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EX-32.2 - EXHIBIT 32.2 - OCLARO, INC.exhibit322-12272014.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-30684
 
 
 
OCLARO, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-1303994
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
2560 Junction Avenue, San Jose, California 95134
(Address of principal executive offices, zip code)
(408) 383-1400
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  x    No  ¨
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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
 
¨
Accelerated filer
x
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes  ¨    No  x
109,017,408 shares of common stock outstanding as of January 30, 2015
 



OCLARO, INC.
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 


2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

OCLARO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
December 27, 2014
 
June 28, 2014
 
(Thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,537

 
$
98,973

Restricted cash
4,362

 
5,055

Short-term investments
81

 
95

Accounts receivable, net of allowances for doubtful accounts and sales returns of $2,482 and $256, respectively as of December 27, 2014, and $2,750 and $579, respectively as of June 28, 2014, and including $770 and $2,706 due from related parties as of December 27, 2014 and June 28, 2014, respectively
82,649

 
82,872

Inventories
65,798

 
71,099

Prepaid expenses and other current assets
22,290

 
45,275

Total current assets
249,717

 
303,369

Property and equipment, net
41,746

 
50,768

Other intangible assets, net
3,020

 
8,536

Other non-current assets
2,929

 
3,012

Total assets
$
297,412

 
$
365,685

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable, including $3,747 and $4,483 due to related parties at December 27, 2014 and June 28, 2014, respectively
$
57,517

 
$
71,283

Accrued expenses and other liabilities
38,185

 
51,492

Capital lease obligations, current
4,075

 
5,387

Total current liabilities
99,777

 
128,162

Deferred gain on sale-leaseback
9,330

 
10,711

Capital lease obligations, non-current
2,235

 
4,539

Other non-current liabilities
10,834

 
14,345

Total liabilities
122,176

 
157,757

Commitments and contingencies (Note 8)

 

Stockholders’ equity:
 
 
 
Preferred stock: 1,000 shares authorized; none issued and outstanding

 

Common stock: $0.01 par value per share; 175,000 shares authorized; 109,001 shares issued and outstanding at December 27, 2014 and 107,779 shares issued and outstanding at June 28, 2014
1,090

 
1,077

Additional paid-in capital
1,461,438

 
1,458,487

Accumulated other comprehensive income
42,845

 
45,864

Accumulated deficit
(1,330,137
)
 
(1,297,500
)
Total stockholders’ equity
175,236

 
207,928

Total liabilities and stockholders’ equity
$
297,412

 
$
365,685


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

3


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
 
(Thousands, except per share amounts)
Revenues, including $794 and $1,971 from related parties for the three and six months ended December 27, 2014, respectively and $3,390 and $4,701 from related parties for the three and six months ended December 28, 2013, respectively
$
86,820

 
$
102,914

 
$
176,061

 
$
199,562

Cost of revenues
73,054

 
86,001

 
147,886

 
171,431

Gross profit
13,766

 
16,913

 
28,175

 
28,131

Operating expenses:
 
 
 
 
 
 
 
     Research and development
11,721

 
16,424

 
25,634

 
34,511

     Selling, general and administrative
13,646

 
18,557

 
29,060

 
39,507

     Amortization of other intangible assets
269

 
417

 
687

 
841

     Restructuring, acquisition and related
(income) expense, net
(8,038
)
 
6,721

 
(6,308
)
 
9,598

     Flood-related (income) expense, net

 
(140
)
 

 
(140
)
     (Gain) loss on sale of property and equipment
(26
)
 
205

 
371

 
657

Total operating expenses
17,572

 
42,184

 
49,444

 
84,974

Operating loss
(3,806
)
 
(25,271
)
 
(21,269
)
 
(56,843
)
Other income (expense):
 
 
 
 
 
 
 
     Interest income (expense), net
(89
)
 
(8,532
)
 
(193
)
 
(9,085
)
     Loss on foreign currency transactions, net
(675
)
 
(2,848
)
 
(2,685
)
 
(1,071
)
     Other income (expense), net
329

 
28

 
884

 
549

Total other income (expense)
(435
)
 
(11,352
)
 
(1,994
)
 
(9,607
)
Loss from continuing operations before income taxes
(4,241
)
 
(36,623
)
 
(23,263
)
 
(66,450
)
Income tax (benefit) provision
(38
)
 
1,424

 
916

 
1,726

Loss from continuing operations
(4,203
)
 
(38,047
)
 
(24,179
)
 
(68,176
)
Income (loss) from discontinued operations, net of tax
(8,080
)
 
69,538

 
(8,458
)
 
132,945

Net income (loss)
$
(12,283
)
 
$
31,491

 
$
(32,637
)
 
$
64,769

Basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Loss per share from continuing operations
$
(0.04
)
 
$
(0.41
)
 
$
(0.22
)
 
$
(0.74
)
Income (loss) per share from discontinued operations
(0.07
)
 
0.75

 
(0.08
)
 
1.44

Basic and diluted net income (loss) per share
$
(0.11
)
 
$
0.34

 
$
(0.30
)
 
$
0.70

Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic
107,849

 
93,204

 
107,549

 
92,085

Diluted
107,849

 
93,204

 
107,549

 
92,085

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


4


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
 
(Thousands)
Net income (loss)
$
(12,283
)
 
$
31,491

 
$
(32,637
)
 
$
64,769

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
4

 
(9
)
 
(15
)
 
(39
)
Currency translation adjustments
(1,874
)
 
2,846

 
(3,583
)
 
(41
)
Pension adjustment, net of tax benefits
76

 
16

 
579

 
5,833

Total comprehensive income (loss)
$
(14,077
)
 
$
34,344

 
$
(35,656
)
 
$
70,522

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


5


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
(Thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(32,637
)
 
$
64,769

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Amortization of deferred gain on sale-leaseback
(228
)
 
(1,060
)
Amortization and write-off of issuance costs in connection with term loan

 
4,293

Gain on sale of Komoro Business
(8,315
)
 

Gain on sale of Zurich Business

 
(62,812
)
Gain on sale of Amplifier Business

 
(69,705
)
Adjustment to the hold-backs related to the sales of the Zurich and Amplifier Businesses
7,650

 

Depreciation and amortization
9,719

 
15,847

Flood-related non-cash losses

 
2,011

Stock-based compensation expense
3,042

 
2,030

Other non-cash adjustments
(24
)
 
(288
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(7,368
)
 
29,005

Inventories
(4,364
)
 
(4,986
)
Prepaid expenses and other current assets
11,364

 
(26,432
)
Other non-current assets
(372
)
 
1,427

Accounts payable
(856
)
 
7,784

Accrued expenses and other liabilities
(6,911
)
 
(8,698
)
Net cash used in operating activities
(29,300
)
 
(46,815
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(9,166
)
 
(3,685
)
Proceeds from sale of Komoro Business
13,783

 

Proceeds from sale of Amplifier Business

 
84,600

Proceeds from sale of Zurich Business

 
90,618

Transfer from restricted cash
682

 
454

Net cash provided by investing activities
5,299

 
171,987

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net
13

 
(175
)
Payments on capital lease obligations
(2,030
)
 
(4,855
)
Repayments on borrowings under credit line and term loan

 
(64,964
)
Net cash used in financing activities
(2,017
)
 
(69,994
)
Effect of exchange rate on cash and cash equivalents
1,582

 
1,747

Net increase (decrease) in cash and cash equivalents
(24,436
)
 
56,925

Cash and cash equivalents at beginning of period
98,973

 
84,635

Cash and cash equivalents at end of period
$
74,537

 
$
141,560


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


6


OCLARO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION
Basis of Presentation
Oclaro, Inc., a Delaware corporation, is sometimes referred to in this Quarterly Report on Form 10-Q as “Oclaro,” “we,” “us” or “our.”
On August 5, 2014, we entered into a separation agreement to sell our industrial and consumer business of Oclaro Japan located at our Komoro, Japan facility to Ushio Opto Semiconductors, Inc. ("Ushio Opto"). On October 27, 2014, the sale was completed. The transaction is more fully discussed in Note 5, Business Combinations and Dispositions.
On November 1, 2013, we sold our optical amplifier and micro-optics business (the “Amplifier Business”) to II-VI Incorporated (II-VI). The sale is more fully discussed in Note 5, Business Combinations and Dispositions. On September 12, 2013, we sold our Oclaro Switzerland GmbH subsidiary and associated laser diodes and pump business (the “Zurich Business”) to II-VI. The sale is more fully discussed in Note 5, Business Combinations and Dispositions. These sales are reported as discontinued operations, which require retrospective restatement of prior periods to classify the results of operations as discontinued operations. The notes to our condensed consolidated financial statements relate to our continuing operations only, unless otherwise indicated.
The accompanying unaudited condensed consolidated financial statements of Oclaro as of December 27, 2014 and for the three and six months ended December 27, 2014 and December 28, 2013 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 our 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 December 27, 2014 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 27, 2015.
The condensed consolidated balance sheet as of June 28, 2014 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 June 28, 2014 ("2014 Form 10-K").
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. Examples of significant estimates and assumptions made by management involve the fair value of other intangible assets and long-lived assets, valuation allowances for deferred tax assets, the fair value of stock-based compensation, estimates used to determine facility lease loss liabilities, estimates for allowances for doubtful accounts and valuation of excess and obsolete inventories. These judgments can be subjective and complex and consequently actual results could differ materially from those estimates and assumptions. Descriptions of the key estimates and assumptions are included in our 2014 Form 10-K.
Out-of-Period Adjustment
In the first quarter of fiscal year 2015, we recorded out-of-period adjustments of approximately $2.0 million in cost of goods sold in our condensed consolidated statements of operations. The adjustments, which increased cost of goods sold, also increased accrued liabilities and decreased inventory, and were made to correct our inventory valuation and the value of our purchase commitment accrual.  We determined that the adjustments did not have a material impact to our current or prior period consolidated financial statements.

7


Fiscal Years
We operate on a 52/53 week year ending on the Saturday closest to June 30. Our fiscal year ending June 27, 2015 will be a 52 week year, with the quarter ended December 27, 2014 being a 13 week quarterly period. Our fiscal year ended June 28, 2014 was a 52 week year, with the quarter ended December 28, 2013 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. These reclassifications did not affect our consolidated revenues, net income (loss), cash flows, cash and cash equivalents or stockholders’ equity as previously reported.

NOTE 2. RECENT ACCOUNTING STANDARDS
In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-01, Income Statement - Extraordinary and Unusual Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. This guidance is effective for us prospectively in the first quarter of fiscal year 2016. We are currently evaluating the impact that the implementation of this standard will have on our financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern. The update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. This guidance is effective for us beginning with our annual financial statements for the fiscal year ended July 1, 2017, and interim periods thereafter. We are currently evaluating the impact that the implementation of this standard will have on our financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This update clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016. This guidance is effective for us prospectively in the first quarter of fiscal year 2018. We are currently evaluating the impact that the implementation of this standard will have on our financial statements.
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity's financial results be reported as discontinued operations. The standard also expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2014. We early adopted this guidance in our first quarter of fiscal year 2015. In accordance with this guidance, our sale of the Komoro Business does not meet the definition of a discontinued operation. We consider this sale as an individually material disposal and have expanded our disclosures related to this transaction, including presenting the pre-tax profit (loss) of the Komoro Business for the three and six months ended December 27, 2014 and December 28, 2013, respectively.


8


NOTE 3. BALANCE SHEET DETAILS
The following table provides details regarding our cash and cash equivalents at the dates indicated:
 
December 27, 2014
 
June 28, 2014
 
(Thousands)
Cash and cash equivalents:
 
     Cash-in-bank
$
73,323

 
$
97,759

     Money market funds
1,214

 
1,214

 
$
74,537

 
$
98,973

As of December 27, 2014, we had restricted cash of $4.6 million, including $0.2 million in other non-current assets, consisting of collateral for the performance of our obligations under certain lease facility agreements and $2.4 million (equivalent to RMB 15 million) of cash held in Oclaro Shenzhen’s bank account in China that was frozen by the Xi'an Court in connection with our litigation with Xi’an Raysung Photonics Inc. (see Note 8, Commitments and Contingencies, for additional details regarding this litigation.)
The following table provides details regarding our inventories at the dates indicated:
 
December 27, 2014
 
June 28, 2014
 
(Thousands)
Inventories:
 
Raw materials
$
18,018

 
$
20,036

Work-in-process
22,072

 
20,505

Finished goods
25,708

 
30,558

 
$
65,798

 
$
71,099

In connection with our sale of the Komoro Business, we transferred approximately $4.6 million in inventories to Ushio Opto during the three months ended December 27, 2014.
The following table provides details regarding our property and equipment, net at the dates indicated:
 
December 27, 2014
 
June 28, 2014
 
(Thousands)
Property and equipment, net:
 
Buildings and improvements
$
11,799

 
$
12,989

Plant and machinery
27,168

 
47,247

Fixtures, fittings and equipment
5,366

 
9,701

Computer equipment
12,380

 
13,723

 
56,713

 
83,660

Less: Accumulated depreciation
(14,967
)
 
(32,892
)
 
$
41,746

 
$
50,768

In connection with our sale of the Komoro Business, we transferred approximately $3.7 million in property and equipment to Ushio Opto during the three months ended December 27, 2014.
Property and equipment includes assets under capital leases of $6.3 million at December 27, 2014 and $9.9 million at June 28, 2014, respectively. Amortization associated with assets under capital leases is recorded in depreciation expense.

9


The following table summarizes the activity related to our other intangible assets for the six months ended December 27, 2014:
 
Core and
Current
Technology
 
Development
and Supply
Agreements
 
Customer
Relationships
 
Patent
Portfolio
 
Other
Intangibles
 
Amortization
 
Total
 
(Thousands)
Balance at June 28, 2014
$
8,267

 
$
4,660

 
$
5,143

 
$
915

 
$
3,338

 
$
(13,787
)
 
$
8,536

Sale of Komoro Business
(1,904
)
 

 
(2,545
)
 

 

 

 
(4,449
)
Amortization

 

 

 

 

 
(687
)
 
(687
)
Translations and adjustments
(106
)
 
(77
)
 
(197
)
 

 

 

 
(380
)
Balance at December 27, 2014
$
6,257

 
$
4,583

 
$
2,401

 
$
915

 
$
3,338

 
$
(14,474
)
 
$
3,020

In connection with the sale of our Komoro Business, we transferred other intangible assets with a book value of $4.4 million to Ushio Opto.
With the sale of our Komoro Business, we expect the amortization of intangible assets to be $0.9 million for fiscal year 2015, $0.8 million for each fiscal year 2016 through 2017, $0.7 million for fiscal year 2018, $0.1 million for fiscal year 2019 and $0.1 million thereafter, based on the current level of our other intangible assets as of December 27, 2014.
The following table presents details regarding our accrued expenses and other liabilities at the dates indicated:
 
December 27, 2014
 
June 28, 2014
 
(Thousands)
Accrued expenses and other liabilities:
 
Trade payables
$
10,637

 
$
18,612

Compensation and benefits related accruals
11,060

 
10,242

Warranty accrual
3,474

 
4,672

Accrued restructuring, current
846

 
2,220

Other accruals
12,168

 
15,746

 
$
38,185

 
$
51,492

In connection with our sale of the Komoro Business, we transferred approximately $2.4 million in accrued expenses and other liabilities to Ushio Opto during the three months ended December 27, 2014.
The following table summarizes the activity related to our accrued restructuring charges for the six months ended December 27, 2014:
 
Lease Cancellations,
Commitments and
Other Charges
 
Termination
Payments to
Employees and
Related Costs
 
Total Accrued
Restructuring Charges
 
(Thousands)
Balance at June 28, 2014
$
1,881

 
$
962

 
$
2,843

Charged to restructuring costs
(126
)
 
2,133

 
2,007

Paid or other adjustments
(1,360
)
 
(2,644
)
 
(4,004
)
Balance at December 27, 2014
$
395

 
$
451

 
$
846

  Current portion
395

 
451

 
846

  Non-current portion

 

 


The current portion of accrued restructuring liabilities is included in the caption accrued expenses and other liabilities in the condensed consolidated balance sheet.

During the first quarter of fiscal year 2014, we initiated a restructuring plan to simplify our operating footprint, reduce our cost structure and focus our research and development investment in the optical communications market where we can leverage our core competencies. During the three and six months ended December 27, 2014, we recorded a net reversal of restructuring charges of $0.5 million and a restructuring charge of $0.2 million, respectively, in connection with this restructuring plan. The

10


restructuring charges for the three months ended December 27, 2014 relate to $0.2 million in employee separation charges and a $0.7 million reversal of restructuring charges related to revised estimates for certain commitments. The restructuring charges for the six months ended December 27, 2014 include $0.3 million related to workforce reductions and a $0.1 million reversal of restructuring charges related to revised estimates for lease cancellations and commitments. During the three and six months ended December 27, 2014, we made scheduled payments of $0.3 million and $1.8 million, respectively. During the three and six months ended December 28, 2013, we recorded restructuring charges of $5.7 million and $5.8 million, respectively, in connection with this restructuring plan. The restructuring charges for the three months ended December 28, 2013 included $5.4 million related to workforce reductions and $0.3 million related to revised estimates related to lease cancellations and commitments, and the restructuring charges for the six months ended December 28, 2013 included $5.6 million related to workforce reductions and $0.3 million related to revised estimates related to lease cancellations and commitments. During the three and six months ended December 28, 2013, we made scheduled payments of $2.9 million and $3.1 million, respectively, to settle a portion of these restructuring liabilities. As of December 27, 2014, we had $0.5 million in accrued restructuring liabilities related to this restructuring plan.
In connection with the acquisition of Opnext, we initiated a restructuring plan to integrate our acquisition of Opnext. We recorded no restructuring charges related to this plan during the current year. During the three and six months ended December 28, 2013, we recorded restructuring charges of $0.1 million and $1.1 million, respectively, in connection with this restructuring plan. The restructuring charges recorded in fiscal year 2014 included $0.9 million in external consulting charges and professional fees associated with reorganizing the infrastructure and $0.1 million in revised estimates related to lease cancellations and commitments. During the three and six months ended December 28, 2013, we made scheduled payments of $0.2 million and $2.2 million to settle these restructuring liabilities. As of December 27, 2014, we had no further accrued restructuring liabilities related to this restructuring plan.
During fiscal year 2012, we initiated a restructuring plan in connection with the transfer of a portion of our Shenzhen, China manufacturing operations to Venture Corporation Limited ("Venture"). This transition occurred in a phased and gradual transfer of certain products and was recently completed. In connection with this transition, during the three and six months ended December 27, 2014, we recorded restructuring charges related to employee separation charges of $0.8 million and $1.8 million, respectively. During the three and six months ended December 27, 2014, we made scheduled payments of $0.8 million and $2.1 million, respectively, to settle a portion of these restructuring liabilities. During the three and six months ended December 28, 2013, we recorded restructuring charges related to employee separation charges of $0.9 million and $1.9 million, respectively. During the three and six months ended December 28, 2013, we made scheduled payments of $1.9 million and $2.3 million, respectively, to settle a portion of these restructuring liabilities. As of December 27, 2014, we had $0.3 million in accrued restructuring liabilities related to this restructuring plan.
We expect to incur an additional $2.0 million to $6.0 million, in aggregate, in restructuring charges over the remainder of fiscal year 2015 in connection with these restructuring plans.

The following table presents the components of accumulated other comprehensive income at the dates indicated:
 
December 27, 2014
 
June 28, 2014
 
(Thousands)
Accumulated other comprehensive income:
 
Currency translation adjustments
$
42,907

 
$
46,490

Unrealized loss on marketable securities
(224
)
 
(209
)
Japan defined benefit plan
162

 
(417
)
 
$
42,845

 
$
45,864



11


NOTE 4. FAIR VALUE
We define fair value as the estimated 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.
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 marketable securities are generally classified within Level 1 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 marketable securities and money market securities.
The contingent obligation related to the make-whole premium on our convertible notes was valued using a valuation model which estimated the value based on the probability and timing of conversion. The contingent obligation was classified within Level 3 of the fair value hierarchy. During the second quarter of fiscal year 2014, the holders of the convertible notes exercised their rights to exchange the convertible notes for common stock, and settled the make-whole premium.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are shown in the table below by their corresponding balance sheet caption and consisted of the following types of instruments at December 27, 2014:
 
Fair Value Measurement at Reporting Date Using
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(Thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents: (1)
 
 
 
 
 
 
 
Money market funds
$
1,214

 
$

 
$

 
$
1,214

Short-term investments:
 
 

 

 
 
Marketable securities
81

 

 

 
81

Total assets measured at fair value
$
1,295

 
$

 
$

 
$
1,295

 
(1) 
Excludes $73.3 million in cash held in our bank accounts at December 27, 2014.


12


NOTE 5. BUSINESS COMBINATIONS AND DISPOSITIONS

Sale of Komoro, Japan Industrial and Consumer Business ("Komoro Business")
On August 5, 2014, Oclaro Japan, Inc., our wholly-owned subsidiary (“Oclaro Japan”), entered into a Master Separation Agreement (“MSA”) with Ushio Opto and Ushio, Inc. (“Ushio”), whereby Ushio Opto agreed to acquire the industrial and consumer business of Oclaro Japan located at its Komoro, Japan facility (the “Komoro Business”), by means of an absorption-type demerger under the Japanese Companies Act. On October 27, 2014, the sale was completed. Initial consideration for this transaction consisted of 1.85 billion Japanese yen (approximately $17.1 million based on the exchange rate on October 27, 2014) in cash, of which 1.6 billion Japanese yen (approximately $14.8 million based on the exchange rate on October 27, 2014) was paid at the closing and 250 million Japanese yen (approximately $2.3 million) was paid into escrow and will be released to Oclaro Japan upon the earlier of six months after the closing or the completion by Oclaro Japan of certain transition services and after deduction for any indemnification amounts determined to be owed to Ushio Opto prior to release of the funds from escrow. In addition, under the MSA, we are subject to a post-closing net asset valuation adjustment. We determined that based on the net assets transferred to Ushio Opto during the second quarter of fiscal year 2015, we owed Ushio Opto a post-closing net asset valuation adjustment of $1.4 million, which is scheduled to be paid to Ushio Opto in the third quarter of fiscal year 2015.
In connection with the sale of the Komoro Business, we transferred net assets with a book value of $6.3 million to Ushio Opto, consisting of $3.4 million in accounts receivable, $4.6 million in inventories, $0.9 million in prepaid expenses and other current assets, $3.7 million in property, plant and equipment, $4.4 million in other intangible assets, $5.9 million in accounts payable, $2.9 million in accrued expenses, other liabilities and capital lease obligations, and $1.9 million in other non-current liabilities. We also incurred $1.0 million in legal fees and other administrative costs related to this transaction. As of December 27, 2014, the transfer of net assets was complete and we recognized a gain of $8.3 million within restructuring, acquisition and related (income) expense, net in the condensed consolidated statements of operations.
At the closing of the Transaction, Oclaro Japan and Ushio Opto entered into certain transition services and reciprocal services agreements to allow the Komoro Business to continue operations during the ownership transition, as well as an intellectual property agreement. Ushio has guaranteed the performance of Ushio Opto’s obligations under the MSA. Oclaro Japan, Ushio Opto and Ushio each provided customary and reciprocal representations, warranties and covenants in the MSA.
The income (loss) from continuing operations before income taxes attributable to the Komoro Business was a $0.3 million loss and $1.3 million income for the three and six months ended December 27, 2014 (up through October 27, 2014, the date the sale was completed), and $1.6 million income and $3.3 million income for the three and six months ended December 28, 2013, respectively.


Sale of Amplifier Business

On October 10, 2013, Oclaro Technology Limited entered into an Asset Purchase Agreement with II-VI, whereby Oclaro Technology Limited agreed to sell to II-VI and certain of its affiliates its Amplifier Business for $88.6 million in cash. The transaction closed on November 1, 2013. Consideration, valued initially at $88.6 million, consisted of $79.6 million in cash, which was received on November 1, 2013, $4.0 million which was subject to hold-back by II-VI until December 31, 2014 to address any post-closing claims and $5.0 million related to the exclusive option, which was received on September 12, 2013 and was credited against the purchase price upon closing of the sale. On December 30, 2014, Oclaro Technology Limited entered into a Settlement Agreement with II-VI and II-VI Holdings B.V. regarding disposition of the amounts held back by the II-VI parties pursuant to the Asset Purchase Agreement. Of the $4.0 million subject to hold-back until December 31, 2014, we received $0.9 million in January 2015 and we released II-VI from the remaining $3.1 million. We recorded the $3.1 million release of the hold-back as a loss from discontinued operations within the condensed consolidated statement of operations during the three and six months ended December 27, 2014. In connection with the Settlement Agreement, we also agreed with the II-VI parties to a mutual release of certain claims related to the Asset Purchase Agreement, and certain related documents and transactions.

We classified the sale of our Amplifier Business as a discontinued operation as of September 12, 2013, the date we committed to sell the business.

13


The following table presents the statements of operations for the discontinued operations of the Amplifier Business:
 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
 
(Thousands)
Revenues
$

 
$
6,869

 
$

 
$
35,185

Cost of revenues

 
5,528

 

 
26,243

Gross profit

 
1,341

 

 
8,942

Operating expenses
(54
)
 
1,508

 
161

 
5,576

Other income (expense), net
(3,060
)
 
69,705

 
(3,060
)
 
69,705

Income (loss) from discontinued operations
  before income taxes
(3,006
)
 
69,538

 
(3,221
)
 
73,071

Income tax provision

 

 

 

Income (loss) from discontinued operations
$
(3,006
)
 
$
69,538

 
$
(3,221
)
 
$
73,071


This acquisition is more fully discussed in Note 3, Business Combinations and Dispositions, to our consolidated financial statements included in our 2014 Form 10-K.
Sale of Zurich Business
On September 12, 2013, we completed a Share and Asset Purchase Agreement with II-VI, pursuant to which we sold our Oclaro Switzerland GmbH subsidiary and associated laser diodes and pump business to II-VI. Also, as part of the agreement, II-VI purchased certain pieces of equipment which are located in our Caswell facility. We continue to operate this equipment on behalf of II-VI, and provide certain wafer processing services in Caswell as part of an ongoing manufacturing services agreement.
We received proceeds of $90.6 million in cash on September 12, 2013, and $2.9 million in cash during the third quarter of fiscal year 2014 which related to a final settlement of the post-closing working capital adjustment. We were also scheduled to receive an additional $6.0 million subject to hold-back by II-VI until December 31, 2014 to address any post-closing adjustments or claims. On December 30, 2014, we entered into a Settlement Agreement with II-VI and II-VI Holdings B.V. regarding disposition of the amounts held back by the II-VI parties pursuant to the Share and Asset Purchase Agreement. Of the $6.0 million subject to hold-back until December 31, 2014, we received $1.4 million in January 2015 and we released II-VI from the remaining $4.6 million. We recorded the $4.6 million release of the hold-back as a loss from discontinued operations within the condensed consolidated statement of operations during the three and six months ended December 27, 2014. In connection with the Settlement Agreement, we also agreed with the II-VI parties to a mutual release of certain claims related to the Share and Asset Purchase Agreement, and certain related documents and transactions.
We classified the sale of our Zurich Business as a discontinued operation as of September 12, 2013.
The following table presents the statements of operations for the discontinued operations of the Zurich Business:
 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
 
(Thousands)
 
(Thousands)
Revenues
$

 
$

 
$

 
$
13,896

Cost of revenues

 

 
163

 
11,593

Gross profit

 

 
(163
)
 
2,303

Operating expenses
484

 

 
484

 
3,416

Other income (expense), net
(4,590
)
 

 
(4,590
)
 
61,150

Income (loss) from discontinued operations
  before income taxes
(5,074
)
 

 
(5,237
)
 
60,037

Income tax provision

 

 

 
163

Income (loss) from discontinued operations
$
(5,074
)
 
$

 
$
(5,237
)
 
$
59,874


14



This acquisition is more fully discussed in Note 3, Business Combinations and Dispositions, to our consolidated financial statements included in our 2014 Annual Report on Form 10-K.

NOTE 6. CREDIT LINE AND NOTES
Silicon Valley Bank Credit Facility

On March 28, 2014, Oclaro, Inc. and its subsidiary, Oclaro Technology Limited (the “Borrower”), entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which the Bank provided the Borrower with a three-year revolving credit facility of up to $40.0 million. Under the Loan Agreement, advances are available based on up to 80 percent of “eligible accounts” as defined in the Loan Agreement. The Loan Agreement has a $10.0 million sub-facility for letters of credit, foreign exchange contracts and cash management services.

Borrowings made under the Loan Agreement bear interest at a rate based on either the London Interbank Offered Rate plus 2.25 percent or Wall Street Journal’s prime rate plus 1.00 percent. If the sum of (a) the Borrower’s unrestricted cash and cash equivalents that are subject to the Bank’s liens less (b) the amount outstanding to the Bank under the Loan Agreement (such sum being “Net Cash”) is less than $15.0 million, then the interest rates are increased by 0.75 percent until Net Cash exceeds $15.0 million for a calendar month. If interest paid under the Loan Agreement is less than $45,000 in any fiscal quarter, the Borrower is required to pay the Bank an additional amount equal to the difference between $45,000 and the actual interest paid during such fiscal quarter. The minimum interest payment is in lieu of a stand-by charge.

If the Loan Agreement terminates prior to its maturity date, the Borrower will pay a termination fee equal to 1.00 percent of the total credit facility if such termination occurs in the first year after closing, 0.75 percent of the total credit facility if such termination occurs in the second year after closing and 0.50 percent of the total credit facility if such termination occurs in the third year after closing. The maturity date of the Loan Agreement is March 28, 2017. At December 27, 2014, there were no amounts outstanding under the Loan Agreement.

The Loan Agreement is more fully discussed in Note 7, Credit Line and Notes, to our consolidated financial statements included in our 2014 Form 10-K.

Wells Fargo Credit Line and Term Loan

On August 2, 2006, Oclaro, Inc. ("Parent"), along with Oclaro Technology Limited (“Borrower”), Oclaro Photonics, Inc. and Oclaro Technology, Inc., each a wholly-owned subsidiary, entered into a Credit Agreement with Wells Fargo Capital Finance, Inc. (“Wells Fargo”) and certain other lenders (the “Credit Agreement”).

From time to time, we amended and restated the Credit Agreement, before terminating the agreement on March 14, 2014. The Credit Agreement is more fully discussed in Note 7, Credit Line and Notes, to our consolidated financial statements included in our 2014 Form 10-K.
7.50% Exchangeable Senior Secured Second Lien Notes ("Convertible Notes")
On December 14, 2012, we and our indirect, wholly owned subsidiary, Oclaro Luxembourg S.A., closed the private placement of $25.0 million aggregate principal amount 7.50 percent Exchangeable Senior Secured Second Lien Notes due 2018 (“Convertible Notes”). The sale of the convertible notes resulted in net proceeds of approximately $22.8 million. The private placement was completed pursuant to a purchase agreement, dated December 14, 2012 entered into by us, certain of our domestic and foreign subsidiaries (the "Guarantors") and Morgan Stanley & Co. LLC, which is more fully discussed in Note 7, Credit Line and Notes, to our consolidated financial statements included in our 2014 Form 10-K.
We considered the contingent obligation of having to make a make-whole payment in the event of an early conversion by the holders of the convertible notes as an embedded derivative. We estimated the fair value of the make-whole payment by using a valuation model to predict the probability and timing of a conversion. On December 19, 2013, the holders exercised their rights to exchange the convertible notes for our common stock. The exchange rate for the exchanges was 541.7118 shares of common stock per $1,000 in principal amount of convertible notes. We issued 13,542,791 shares of common stock in connection with the exchange, with cash payable in lieu of fractional shares. In addition, pursuant to the terms of the indenture governing the

15


convertible notes, we made a redemption exchange make-whole payment of $8.3 million during the second quarter of fiscal year 2014.
In connection with the private placement of the convertible notes, we incurred approximately $1.3 million in debt discount and $0.9 million in issuance costs. Upon exchange of the convertible notes during the second quarter of fiscal year 2014, we recorded the remaining unamortized debt discount and issuance costs of $1.8 million in additional paid-in capital.

NOTE 7. POST-RETIREMENT BENEFITS
Switzerland Defined Benefit Plan
During the first quarter of fiscal year 2014, we sold our Zurich Business, and as part of the sale transferred our pension plan covering employees of our Swiss subsidiary (the “Swiss Plan”) to II-VI. At the end of our first quarter of fiscal year 2014, we had no remaining obligations under the Swiss Plan.
Japan Defined Contribution and Benefit Plan
In connection with our acquisition of Opnext, we assumed a defined contribution plan and a defined benefit plan that provides retirement benefits to our employees in Japan.
Under the defined contribution plan, contributions are provided based on grade level and totaled $0.1 million and $0.3 million for the three and six months ended December 27, 2014, respectively, and $0.2 million and $0.4 million for the three and six months ended December 28, 2013, respectively. Employees can elect to receive the benefit as additional salary or contribute the benefit to the plan on a tax-deferred basis.
Under the defined benefit plan in Japan (the “Japan Plan”), we calculate benefits based on an employee’s individual grade level and years of service. Employees are entitled to a lump sum benefit upon retirement or upon certain instances of termination. During the second quarter of fiscal year 2015, we sold our Komoro Business, and as part of the sale transferred a portion of our Japan Plan covering employees of the Komoro Business to II-VI. As of December 27, 2014, there were no plan assets associated with the Japan Plan. As of December 27, 2014, there was $0.2 million in accrued expenses and other liabilities and $4.9 million in other non-current liabilities in our condensed consolidated balance sheet as of December 27, 2014, to account for the projected benefit obligations under the Japan Plan. Net periodic pension costs for the Japan Plan included the following:

 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
 
(Thousands)
Service cost
$
177

 
$
233

 
$
376

 
$
481

Interest cost
18

 
23

 
38

 
47

Net amortization
12

 
15

 
27

 
31

Net periodic pension costs
$
207

 
$
271

 
$
441

 
$
559

During the first quarter of fiscal year 2015, we recorded an adjustment of $0.5 million in accumulated other comprehensive income in connection with revising our methodology for estimating the actuarial present value of accumulated plan benefits under the Japan Plan.
We made benefit payments under the Japan Plan of $0.1 million and $0.1 million during the three and six months ended December 27, 2014, respectively, and $0.1 million and $0.1 million during the three and six months ended December 28, 2013, respectively.


16


NOTE 8. COMMITMENTS AND CONTINGENCIES
Loss Contingencies
We are involved in various lawsuits, claims, and proceedings that arise in the ordinary course of business. We record a loss provision when we believe it is both probable that a liability has been incurred and the amount can be reasonably estimated.
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 indemnifications 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 generally provide a warranty for our products for twelve months to thirty-six months from the date of sale, although warranties for certain of our products may be longer. 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.

The following table summarizes movements in the warranty accrual for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
 
(Thousands)
Warranty provision—beginning of period
$
4,054

 
$
4,753

 
$
4,672

 
$
4,670

Warranties issued
764

 
529

 
893

 
1,501

Warranties utilized or expired
(1,184
)
 
(1,031
)
 
(1,859
)
 
(2,014
)
Currency translation and other adjustments
(160
)
 
1,236

 
(232
)
 
1,330

Warranty provision—end of period
$
3,474

 
$
5,487

 
$
3,474

 
$
5,487

Capital Leases
In connection with our acquisition of Opnext, we assumed certain capital leases with Hitachi Capital Corporation, a related party, for certain equipment. The terms of the leases generally range from one to five years and the equipment can be purchased at the residual value upon expiration. We can terminate the leases at our discretion in return for a penalty payment as stated in the lease contracts.

17


The following table shows the future minimum lease payments due under non-cancelable capital leases with Hitachi Capital Corporation at December 27, 2014:
 
Capital Leases
 
(Thousands)
Fiscal Year Ending:
 
2015 (remaining)
$
2,435

2016
2,907

2017
1,093

2018
42

2019
28

Thereafter
77

Total minimum lease payments
6,582

Less amount representing interest
(272
)
Present value of capitalized payments
6,310

Less: current portion
(4,075
)
Long-term portion
$
2,235


In connection with our sale of the Komoro Business, during the second quarter of fiscal year 2015, we transferred $0.5 million in capital leases with Hitachi Corporation to Ushio Opto.
Litigation
Overview
In the ordinary course of business, we are involved in various legal proceedings, and we anticipate that additional actions will be brought against us in the future. The most significant of these proceedings are described below. These legal proceedings, as well as other matters, involve various aspects of our business and a variety of claims in various jurisdictions. Complex legal proceedings frequently extend for several years, and a number of the matters pending against us are at very early stages of the legal process. As a result, some pending matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to determine whether the proceeding is material to us or to estimate a range of possible loss, if any. Unless otherwise disclosed, we are unable to estimate the possible loss or range of loss for the legal proceedings described below. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these items currently pending could have a material effect on our results of operations, financial position or cash flows.
Raysung Commercial Litigation
On October 23, 2013, Xi’an Raysung Photonics Inc., or Raysung, filed a civil suit against our wholly-owned subsidiary, Oclaro Technology (Shenzhen) Co., Ltd. (formerly known as Bookham Technology (Shenzhen) Co., Ltd.), or Oclaro Shenzhen, in the Xi’an Intermediate People’s Court in Shaanxi Province of the People’s Republic of China, or the Xi’an Court. The complaint filed by Raysung alleges that Oclaro Shenzhen terminated its purchase order pursuant to which Raysung had supplied certain products and was to supply certain products to Oclaro Shenzhen.
Raysung initially requested that the court award damages of RMB 4,796,531 (equivalent to approximately $0.8 million at the exchange rate in effect December 27, 2014), and requested that Oclaro Shenzhen take the finished products that are now stored in Raysung’s warehouse (the value of the finished product is RMB 13,505,162 (equivalent to approximately $2.2 million at the exchange rate in effect December 27, 2014) and requested that Oclaro Shenzhen pay its court fees in connection with this suit.
The Xi’an Court delivered an Asset Preservation Order which was served on Oclaro Shenzhen and the local Customs office. According to the Asset Preservation Order, Oclaro Shenzhen was ordered to maintain RMB 15,000,000 (equivalent to approximately $2.4 million at the exchange rate in effect December 27, 2014) or assets equivalent to the said amount during the litigation process, and the Customs office was ordered to restrict Oclaro Shenzhen's equipment from being exported before the Asset Preservation Order is lifted. On November 11, 2013, Oclaro Shenzhen entered into a settlement agreement. Under the terms of this settlement agreement, Oclaro Shenzhen agreed to pay $500,000 in payment of invoices for certain materials to Raysung and to work with Raysung to requalify it as a vendor for certain Oclaro Shenzhen manufacturing requirements, in consideration of which Raysung agreed to submit the settlement agreement to the Xi’an Court so it could issue a civil

18


mediation agreement, apply for a discharge of the Asset Preservation Order and waive the right to bring any legal actions against Oclaro Shenzhen relating to these matters. Oclaro Shenzhen performed its obligations under the settlement agreement, however, on January 15, 2014, Raysung applied to the Xi’an Court to terminate the settlement agreement and add Oclaro, Inc. as a co-defendant in the original civil suit.

On March 26, 2014, the Xi’an Court froze RMB 15,000,000 (equivalent to approximately $2.4 million at the exchange rate in effect December 27, 2014) of cash held in Oclaro Shenzhen’s bank account in China. On April 30, 2014, Oclaro Shenzhen submitted a challenge to the jurisdiction of the Xi'an Court. On May 26, 2014, the Xi'an Court overruled the jurisdictional challenge. On June 4, 2014, Oclaro Shenzhen filed an appeal with the Shaanxi High Court to revoke the civil order of the Xi'an Court overruling Oclaro Shenzhen's jurisdictional challenge. The Shaanxi High Court held hearings on July 15, 2014 and July 30, 2014, and on August 20, 2014 sustained the Xi'an Court's civil order on jurisdiction and transferred the case back to the Xi'an Court for substantive proceedings. On September 22, 2014, Raysung amended its complaint in the Xi'an Court proceeding by increasing its claims to RMB 36.2 million (equivalent to approximately $5.9 million at the exchange rate in effect on December 27, 2014). On October 22, 2014, the Xi'an Court conducted a hearing on the substantive elements of Raysung's claims. At the same hearing, Oclaro Shenzhen filed counterclaims against Raysung for RMB 7.4 million (equivalent to approximately $1.2 million at the exchange rate in effect on December 27, 2014) of losses resulting from supply of products with unqualified materials. On December 17, 2014, the Xi'an Court conducted a hearing on the substantive elements of each party's claims against the other party. The Xi'an Court has not yet issued a decision or established a new hearing date. Oclaro, Inc. and Oclaro Shenzhen believe that they have meritorious defenses to the claims made by Raysung and intend to defend this litigation vigorously.

Class Action and Derivative Litigation

On May 19, 2011, Curtis and Charlotte Westley filed a purported class action complaint in the United States District Court for the Northern District of California, against us and certain of our officers and directors. The Court subsequently appointed the Connecticut Laborers’ Pension Fund (“Pension Fund”) as lead plaintiff for the putative class. On April 26, 2012, the Pension Fund filed a second amended complaint, captioned as Westley v. Oclaro, Inc., No. 11 Civ. 2448 EMC, allegedly on behalf of persons who purchased our common stock between May 6 and October 28, 2010, alleging that we and certain of our officers and directors issued materially false and misleading statements during this time period regarding our current business and financial condition, including projections for demand for our products, as well as our revenues, earnings, and gross margins, for the first quarter of fiscal year 2011 as well as the full fiscal year. The complaint alleged violations of section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, as well as section 20(a) of the Securities Exchange Act. The complaint sought damages and costs of an unspecified amount. On September 21, 2012, the Court dismissed the second amended complaint with leave to amend. After the Pension Fund moved for reconsideration, on January 10, 2013, the Court allowed plaintiffs to take discovery regarding statements made in May and June 2010. On March 1, 2013 the Pension Fund filed a third amended complaint, attempting to cure pleading deficiencies with regard to statements allegedly made in July and August 2010. On April 1, 2013, defendants moved to dismiss the third amended complaint with respect to the statements made in July and August 2010. On May 30, 2013, the Court granted Defendants’ motion to dismiss the complaint’s claims based on statements made in July and August 2010. Although discovery has commenced, no trial was ever scheduled in this action.
On June 10, 2011, a purported shareholder, Stanley Moskal, filed a purported derivative action in the Superior Court for the State of California, County of Santa Clara, against us, as nominal defendant, and certain of our current and former officers and directors, as defendants. The case is styled Moskal v. Couder, No. 1:11 CV 202880 (Santa Clara County Super. Ct., filed June 10, 2011). Four other purported shareholders, Matteo Guindani, Jermaine Coney, Jefferson Braman and Toby Aguilar, separately filed substantially similar lawsuits in the United States District Court for the Northern District of California on June 27, June 28, July 7 and July 26, 2011, respectively. By Order dated September 14, 2011, the Guindani, Coney, and Braman actions were consolidated under In re Oclaro, Inc. Derivative Litigation, Lead Case No. 11 Civ. 3176 EMC. On October 5, 2011, the Aguilar action was voluntarily dismissed. Each remaining purported derivative complaint alleged that Oclaro has been, or will be, damaged by the actions alleged in the Westley complaint, and the litigation of the Westley action, and any damages or settlement paid in the Westley action. Each purported derivative complaint alleged counts for breaches of fiduciary duty, waste, and unjust enrichment. Each purported derivative complaint sought damages and costs of an unspecified amount, as well as injunctive relief. By Order dated March 6, 2012, the parties in the Moskal action agreed that defendants shall not be required to respond to the original complaint. By Order dated February 27, 2013, the parties in the Moskal action agreed that plaintiff would serve an amended complaint no later than 30 days after the Court in the Westley action rules on defendants’ motion to dismiss the third amended complaint in the Westley action and the stay of discovery would remain in effect until further order of the Court or agreement by the parties, provided, however, that they obtain discovery produced in the Westley Action. By Order dated March 12, 2013, the parties to In re Oclaro, Inc. Derivative Litigation agreed to stay all proceedings until such time as (a) the defendants file an answer to any complaint in the Westley action; or (b) the Westley action is

19


dismissed in its entirety with prejudice, provided, however, that they obtain discovery produced in the Westley Action. No trial has been scheduled in any of these actions.
On September 3, 2013, the parties agreed to settle the Westley, Moskal, and In re Oclaro Derivative matters for a total of $3.95 million, plus certain corporate governance changes. The money was paid entirely by our directors and officers liability insurance carriers. The fees awarded to the plaintiffs in these actions, or their respective counsel, were included in this amount. By Order dated August 13, 2014, the Court in the Westley matter gave its final approval to the settlement. By Order dated September 19, 2014, the Court in the In re Oclaro, Inc. Derivative Litigation gave its final approval to the settlement, which then became effective on December 1, 2014. By Order dated October 1, 2014, the Court approved the voluntary dismissal of the Moskal matter, terminating the state court derivative matters.
 
NOTE 9. EMPLOYEE STOCK PLANS

Stock Incentive Plans
On July 23, 2013, our board of directors approved the Fourth Amended and Restated 2001 Long-Term Stock Incentive Plan and on January 14, 2014, our shareholders ratified this plan, establishing it as our primary equity incentive plan at that time. This plan (i) revised the eligibility section to allow us to make grants to all our employees, non-employee directors and consultants, (ii) allowed us to grant incentive stock options and awards which may be able to qualify as qualified performance-based compensation under Section 162(m) of the Internal Revenue Code, (iii) extended the term of the plan to ten years from the effective date of the plan (the plan expires in July 2023), and (iv) conformed the share counting provisions of the plan to provide that full value awards count as 1.25 shares for purposes of the plan.
On July 30, 2014, our board of directors approved the Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan (the “Plan”) and on November 14, 2014, our shareholders ratified the Plan. The Plan amends and restates in its entirety the Fourth Amended and Restated 2001 Long-Term Stock Incentive Plan. The Plan (i) increases the number of shares of common stock available for issuance by 6.0 million shares, (ii) consolidates the share reserve of the Plan with the share reserve of the Amended and Restated 2004 Stock Incentive Plan ("2004 Plan"), such that from November 14, 2014, no additional awards will be granted under the 2004 Plan, and (iii) establishes that full value awards count as 1.40 shares of common stock for purposes of the Plan.
As of December 27, 2014, there were 8.5 million shares of our common stock available for grant under the Plan.
We generally grant stock options that vest over a two to 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 or the compensation committee of our board of directors.
In July 2011, our board of directors approved the grant of 0.2 million performance stock units (“PSUs”) to certain executive officers with an aggregate estimated grant date fair value of $0.9 million. In October 2013, the board of directors determined that achievement of the performance conditions was reached at the 100 percent target level. Approximately 0.1 million of the grants outstanding, or 50 percent, vested on October 22, 2013, with the remaining 50 percent scheduled to vest upon a two-year service condition through August 2015. As of December 27, 2014, there were less than 0.1 million PSUs outstanding, after adjustments for forfeitures due to terminations, related to this grant, with an aggregate estimated grant date fair value of less than $0.1 million.
In July 2012, our board of directors approved a grant of 0.6 million PSUs to certain executive officers, subject to shareholder approval of an amendment to our Plan. Prior to shareholder approval, approximately 0.4 million of the PSUs were forfeited as a result of certain executive officer departures. On January 14, 2014, shareholder approval was obtained at our annual general meeting of stockholders. These PSUs were scheduled to vest upon the achievement of certain adjusted earnings before interest, taxes, depreciation and amortization targets through June 30, 2014. During the first quarter of fiscal year 2015, it was determined that the performance conditions were not achieved, and the corresponding PSUs were forfeited.
In February 2014, our board of directors granted our chief executive officer 0.8 million restricted stock units ("RSUs") in satisfaction of the terms set forth in his employment agreement dated September 11, 2013. The RSUs vested in full on the date of grant, and settled on August 15, 2014. The RSUs have an aggregate grant date fair value of $2.0 million, which was recorded in the third quarter of fiscal year 2014.

20


In March 2014, our board of directors approved a grant of 0.2 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $0.5 million. These PSUs vest upon the achievement of non-GAAP operating income break-even for calendar year 2015. Vesting is also contingent upon service conditions being met through February 2018. If the performance condition is not achieved, then the corresponding PSUs will be forfeited in the third quarter of fiscal year 2016. As of December 27, 2014, there were 0.1 million PSUs outstanding, after adjustments for forfeitures due to terminations, related to this grant, with an aggregate estimated grant date fair value of $0.4 million. During the second quarter of fiscal year 2015, we determined that the achievement of the performance conditions associated with these PSUs was improbable. In the second quarter of fiscal year 2015, we reversed approximately $0.1 million in previously recognized stock-based compensation expense related to these PSUs.
In August 2014, our board of directors approved a grant of 0.5 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $0.9 million. These PSUs will vest at 100 percent upon the achievement of two consecutive quarters with positive earnings before interest, taxes, depreciation and amortization on or before the end of our fiscal year 2017. If the performance condition is not achieved, then the corresponding PSUs will be forfeited in the first quarter of fiscal year 2018.
In August 2014, our board of directors approved a retention grant of 0.4 million RSUs to certain of our executives, which vest over three years. In September 2014, our board of directors also approved a retention grant of 1.4 million RSUs to other employees, which vest over two years.
The following table summarizes the combined activity under all of our equity incentive plans for the six months ended December 27, 2014:
 
Shares
Available
For Grant
 
Stock
Options /
SARs
Outstanding
 
Weighted-
Average
Exercise Price
 
Restricted Stock
Awards / Units
Outstanding
 
Weighted-
Average Grant
Date Fair Value
 
(Thousands)
 
(Thousands)
 
 
 
(Thousands)
 
 
Balance at June 28, 2014
5,703

 
4,156

 
$
8.43

 
4,273

 
$
2.59

Increase in share reserve
6,000

 

 

 

 

Granted
(3,882
)
 
164

 
1.79

 
2,933

 
1.45

Exercised or released

 
(1
)
 
1.60

 
(1,154
)
 
2.41

Cancelled or forfeited
659

 
(388
)
 
13.51

 
(222
)
 
3.20

Balance at December 27, 2014
8,480

 
3,931

 
7.71

 
5,830

 
2.03

Supplemental disclosure information about our stock options and stock appreciation rights ("SARs") outstanding as of December 27, 2014 is as follows:
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic
Value
 
(Thousands)
 
 
 
(Years)
 
(Thousands)
Options and SARs exercisable
3,329

 
$
8.65

 
4.1
 
$
46

Options and SARs outstanding
3,931

 
7.71

 
4.8
 
81

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 $1.88 on December 26, 2014, which would have been received by the option holders had all option holders exercised their options as of that date. There were less than 0.1 million shares of common stock subject to in-the-money options which were exercisable as of December 27, 2014. We settle employee stock option exercises with newly issued shares of common stock.

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NOTE 10. STOCK-BASED COMPENSATION
We recognize stock-based compensation expense in our condensed consolidated 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 were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
Stock options:
 
 
 
 
 
 
 
Expected life
5.3 years

 
5.3 years

 
5.3 years

 
5.3 years

Risk-free interest rate
1.6
%
 
1.5
%
 
1.6
%
 
1.5
%
Volatility
76.0
%
 
82.2
%
 
76.9
%
 
82.2
%
Dividend yield

 

 

 

The amounts included in cost of revenues and operating expenses for stock-based compensation were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
 
(Thousands)
Stock-based compensation by category of expense:
Cost of revenues
$
576

 
$
250

 
$
906

 
$
502

Research and development
410

 
206

 
742

 
452

Selling, general and administrative
770

 
390

 
1,394

 
855

 
$
1,756

 
$
846

 
$
3,042

 
$
1,809

Stock-based compensation by type of award:
 
 
 
 
 
 
 
Stock options
$
88

 
$
262

 
$
230

 
$
593

Restricted stock awards
1,551

 
566

 
2,736

 
1,224

Inventory adjustment to cost of revenues
117

 
18

 
76

 
(8
)
 
$
1,756

 
$
846

 
$
3,042

 
$
1,809


As of December 27, 2014 and June 28, 2014, we had capitalized approximately $0.5 million and $0.4 million, respectively, of stock-based compensation as inventory.

As of December 27, 2014, we had $0.6 million in unrecognized stock-based compensation expense related to unvested stock options, net of estimated forfeitures, that will be recognized over a weighted-average period of 2.9 years, and $7.4 million in unrecognized stock-based compensation expense related to unvested restricted stock awards, net of estimated forfeitures, that will be recognized over a weighted-average period of 1.6 years.

The amount of stock-based compensation expense recognized in any one period related to PSUs can vary based on the achievement or anticipated achievement of the performance conditions. If the performance conditions are not met or not expected be met, no compensation cost would be recognized on the underlying PSUs, and any previously recognized compensation expense related to those PSUs would be reversed. During the second quarter of fiscal year 2015, we determined that the achievement of the performance conditions associated with the PSUs granted in March 2014 was improbable. We reversed approximately $0.1 million in previously recognized stock-based compensation expense related to these PSUs.
During the three and six months ended December 27, 2014 and December 28, 2013, we recorded minimal stock-based compensation expense in connection with the issuance of the PSUs from July 2011, March 2014 and August 2014.




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NOTE 11. INCOME TAXES
The income tax benefit of $38,000 and the income tax provision of $0.9 million for the three and six months ended December 27, 2014, respectively, and the income tax provision of $1.4 million and $1.7 million for the three and six months ended December 28, 2013, respectively, relates primarily to our foreign operations.
The total amount of our unrecognized tax benefits as of December 27, 2014 and June 28, 2014 were approximately $4.0 million and $4.2 million, respectively. As of December 27, 2014, we had $3.5 million of 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, we believe that unrecognized tax benefits could decrease by approximately $1.4 million in the next twelve months.
On December 19, 2014, the President of the U.S. signed into law The Tax Increase Prevention Act of 2014, which retroactively extends more than 50 expired tax provisions through 2014. Among the extended provisions is the Sec. 41 research credit for qualified research expenditures incurred through the end of 2014. The benefit of the reinstated credit did not impact the consolidated statement of operations in the period of enactment, which was the second quarter of fiscal year 2015, as the research and development credit carryforwards are offset by a full valuation allowance.

NOTE 12. NET INCOME (LOSS) PER SHARE
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 per share is computed assuming conversion of all potentially dilutive securities, such as stock options, unvested restricted stock awards, warrants and convertible notes during such period.
For the three and six months ended December 27, 2014, we excluded 9.7 million and 9.1 million, respectively, of outstanding stock options, stock appreciation rights and unvested restricted stock awards from the calculation of diluted net income per share because their effect would have been anti-dilutive.
For the three and six months ended December 28, 2013, we excluded 22.0 million and 21.7 million, respectively, of outstanding stock options, stock appreciation rights, warrants, shares issuable in connections with convertible notes and unvested restricted stock awards from the calculation of diluted net income per share because their effect would have been anti-dilutive.

NOTE 13. GEOGRAPHIC INFORMATION, PRODUCT GROUPS AND CUSTOMER CONCENTRATION INFORMATION
Geographic Information
The following table shows revenues by geographic area based on the delivery locations of our products:
 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
 
(Thousands)
China
$
25,531

 
$
25,639

 
$
46,253

 
$
48,456

Malaysia
13,761

 
13,917

 
29,461

 
23,428

United States
13,386

 
8,541

 
27,923

 
15,931

Mexico
10,899

 
8,411

 
22,890

 
21,265

Germany
6,233

 
20,619

 
14,387

 
35,014

Italy
6,768

 
5,113

 
10,903

 
11,500

Japan
1,704

 
8,953

 
5,448

 
21,441

Thailand
1,286

 
2,077

 
2,722

 
5,384

Rest of world
7,252

 
9,644

 
16,074

 
17,143

 
$
86,820

 
$
102,914

 
$
176,061

 
$
199,562


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Product Groups
The following table sets forth revenues by product group:
 
 
Three Months Ended
 
Six Months Ended
 
December 27, 2014
 
December 28, 2013
 
December 27, 2014
 
December 28, 2013
 
(Thousands)
100 Gb/s transmission
$
33,670

 
$
19,378

 
$
55,000

 
$
35,304

40 Gb/s transmission
19,300

 
26,322

 
41,466

 
49,254

10 Gb/s and lower transmission
32,005

 
49,828

 
70,231

 
100,402

Industrial and consumer
1,845

 
7,386

 
9,364

 
14,602

 
$
86,820

 
$
102,914

 
$
176,061

 
$
199,562

Significant Customers and Concentration of Credit Risk
For the three months ended December 27, 2014, Coriant GmbH ("Coriant") accounted for 20 percent, Huawei Technologies Co., Ltd. (“Huawei”) accounted for 14 percent and Alcatel-Lucent accounted for 13 percent of our revenues. For the six months ended December 27, 2014, Coriant accounted for 23 percent, Huawei accounted for 13 percent, Cisco Systems, Inc. ("Cisco") accounted for 10 percent and Alcatel-Lucent accounted for 10 percent of our revenues.
For the three months ended December 28, 2013, Coriant accounted for 15 percent, Cisco accounted for 13 percent and Huawei accounted for 10 percent of our revenues. For the six months ended December 28, 2013, Cisco accounted for 14 percent, Coriant accounted for 13 percent and Huawei accounted for 10 percent of our revenues.
As of December 27, 2014, Coriant accounted for 28 percent and Alcatel-Lucent accounted for 10 percent of our accounts receivable. As of June 28, 2014, Coriant accounted for 19 percent and Huawei accounted for 13 percent of our accounts receivable.

NOTE 14. RELATED PARTY TRANSACTIONS

As a result of our acquisition of Opnext on July 23, 2012, Hitachi, Ltd. (Hitachi) holds approximately 11 percent of our outstanding common stock as of December 27, 2014 based on Hitachi’s most recent Schedule 13G filed with the Securities and Exchange Commission on February 12, 2014.
We continue to enter into transactions with Hitachi in the normal course of business. Sales to Hitachi were $0.8 million and $2.0 million for the three and six months ended December 27, 2014, respectively, and $3.4 million and $4.7 million for the three and six months ended December 28, 2013, respectively. Purchases from Hitachi were $3.9 million and $7.3 million for the three and six months ended December 27, 2014, respectively, and were $4.0 million and $6.7 million for the three and six months ended December 28, 2013, respectively. At December 27, 2014, we had $0.8 million accounts receivable due from Hitachi and $3.7 million accounts payable due to Hitachi. At June 28, 2014 we had $2.7 million accounts receivable due from Hitachi and $4.5 million accounts payable due to Hitachi. We also have certain capital equipment leases with Hitachi Capital Corporation as described in Note 8, Commitments and Contingencies.

We are party to a research and development agreement and intellectual property license agreements with Hitachi.

NOTE 15. SUBSEQUENT EVENTS

On December 30, 2014, Oclaro Technology Limited (a company incorporated under the laws of England and Wales (“Oclaro Technology”) and a wholly-owned subsidiary of Oclaro, Inc. (the “Company”), entered into a Settlement Agreement with II-VI Incorporated, a Pennsylvania corporation (“II-VI”) and II-VI Holdings B.V., a Netherlands corporation (“II-VI B.V.,” and together with II-VI, the "II-VI Parties"), a wholly-owned subsidiary of II-VI, regarding disposition of the amounts held back by the II-VI Parties pursuant to the Share and Asset Purchase Agreement between Oclaro Technology and II-VI B.V. (as previously disclosed in the Company's Current Report on Form 8-K filed on September 17, 2013) and pursuant to the Asset Purchase Agreement between Oclaro Technology and II-VI (as previously disclosed in the Company's Current Report on Form

24


8-K filed on October 11, 2013) (the “Settlement Agreement”). Of the $10.0 million aggregate holdback, a total of $2.35 million was paid to Oclaro Technology in January 2015 and a total of $7.65 million was released to II-VI Holdings B.V. Oclaro Technology and the II-VI Parties also agreed to a mutual release of certain claims related to the Share and Asset Purchase Agreement, the Asset Purchase Agreement, and certain related documents and transactions. This transaction is more fully discussed in Note 5, Business Combinations and Dispositions.




25


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, about our 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,” “model,” “may” and other words of similar meaning in connection with discussion of future operating or financial performance. We have based our forward looking statements on our management’s 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 (i) our dependence on a limited number of customers for a significant percentage of our revenues, (ii) our ability to maintain strong relationships with certain customers, (iii) the effects of fluctuating product mix on our results, (iv) our ability to timely develop and commercialize new products, (v) competition and pricing pressure, (vi) our ability to meet or exceed our gross margin expectations, (vii) our ability to maintain or increase our cash reserves and obtain debt or equity-based financing on terms acceptable to us or at all, (viii) our future performance and our ability to effectively restructure our operations and business, (ix) our ability to respond to evolving technologies and customer requirements and demands, (x) 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, (xi) our ability to timely capitalize on any increase in market demand, (xii) the potential inability to realize the expected benefits of asset dispositions, (xiii) the sale of businesses which may or may not arise in connection with executing our restructuring plans, (xiv) our ability to reduce costs and operating expenses, (xv) increased costs related to downsizing and compliance with regulatory and legal requirements in connection with such downsizing, (xvi) the risks associated with our international operations, (xvii) the impact of continued uncertainty in world financial markets and any resulting reduction in demand for our products, (xviii) the outcome of tax audits or similar proceedings, (xix) the outcome of pending litigation against the company, and other factors described in other documents we periodically file with the SEC. We cannot guarantee any future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements. Several of the important factors that may cause our actual results to differ materially from the expectations we describe in forward-looking statements are identified in the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and "Risk Factors" in this Quarterly Report on Form 10-Q and the documents incorporated herein by reference.
As used herein, “Oclaro,” “we,” “our,” and similar terms include Oclaro, Inc. and its subsidiaries, unless the context indicates otherwise.

OVERVIEW
We are one of the leading providers of optical components, modules and subsystems for the core optical transport, service provider, wireless backhaul, enterprise and data center markets. Leveraging over three decades of laser technology innovation, photonic integration, and subsystem design, we provide differentiated solutions for optical networks and high-speed interconnects driving the next wave of streaming video, cloud computing, voice over IP, Software as a Service ("SaaS") and other bandwidth-intensive and high-speed applications.
We have research and development ("R&D") and chip fabrication facilities in the U.K., Italy and Japan. We have in-house and contract manufacturing sites in the U.S., China, Malaysia and Thailand, with design, sales and service organizations in most of the major regions around the world.
Our customers include ADVA Optical Networking ("ADVA"); Alcatel-Lucent; Ciena Corporation ("Ciena"); Cisco Systems, Inc. ("Cisco"); Coriant GmbH ("Coriant"); Fiberhome Networks ("Fiberhome"); Huawei Technologies Co. Ltd ("Huawei"); Juniper Networks, Inc. ("Juniper"); Telefonaktiebolaget LM Ericsson ("Ericsson") and ZTE Corporation ("ZTE").
RECENT DEVELOPMENTS

On December 30, 2014, Oclaro Technology Limited (a company incorporated under the laws of England and Wales (“Oclaro Technology”) and a wholly-owned subsidiary of Oclaro, Inc., entered into a Settlement Agreement with II-VI Incorporated, a

26


Pennsylvania corporation (“II-VI”) and II-VI Holdings B.V., a Netherlands corporation (“II-VI B.V.,” and together with II-VI, the "II-VI Parties"), a wholly-owned subsidiary of II-VI, regarding disposition of the amounts held back by the II-VI Parties pursuant to the Share and Asset Purchase Agreement between Oclaro Technology and II-VI B.V. (as previously disclosed in our Current Report on Form 8-K filed on September 17, 2013) and pursuant to the Asset Purchase Agreement between Oclaro Technology and II-VI (as previously disclosed in our Current Report on Form 8-K filed on October 11, 2013) (the “Settlement Agreement”). Of the $10.0 million aggregate holdback, a total of $2.35 million was paid to Oclaro Technology in January 2015 and a total of $7.65 million was released to II-VI Holdings B.V. Oclaro Technology and the II-VI Parties also agreed to a mutual release of certain claims related to the Share and Asset Purchase Agreement, the Asset Purchase Agreement, and certain related documents and transactions. This transaction is more fully discussed in Note 5, Business Combinations and Dispositions.
On August 5, 2014, Oclaro Japan, Inc. our wholly-owned subsidiary (“Oclaro Japan”), entered into a Master Separation Agreement (“MSA”) with Ushio Opto Semiconductors, Inc. (“Ushio Opto”) and Ushio, Inc. (“Ushio”), whereby Ushio Opto agreed to acquire the industrial and consumer business of Oclaro Japan located at its Komoro, Japan facility (the “Komoro Business”), by means of an absorption-type demerger under the Japanese Companies Act (such transaction, the “Transaction”). On October 27, 2014, the sale was completed. Consideration for the Transaction consisted of 1.85 billion Japanese yen (approximately $17.1 million based on the exchange rate on October 27, 2014) in cash, of which 1.6 billion Japanese yen (approximately $14.8 million based on the exchange rate on October 27, 2014) was paid at the closing and 250 million Japanese yen (approximately $2.3 million) was paid into escrow and will be released to Oclaro Japan upon the earlier of six months after the closing or the completion by Oclaro Japan of certain transition services and after deduction for any indemnification amounts determined to be owed to Ushio Opto prior to release of the funds from escrow. In addition, under the MSA, we are subject to a post-closing net asset valuation adjustment. We determined that based on the net assets transferred to Ushio Opto during the second quarter of fiscal year 2015, we owed Ushio Opto a post-closing net asset valuation adjustment of $1.4 million, which is scheduled to be paid to Ushio Opto in the third quarter of fiscal year 2015. This transaction is more fully discussed in Note 5, Business Combinations and Dispositions.
On July 30, 2014, our board of directors approved the Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan (the “Plan”) and on November 14, 2014, our shareholders ratified this plan. The Plan amends and restates in its entirety the Fourth Amended and Restated 2001 Long-Term Stock Incentive Plan. The Plan (i) increases the number of shares of common stock available for issuance by 6.0 million shares, (ii) consolidates the share reserve of the Plan with the share reserve of the Amended and Restated 2004 Stock Incentive Plan ("2004 Plan"), such that from November 14, 2014, no additional awards will be granted under the 2004 Plan, and (iii) establishes that full value awards count as 1.40 shares of common stock for purposes of the Plan.


RESULTS OF OPERATIONS
On September 12, 2013 we completed a Share and Asset Purchase Agreement with II-VI for the sale of our Zurich Business. On October 10, 2013, we entered into an Asset Purchase Agreement with II-VI for the sale of our Amplifier Business, which subsequently closed on November 1, 2013. We have classified the financial results of the Zurich and Amplifier Businesses as discontinued operations for all periods presented. The following presentations relate to continuing operations only and accordingly excludes the financial results of the Zurich and Amplifier Businesses, unless otherwise indicated.

The following tables sets forth our condensed consolidated results of operations for the periods indicated, along with amounts expressed as a percentage of revenues, and comparative information regarding the absolute and percentage changes in these amounts:
 

27


 
Three Months Ended
 
 
 
Increase
 
 
December 27, 2014
 
December 28, 2013
 
Change
 
(Decrease)
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
86,820

 
100.0

 
$
102,914

 
100.0

 
$
(16,094
)
 
(15.6
)
 
Cost of revenues
73,054

 
84.1

 
86,001

 
83.6

 
(12,947
)
 
(15.1
)
 
Gross profit
13,766

 
15.9

 
16,913

 
16.4

 
(3,147
)
 
(18.6
)
  
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
11,721

 
13.5

 
16,424

 
16.0

 
(4,703
)
 
(28.6
)
 
Selling, general and administrative
13,646

 
15.7

 
18,557

 
18.0

 
(4,911
)
 
(26.5
)
 
Amortization of other intangible assets
269

 
0.3

 
417

 
0.4

 
(148
)
 
(35.5
)
 
Restructuring, acquisition and related (income) expense, net
(8,038
)
 
(9.3
)
 
6,721

 
6.5

 
(14,759
)
 
n/m

(1) 
Flood-related (income) expense, net

 

 
(140
)
 
(0.1
)
 
140

 
(100.0
)
 
(Gain) loss on sale of property and equipment
(26
)
 

 
205

 
0.2

 
(231
)
 
n/m

(1) 
Total operating expenses
17,572

 
20.2

 
42,184

 
41.0

 
(24,612
)
 
(58.3
)
  
Operating loss
(3,806
)
 
(4.4
)
 
(25,271
)
 
(24.6
)
 
21,465

 
(84.9
)
  
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
(89
)
 
(0.1
)
 
(8,532
)
 
(8.3
)
 
8,443

 
(99.0
)
  
Loss on foreign currency transactions, net
(675
)
 
(0.8
)
 
(2,848
)
 
(2.7
)
 
2,173

 
(76.3
)
 
Other income (expense), net
329

 
0.4

 
28

 

 
301

 
1,075.0

 
Total other income (expense)
(435
)
 
(0.5
)
 
(11,352
)
 
(11.0
)
 
10,917

 
(96.2
)
 
Loss from continuing operations before
  income taxes
(4,241
)
 
(4.9
)
 
(36,623
)
 
(35.6
)
 
32,382

 
(88.4
)
  
Income tax (benefit) provision
(38
)
 
(0.1
)
 
1,424

 
1.4

 
(1,462
)
 
n/m

(1) 
Loss from continuing operations
(4,203
)
 
(4.8
)
 
(38,047
)
 
(37.0
)
 
33,844

 
(89.0
)
  
Income (loss) from discontinued
  operations, net of tax
(8,080
)
 
(9.3
)
 
69,538

 
67.6

 
(77,618
)
 
n/m

(1) 
Net income (loss)
$
(12,283
)
 
(14.1
)
 
$
31,491

 
30.6

 
$
(43,774
)
 
n/m

(1) 
(1)
Not meaningful.




28


 
 
Six Months Ended
 
 
 
 Increase
 
 
 
December 27, 2014
 
December 28, 2013
 
Change
 
(Decrease)
 
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
176,061

 
100.0

 
$
199,562

 
100.0

 
$
(23,501
)
 
(11.8
)
 
Cost of revenues
147,886

 
84.0

 
171,431

 
85.9

 
(23,545
)
 
(13.7
)
 
Gross profit
28,175

 
16.0

 
28,131

 
14.1

 
44

 
0.2

 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
     Research and development
25,634

 
14.6

 
34,511

 
17.3

 
(8,877
)
 
(25.7
)
 
     Selling, general and administrative
29,060

 
16.5

 
39,507

 
19.8

 
(10,447
)
 
(26.4
)
 
     Amortization of other intangible assets
687

 
0.4

 
841

 
0.4

 
(154
)
 
(18.3
)
 
     Restructuring, acquisition and related
(income) expense, net
(6,308
)
 
(3.6
)
 
9,598

 
4.8

 
(15,906
)
 
n/m

(1) 
     Flood-related (income) expense, net

 

 
(140
)
 
(0.1
)
 
140

 
(100.0
)
 
     Loss on sale of property and equipment
371

 
0.2

 
657

 
0.4

 
(286
)
 
(43.5
)
 
Total operating expenses
49,444

 
28.1

 
84,974

 
42.6

 
(35,530
)
 
(41.8
)
 
Operating loss
(21,269
)
 
(12.1
)
 
(56,843
)
 
(28.5
)
 
35,574

 
(62.6
)
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
     Interest income (expense), net
(193
)
 
(0.1
)
 
(9,085
)
 
(4.6
)
 
8,892

 
(97.9
)
 
     Loss on foreign currency transactions,
net
(2,685
)
 
(1.5
)
 
(1,071
)
 
(0.5
)
 
(1,614
)
 
150.7

 
     Other income (expense), net
884

 
0.5

 
549

 
0.3

 
335

 
61.0

 
Total other income (expense)
(1,994
)
 
(1.1
)
 
(9,607
)
 
(4.8
)
 
7,613

 
(79.2
)
 
Loss from continuing operations
before income taxes
(23,263
)
 
(13.2
)
 
(66,450
)
 
(33.3
)
 
43,187

 
(65.0
)
 
Income tax provision
916

 
0.5

 
1,726

 
0.8

 
(810
)
 
(46.9
)
 
Loss from continuing operations
(24,179
)
 
(13.7
)
 
(68,176
)
 
(34.1
)
 
43,997

 
(64.5
)
 
Income (loss) from discontinued
operations, net of tax
(8,458
)
 
(4.8
)
 
132,945

 
66.6

 
(141,403
)
 
n/m

(1) 
Net income (loss)
$
(32,637
)
 
(18.5
)
 
$
64,769

 
32.5

 
$
(97,406
)
 
n/m

(1) 
(1)
Not meaningful.

Revenues
Revenues for the three months ended December 27, 2014 decreased by $16.1 million, or 16 percent, compared to the three months ended December 28, 2013. Compared to the three months ended December 28, 2013, revenues from sales of our 100 Gb/s transmission modules increased by $14.3 million, or 74 percent; revenues from sales of our 40 Gb/s transmission modules decreased by $7.0 million, or 27 percent; revenues from sales of our 10 Gb/s transmission modules decreased by $17.8 million, or 36 percent; and revenues from sales of our industrial and consumer products decreased by $5.5 million, or 75 percent, which related to our sale of the Komoro Business. This product mix shift reflects the continued focus on the market for higher speed products that are smaller in size and have lower power consumption.
For the three months ended December 27, 2014, Coriant GmbH ("Coriant") accounted for 20 percent, Huawei Technologies Co., Ltd. (“Huawei”) accounted for 14 percent and Alcatel-Lucent accounted for 13 percent of our revenues. For the three months ended December 28, 2013, Coriant accounted for 15 percent, Cisco Systems, Inc. ("Cisco") accounted for 13 percent and Huawei accounted for 10 percent of our revenues.
Revenues for the six months ended December 27, 2014 decreased by $23.5 million, or 12 percent, compared to the six months ended December 28, 2013. Compared to the six months ended December 28, 2013, revenues from sales of our 100 Gb/s transmission modules increased by $19.7 million, or 56 percent; revenues from sales of our 40 Gb/s transmission modules decreased by $7.8 million, or 16 percent; revenues from sales of our 10 Gb/s transmission modules decreased by $30.2 million, or 30 percent; and revenues from sales of our industrial and consumer products decreased by $5.2 million, or 36 percent, which

29


related to our sale of the Komoro Business. This product mix shift reflects the continued focus on the market for higher speed products that are smaller in size and have lower power consumption.
For the six months ended December 27, 2014, Coriant accounted for 23 percent, Huawei accounted for 13 percent, Cisco accounted for 10 percent and Alcatel-Lucent accounted for 10 percent of our revenues. For the six months ended December 28, 2013, Cisco accounted for 14 percent, Coriant accounted for 13 percent and Huawei accounted for 10 percent of our revenues.

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 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 for the products they manufacture for us. Charges for excess and obsolete inventory 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 expenses.
Our gross margin rate was flat at 16 percent for the three months ended December 27, 2014, compared to the three months ended December 28, 2013. A better product mix of higher margin 100 Gb/s products and favorable foreign currency exchange movements contributed approximately 2 percentage points of improvement. This improvement was offset by a 2 percentage point decrease resulting from higher inventory reserves and a lower mix of relatively higher margin industrial and consumer products as a result of the sale of our Komoro Business in the second quarter of fiscal year 2015.
Our gross margin rate increased to approximately 16 percent for the six months ended December 27, 2014, compared to 14 percent for the six months ended December 28, 2013. A better product mix of higher margin 100 Gb/s products and favorable foreign currency exchange movements contributed approximately 5 percentage points of improvement. These improvements were offset by a 2 percentage point decrease resulting from out-of-period adjustments relating to our inventory valuation and purchase commitment accrual, and a 1 percentage point decrease resulting from a lower mix of relatively higher margin industrial and consumer products as a result of the sale of our Komoro Business in the second quarter of fiscal year 2015.

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.
Research and development expenses decreased to $11.7 million for the three months ended December 27, 2014, from $16.4 million for the three months ended December 28, 2013. The decline was primarily related to a decrease of $3.3 million as a result of our restructuring plan which was initiated during the first quarter of fiscal year 2014, a decrease of $0.3 million related to our decision to no longer develop the WSS product line, a decrease of $0.8 million related to the impact of the Japanese yen weakening relative to the U.S. dollar, and a decrease of $0.7 million related to the sale of our Komoro Business in the first month of the second quarter of fiscal year 2015. These decreases were partially offset by an increase of $0.3 million in stock compensation charges and variable compensation.
Research and development expenses decreased to $25.6 million for the six months ended December 27, 2014 from $34.5 million for the six months ended December 28, 2013. The decline was primarily related to a decrease of $5.9 million as a result of our restructuring plan which was initiated during the first quarter of fiscal year 2014, a decrease of $1.4 million related to our decision to no longer develop the WSS product line, a decrease of $1.2 million related to the impact of the Japanese yen weakening relative to the U.S. dollar, and a decrease of $0.7 million related to the sale of our Komoro Business in the first month of the second quarter of fiscal year 2015. These decreases were partially offset by an increase of $0.5 million in stock compensation charges and variable compensation.


30


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, insurance expenses and certain information technology costs.
Selling, general and administrative expenses decreased to $13.6 million for the three months ended December 27, 2014, from $18.6 million for the three months ended December 28, 2013. The decline was primarily related to a decrease of $3.1 million as a result of our restructuring plan which was initiated during the first quarter of fiscal year 2014, a decrease of $1.2 million in audit and legal costs, a decrease of $0.4 million related to the impact of the Japanese yen weakening relative to the U.S. dollar, and a decrease of $0.4 million related to the sale of our Komoro Business in the first month of the second quarter of fiscal year 2015. These decreases were partially offset by an increase of $0.4 million in stock compensation charges and variable compensation.
Selling, general and administrative expenses decreased to $29.1 million for the six months ended December 27, 2014, from $39.5 million for the six months ended December 28, 2013. The decline was primarily related to a decrease of $6.9 million as a result of our restructuring plan which was initiated during the first quarter of fiscal year 2014, a decrease of $2.7 million in audit and legal costs, a decrease of $0.6 million related to the impact of the Japanese yen weakening relative to the U.S. dollar, and a decrease of $0.4 million related to the sale of our Komoro Business in the first month of the second quarter of fiscal year 2015. These decreases were partially offset by an increase of $0.9 million in stock compensation charges and variable compensation.

Amortization of Other Intangible Assets
Amortization of other intangible assets remained relatively flat during the three and six months ended December 27, 2014 as compared to the three and six months ended December 28, 2013.
With the sale of our Komoro Business, we expect the amortization of intangible assets to be $0.9 million for fiscal year 2015, $0.8 million for each fiscal year 2016 through 2017, $0.7 million for fiscal year 2018, $0.1 million for fiscal year 2019 and $0.1 million thereafter, based on the current level of our other intangible assets as of December 27, 2014.

Restructuring, Acquisition and Related Costs
In the second quarter of fiscal year 2015, we completed the sale of our Komoro Business to Ushio Opto. We recognized a gain of $8.3 million within restructuring, acquisition and related (income) expense, net in the condensed consolidated statements of operations.
During the first quarter of fiscal year 2014, we initiated a restructuring plan to simplify our operating footprint, reduce our cost structure and focus our research and development investment in the optical communications market where we can leverage our core competencies. During the three and six months ended December 27, 2014, we recorded a net reversal of restructuring charges of $0.5 million and a restructuring charge of $0.2 million, respectively, in connection with this restructuring plan. The restructuring charges for the three months ended December 27, 2014 relate to $0.2 million in employee separation charges and a $0.7 million reversal of restructuring charges related to revised estimates for certain commitments. The restructuring charges for the six months ended December 27, 2014 include $0.3 million related to workforce reductions and a $0.1 million reversal of restructuring charges related to revised estimates for lease cancellations and commitments. During the three and six months ended December 27, 2014, we made scheduled payments of $0.3 million and $1.8 million, respectively. During the three and six months ended December 28, 2013, we recorded restructuring charges of $5.7 million and $5.8 million, respectively, in connection with this restructuring plan. The restructuring charges for the three months ended December 28, 2013 included $5.4 million related to workforce reductions and $0.3 million related to revised estimates related to lease cancellations and commitments, and the restructuring charges for the six months ended December 28, 2013