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EX-31.1 - EXHIBIT 31.1 - OCLARO, INC.exhibit311-3x28x2015.htm
EX-32.1 - EXHIBIT 32.1 - OCLARO, INC.exhibit321-3x28x2015.htm
EX-31.2 - EXHIBIT 31.2 - OCLARO, INC.exhibit312-3x28x2015.htm
EX-10.71 - EXHIBIT 10.71 - OCLARO, INC.exhibit1071-indenture.htm
EX-10.73 - EXHIBIT 10.73 - OCLARO, INC.exhibit1073-svbconsent.htm
EX-10.72 - EXHIBIT 10.72 - OCLARO, INC.exhibit1072-regrightsagree.htm
EX-10.70 - EXHIBIT 10.70 - OCLARO, INC.exhibit1070-purchaseagreem.htm
EXCEL - IDEA: XBRL DOCUMENT - OCLARO, INC.Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - OCLARO, INC.exhibit322-3x28x2015.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 March 28, 2015
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
109,803,216 shares of common stock outstanding as of May 1, 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)
 
March 28, 2015
 
June 28, 2014
 
(Thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
119,809

 
$
98,973

Restricted cash
4,101

 
5,055

Short-term investments

 
95

Accounts receivable, net of allowances for doubtful accounts and sales returns of $2,534 and zero, respectively, as of March 28, 2015, and $2,750 and $579, respectively, as of June 28, 2014; and including $799 and $2,706 due from related parties as of March 28, 2015 and June 28, 2014, respectively
81,440

 
82,872

Inventories
65,346

 
71,099

Prepaid expenses and other current assets
24,322

 
45,275

Total current assets
295,018

 
303,369

Property and equipment, net
41,401

 
50,768

Other intangible assets, net
2,792

 
8,536

Other non-current assets
3,059

 
3,012

Total assets
$
342,270

 
$
365,685

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable, including $4,315 and $4,483 due to related parties at March 28, 2015 and June 28, 2014, respectively
$
57,757

 
$
71,283

Accrued expenses and other liabilities
36,260

 
51,492

Capital lease obligations, current
3,923

 
5,387

Total current liabilities
97,940

 
128,162

Deferred gain on sale-leaseback
8,697

 
10,711

Convertible notes payable
61,673

 

Capital lease obligations, non-current
1,688

 
4,539

Other non-current liabilities
10,346

 
14,345

Total liabilities
180,344

 
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; 109,798 shares issued and outstanding at March 28, 2015 and 107,779 shares issued and outstanding at June 28, 2014
1,098

 
1,077

Additional paid-in capital
1,463,016

 
1,458,487

Accumulated other comprehensive income
38,135

 
45,864

Accumulated deficit
(1,340,323
)
 
(1,297,500
)
Total stockholders’ equity
161,926

 
207,928

Total liabilities and stockholders’ equity
$
342,270

 
$
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
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
(Thousands, except per share amounts)
Revenues, including $1,176 and $3,146 from related parties for the three and nine months ended March 28, 2015, respectively and $1,809 and $6,510 from related parties for the three and nine months ended March 29, 2014, respectively
$
83,023

 
$
95,398

 
$
259,084

 
$
294,960

Cost of revenues
70,323

 
84,298

 
218,209

 
255,729

Gross profit
12,700

 
11,100

 
40,875

 
39,231

Operating expenses:
 
 
 
 
 
 
 
     Research and development
11,732

 
14,624

 
37,366

 
49,135

     Selling, general and administrative
12,048

 
17,437

 
41,108

 
56,944

     Amortization of other intangible assets
194

 
418

 
881

 
1,259

     Restructuring, acquisition and related
(income) expense, net
2,246

 
3,068

 
(4,062
)
 
12,666

     Flood-related (income) expense, net

 
(1,657
)
 

 
(1,797
)
     (Gain) loss on sale of property and
equipment
(138
)
 
(326
)
 
233

 
331

Total operating expenses
26,082

 
33,564

 
75,526

 
118,538

Operating loss
(13,382
)
 
(22,464
)
 
(34,651
)
 
(79,307
)
Other income (expense):
 
 
 
 
 
 
 
     Interest income (expense), net
(599
)
 
(29
)
 
(792
)
 
(9,114
)
     Gain (loss) on foreign currency
transactions, net
2,892

 
625

 
207

 
(446
)
     Other income (expense), net
366

 
(56
)
 
1,250

 
493

Total other income (expense)
2,659

 
540

 
665

 
(9,067
)
Loss from continuing operations before income taxes
(10,723
)
 
(21,924
)
 
(33,986
)
 
(88,374
)
Income tax (benefit) provision
(537
)
 
745

 
379

 
2,471

Loss from continuing operations
(10,186
)
 
(22,669
)
 
(34,365
)
 
(90,845
)
Income (loss) from discontinued operations, net of tax

 
(252
)
 
(8,458
)
 
132,693

Net income (loss)
$
(10,186
)
 
$
(22,921
)
 
$
(42,823
)
 
$
41,848

Basic and diluted net income (loss) per share:
 
 
 
 
 
 
 
Loss per share from continuing operations
$
(0.09
)
 
$
(0.22
)
 
$
(0.32
)
 
$
(0.94
)
Income (loss) per share from discontinued operations

 

 
(0.08
)
 
1.37

Basic and diluted net income (loss) per share
$
(0.09
)
 
$
(0.22
)
 
$
(0.40
)
 
$
0.43

Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic
108,357

 
105,487

 
107,818

 
96,552

Diluted
108,357

 
105,487

 
107,818

 
96,552

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
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
(Thousands)
Net income (loss)
$
(10,186
)
 
$
(22,921
)
 
$
(42,823
)
 
$
41,848

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
224

 

 
209

 
(39
)
Currency translation adjustments
(4,945
)
 
(23
)
 
(8,528
)
 
(64
)
Pension adjustment, net of tax benefits
11

 
15

 
590

 
5,848

Total comprehensive income (loss)
$
(14,896
)
 
$
(22,929
)
 
$
(50,552
)
 
$
47,593

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


5


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
(Thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(42,823
)
 
$
41,848

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Amortization of deferred gain on sale-leaseback
(684
)
 
(1,594
)
Amortization and write-off of issuance costs in connection with term loan

 
4,293

Amortization of debt discount and issuance costs in connection with convertible notes payable
99

 

Gain on sale of Komoro Business
(8,315
)
 

Gain on sale of Zurich Business

 
(63,214
)
Gain on sale of Amplifier Business

 
(69,069
)
Gain on sale of assets
223

 
(660
)
Adjustment to the hold-backs related to the sales of the Zurich and Amplifier Businesses
7,650

 

Depreciation and amortization
14,122

 
21,567

Flood-related non-cash losses

 
2,011

Stock-based compensation expense
4,617

 
5,015

Other non-cash adjustments
161

 
1,376

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(7,887
)
 
32,051

Inventories
(4,639
)
 
4,129

Prepaid expenses and other current assets
7,001

 
(20,843
)
Other non-current assets
(925
)
 
1,284

Accounts payable
499

 
(8,338
)
Accrued expenses and other liabilities
(8,370
)
 
(15,242
)
Net cash used in operating activities
(39,271
)
 
(65,386
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(13,809
)
 
(6,074
)
Proceeds from sale of Komoro Business
12,335

 

Proceeds from sale of Amplifier Business
940

 
84,600

Proceeds from sale of Zurich Business
1,410

 
93,545

Proceeds from sale of short-term investments and other assets
141

 
2,120

Transfer from restricted cash
940

 
(1,938
)
Net cash provided by investing activities
1,957

 
172,253

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net
21

 
(59
)
Proceeds from the sale of convertible notes, net
61,587

 

Payments on capital lease obligations
(2,953
)
 
(6,056
)
Repayments on borrowings under credit line and term loan

 
(64,964
)
Net cash provided by (used in) financing activities
58,655

 
(71,079
)
Effect of exchange rate on cash and cash equivalents
(505
)
 
(2,982
)
Net increase in cash and cash equivalents
20,836

 
32,806

Cash and cash equivalents at beginning of period
98,973

 
84,635

Cash and cash equivalents at end of period
$
119,809

 
$
117,441

 
 
 
 
Supplemental disclosures of non-cash transactions:
 
 
 
Issuance of common stock in connection with exercise of convertible notes
$

 
$
23,050


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 March 28, 2015 and for the three and nine months ended March 28, 2015 and March 29, 2014 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 nine months ended March 28, 2015 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 March 28, 2015 being a 13 week quarterly period. Our fiscal year ended June 28, 2014 was a 52 week year, with the quarter ended March 29, 2014 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 April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. Under ASU 2015-03, debt issuance costs are required to be presented as a direct deduction of debt balances on the balance sheet. This new standard does not affect the recognition and measurement of debt issuance costs. ASU 2015-03 will be effective on a retrospective basis, as a change in accounting principle, for years beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016. We are currently evaluating the impact that the implementation of this standard will have on our financial statements.
In January 2015, the FASB issued 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 2017. 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 nine months ended March 28, 2015 and the three and nine months ended March 29, 2014, respectively.

8


NOTE 3. BALANCE SHEET DETAILS
The following table provides details regarding our cash and cash equivalents at the dates indicated:
 
March 28, 2015
 
June 28, 2014
 
(Thousands)
Cash and cash equivalents:
 
     Cash-in-bank
$
118,594

 
$
97,759

     Money market funds
1,215

 
1,214

 
$
119,809

 
$
98,973

As of March 28, 2015, we had restricted cash of $4.3 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:
 
March 28, 2015
 
June 28, 2014
 
(Thousands)
Inventories:
 
Raw materials
$
17,210

 
$
20,036

Work-in-process
19,987

 
20,505

Finished goods
28,149

 
30,558

 
$
65,346

 
$
71,099

In connection with our sale of the Komoro Business, we transferred approximately $4.6 million in inventories to Ushio Opto during the second quarter of fiscal year 2015.
The following table provides details regarding our property and equipment, net at the dates indicated:
 
March 28, 2015
 
June 28, 2014
 
(Thousands)
Property and equipment, net:
 
Buildings and improvements
$
11,489

 
$
12,989

Plant and machinery
30,055

 
47,247

Fixtures, fittings and equipment
5,623

 
9,701

Computer equipment
12,110

 
13,723

 
59,277

 
83,660

Less: Accumulated depreciation
(17,876
)
 
(32,892
)
 
$
41,401

 
$
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 second quarter of fiscal year 2015.
Property and equipment includes assets under capital leases of $5.6 million at March 28, 2015 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 nine months ended March 28, 2015:
 
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

 

 

 

 

 
(881
)
 
(881
)
Translations and adjustments
(110
)
 
(107
)
 
(197
)
 

 

 

 
(414
)
Balance at March 28, 2015
$
6,253

 
$
4,553

 
$
2,401

 
$
915

 
$
3,338

 
$
(14,668
)
 
$
2,792

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 during the second quarter of fiscal year 2015.
With the sale of our Komoro Business, we expect the amortization of intangible assets to be $1.0 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 March 28, 2015.
The following table presents details regarding our accrued expenses and other liabilities at the dates indicated:
 
March 28, 2015
 
June 28, 2014
 
(Thousands)
Accrued expenses and other liabilities:
 
Trade payables
$
5,342

 
$
18,612

Compensation and benefits related accruals
9,399

 
10,242

Warranty accrual
3,270

 
4,672

Accrued restructuring, current
2,459

 
2,220

Purchase commitments in excess of future demand, current
4,180

 

Other accruals
11,610

 
15,746

 
$
36,260

 
$
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 second quarter of fiscal year 2015.
The following table summarizes the activity related to our accrued restructuring charges for the nine months ended March 28, 2015:
 
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
(121
)
 
4,385

 
4,264

Paid or other adjustments
(1,491
)
 
(3,157
)
 
(4,648
)
Balance at March 28, 2015
$
269

 
$
2,190

 
$
2,459

  Current portion
269

 
2,190

 
2,459

  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 nine months ended March 28, 2015, we recorded restructuring charges of $1.5 million and $1.7 million, respectively, in connection with this restructuring plan. The restructuring charges for the three months ended

10


March 28, 2015 relate to workforce reductions. The restructuring charges for the nine months ended March 28, 2015 include $1.8 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 nine months ended March 28, 2015, we made scheduled payments of $0.3 million and $2.0 million, respectively. During the three and nine months ended March 29, 2014, we recorded restructuring charges of $2.2 million and $8.0 million, respectively, in connection with this restructuring plan. The restructuring charges during the three and nine months ended March 29, 2014 related primarily to workforce reductions. During the three and nine months ended March 29, 2014, we made scheduled payments of $4.2 million and $7.3 million, respectively, to settle a portion of these restructuring liabilities. As of March 28, 2015, we had $1.7 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 nine months ended March 29, 2014, we recorded restructuring charges of zero 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 nine months ended March 29, 2014, we made scheduled payments of $0.2 million and $2.2 million, respectively, to settle these restructuring liabilities. As of March 28, 2015, 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 nine months ended March 28, 2015, we recorded restructuring charges related to employee separation charges of $0.8 million and $2.6 million, respectively. During the three and nine months ended March 28, 2015, we made scheduled payments of $0.2 million and $2.3 million, respectively, to settle a portion of these restructuring liabilities. During the three and nine months ended March 29, 2014, we recorded restructuring charges related to employee separation charges of $0.9 million and $2.7 million, respectively. During the three and nine months ended March 29, 2014, we made scheduled payments of $1.5 million and $3.8 million, respectively, to settle a portion of these restructuring liabilities. As of March 28, 2015, we had $0.7 million in accrued restructuring liabilities related to this restructuring plan.
We expect to incur an additional $3.0 million to $5.0 million, in aggregate, in restructuring charges in the fourth quarter 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:
 
March 28, 2015
 
June 28, 2014
 
(Thousands)
Accumulated other comprehensive income:
 
Currency translation adjustments
$
37,962

 
$
46,490

Unrealized loss on marketable securities

 
(209
)
Japan defined benefit plan
173

 
(417
)
 
$
38,135

 
$
45,864


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.

11


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 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 6.00% Convertible Senior Notes was valued using a binomial lattice valuation model which estimated the value based on the probability and timing of conversion. As of February 19, 2015, the date of the debt issuance, and as of March 28, 2015, the fair value of this contingent obligation is estimated at 0. The contingent obligation will continue to be revalued each reporting period and classified within Level 3 of the fair value hierarchy.
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 March 28, 2015:
 
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
$
1,215

 
$

 
$

 
$
1,215

Total assets measured at fair value
$
1,215

 
$

 
$

 
$
1,215

 
(1) 
Excludes $118.6 million in cash held in our bank accounts at March 28, 2015.

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 $2.1 million based on the exchange rate on April 24, 2015) was paid into escrow and was released to Oclaro Japan on April 24, 2015. 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 was 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. During the second quarter of fiscal year 2015, 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

12


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.
Income from continuing operations before income taxes attributable to the Komoro Business was $1.3 million for the nine months ended March 28, 2015 (up through October 27, 2014, the date the sale was completed), and $1.6 million and $4.4 million for the three and nine months ended March 29, 2014, 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 second quarter of fiscal year 2015. 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.
The following table presents the statements of operations for the discontinued operations of the Amplifier Business:
 
Three Months Ended
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
(Thousands)
Revenues
$

 
$

 
$

 
$
35,185

Cost of revenues

 

 

 
26,243

Gross profit

 

 

 
8,942

Operating expenses

 

 
161

 
5,576

Other income (expense), net

 
(636
)
 
(3,060
)
 
69,069

Income (loss) from discontinued operations
  before income taxes

 
(636
)
 
(3,221
)
 
72,435

Income tax provision

 

 

 

Income (loss) from discontinued operations
$

 
$
(636
)
 
$
(3,221
)
 
$
72,435

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 second quarter of fiscal year 2015. In connection with the

13


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
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
(Thousands)
 
(Thousands)
Revenues
$

 
$

 
$

 
$
13,896

Cost of revenues

 

 
163

 
11,593

Gross profit

 

 
(163
)
 
2,303

Operating expenses

 

 
484

 
3,416

Other income (expense), net

 
884

 
(4,590
)
 
62,034

Income (loss) from discontinued operations
  before income taxes

 
884

 
(5,237
)
 
60,921

Income tax provision

 
500

 

 
663

Income (loss) from discontinued operations
$

 
$
384

 
$
(5,237
)
 
$
60,258

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
6.00% Convertible Senior Notes due 2020 ("6.00% Notes")
On February 12, 2015, we entered into a Purchase Agreement (the “Purchase Agreement”), with Jefferies LLC (the “Initial Purchaser”), pursuant to which we agreed to issue and sell to the Initial Purchaser up to $65.0 million in aggregate principal Convertible Senior Notes due 2020 (the “6.00% Notes”). On February 19, 2015, we closed the private placement of $65.0 million aggregate principal amount of the 6.00% Notes. The 6.00% Notes were sold at 100 percent of par, resulting in net proceeds of approximately $61.6 million, after deducting the Initial Purchaser’s discounts of $3.4 million. We also incurred offering expenses of $0.6 million. The net proceeds of this offering will be used for general corporate purposes, including working capital for, among other things, investing in development of new products and technologies.
The Notes will mature on February 15, 2020 and will bear interest at a fixed rate of 6.00 percent per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2015. During the three and nine months ended March 28, 2015, we recorded $0.5 million in interest expense related to these 6.00% Notes.
The Purchase Agreement contains customary representations and warranties of the parties and indemnification and contribution provisions under which we, on the one hand, and the Initial Purchaser, on the other, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”).
The 6.00% Notes are governed by an Indenture, dated February 19, 2015 (the “Indenture”), entered into between us and U.S. Bank National Association, as trustee (the “Trustee”). The Indenture contains affirmative and negative covenants that, among other things, limits our ability to incur, assume or guarantee additional indebtedness; create liens; sell or otherwise dispose of substantially all of our assets; and enter into mergers and consolidations. The Indenture also contains customary events of default. Upon the occurrence of certain events of default, the Trustee or the holders of the 6.00% Notes may declare all outstanding 6.00% Notes to be due and payable immediately.
Prior to February 15, 2018, in the event that the last reported sale price of our common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending within five trading days immediately prior to the date we receive a notice of conversion exceeds the conversion price in effect on each such trading day, we will, in addition to delivering shares upon conversion by the holder of 6.00% Notes, together with cash in lieu of fractional shares, make an interest make-whole payment in cash equal to the sum of the remaining scheduled payments of interest on the 6.00% Notes to be converted through February 15, 2018.
Any holder that converts its 6.00% Notes in connection with a make-whole fundamental change, as defined in the Indenture, will not receive the interest make-whole payment but will instead receive the additional shares set forth in the Indenture.
Prior to February 15, 2018, we may not redeem the 6.00% Notes. On or after February 15, 2018, we may redeem for cash all of the 6.00% Notes if the last reported sale price per share of our common stock has been at least 130 percent of the conversion

14


price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending within five trading days prior to the date on which we provide notice of redemption. The redemption price will equal (i) 100 percent of the principal amount of the Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date plus (iii) the sum of the present values of each of the remaining scheduled payments of interest that would have been made on the 6.00% Notes to be redeemed had such 6.00% Notes remained outstanding from the redemption date to the maturity date (excluding interest accrued to, but excluding, the redemption date that is otherwise paid pursuant to the immediately preceding clause (ii)).
Upon the occurrence of a fundamental change, subject to certain conditions, each holder of the 6.00% Notes will have the option to require that we purchase all or a portion of such holder’s Notes in cash at a purchase price equal to 100 percent of the principal amount of the 6.00% Notes to be purchased plus any accrued and unpaid interest, including additional interest, if any, to, but excluding, the fundamental change purchase date.
Our contingent obligation to make a make-whole payment in the event of an early conversion by the holders of the 6.00% Notes, or at our election to redeem the 6.00% Notes for cash, are both considered embedded derivatives. As of February 19, 2015, the date of the debt issuance, and as of March 28, 2015, the fair value of the embedded derivatives is estimated at zero. The estimated fair value of the embedded derivatives was determined by using a binomial lattice approach to determine the probability and timing of a conversion or redemption.
On February 19, 2015, we also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Initial Purchaser to provide the holders of the 6.00% Notes with registration rights with respect to shares of common stock that have been issued upon conversion of the 6.00% Notes and are then outstanding, but only if Rule 144 under the Securities Act is unavailable to holders of the 6.00% Notes who are not affiliates of ours on and following the date that is six months after the original issuance date of the 6.00% Notes.
On February 19, 2015, we entered into a Consent and First Loan Modification Agreement (the “Amendment”) with Silicon Valley Bank (“SVB”). The Amendment modifies the Loan and Security Agreement, dated as of March 28, 2014, by and among us, Oclaro Technology Limited and SVB to allow the cash payments provided for in the Indenture and the 6.00% Notes and include the 6.00% Notes as permitted indebtedness.
The following table sets forth balance sheet information related to the 6.00% Notes at March 28, 2015:
 
 
 
 
March 28, 2015
 
 
 
 
(Thousands)
Principal value of the liability component
 
 
 
$
65,000

Unamortized value of the debt discount
 
 
 
(3,327
)
       Net carrying value of the liability component
 
 
$
61,673

At March 28, 2015, the $3.3 million debt discount is recorded in convertible notes payable and the $0.6 million issuance costs are recorded within other non-current assets within the condensed consolidated balance sheet.
Silicon Valley Bank Credit Facility
On March 28, 2014, we entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which the Bank provided us 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) our 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, we are 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, we 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 March 28, 2015, there were no amounts outstanding under the Loan Agreement.

15


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, we 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 ("7.50% Notes")
On December 14, 2012, we closed the private placement of $25.0 million aggregate principal amount 7.50 percent Exchangeable Senior Secured Second Lien Notes due 2018 (“7.50% Notes”). The sale of the 7.50% 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.
On December 19, 2013, the holders exercised their rights to exchange the 7.50% 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 convertible notes, we made a redemption exchange make-whole payment of $8.3 million during the second quarter of fiscal year 2014.
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 $0.4 million for the three and nine months ended March 28, 2015, respectively, and $0.2 million and $0.6 million for the three and nine months ended March 29, 2014, respectively. Employees can elect to receive the benefit as additional salary or contribute the benefit to the plan on a tax-deferred basis.

16


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 Ushio Opto. As of March 28, 2015, there were no plan assets associated with the Japan Plan. As of March 28, 2015, there was $0.2 million in accrued expenses and other liabilities and $5.1 million in other non-current liabilities in our condensed consolidated balance sheet as of March 28, 2015, 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
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
(Thousands)
Service cost
$
177

 
$
239

 
$
553

 
$
720

Interest cost
18

 
23

 
56

 
70

Net amortization
10

 
17

 
37

 
48

Net periodic pension costs
$
205

 
$
279

 
$
646

 
$
838

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 $0.2 million during the three and nine months ended March 28, 2015, respectively, and $0.3 million and $0.4 million during the three and nine months ended March 29, 2014, respectively.

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:

17


 
Three Months Ended
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
(Thousands)
Warranty provision—beginning of period
$
3,474

 
$
5,487

 
$
4,672

 
$
4,670

Warranties issued
185

 
466

 
1,078

 
1,967

Warranties utilized or expired
(377
)
 
(849
)
 
(2,236
)
 
(2,863
)
Currency translation and other adjustments
(12
)
 
33

 
(244
)
 
1,363

Warranty provision—end of period
$
3,270

 
$
5,137

 
$
3,270

 
$
5,137

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.
The following table shows the future minimum lease payments due under non-cancelable capital leases with Hitachi Capital Corporation at March 28, 2015:
 
Capital Leases
 
(Thousands)
Fiscal Year Ending:
 
2015 (remaining)
$
1,232

2016
3,379

2017
1,097

2018
42

2019
28

Thereafter
75

Total minimum lease payments
5,853

Less amount representing interest
(242
)
Present value of capitalized payments
5,611

Less: current portion
(3,923
)
Long-term portion
$
1,688


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

18


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 March 28, 2015), 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 March 28, 2015)) 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 March 28, 2015) 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 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 15.0 million (equivalent to approximately $2.4 million at the exchange rate in effect March 28, 2015) 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 March 28, 2015). 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 March 28, 2015) 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.
On April 2, 2015, the Xi'an Court released RMB 5.0 million of cash (equivalent to approximately $0.8 million at the exchange rate in effect March 28, 2015) previously frozen in Oclaro Shenzhen's bank account in exchange for a new lien on physical assets located at Oclaro Shenzhen's facility with an equivalent appraised value. The Asset Preservation Order is currently in effect until March 2016. On April 10, 2015, the Xi'an Court issued a decision, ruling that Oclaro Shenzhen should pay Raysung RMB 11.4 million (equivalent to approximately $1.9 million at the exchange rate in effect March 28, 2015). The Xi'an Court also dismissed Raysung's other claims and each of Oclaro Shenzhen's counterclaims. On April 24, 2015, Oclaro Shenzhen filed an appeal of the Xi'an Court decision with the Shaanxi High Court, on the basis of both factual and legal error in the underlying decision. As of May 7, 2015, no judge has been assigned to the appellate case and no hearing dates have been established. Oclaro, Inc. and Oclaro Shenzhen continue to believe that they have meritorious defenses to the claims made by Raysung and intend to defend this litigation vigorously.

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

19


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 March 28, 2015, there were 9.0 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 March 28, 2015, there were minimal PSUs outstanding, after adjustments for forfeitures due to terminations, related to this grant, with a de minimis aggregate estimated grant date fair value.
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 had an aggregate grant date fair value of $2.0 million, which was recorded in the third quarter of fiscal year 2014.
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 March 28, 2015, 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.

20


The following table summarizes the combined activity under all of our equity incentive plans for the nine months ended March 28, 2015:
 
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
(3,910
)
 
164

 
1.79

 
2,953

 
1.45

Exercised or released

 
(8
)
 
0.84

 
(2,335
)
 
2.66

Forfeited or expired
1,218

 
(792
)
 
13.54

 
(337
)
 
2.87

Balance at March 28, 2015
9,011

 
3,520

 
7.05

 
4,554

 
1.82

Supplemental disclosure information about our stock options and stock appreciation rights ("SARs") outstanding as of March 28, 2015 is as follows:
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic
Value
 
(Thousands)
 
 
 
(Years)
 
(Thousands)
Options and SARs exercisable
2,988

 
$
7.87

 
4.2
 
$
41

Options and SARs outstanding
3,520

 
7.05

 
4.9
 
92

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 $1.95 on March 27, 2015, 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 March 28, 2015. We settle employee stock option exercises with newly issued shares of common stock.

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
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
Stock options:
 
 
 
 
 
 
 
Expected life
N/A
 
5.3 years

 
5.3 years

 
5.3 years

Risk-free interest rate
N/A
 
1.6
%
 
1.6
%
 
1.5
%
Volatility
N/A
 
84.8
%
 
76.9
%
 
83.9
%
Dividend yield
N/A
 

 

 


21


The amounts included in cost of revenues and operating expenses for stock-based compensation were as follows:
 
Three Months Ended
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
(Thousands)
Stock-based compensation by category of expense:
Cost of revenues
$
434

 
$
244

 
$
1,340

 
$
746

Research and development
396

 
249

 
1,138

 
701

Selling, general and administrative
745

 
2,492

 
2,139

 
3,347

 
$
1,575

 
$
2,985

 
$
4,617

 
$
4,794

Stock-based compensation by type of award:
 
 
 
 
 
 
 
Stock options
$
87

 
$
210

 
$
317

 
$
803

Restricted stock awards
1,497

 
2,810

 
4,233

 
4,034

Inventory adjustment to cost of revenues
(9
)
 
(35
)
 
67

 
(43
)
 
$
1,575

 
$
2,985

 
$
4,617

 
$
4,794

As of March 28, 2015 and June 28, 2014, we had capitalized approximately $0.5 million and $0.4 million, respectively, of stock-based compensation as inventory.
Included in stock based-compensation for the three and nine months ended March 29, 2014, is approximately $2.0 million in compensation cost related to the grant of 0.8 million RSUs to our chief executive officer on February 10, 2014, which vested in full on the grant date.
As of March 28, 2015, we had $0.5 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 2.7 years, and $6.1 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 1.5 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 nine months ended March 28, 2015, we recorded $0.1 million and $0.2 million in stock-based compensation in connection with the issuance of the PSUs from July 2011, March 2014 and August 2014. During the three and nine months ended March 29, 2014, we recorded minimal stock-based compensation expense in connection with the issuance of the PSUs from July 2011 and March 2014.

NOTE 11. INCOME TAXES
The income tax benefit of $0.5 million and income tax provision of $0.4 million for the three and nine months ended March 28, 2015, respectively, and the income tax provision of $0.7 million and $2.5 million for the three and nine months ended March 29, 2014, respectively, relates primarily to our foreign operations.
The total amount of our unrecognized tax benefits as of March 28, 2015 and June 28, 2014 were approximately $3.6 million and $4.2 million, respectively. As of March 28, 2015, we had $3.0 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 $1.0 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 condensed 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.


22


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 (loss) 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 nine months ended March 28, 2015, we excluded 22.4 million and 13.5 million, respectively, of outstanding stock options, stock appreciation rights, unvested restricted stock awards and shares issuable in connection with convertible notes from the calculation of diluted net loss per share because their effect would have been anti-dilutive.
For the three and nine months ended March 29, 2014, we excluded 10.6 million and 13.5 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 (loss) 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
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
(Thousands)
China
$
29,433

 
$
26,609

 
$
75,686

 
$
75,065

United States
12,429

 
7,097

 
40,352

 
23,028

Malaysia
10,845

 
11,230

 
40,306

 
34,658

Mexico
8,139

 
5,073

 
31,029

 
26,338

Germany
5,781

 
21,511

 
20,168

 
56,525

Italy
6,429

 
3,625

 
17,332

 
15,125

Japan
2,189

 
7,822

 
7,637

 
29,263

Thailand
540

 
2,798

 
3,262

 
8,182

Rest of world
7,238

 
9,633

 
23,312

 
26,776

 
$
83,023

 
$
95,398

 
$
259,084

 
$
294,960

Product Groups
The following table sets forth revenues by product group:
 
 
Three Months Ended
 
Nine Months Ended
 
March 28, 2015
 
March 29, 2014
 
March 28, 2015
 
March 29, 2014
 
(Thousands)
100 Gb/s transmission
$
30,221

 
$
18,989

 
$
85,221

 
$
54,293

40 Gb/s transmission
18,962

 
25,156

 
60,428

 
74,410

10 Gb/s and lower transmission
33,840

 
43,675

 
104,071

 
144,077

Industrial and consumer

 
7,578

 
9,364

 
22,180

 
$
83,023

 
$
95,398

 
$
259,084

 
$
294,960


During the second quarter of fiscal year 2015, we sold our Komoro Business, which included the industrial and consumer product group of Oclaro Japan.

23


Significant Customers and Concentration of Credit Risk
For the three months ended March 28, 2015, four customers accounted for 10 percent or more of our revenues, representing approximately 19 percent, 16 percent, 11 percent and 10 percent of our revenues, respectively. For the nine months ended March 28, 2015, three customers accounted for 10 percent or more of our revenues, representing approximately 22 percent, 14 percent and 10 percent of our revenues, respectively.
For the three months ended March 29, 2014, three customers accounted for 10 percent or more of our revenues, representing approximately 21 percent, 12 percent and 11 percent of our revenues, respectively. For the nine months ended March 29, 2014, three customers accounted for 10 percent or more of our revenues, representing approximately 18 percent, 13 percent and 10 percent of our revenues, respectively.
As of March 28, 2015, two customers accounted for 10 percent or more of our accounts receivable, representing approximately 28 percent and 10 percent of our accounts receivable, respectively. As of June 28, 2014, two customers accounted for 10 percent of our accounts receivable, representing approximately 19 percent and 13 percent of our accounts receivable, respectively.

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 March 28, 2015 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 $1.2 million and $3.1 million for the three and nine months ended March 28, 2015, respectively, and $1.8 million and $6.5 million for the three and nine months ended March 29, 2014, respectively. Purchases from Hitachi were $4.2 million and $11.5 million for the three and nine months ended March 28, 2015, respectively, and were $2.9 million and $9.5 million for the three and nine months ended March 29, 2014, respectively. At March 28, 2015, we had $0.8 million accounts receivable due from Hitachi and $4.3 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.

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 ability to timely develop, commercialize and ramp the production of new products, (ii) our ability to increase the percentage of sales associated with our new products, (iii) our ability to respond to evolving technologies, customer requirements and demands, and product design challenges, (iv) our dependence on a limited number of customers for a significant percentage of our revenues, (v) our ability to maintain strong relationships with certain customers, (vi) the effects of fluctuating product mix on our results, (vii) competition and pricing pressure, (viii) our ability to effectively manage our inventory, (ix) our ability to meet or exceed our gross margin expectations, (x) the effects of fluctuations in foreign currency exchange rates, (xi) our ability to maintain or increase our cash reserves and obtain debt or equity-based financing on acceptable terms or at all, (xii) our future performance and our ability to effectively restructure our operations and business, (xiii) our ability to effectively compete with companies that have greater name recognition, broader customer relationships and substantially greater financial, technical and marketing resources, (xiv) our ability to timely capitalize on any increase in market demand, (xv) our ability to service and repay our outstanding indebtedness pursuant to the terms of the applicable agreements (xvi) the potential inability to realize the expected benefits of asset dispositions, (xvii) the sale of businesses which may or may not arise in connection with executing our restructuring plans, (xviii) our ability to reduce costs and operating expenses, (xix) increased costs related to downsizing and compliance with regulatory and legal requirements in connection with such downsizing, (xx) the risks associated with our international operations, (xxi) the impact of continued uncertainty in world financial markets and any resulting reduction in demand for our

24


products, (xxii) the outcome of tax audits or similar proceedings, (xxiii) the outcome of pending litigation against us, and (xxiv) 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 February 19, 2015, we closed the private placement of $65.0 million aggregate principal amount of Convertible Senior Notes ("6.00% Notes"). The 6.00% Notes were sold at 100 percent of par, resulting in net proceeds of approximately $61.6 million, after deducting the Initial Purchaser’s discounts. We also incurred offering expenses of $0.6 million. We intend to use the net proceeds of the offering for general corporate purposes, including working capital for, among other things, investing in development of new products and technologies.
On December 30, 2014, we 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 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 us in January 2015 and a total of $7.65 million was released to II-VI Holdings B.V. We 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.

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.


25


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:
 
Three Months Ended
 
 
 
Increase
 
 
March 28, 2015
 
March 29, 2014
 
Change
 
(Decrease)
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
83,023

 
100.0

 
$
95,398

 
100.0

 
$
(12,375
)
 
(13.0
)
 
Cost of revenues
70,323

 
84.7

 
84,298

 
88.4

 
(13,975
)
 
(16.6
)
 
Gross profit
12,700

 
15.3

 
11,100

 
11.6

 
1,600

 
14.4

  
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
11,732

 
14.1

 
14,624

 
15.3

 
(2,892
)
 
(19.8
)
 
Selling, general and administrative
12,048

 
14.5

 
17,437

 
18.3

 
(5,389
)
 
(30.9
)
 
Amortization of other intangible assets
194

 
0.2

 
418

 
0.4

 
(224
)
 
(53.6
)
 
Restructuring, acquisition and related (income) expense, net
2,246

 
2.7

 
3,068

 
3.2

 
(822
)
 
(26.8
)
 
Flood-related (income) expense, net

 

 
(1,657
)
 
(1.7
)
 
1,657

 
(100.0
)
 
Gain on sale of property and equipment
(138
)
 
(0.1
)
 
(326
)
 
(0.3
)
 
188

 
(57.7
)
 
Total operating expenses
26,082

 
31.4

 
33,564

 
35.2

 
(7,482
)
 
(22.3
)
  
Operating loss
(13,382
)
 
(16.1
)
 
(22,464
)
 
(23.6
)
 
9,082

 
(40.4
)
  
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
(599
)
 
(0.7
)
 
(29
)
 

 
(570
)
 
1,965.5

  
Gain on foreign currency transactions, net
2,892

 
3.5

 
625

 
0.7

 
2,267

 
362.7

 
Other income (expense), net
366

 
0.4

 
(56
)
 
(0.1
)
 
422

 
n/m

(1) 
Total other income (expense)
2,659

 
3.2

 
540

 
0.6

 
2,119

 
392.4

 
Loss from continuing operations before
income taxes
(10,723
)
 
(12.9
)
 
(21,924
)
 
(23.0
)
 
11,201

 
(51.1
)
  
Income tax (benefit) provision
(537
)
 
(0.6
)
 
745

 
0.8

 
(1,282
)
 
n/m

(1) 
Loss from continuing operations
(10,186
)
 
(12.3
)
 
(22,669
)
 
(23.8
)
 
12,483

 
(55.1
)
  
Loss from discontinued operations, net of tax

 

 
(252
)
 
(0.2
)
 
252

 
(100.0
)
 
Net loss
$
(10,186
)
 
(12.3
)
 
$
(22,921
)
 
(24.0
)
 
$
12,735

 
(55.6
)
 
(1)
Not meaningful.




26


 
 
Nine Months Ended
 
 
 
 Increase
 
 
 
March 28, 2015
 
March 29, 2014
 
Change
 
(Decrease)
 
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
259,084

 
100.0

 
$
294,960

 
100.0

 
$
(35,876
)
 
(12.2
)
 
Cost of revenues
218,209

 
84.2

 
255,729

 
86.7

 
(37,520
)
 
(14.7
)
 
Gross profit
40,875

 
15.8

 
39,231

 
13.3

 
1,644

 
4.2

 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
     Research and development
37,366

 
14.4

 
49,135

 
16.7

 
(11,769
)
 
(24.0
)
 
     Selling, general and administrative
41,108

 
15.9

 
56,944

 
19.3

 
(15,836
)
 
(27.8
)
 
     Amortization of other intangible assets
881

 
0.3

 
1,259

 
0.4

 
(378
)
 
(30.0
)
 
     Restructuring, acquisition and related
(income) expense, net
(4,062
)
 
(1.5
)
 
12,666

 
4.3

 
(16,728
)
 
n/m

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

 

 
(1,797
)
 
(0.6
)
 
1,797

 
(100.0
)
 
     Loss on sale of property and equipment
233

 
0.1

 
331

 
0.1

 
(98
)
 
(29.6
)
 
Total operating expenses
75,526

 
29.2

 
118,538

 
40.2

 
(43,012
)
 
(36.3
)
 
Operating loss
(34,651
)
 
(13.4
)
 
(79,307
)
 
(26.9
)
 
44,656

 
(56.3
)
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
     Interest income (expense), net
(792
)
 
(0.3
)
 
(9,114
)
 
(3.1
)
 
8,322

 
(91.3
)
 
     Gain (loss) on foreign currency
     transactions, net
207

 
0.1

 
(446
)
 
(0.2
)
 
653

 
n/m

(1) 
     Other income (expense), net
1,250

 
0.5

 
493

 
0.2

 
757

 
153.5

 
Total other income (expense)
665

 
0.3

 
(9,067
)
 
(3.1
)
 
9,732

 
n/m

(1) 
Loss from continuing operations
before income taxes
(33,986
)
 
(13.1
)
 
(88,374
)
 
(30.0
)
 
54,388

 
(61.5
)
 
Income tax provision
379

 
0.2

 
2,471

 
0.8

 
(2,092
)
 
(84.7
)
 
Loss from continuing operations
(34,365
)
 
(13.3
)
 
(90,845
)
 
(30.8
)
 
56,480

 
(62.2
)
 
Income (loss) from discontinued
operations, net of tax
(8,458
)
 
(3.2
)
 
132,693

 
45.0

 
(141,151
)
 
n/m

(1) 
Net income (loss)
$
(42,823
)
 
(16.5
)
 
$
41,848

 
14.2

 
$
(84,671
)
 
n/m

(1) 
(1)
Not meaningful.

Revenues
Revenues for the three months ended March 28, 2015 decreased by $12.4 million, or 13 percent, compared to the three months ended March 29, 2014. Compared to the three months ended March 29, 2014, revenues from sales of our 100 Gb/s transmission modules increased by $11.2 million, or 59 percent; revenues from sales of our 40 Gb/s transmission modules decreased by $6.2 million, or 25 percent; revenues from sales of our 10 Gb/s transmission modules decreased by $9.8 million, or 23 percent; and revenues from sales of our industrial and consumer products decreased by $7.6 million, or 100 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 March 28, 2015, four customers accounted for 10 percent or more of our revenues, representing approximately 19 percent, 16 percent, 11 percent and 10 percent of our revenues, respectively. For the three months ended March 29, 2014, three customers accounted for 10 percent or more of our revenues, representing approximately 21 percent, 12 percent and 11 percent of our revenues, respectively.
Revenues for the nine months ended March 28, 2015 decreased by $35.9 million, or 12 percent, compared to the nine months ended March 29, 2014. Compared to the nine months ended March 29, 2014, revenues from sales of our 100 Gb/s transmission modules increased by $30.9 million, or 57 percent; revenues from sales of our 40 Gb/s transmission modules decreased by $14.0 million, or 19 percent; revenues from sales of our 10 Gb/s transmission modules decreased by $40.0 million, or 28 percent; and revenues from sales of our industrial and consumer products decreased by $12.8 million, or 58 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.

27


For the nine months ended March 28, 2015, three customers accounted for 10 percent or more of our revenues, representing approximately 22 percent, 14 percent and 10 percent of our revenues, respectively. For the nine months ended March 29, 2014, three customers accounted for 10 percent or more of our revenues, representing approximately 18 percent, 13 percent and 10 percent of our revenues, respectively.

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 increased to approximately 15 percent for the three months ended March 28, 2015, compared to 12 percent for the three months ended March 29, 2014. A better product mix of higher margin 100 Gb/s products and favorable foreign currency exchange movements contributed approximately 7 percentage points of improvement. This improvement was partially offset by a 4 percentage point decrease due to the absence 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 nine months ended March 28, 2015, compared to 13 percent for the nine months ended March 29, 2014. 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 1 percentage point decrease resulting from out-of-period adjustments made to correct our inventory valuation and purchase commitment accrual, and a 1 percentage point decrease due to the absence 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 March 28, 2015, from $14.6 million for the three months ended March 29, 2014. The decline was primarily related to a decrease of $1.3 million from the sale of our Komoro Business in the second quarter of fiscal year 2015, a decrease of $1.2 million related to the impact of the Japanese yen, British pound, and Euro weakening relative to the U.S. dollar, and a decrease of $0.8 million as a result of our restructuring plan which was initiated during the first quarter of fiscal year 2014. These decreases were partially offset by an increase of $0.4 million in stock compensation charges and variable compensation.
Research and development expenses decreased to $37.4 million for the nine months ended March 28, 2015 from $49.1 million for the nine months ended March 29, 2014. The decline was primarily related to a decrease of $6.7 million as a result of our restructuring plan which was initiated during the first quarter of fiscal year 2014, a decrease of $2.1 million related to the impact of the Japanese yen, British pound, and Euro weakening relative to the U.S. dollar, a decrease of $1.9 million related to the sale of our Komoro Business in the first month of the second quarter of fiscal year 2015, and a decrease of $1.4 million related to our decision to no longer develop the WSS product line. These decreases were partially offset by an increase of $0.4 million in stock compensation charges and variable compensation.

Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel-related expenses, including stock-based compensat