenses for revised
estimates related to employee separation charges and costs to exit certain facilities. During the
three months ended January 2, 2010, we also recorded $1.2 million for acquisition-related costs,
which included $0.7 million of professional fees and $0.5 million in employee retention payments in
connection with our acquisition of Xtellus.
We accrued $1.1 million in employee separation costs during the six months ended January 1, 2011 in
connection with cost reduction and restructuring plans, offset by reductions to our restructuring
reserve of $0.2 million from revised estimates for lease cancellation and commitments and other
charges. We also incurred $0.6 million during the six months ended January 1, 2011 in external
consulting charges associated with the next phase of optimization of past acquisitions as we focus
on the associated infrastructure and process required to support sustainable growth. In addition,
we recorded $0.1 million in acquisition-related professional fees during this same period.
For the six months ended January 2, 2010, we accrued $3.0 million in expenses for revised estimates
related to employee separation charges and costs to exit certain facilities. During the six months
ended January 2, 2010, we also recorded $1.6 million for acquisition-related costs, which included
$1.1 million of professional fees and $0.5 million in employee retention payments in connection
with our acquisition of Xtellus.
Legal Settlements
Legal settlements expense of $1.7 million during the three and six months ended January 1, 2011
includes amounts reserved in connection with the memorandum of understanding with QinetiQ and in
anticipation of other legal settlements and related legal costs.
Gain on Sale of Property and Equipment
For the six months ended January 2, 2010, we recorded a net gain of $0.6 million, primarily related
to the sale of certain fixed assets in Villebon, France in connection with the closing of that
facility.
Other Income (Expense)
Other income (expense) for the three months ended January 1, 2011 decreased by $2.4 million
compared to the three months ended January 2, 2010. This decrease was primarily due to a $1.9
million increase in loss from the re-measurement of short term receivables and payables among
certain of our wholly-owned international subsidiaries for fluctuations in the U.S. dollar relative
to our other local functional currencies during the corresponding periods and from a $0.4 million
increase in interest expense related to liabilities recognized in the acquisitions of Xtellus and
Mintera.
Other income (expense) for the six months ended January 1, 2011 decreased by $10.5 million compared
to the six months ended January 2, 2010. This decrease was primarily due to $5.3 million in gain
from our purchase of Newports high power laser diodes business being recorded during the six
months ended January 2, 2010. There was also a $4.2 million decrease from the re-measurement of
short term receivables and payables among certain of our wholly-owned international subsidiaries
for fluctuations in the U.S. dollar relative to our other local functional currencies during the
corresponding periods and from a $0.9 million increase in interest expense related to liabilities
recognized in the acquisitions of Xtellus and Mintera.
26
Income Tax Provision (Benefit)
For the three months ended January 1, 2011, our income tax provision of $0.3 million primarily
related to our foreign operations. For the three months ended January 2, 2010, our income tax
provision of $0.5 million primarily related to income taxes on our operations in Italy and China.
For the six months ended January 1, 2011, our income tax provision of $0.8 million primarily
related to our foreign operations. For the six months ended January 2, 2010, our income tax
provision of $0.7 million primarily related to income taxes on our operations in Italy and China.
In the fourth quarter of fiscal year 2010, we determined that it is more-likely-than-not that we
will utilize net operating losses in one of our foreign jurisdictions due to current earnings and
projections of future profitability. Accordingly, we released $1.3 million of our valuation
allowance against $1.3 million of previously unrecognized deferred tax assets during the fourth
quarter of fiscal year 2010. This amount represented the entire remaining deferred tax asset
related to the accumulated net operating losses of the foreign jurisdiction. Due to the uncertainty
surrounding the realization of the tax attributes in other jurisdictions, we have recorded a full
valuation allowance against our remaining foreign and domestic deferred tax assets as of January 1,
2011.
Income from Discontinued Operations
During the six months ended January 2, 2010, we recorded income of $1.4 million from discontinued
operations from the sale of our New Focus business. For further details, refer to Note 3, Business
Combinations.
Recent Accounting Pronouncements
See Note 1, Basis of Preparation, to our condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q for information regarding the effect of new
accounting pronouncements on our financial statements.
Application of Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based on our
condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form
10-Q, which have been prepared in accordance with accounting principles generally accepted in the
United States (U.S. GAAP). The preparation of our financial statements requires us to make
estimates and judgments 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 and judgments or could be materially different if we used different assumptions,
estimates or conditions. In addition, our financial condition and results of operations could vary
due to a change in the application of a particular accounting standard.
We identified our critical accounting policies in our Annual Report on Form 10-K for the year ended
July 3, 2010 (2010 Form 10-K) related to revenue recognition and sales returns, inventory
valuation, business combinations, impairment of goodwill and other intangible assets, accounting
for share-based payments and income taxes. It is important that the discussion of our operating
results be read in conjunction with the critical accounting policies discussed in our 2010 Form
10-K.
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash used by operating activities for the six months ended January 1, 2011 was $7.3 million,
primarily resulting from an $18.0 million decrease in cash due to changes in operating assets and
liabilities, partially offset by net income of $0.1 million and non-cash adjustments of $10.6
million. The $18.0 million decrease in cash due to changes in operating assets and liabilities was
comprised of a $14.5 million increase in inventory as we are investing to match the rate of our
anticipated revenue growth and to provide us with strategic flexibility, a $6.1 million increase in
accounts receivable, a $5.3 million decrease in accrued expenses and other liabilities and a $0.2
million
27
increase in prepaid expense and other current assets, offset in part by cash generated from a $8.0
million increase in accounts payable and a $0.1 million decrease in other non-current assets. The
$10.6 million increase in cash resulting from non-cash adjustments primarily consisted of $8.1
million of expense related to depreciation and amortization and $3.0 million of expense related to
stock-based compensation, offset in part by $0.5 million from the amortization of deferred gain
from a sales-leaseback transaction.
Net cash used in operating activities for the six months ended January 2, 2010 was $3.6 million,
resulting from our net income of $1.6 million, offset by a decrease in our net operating assets and
liabilities of $5.0 million. The $5.0 million decrease resulting from the change in operating
assets and liabilities was comprised of cash used by an accounts receivable increase of $10.2
million, a prepaid expenses and other current assets increase of $1.2 million and an accrued
expenses and other liabilities decrease of $7.3 million, partly offset by cash generated from
inventory decreases of $5.5 million, other non-current assets decreases of $1.6 million, and
accounts payable increases of $6.6 million.
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended January 1, 2011 was $25.4 million,
primarily consisting of $10.5 million used in the acquisition of Mintera and $18.7 million used in
capital expenditures to support new product introductions and our anticipated revenue growth,
partially offset by a reduction of $3.7 million in restricted cash related to a facility lease from
which we exited during the first quarter of the current fiscal year.
Net cash provided by investing activities for the six months ended January 2, 2010 was $10.8
million, primarily consisting of $9.3 million in sales and maturities of available-for-sale
investments, $3.0 million in cash proceeds from the exchange of assets with Newport, $0.3 million
in cash proceeds from the acquisition of Xtellus, and $0.7 million in proceeds from the sale of
certain fixed assets, partially offset by $2.4 million used in capital expenditures.
Cash Flows from Financing Activities
Net cash provided by financing activities of $0.6 million for the six months ended January 1, 2011
primarily resulted from $0.3 million in additional proceeds related to our May 2010 follow-on stock
offering due to finalization of our previous estimates of offering related expenses and $0.3
million received from issuance of common stock, primarily through stock option exercises. There
were no other significant cash flows from financing activities for the six months ended January 1,
2011 or the six months ended January 2, 2010.
Effect of Exchange Rates on Cash and Cash Equivalents for the Six Months Ended January 1, 2011
and January 2, 2010
The effect of exchange rates on cash and cash equivalents for the six months ended January 1, 2011
was an increase of $2.2 million, primarily consisting of $0.8 million in net gain due to the
revaluation of foreign currency cash balances to the functional currency of the respective
subsidiaries and from gains of approximately $0.8 million related to the revaluation of U.S. dollar
denominated operating intercompany payables of our subsidiaries.
The effect of exchange rates on cash and cash equivalents for the six months ended January 2, 2010
was a minimal increase, primarily consisting of $0.3 million in net gain due to the revaluation of
foreign currency denominated cash balances to the functional currency of the respective
subsidiaries, offset by a loss of approximately $0.3 million related to the revaluation of U.S.
dollar denominated operating intercompany receivables of our U.K. subsidiary.
Credit Facility
As of January 1, 2011, we had a $25.0 million senior secured revolving credit facility with Wells
Fargo Capital Finance, Inc. and other lenders with an expiration date of August 1, 2012. As of
January 1, 2011 and July 3, 2010, there were no amounts outstanding under the credit facility. At
January 1, 2011, we had a standby letter of credit in the amount of $1.5 million with a vendor
secured under the credit facility. This standby letter of credit expires in March 2011.
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Future Cash Requirements
As of January 1, 2011, we held $77.3 million in cash and cash equivalents and $0.8 million in
restricted cash. We believe that existing funds, cash generated from operations and existing
sources of and access to financing are adequate to satisfy our working capital and capital
expenditure requirements for the foreseeable future.
In the future, in order to strengthen our financial position, in the event of unforeseen
circumstances, or in the event we need to fund our growth in future financial periods, we may need
to raise additional funds by any one or a combination of the following: issuing equity securities,
debt or convertible debt or the sale of certain product lines and/or portions of our business.
There can be no guarantee that we will be able to raise additional funds on terms acceptable to us,
or at all.
From time to time, we have engaged in discussions with third parties concerning potential
acquisitions of product lines, technologies and businesses, and we continue to consider potential
acquisition candidates. Any such 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.
Off-Balance Sheet Arrangements
We indemnify our directors and certain employees as permitted by law, and have entered into
indemnification agreements with our directors and executive officers. We have not recorded a
liability associated with these indemnification arrangements, as we historically have not incurred
any material costs associated with such indemnification obligations. Costs associated with such
indemnification obligations may be mitigated by insurance coverage that we maintain, however, such
insurance may not cover any, or may cover only a portion of, the amounts we may be required to pay.
In addition, we may not be able to maintain such insurance coverage in the future.
We also have indemnification clauses in various contracts that we enter into in the normal course
of business, such as those issued by our bankers in favor of certain 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 material amounts related to these indemnifications; 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rates
We finance our operations through a mixture of the issuance of equity securities, finance leases,
working capital and by drawing on our Amended Credit Agreement. Our only exposure to interest rate
fluctuations is on our cash deposits. We monitor our interest rate risk on cash balances primarily
through cash flow forecasting. Cash that is surplus to immediate requirements is generally invested
in short-term deposits with banks accessible within one days notice and invested in overnight
money market accounts. We believe our interest rate risk is immaterial.
Foreign currency
As our business is multinational in scope, we are subject to fluctuations based upon changes in the
exchange rates between the currencies in which we collect revenues and pay expenses. In the future
we expect that a majority of our revenues will be denominated in U.S. dollars, while a significant
portion of our expenses related to our operations in the United Kingdom will 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, the Korean won, the Israeli
shekel, the Swiss franc and the Euro in which we pay expenses in connection with operating our
facilities in Shenzhen and Shanghai, China; Daejeon, South Korea; Jerusalem, Israel; Zurich,
Switzerland and San Donato, Italy, respectively.
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To the extent the exchange rate between the U.S. dollar and these currencies were to fluctuate more
significantly than experienced to date, our exposure would increase.
As of January 1, 2011, our U.K. subsidiary had $40.6 million, net, in U.S. dollar denominated
operating intercompany payables and $84.8 million in U.S. dollar denominated accounts receivable
related to sales to external customers. It is estimated that a 10 percent fluctuation in the U.S.
dollar relative to the U.K. pound sterling would lead to a profit of $4.4 million (U.S. dollar
strengthening), or loss of $4.4 million (U.S. dollar weakening) on the translation of these
receivables, which would be recorded as gain (loss) on foreign exchange in our condensed
consolidated statement of operations.
Hedging Program
We enter into foreign currency forward exchange contracts in an effort to mitigate a portion of our
exposure to such fluctuations between the U.S. dollar and the U.K. pound sterling. We do not
currently hedge our exposure to the Chinese yuan, the Korean won, the Israeli shekel, the Swiss
franc or the Euro, but we may in the future if conditions warrant. We also do not currently hedge
our exposure related to our U.S. dollar denominated intercompany payables and receivables. 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
January 1, 2011, we held sixteen outstanding foreign currency forward exchange contracts with a
notional value of $17.5 million which include put and call options which expire, or expired, at
various dates from January 2011 to November 2011 and we have recorded an unrealized gain of $0.1
million to accumulated other comprehensive income in connection with marking these contracts to
fair value as of January 1, 2011. It is estimated that a 10 percent fluctuation in the dollar
between January 1, 2011 and the maturity dates of the put and call instruments underlying these
contracts would lead to a profit of $1.3 million dollars (U.S. dollar weakening) or loss of $0.6
million dollars (U.S. dollar strengthening) on our outstanding foreign currency forward exchange
contracts, should they be held to maturity.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of January 1, 2011. 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, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of January 1,
2011, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
There was no change in our internal control over financial reporting during the three months ended
January 1, 2011 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
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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 Ltd (Bookham Technology) and Avanex Corporation, now known as
Oclaro (North America), Inc. (Avanex), and certain of each entitys 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.
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 Courts 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 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. QinetiQs original complaint alleged infringement of United States Patent Nos. 5,410,625
and 5,428,698, and sought a permanent injunction, money damages, costs, and attorneys fees. We
filed an answer to the complaint and stated counterclaims against QinetiQ for judgments that the
patents-in-suit are invalid and unenforceable. Additionally, we filed a motion to transfer venue
to the Northern District of California, which was granted on December 18, 2009. After transfer,
the litigation was assigned Civil Action No. 4:10-cv-00080-SBA by the Northern District Court. On
June 21, 2010, QinetiQ amended its complaint to allege infringement of a third patent, U.S. Patent
No. 5,379,354. We answered QinetiQs amended complaint and asserted fraud counterclaims against
QinetiQ. In December 2010, we entered into a binding memorandum of understanding with QinetiQ.
On December 6, 2010, a bankruptcy preferential transfer avoidance action was filed by Nortel
Networks Inc. et al. against Oclaro Technology Ltd. (formerly Bookham Technology Plc.) and Oclaro
(North America), Inc. (formerly Avanex Corporation) in the United States Bankruptcy Court for the
District of Delaware, Adversary Proceeding No. 10-55919-KG. The complaint alleges, among other
things, that Nortel Networks Inc., and/or its affiliated debtors in the Chapter 11 bankruptcy cases
also pending before the Delaware Bankruptcy Court (Jointly Administered Case No. 09-10138-KG), made
at least $4,593,152 in preferential transfers to the defendants predecessors, Bookham Technology
Plc. and Avanex Corporation, in the 90 days prior to the commencement of the Nortel Chapter 11
bankruptcy cases on January 14, 2009. We intend to vigorously contest the claims set forth in the
complaint.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently believe are
immaterial also may impair our business, operations, liquidity and stock price materially and
adversely. You should carefully consider the risks and uncertainties described below in addition to
the other information included or incorporated by reference in this Quarterly Report on Form 10-Q.
If any of the following risks actually occur, our business, financial condition or results of
operations would likely suffer materially. In that case, the trading price of our common stock
could fall and you could lose all or part of your investment.
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Risks Related to Our Business
Prior to the year ended July 3, 2010, we had a history of large operating losses and we may not be
able to sustain profitability in the future.
We have historically incurred losses and negative cash flows from operations since our
inception. As of January 1, 2011, we had an accumulated deficit of $1,079.5 million. Although we
generated income from continuing operations for the six months ended January 1, 2011 and the year
ended July 3, 2010 of $0.1 million and $11.0 million, respectively, we incurred losses from
continuing operations for the years ended June 27, 2009 and June 28, 2008 of $25.8 million and
$23.3 million, respectively. We may not be able to achieve profitability in any future periods. If
we are unable to do so, we may need additional financing, which may not be available to us on
commercially acceptable terms or at all, to execute on our current or future business strategies.
We may not be able to maintain gross margin levels.
We may not be able to maintain or improve our gross margins, to the extent that current
economic uncertainty, changes in customer demand, including a change in product mix between
different areas of our business, pricing pressure due to increased competition or other factors,
affects our overall revenue, and we are unable to adjust our expenses as necessary. We attempt to
reduce our product costs and improve our product mix to offset price competition and erosion
expected in most product categories, but there is no assurance that we will be successful. Our
gross margins can also be adversely impacted for reasons including, but not limited to, unfavorable
production variances, increases in costs of input parts and materials, the timing of movements in
our inventory balances, warranty costs and related returns, and possible exposure to inventory
valuation reserves. Any failure to maintain, or improve, our gross margins will adversely affect
our financial results, including our goal to achieve sustainable cash flow positive operations.
Our business and results of operations may be negatively impacted by general economic and
financial market conditions and such conditions may increase the other risks that affect our
business.
Over the past two years, the worlds financial markets have experienced significant turmoil,
resulting in reductions in available credit, increased costs of credit, extreme volatility in
security prices, potential changes to existing credit terms, rating downgrades of investments and
reduced valuations of securities generally. In light of these economic conditions, many of our
customers reduced their spending plans, leading them to draw down their existing inventory and
reduce orders for our products. While we have seen a short-term improvement in customer demand, and
improvements in the economic conditions contributing to that improved customer demand, it is
possible that economic conditions could result in further setbacks, and that these customers, or
others, could as a result significantly reduce their capital expenditures, draw down their
inventories, reduce production levels of existing products, defer introduction of new products or
place orders and accept delivery for products for which they do not pay us due to their economic
difficulties or other reasons. Prior to the recent improvement in customer demand, these actions
had, and in future quarters could have, an adverse impact on our own revenues. In addition, the
financial downturn affected the financial strength of certain of our customers, including their
ability to obtain credit to finance purchases of our products, and could adversely affect
additional customers in the future. Our suppliers may also be adversely affected by economic
conditions that may impact their ability to provide important components used in our manufacturing
processes on a timely basis, or at all.
These conditions could also result in reduced capital resources because of the potential lack
of credit availability, higher costs of credit and the stretching of payables by creditors seeking
to preserve their own cash resources. We are unable to predict the likely duration, severity and
potential continuation of the recent disruption in financial markets and adverse economic
conditions in the U.S. and other countries, but the longer the duration the greater the risks we
face in operating our business.
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, rapid and unpredictable changes in customer demand and diverse and evolving
technologies. For example, the market for
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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 wavelength 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 or products in development uncompetitive from a pricing standpoint, obsolete or
unmarketable, which would negatively affect our financial condition and results of operations.
We depend on a limited number of customers for a significant percentage of our revenues.
Historically, we have generated most of our revenues from a limited number of 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. These companies in turn depend
primarily on a limited number of major telecommunications carrier customers to purchase their
products that incorporate our optical components. For example, in the years ended July 3, 2010,
June 27, 2009 and June 28, 2008, our three largest customers accounted for 29 percent, 38 percent
and 38 percent of our revenues, respectively. Because we rely on a limited number of customers for
significant percentages of our revenues, a decrease in demand for our products from any of our
major customers could have a materially adverse impact on our financial conditions and results of
operations. Further, the industry in which our customers operate is subject to a trend of
consolidation. To the extent this trend continues, we may become dependent on even fewer customers
to maintain our revenues.
The majority of our long-term customer contracts do not commit customers to specified buying
levels, and our customers may decrease, cancel or delay their buying levels at any time with
little or no advance notice to us.
The majority of our customers typically purchase our products pursuant to individual purchase
orders or contracts that do not contain purchase commitments. Some customers provide us with their
expected forecasts for our products several months in advance, but many of these customers may
decrease, cancel or delay purchase orders already in place, and the impact of any such actions may
be intensified given our dependence on a small number of large customers. If any of our major
customers decrease, stop or delay purchasing our products for any reason, our business and results
of operations would be harmed. Cancellation or delays of such orders may cause us to fail to
achieve our short-term and long-term financial and operating goals and result in excess and
obsolete inventory. For example, in mid-September 2010, we did experience certain deferrals and
cancellation of orders which adversely impacted our financial results.
We may undertake mergers or acquisitions that do not prove successful.
From time to time we consider mergers or acquisitions, collectively referred to as
acquisitions, of other businesses, assets or companies that would complement our current product
offerings, enhance our intellectual property rights or offer other competitive opportunities.
However, we may not be able to identify suitable acquisition candidates at prices we consider
appropriate. In addition, we are in an industry that is actively consolidating and, as a result,
there is no guarantee that we will successfully and satisfactorily bid against third parties,
including competitors, when we identify a critical target we want to acquire. Our management may
not be able to effectively implement our acquisition plans and internal growth strategy
simultaneously.
We cannot readily predict the timing, size or success of our future acquisitions. Failure to
successfully implement our acquisition plans could have a material adverse effect on our business,
prospects, financial condition and results of operations. Even successful acquisitions could have
the effect of reducing our cash balances, diluting the ownership interests of existing stockholders
or increasing our indebtedness. For example, our recent acquisition of Xtellus required an
immediate issuance of a significant number of newly issued shares of our common stock. We could
also choose to use shares of our common stock to pay certain earnouts associated with our
acquisition of Mintera, should all, or portions, of these earnouts be achieved in the twelve and/or
eighteen month periods subsequent to the acquisition date. We cannot predict with certainty which
strategic, financial or operating synergies or other benefits, if any, will actually be achieved
from any transaction we undertake, the timing of any such
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benefits, or whether those benefits which have been achieved will be sustainable on a long-term
basis. Our failure to identify, consummate or integrate suitable acquisitions could adversely
affect our business and results of operations.
Acquisitions could involve a number of other potential risks to our business, including the
following, any of which could harm our business:
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failure to realize the potential financial or strategic benefits of the acquisition; |
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increased costs associated with acquired operations; |
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economic dilution to gross and operating profit and earnings (loss) per share; |
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failure to successfully further develop the combined, acquired or remaining technology,
which could, among other things, result in the impairment of amounts recorded as goodwill
or other intangible assets; |
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unanticipated costs and liabilities and unforeseen accounting charges; |
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difficulty in integrating product offerings; |
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difficulty in coordinating and rationalizing research and development activities to
enhance introduction of new products and technologies with reduced cost; |
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difficulty in coordinating and integrating the manufacturing activities of our acquired
businesses, including with respect to third-party manufacturers, including executing a
production capacity ramp up of our South Korea facility and our contract manufacturers to
support the potential revenue demand for the WSS-related products of Xtellus, managing the
manufacturing activities of the laser diode business acquired from Newport while these
activities are being transferred from Tucson, Arizona to Europe and Asia, and transferring
certain production of Mintera products to our internal facilities; |
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delays and difficulties in delivery of products and services; |
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failure to effectively integrate or separate management information systems, personnel,
research and development, marketing, sales and support operations; |
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difficulty in maintaining internal control procedures and disclosure controls that
comply with the requirements of the Sarbanes-Oxley Act of 2002, or poor integration of a
targets procedures and controls; |
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difficulty in preserving important relationships of our acquired businesses and
resolving potential conflicts between business cultures; |
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uncertainty on the part of our existing customers, or the customers of an acquired
company, about our ability to operate effectively after a transaction, and the potential
loss of such customers; |
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loss of key employees; |
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difficulty in coordinating the international activities of our acquired businesses; |
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the effect of tax laws due to increasing complexities of our global operating structure; |
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the effect of employment law or regulations or other limitations in foreign
jurisdictions that could have an impact on timing, amounts or costs of achieving expected
synergies; and |
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substantial demands on our management as a result of these transactions that may limit
their time to attend to other operational, financial, business and strategic issues. |
Our integration with acquired businesses has been and will continue to be a complex,
time-consuming and expensive process. We cannot assure you that we will be able to successfully
integrate these businesses in a timely
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manner, or at all, or that any of the anticipated benefits from our acquisition of these businesses
will be realized. We may have difficulty, and may incur unanticipated expenses related to,
integrating management and personnel from these acquired entities with our management and
personnel. Our failure to achieve the strategic objectives of our acquisitions could have a
material adverse effect on our revenues, expenses and our other operating results and cash
resources and could result in us not achieving the anticipated potential benefits of these
transactions. In addition, we cannot assure you that the growth rate of the combined company will
equal the historical growth rate experienced by any of the companies that we have acquired.
Comparable risks would accompany any divestiture of business or assets we might undertake.
Sales of our products could decline if customer and/or supplier relationships are disrupted by our
recent acquisition activities.
The customers of acquired businesses, and/or of predecessor companies, may not continue their
historical buying patterns. Customers may defer purchasing decisions as they evaluate the
likelihood of successful integration of our products and our future product strategy, or consider
purchasing products of our competitors.
Customers may also seek to modify or terminate existing agreements, or prospective customers
may delay entering into new agreements or purchasing our products or may decide not to purchase any
products from us. In addition, by increasing the breadth of our business, the transactions may make
it more difficult for us to enter into relationships, including customer relationships, with
strategic partners, some of whom may view us as a more direct competitor than any of the
predecessor and/or acquired businesses as independent companies.
Competitive positions in the market, including relative to suppliers who are also competitors,
could change as a result of an acquisition, and this could impact supplier relationships, including
the terms under which we do business with such suppliers.
As a result of our recent business combinations, we have become a larger and more geographically
diverse organization, with greater available market opportunities. If our management is unable to
manage the combined organization efficiently, including the challenges of managing the growth
potentially available from expanded market opportunities, our operating results will suffer.
As of January 1, 2011, we had approximately 3,208 employees in a total of 15 facilities around
the world. As a result, we face challenges inherent in efficiently managing an increased number of
employees over large geographic distances, including the need to implement appropriate systems,
policies, benefits and compliance programs. Our inability to manage successfully the geographically
more diverse (including from a cultural perspective) and substantially larger combined organization
could have a material adverse effect on our operating results and, as a result, on the market price
of our common stock. Certain of these acquisitions have increased our serviceable available markets
and scaling the company to address the growth potentially available from addressing these markets,
and potentially available within our previously existing markets, creates additional challenges of
a similar nature.
We may not realize the anticipated benefits from the transfer of wafer production from our Tucson,
Arizona manufacturing operations we acquired from Newport to our European fabrication facilities.
Achieving the potential benefits of our July 4, 2009 acquisition from Newport of the laser
diodes manufacturing operations in Tucson, Arizona will depend in substantial part on the
successful transfer of those manufacturing operations to our European fabrication facilities. We
have faced significant challenges in transferring these operations in a timely and efficient
manner. As a result of certain of these challenges, our opportunities to increase revenues in the
corresponding business were limited in the quarter ended January 1, 2011, and the six months ended
January 1, 2011, and we expect certain of these limitations to continue into the third quarter of
fiscal year 2011.
While we have now successfully transferred those manufacturing facilities to our European
fabrication facilities, we have not yet achieved the desired yields and related cost savings. Any
delays in achieving desired yields may cause us not to achieve expected synergies from leveraging
our existing global manufacturing infrastructure, and our ability to grow related revenues could
continue to be limited by the fully yielded output of production.
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Our products are complex and 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
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 modifications to
existing products often take many quarters or even years 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, design, sales and marketing
activities in connection with products that may be purchased long after we have incurred such
costs. In addition, due to the rapid technological changes in our market, a customer may cancel or
modify a design project before we begin large-scale manufacture of the product and receive revenues
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.
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 and will continue to 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 margins and our cash flow. A
significant portion of our expenses are 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/or pay expenses could have a material effect on our
future operating results. From the end of our fiscal year ended June 27, 2009 to the end of our
fiscal year ended July 3, 2010, the U.S. dollar appreciated 8 percent relative to the U.K. pound
sterling, which favorably impacted our operating results for fiscal year 2010. If the U.S. dollar
stays the same or depreciates relative to the U.K. pound sterling in the future, our future
operating results may be materially impacted. Additional exposure could also result should the
exchange rate between the U.S. dollar and the Chinese yuan, the South Korean won, the Israeli
shekel, the Swiss franc or the Euro vary more significantly than they have to date.
We engage in currency hedging transactions in an effort to cover some of our exposure to U.S.
dollar to U.K. pound sterling currency fluctuations, and we may be required to convert currencies
to meet our obligations. These transactions may not operate to fully hedge our exposure to currency
fluctuations, and under certain circumstances, these transactions could have an adverse effect on
our financial condition.
We have significant manufacturing operations in China, which exposes us to risks inherent in doing
business in China.
The majority of our assembly and test operations, chip-on-carrier operations and manufacturing
and supply chain management operations are concentrated in our facility in Shenzhen, China. We
have substantial research and development related activities in Shenzhen and Shanghai, China. To
be successful in China we will need to:
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qualify our manufacturing lines and the products we produce in Shenzhen, as required by
our customers; |
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attract and retain qualified personnel to operate our Shenzhen facility; and |
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attract and retain research and development employees at our Shenzhen and Shanghai
facilities. |
We cannot assure you that we will be able to do any of these.
Employee turnover in China is high due to the intensely competitive and fluid market for
skilled labor. To operate our Shenzhen facility under these conditions, we will need to continue to
hire direct manufacturing personnel, administrative personnel and technical personnel; obtain and
retain required legal authorization to hire
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such personnel; and incur the time and expense to hire and train such personnel. We are currently
seeing a return of customer demand which had decreased as a result of adverse economic conditions
in the preceding two years. Our ability to respond to this demand will, among other things, be a
function of our ability to attract, train and retain skilled labor in China.
Operations in China are subject to greater political, legal and economic risks than our
operations in other countries. 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, among other
things, taxation, import and export tariffs, environmental regulations, land use rights,
intellectual property, employee benefits 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, in the past, been advised that power may be rationed in the location of our Shenzhen
facility, and were power rationing to be implemented, it could 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,
which we may not be able to do successfully.
We intend to continue 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 or export fees in
China, our business and results of operations could be materially adversely affected. We may also
be required to expend greater amounts than we currently anticipate in connection with increasing
production at our Shenzhen facility. Any one of the factors cited above, or a combination of them,
could result in unanticipated costs or interruptions in production, which could materially and
adversely affect our business.
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. Accurately forecasting 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. We
also have exposure to contractual liabilities to our contract manufacturers for inventories
purchased by them on our behalf, based on our forecasted requirements, which may become excess or
obsolete. 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 non-saleable or obsolete inventory, which
would adversely affect our results of operations. We have from time to time incurred significant
inventory-related charges. Any such charges we incur in future periods could materially and
adversely affect our results of operations.
We depend on a limited number of suppliers who could disrupt our business if they stopped,
decreased, delayed or were unable to meet our demand for shipments of their products.
We depend on a limited number of suppliers of raw materials and equipment used to manufacture
our products. We also depend on a limited number of contract manufacturers, principally Fabrinet in
Thailand, to manufacture certain of our products. Some of these suppliers are sole sources. We
typically have not entered into long-term agreements with our suppliers other than Fabrinet and,
therefore, these suppliers generally may stop supplying us materials and equipment at any time. Our
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. Given the recent macroeconomic downturn, some of our suppliers that
may be small or undercapitalized may experience financial difficulties that could prevent them from
supplying us materials and equipment.
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Any supply deficiencies relating to the quality or quantities of materials or equipment we use
to manufacture our products could materially adversely affect our ability to fulfill customer
orders and our results of operations. Lead times for the purchase of certain materials and
equipment from suppliers have increased and in some cases have limited our ability to rapidly
respond to increased demand, and may continue to do so in the future. These conditions have been
exacerbated by suppliers, customers and companies reducing their inventory levels in response to
the recent macroeconomic downturn.
In addition, Fabrinets manufacturing operations are located in Thailand. Thailand has been
subject to political unrest in the recent past, including the temporary interruption of service at
one of its international airports, and may again experience such political unrest in the future. If
Fabrinet is unable to supply us with materials or equipment, or if they are unable to ship our
materials or equipment out of Thailand due to political unrest, this could materially adversely
affect our ability to fulfill customer orders and our results of operations.
We may record additional impairment charges that will adversely impact our results of operations.
We review our goodwill, intangible assets and long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amounts of these assets may not be
recoverable, and also review goodwill annually. During the year ended June 27, 2009, we determined
that the goodwill related to our New Focus and Avalon reporting units was fully impaired.
Impairment of goodwill and other intangible assets for fiscal year 2009, net of $2.8 million
associated with the discontinued operations of the New Focus business, amounted to $9.1 million.
During year ended July 3, 2010, we recorded goodwill of $20.0 million and other intangible
assets of $9.8 million primarily in connection with our acquisitions of the Newport high-power
laser diodes business and Xtellus. During the first quarter of fiscal year 2011, we also recorded
goodwill of $10.9 million and other intangible assets of $11.7 million in connection with our
acquisition of Mintera. In the event that we determine in a future period that impairment of our
goodwill, intangible assets or long-lived assets exists for any reason, we would record additional
impairment charges in the period such determination is made, which would adversely impact our
financial position and results of operations.
We may incur additional significant restructuring charges that will adversely affect our results
of operations.
We have previously enacted a series of restructuring plans and cost reduction plans designed
to reduce our manufacturing overhead and our operating expenses that have resulted in significant
restructuring charges. Such 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.
Additionally, actual costs have in the past, and may in the future, exceed the amounts estimated
and provided for in our financial statements. Significant additional charges could materially and
adversely affect our results of operations in the periods that they are incurred and recognized.
For instance, we accrued $5.4 million and $2.2 million in restructuring charges during fiscal
year 2009 and 2010, respectively, in connection with our merger with Avanex. On July 4, 2009, we
completed the exchange of our New Focus business to Newport in exchange for Newports high powered
laser diode business, which resulted in us incurring $0.5 million in restructuring charges in
fiscal year 2010 in connection with the transfer of the Tucson manufacturing operations to our
European facilities, an activity which has inherent risk as to the ability to execute and timing to
completion. While restructuring activities associated with our acquisitions of Xtellus and Mintera
are expected to be more limited, the costs and execution risk of the corresponding actions could be
significant.
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 also require that our manufacturing
lines 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,
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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 or failure to obtain qualifications 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 our gross margins, and our 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 results 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, 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. Any reduction in our
manufacturing yields will adversely affect our gross margins and could have a material impact on
our operating results.
Our intellectual property rights may not be adequately protected.
Our future success will depend, in large part, upon our intellectual property rights,
including patents, copyrights, design rights, trade secrets, trademarks and know-how. 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 full or in part in all jurisdictions and
any breach of a confidentiality obligation could have a negative effect on our business and our
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 you 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, that the claims allowed will be sufficiently broad to deter
or prohibit others from marketing similar products. In addition, we cannot assure you 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 or that our products and technology will
be adequately covered by our patents and other intellectual property. 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 be enforceable to 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 now that we have transferred certain
advanced photonics solution manufacturing activities from our San Jose, California facility to
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Shenzhen, China and have also transferred all of our assembly and test operations and
chip-on-carrier operations, including certain engineering-related functions, from our facilities in
the U.K. to Shenzhen, China.
Our products may infringe the intellectual property rights of others which could result in
expensive litigation or 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 are sued or receive informal claims
of patent infringement or infringement of other intellectual property rights. We have, from time to
time, received such claims, including from competitors and from companies that have substantially
more resources than us.
For example, 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. QinetiQs original complaint alleged infringement of United States Patent
Nos. 5,410,625 and 5,428,698, and sought a permanent injunction, money damages, costs, and
attorneys fees. We filed an answer to the complaint and stated counterclaims against QinetiQ for
judgments that the patents-in-suit are invalid and unenforceable. Additionally, we filed a motion
to transfer venue to the Northern District of California, which was granted on December 18, 2009.
After transfer, the litigation was assigned Civil Action No. 4:10-cv-00080-SBA by the Northern
District Court. On June 21, 2010, QinetiQ amended its complaint to allege infringement of a third
patent, U.S. Patent No. 5,379,354. We answered QinetiQs amended complaint and asserted fraud
counterclaims against QinetiQ. A trial in this matter has not yet been set. We believe the claims
asserted against us by QinetiQ are without merit and will continue to defend ourselves vigorously,
but litigation is inherently uncertain and accordingly we cannot assure you of a positive outcome.
In December 2010, we entered into a binding memorandum of understanding with QinetiQ.
Third parties may in the future assert claims against us concerning our existing products or
with respect to future products under development, or with respect to products that we may acquire
through acquisitions. 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 those rights in order to obtain a license to those rights or
otherwise settle any infringement claim. 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. Any
license agreements that we wish to enter into the future with respect to intellectual property
rights may not be available to us on commercially reasonable terms, or at all. 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. The recent economic
downturn could result in holders of intellectual property rights becoming more aggressive in
alleging infringement of their intellectual property rights and we may be the subject of such
claims asserted by a third-party. 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 and
our managements attention. 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 or judgments that require payment of significant royalties or damages.
If we fail to obtain the right to use the intellectual property rights of others necessary to
operate our business, our business and results of operations will be materially and 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 suppliers may seek to gain a competitive advantage or other
third parties, inside or outside our market, may seek an economic return on their intellectual
property portfolios by making infringement claims against us. We currently in-license certain
intellectual property of third-parties, and 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 be used to inhibit or prohibit our production and sale
of existing products and our development of new products for our
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markets. Licenses granting us the right to use third-party technology may not be available on
commercially reasonable terms, or 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. In addition, in the event we are granted such a license,
it is likely such license would be non-exclusive and other parties, including competitors, may be
able to utilize such technology. 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. In addition, our larger competitors may be able to buy such technology and preclude
us from licensing or using such technology.
The inability to obtain government licenses and approvals for desired international trading
activities or technology transfers may prevent the profitable operation of our business.
Many of our present and future business activities are subject to licensing by the United
States government under the Export Administration Act, the Export Administration Regulations and
other laws, regulations and requirements governing international trade and technology transfer. We
presently manufacture products in China and Thailand that require such licenses. The profitable
operations of our business may require the continuity of these licenses and may require further
licenses and approvals for future products in these and other countries. However, there is no
certainty to the continuity of these licenses, nor that further desired licenses and approvals may
be obtained.
The markets in which we operate are highly competitive, which could result in lost sales and lower
revenues.
The market for optical components and modules is highly competitive and this competition could
result in our existing customers moving their orders to our competitors. We are aware of a number
of companies that have developed or are developing optical component products, including tunable
lasers, pluggables, wavelength selective switches and thin film filter products, among others, that
compete directly with our current and proposed product offerings.
Certain of our competitors may be able to more quickly and effectively:
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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;
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deliver competitive products at lower prices. |
Some of our current competitors, as well as some 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. Also relevant is that our competitors and new Chinese companies are establishing
manufacturing operations in China to take advantage of comparatively low manufacturing costs. All
of these risks may be increased if the market were to further consolidate through mergers or other
business combinations between competitors.
We may not be able to compete successfully with our competitors and aggressive competition in
the market may result in lower prices for our products and/or decreased gross margins. Any such
development could 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 fiscal years ended July 3, 2010, June 27, 2009 and June 28, 2008, 19 percent, 20 percent
and 18 percent of our revenues, respectively, were derived from sales to customers located in the
United States and 81 percent, 80
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percent and 82 percent of our revenues, respectively, were derived from sales to customers
located 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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ability to hire qualified candidates; |
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foreign taxes; |
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political, legal and economic instability in foreign markets; |
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foreign regulations; |
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changes in, or impositions of, legislative or regulatory requirements; |
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trade restrictions, including restrictions imposed by the United States government on
trading with parties in foreign countries; |
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transportation delays; |
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epidemics and illnesses; |
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terrorism and threats of terrorism; |
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work stoppages and infrastructure problems due to adverse weather conditions or natural
disasters; |
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work stoppages related to employee dissatisfaction; |
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changes in import/export regulations, tariffs, and freight rates; and |
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the effective protections of, and the ability to enforce, contractual arrangements. |
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.
We may face product liability claims.
Despite quality assurance measures, 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, including
consequential damages. Such defects could, moreover, impair market 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 $25.0 million aggregate annual limit and
errors and omissions insurance with a $5.0 million annual limit. We cannot assure you that this
insurance would adequately cover any or a portion of our costs arising from any defects in our
products or otherwise.
If we fail to attract and retain key personnel, our business could suffer.
Our future success depends, in part, on our ability to attract and retain key personnel.
Competition for highly skilled technical personnel 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 success also depends on the
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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.
In addition, certain employees of companies we have acquired that are now employed by us may
decide to no longer work for us with little or no notice for a number of reasons, including
dissatisfaction with our corporate culture, compensation, and new roles or responsibilities, among
others.
Risks Related to Regulatory Compliance and Litigation
Our business involves the use of hazardous materials, and we are subject to environmental and
import/export laws and regulations that may expose us to liability and increase our costs.
We historically handled hazardous materials as part of our manufacturing activities.
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 incur 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, or that we would be subject to extensive monetary
liability. The costs associated with environmental compliance or remediation efforts or other
environmental liabilities could adversely affect our business. 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 could lose business or face product returns if we
fail to maintain these requirements properly.
In addition, the sale and manufacture of certain of our products require on-going compliance
with governmental security and import/export regulations. We may, in the future, be subject to
investigation which may result in fines for violations of security and import/export regulations.
Furthermore, any disruptions of our product shipments in the future, including disruptions as a
result of efforts to comply with governmental regulations, could adversely affect our revenues,
gross margins and results of operations.
A lack of effective internal control over our financial reporting could result in an inability to
report our financial results accurately, which could lead to a loss of investor confidence in our
financial reports and have an adverse effect on our stock price.
Effective internal controls over financial reporting are necessary for us to provide reliable
financial reports. If we cannot provide reliable financial reports or prevent fraud, our business
and operating results could be harmed. Our failure to implement and maintain effective internal
control over financial reporting could result in a material misstatement of our financial
statements or otherwise cause us to fail to meet our financial reporting obligations. This, in
turn, could result in a loss of investor confidence in the accuracy and completeness of our
financial reports, which could have an adverse effect on our business, financial condition,
operating results and our stock price, and we could be subject to stockholder litigation. Even if
we are able to implement and maintain effective internal control over financial reporting, the
costs of doing business may increase and our management may be required to dedicate greater time
and resources to that effort. In addition, we have in the past, and may in the future, acquire
companies that have either experienced material weaknesses in their internal controls over
financial reporting or have had no previous reporting obligations under Sarbanes-Oxley. Failure to
integrate acquired businesses into our internal controls over financial reporting could cause those
controls to fail.
Litigation may substantially increase our costs and harm our business.
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.
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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 Ltd (Bookham Technology) and Avanex Corporation, now known as Oclaro
(North America), Inc. (Avanex), and certain of each entitys 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.
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 Courts 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, but litigation is inherently uncertain and we cannot assure you of a
positive outcome.
In addition, we are party to certain intellectual property infringement litigation as more
fully described above under Risks Related to Our Business Our products may infringe the
intellectual property rights of others which could result in expensive litigation or 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.
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.
Risks Related to Our Common Stock
A variety of factors could cause the trading price of our common stock to be volatile or to
decline and we may incur significant costs from class action litigation due to our expected stock
volatility.
The trading price of our common stock has been, and is likely to continue to be, highly
volatile. Many factors could cause the market price of our common stock to rise and fall. In
addition to the matters discussed in other risk factors included herein, some of the reasons for
the fluctuations in our stock price are:
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fluctuations in our results of operations, including our gross margins; |
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changes in our business, operations or prospects; |
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hiring or departure of key personnel; |
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new contractual relationships with key suppliers or customers by us or our competitors; |
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proposed acquisitions by us or our competitors; |
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financial results or projections that fail to meet public market analysts expectations
and changes in stock market analysts recommendations regarding us, other optical
technology companies or the telecommunication industry in
general; |
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future sales of common stock, or securities convertible into or exercisable for common
stock; |
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adverse judgments or settlements obligating us to pay damages; |
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future issuances of common stock in connection with acquisitions or other transactions; |
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acts of war, terrorism, or natural disasters; |
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industry, domestic and international market and economic conditions, including the
global macroeconomic downturn over the last two years; |
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low trading volume in our stock; |
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developments relating to patents or property rights; and |
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government regulatory changes. |
In connection with our acquisition of Mintera in July 2010, we may pay up to $20.0 million in
additional revenue-based consideration to former stockholders of Mintera, determined based on a set
of sliding scale formulas, to the extent revenue from Mintera products is more than $29.0 million
in the twelve months following the acquisition and/or more than $40.0 million in the 18 months
following the acquisition. Achieving cumulative revenues of $40 million over the next 12 months
and $70.0 million over the next 18 month period would lead to the maximum $20.0 million in
additional consideration. This earnout consideration, if any, will be payable in cash or, at our
option, newly issued shares of our common stock, or a combination of cash and stock. The issuance,
if any, and subsequent sale of these shares could also negatively impact our stock price.
Our shares of common stock have experienced substantial price and volume fluctuations, in many
cases without any direct relationship to our operating performance. An outgrowth of this market
volatility is the significant vulnerability of our stock price 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 our stock is highly volatile. These broad market
and industry factors have caused the market price of 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.
When the market price of a stock has been volatile, as our stock price may be, holders of that
stock have occasionally brought securities class action litigation against the company that issued
the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the
lawsuit were without merit, we could incur substantial costs defending the lawsuit. The lawsuit
could also divert the time and attention of our management. In addition, if the suit were resolved
in a manner adverse to us, the damages we could be required to pay may be substantial and would
have an adverse impact on our ability to operate our business.
Fluctuations in our operating results could adversely affect the market price of our common stock.
Our revenues and other 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, changes in the pricing of our products due to competitive pressures as well as order or
shipment delays or deferrals, with respect to our products, may cause material fluctuations in
revenues. Our lengthy sales cycle in both of our segments, 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 decisions by
our customers may increase as we develop new or enhanced products for new markets, including data
communications, industrial, research, military, consumer and biotechnology markets. Our current and
anticipated future dependence on a small number of customers increases the revenue impact of each
such customers decision to delay or defer purchases from us, or decision not to purchase products
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, operating results 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 indicative of our future performance. In future periods, our results of
operations may differ, in some cases
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materially, from the estimates of public market analysts and investors. Such a discrepancy, or our
failure to meet published financial projections, could cause the market price of our common stock
to decline.
We may not be able to raise capital when desired on favorable terms without dilution to our
stockholders, or at all.
The rapidly changing industry in which we operate, the length of time between developing and
introducing a product to market and frequent changing customer specifications for products, among
other things, makes our prospects difficult to evaluate. It is possible that we may not generate
sufficient cash flow from operations, or be able to draw down on the $25.0 million senior secured
revolving credit facility with Wells Fargo Capital Finance, Inc. and other lenders, or otherwise
have sufficient capital resources to meet our future capital needs. If this occurs, we may need
additional financing to execute on our current or future business strategies.
If we raise funds through the issuance of equity, equity-linked or convertible debt
securities, our stockholders may be significantly diluted, and these newly-issued securities may
have rights, preferences or privileges senior to those of securities held by existing stockholders.
If we raise funds through the issuance of debt instruments, the agreements governing such debt
instruments may contain covenant restrictions that limit our ability to, among other things: (i)
incur additional debt, assume obligations in connection with letters of credit, or issue
guarantees; (ii) create liens; (iii) make certain investments or acquisitions; (iv) enter into
transactions with our affiliates; (v) sell certain assets; (vi) redeem capital stock or make other
restricted payments; (vii) declare or pay dividends or make other distributions to stockholders;
and (viii) merge or consolidate with any entity. We cannot assure you that additional financing
will be available on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, if and when needed, our ability to fund our operations, develop
or enhance our products, or otherwise respond to competitive pressures and operate effectively
could be significantly limited.
Because we do not intend to pay dividends, stockholders will benefit from an investment in our
common stock only if it appreciates in value.
We have never declared or paid any dividends on our common stock. We anticipate that we will
retain any future earnings to support operations and to finance the development of our business and
do not expect to pay cash dividends in the foreseeable future. As a result, the success of an
investment in our common stock will depend entirely upon any future appreciation in its value.
There is no guarantee that our common stock will appreciate in value or even maintain the price at
which stockholders have purchased their shares.
We can issue shares of preferred stock that may adversely affect your rights as a stockholder
of our common stock.
Our certificate of incorporation authorizes us to issue up to 1,000,000 shares of preferred
stock with designations, rights and preferences determined from time-to-time by our board of
directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of
holders of our common stock. For example, an issuance of shares of preferred stock could:
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adversely affect the voting power of the holders of our common stock; |
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make it more difficult for a third-party to gain control of us; |
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discourage bids for our common stock at a premium; |
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limit or eliminate any payments that the holders of our common stock could expect to
receive upon our liquidation; or |
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otherwise adversely affect the market price of our common stock. |
We may in the future issue shares of authorized preferred stock at any time.
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Delaware law and our charter documents contain provisions that could discourage or prevent a
potential takeover, even if such a transaction would be beneficial to our stockholders.
Some provisions of our certificate of incorporation and bylaws, as well as provisions of
Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These include provisions:
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authorizing the board of directors to issue preferred stock; |
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prohibiting cumulative voting in the election of directors; |
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limiting the persons who may call special meetings of stockholders; |
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prohibiting stockholder actions by written consent; |
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creating a classified board of directors pursuant to which our directors are elected
for staggered three-year terms; |
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permitting the board of directors to increase the size of the board and to fill
vacancies; |
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requiring a super-majority vote of our stockholders to amend our bylaws and certain
provisions of our certificate of incorporation; and |
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establishing advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted on by stockholders at stockholder
meetings. |
We are subject to the provisions of Section 203 of the Delaware General Corporation Law which
limit the right of a corporation to engage in a business combination with a holder of 15 percent or
more of the corporations outstanding voting securities, or certain affiliated persons. We do not
currently have a stockholder rights plan in place.
Although we believe that these charter and bylaw provisions, and provisions of Delaware law
provide an opportunity for the board to assure that our stockholders realize full value for their
investment, they could have the effect of delaying or preventing a change of control, even under
circumstances that some stockholders may consider beneficial.
Item 6. Exhibits
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed
as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by
reference.
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SIGNATURE
Pursuant to the requirements 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.
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OCLARO, INC.
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Date: February 10, 2011 |
By: |
/s/ Jerry Turin
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Jerry Turin |
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Chief Financial Officer
(Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description of Exhibit |
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2.1 |
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Agreement of
Merger, dated as of July 20, 2010, by and among Oclaro, Inc.,
Nikko Acquisition Corp., Mintera Corporation and Shareholder
Representative Services LLC (previously filed as Exhibit 2.1 to
our current report on Form 8-K, filed with the SEC on
July 26, 2010, and incorporated herein by reference). |
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10.1 |
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Variable Pay Program (previously filed as Exhibit 5.02 to our current report on Form 8-K, filed with the SEC on August 2, 2010, and incorporated herein by reference) |
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10.2 |
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Amended and Restated Employment Agreement, dated August 4, 2010, by and between Oclaro, Inc. and Alain Couder (previously filed as Exhibit 10.1 to our current report on Form 8-K, filed with the SEC on August 10, 2010, and incorporated herein by reference). |
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10.3 |
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Oclaro, Inc. Amended and Restated 2004 Stock Incentive Plan (previously filed as Exhibit 10.1 to our current report on Form 8-K, filed with the SEC on October 28, 2010, and incorporated herein by reference). |
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10.4( |
1) |
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First Amendment to the Executive Severance and Retention Agreement, dated as of December 14, 2010, by and between Oclaro, Inc., a Delaware corporation, and Catherine Hunt Rundle (also known as Kate Rundle). |
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10.5( |
1) |
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First Amendment to the Executive Severance and Retention Agreement, dated as of December 14, 2010, by and between Oclaro, Inc., a Delaware corporation, and Jerry Turin. |
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31.1( |
1) |
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Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
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31.2( |
1) |
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Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. |
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32.1( |
1) |
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. |
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32.2( |
1) |
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Certification
of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350. |
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