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EX-31.2 - EXHIBIT 31.2 - OCLARO, INC.exhibit312-12x26x2015.htm
EX-32.2 - EXHIBIT 32.2 - OCLARO, INC.exhibit322-12x26x2015.htm
EX-32.1 - EXHIBIT 32.1 - OCLARO, INC.exhibit321-12x26x2015.htm
EX-31.1 - EXHIBIT 31.1 - OCLARO, INC.exhibit311-12x26x2015.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 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)
225 Charcot Avenue, San Jose, California 95131
(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
111,045,922 shares of common stock outstanding as of January 29, 2016
 



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


2


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

OCLARO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
December 26, 2015
 
June 27, 2015
 
(Thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
114,058

 
$
111,840

Restricted cash
1,623

 
3,275

Accounts receivable, net of allowances for doubtful accounts of $2,433 and $2,815 as of December 26, 2015 and June 27, 2015, respectively; and including $1,141 and $709 due from related parties as of December 26, 2015 and June 27, 2015, respectively
77,423

 
74,815

Inventories
71,281

 
66,342

Prepaid expenses and other current assets
20,261

 
22,746

Total current assets
284,646

 
279,018

Property and equipment, net
46,067

 
41,766

Other intangible assets, net
2,045

 
2,579

Other non-current assets
2,132

 
2,521

Total assets
$
334,890

 
$
325,884

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable, including $4,825 and $4,831 due to related parties at December 26, 2015 and June 27, 2015, respectively
$
60,244

 
$
53,133

Accrued expenses and other liabilities
40,230

 
35,648

Capital lease obligations, current
3,516

 
3,580

Total current liabilities
103,990

 
92,361

Deferred gain on sale-leaseback
8,075

 
8,978

Convertible notes payable
61,652

 
61,246

Capital lease obligations, non-current
317

 
1,167

Other non-current liabilities
9,606

 
9,132

Total liabilities
183,640

 
172,884

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; 275,000 shares authorized, 111,045 shares issued and outstanding at December 26, 2015; and 175,000 shares authorized, 109,889 shares issued and outstanding at June 27, 2015
1,110

 
1,099

Additional paid-in capital
1,468,648

 
1,464,567

Accumulated other comprehensive income
39,037

 
41,526

Accumulated deficit
(1,357,545
)
 
(1,354,192
)
Total stockholders’ equity
151,250

 
153,000

Total liabilities and stockholders’ equity
$
334,890

 
$
325,884


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

3


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
(Thousands, except per share amounts)
Revenues, including $1,007 and $1,899 from related parties for the three and six months ended December 26, 2015, respectively, and $794 and $1,971 from related parties for the three and six months ended December 27, 2014, respectively
$
94,129

 
$
86,820

 
$
181,679

 
$
176,061

Cost of revenues
67,521

 
73,054

 
132,374

 
147,886

Gross profit
26,608

 
13,766

 
49,305

 
28,175

Operating expenses:
 
 
 
 
 
 
 
     Research and development
11,075

 
11,721

 
22,020

 
25,634

     Selling, general and administrative
12,791

 
13,646

 
25,999

 
29,060

     Amortization of other intangible assets
250

 
269

 
501

 
687

     Restructuring, acquisition and related (income) expense, net
6

 
(8,038
)
 
38

 
(6,308
)
     (Gain) loss on sale of property and equipment
(46
)
 
(26
)
 
167

 
371

Total operating expenses
24,076

 
17,572

 
48,725

 
49,444

Operating income (loss)
2,532

 
(3,806
)
 
580

 
(21,269
)
Other income (expense):
 
 
 
 
 
 
 
     Interest income (expense), net
(1,247
)
 
(89
)
 
(2,523
)
 
(193
)
     Gain (loss) on foreign currency transactions, net
(500
)
 
(675
)
 
4

 
(2,685
)
     Other income (expense), net
357

 
329

 
470

 
884

Total other income (expense)
(1,390
)
 
(435
)
 
(2,049
)
 
(1,994
)
Income (loss) from continuing operations before income taxes
1,142

 
(4,241
)
 
(1,469
)
 
(23,263
)
Income tax (benefit) provision
985

 
(38
)
 
1,884

 
916

Income (loss) from continuing operations
157

 
(4,203
)
 
(3,353
)
 
(24,179
)
Loss from discontinued operations, net of tax

 
(8,080
)
 

 
(8,458
)
Net income (loss)
$
157

 
$
(12,283
)
 
$
(3,353
)
 
$
(32,637
)
Basic net income (loss) per share:
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.00

 
$
(0.04
)
 
$
(0.03
)
 
$
(0.22
)
Loss per share from discontinued operations
0.00

 
(0.07
)
 
0.00

 
(0.08
)
Basic net income (loss) per share
$
0.00

 
$
(0.11
)
 
$
(0.03
)
 
$
(0.30
)
Diluted net income (loss) per share:
 
 
 
 
 
 
 
Income (loss) per share from continuing operations
$
0.00

 
$
(0.04
)
 
$
(0.03
)
 
$
(0.22
)
Loss per share from discontinued operations
0.00

 
(0.07
)
 
0.00

 
(0.08
)
Diluted net income (loss) per share
$
0.00

 
$
(0.11
)
 
$
(0.03
)
 
$
(0.30
)
Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic
110,296

 
107,849

 
109,877

 
107,549

Diluted
112,394

 
107,849

 
109,877

 
107,549

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


4


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
(Thousands)
Net income (loss)
$
157

 
$
(12,283
)
 
$
(3,353
)
 
$
(32,637
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities

 
4

 

 
(15
)
Currency translation adjustments
(596
)
 
(1,874
)
 
(2,479
)
 
(3,583
)
Pension adjustment, net of tax benefits

 
76

 
(10
)
 
579

Total comprehensive loss
$
(439
)
 
$
(14,077
)
 
$
(5,842
)
 
$
(35,656
)
The accompanying notes form an integral part of these condensed consolidated financial statements.


5


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
(Thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(3,353
)
 
$
(32,637
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Amortization of deferred gain on sale-leaseback
(441
)
 
(228
)
Amortization of debt discount and issuance costs in connection with convertible notes payable
406

 

Gain on sale of Komoro Business

 
(8,315
)
Adjustment to the hold-backs related to the sales of the Zurich and Amplifier Businesses

 
7,650

Depreciation and amortization
8,040

 
9,719

Stock-based compensation expense
4,367

 
3,042

Other non-cash adjustments
167

 
(24
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(4,268
)
 
(7,368
)
Inventories
(6,355
)
 
(4,364
)
Prepaid expenses and other current assets
1,734

 
11,364

Other non-current assets
296

 
(372
)
Accounts payable
1,930

 
(856
)
Accrued expenses and other liabilities
5,479

 
(6,911
)
Net cash (used in) provided by operating activities
8,002

 
(29,300
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(6,632
)
 
(9,166
)
Proceeds from sale of Komoro Business


 
13,783

Transfer from restricted cash
1,555

 
682

Net cash (used in) provided by investing activities
(5,077
)
 
5,299

Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock, net
133

 
13

Shares repurchased for tax withholdings on vesting of restricted stock units
(554
)
 

Payments on capital lease obligations
(1,468
)
 
(2,030
)
Net cash used in financing activities
(1,889
)
 
(2,017
)
Effect of exchange rate on cash and cash equivalents
1,182

 
1,582

Net increase (decrease) in cash and cash equivalents
2,218

 
(24,436
)
Cash and cash equivalents at beginning of period
111,840

 
98,973

Cash and cash equivalents at end of period
$
114,058

 
$
74,537

 
 
 
 
Supplemental disclosures of non-cash transactions:
 
 
 
Purchases of property and equipment funded by accounts payable
(6,099
)
 


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.”
The accompanying unaudited condensed consolidated financial statements of Oclaro as of December 26, 2015 and for the three and six months ended December 26, 2015 and December 27, 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 six months ended December 26, 2015 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending July 2, 2016.
The condensed consolidated balance sheet as of June 27, 2015 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 27, 2015 ("2015 Form 10-K").
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. This 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"). On September 12, 2013, we sold our Oclaro Switzerland GmbH subsidiary and associated laser diodes and pump business (the “Zurich Business”) to II-VI. 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. These transactions are more fully discussed in Note 5, Business Combinations and Dispositions.
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, the fair value of embedded derivatives related to convertible debt, the fair value of pension liabilities, 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 2015 Form 10-K.
Out-of-Period Adjustment
In the quarter ended September 27, 2014, 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 in fiscal year 2015, also increased accrued liabilities and decreased inventory, and were made to correct our inventory valuation and the value of our purchase commitment accrual from fiscal year 2014. We determined that the adjustments did not have a material impact to any of the 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 July 2, 2016 will be a 53 week year, with the quarter ended December 26, 2015 being a 13 week quarterly period. Our fiscal quarter ending March 26 2016 will have 13 weeks and our fiscal quarter ending July 2, 2016 will have 14 weeks. Our fiscal year ended June 27, 2015 was a 52 week year, with the quarter ended December 27, 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 November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes. This amendment eliminates the requirement to bifurcate deferred taxes between current and non-current on the balance sheet and requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. We elected to early adopt this guidance in the second quarter of fiscal year 2016. The implementation of this guidance did not have a material impact on our financial statements and footnote disclosures.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. This amendment requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. 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 and footnote disclosures.
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 U.S. 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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, deferring the effective date of ASU 2014-09 by one year, to annual periods, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for periods beginning after December 15, 2016. We are currently evaluating the impact that the implementation of this standard will have on our financial statements and footnote disclosures.
In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. Under ASU 2015-11, we are required to measure inventory at the lower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance is effective for us prospectively in the first quarter of fiscal year 2017, with early application permitted. We are currently evaluating the impact that the implementation of this standard will have on our financial statements and footnote disclosures.
In June 2015, the FASB issued ASU No. 2015-10, Technical Corrections and Improvements. ASU 2015-10 covers a wide range of Topics in the Codification. The amendments in this ASU represent changes to make minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. This guidance is effective for us prospectively in the first quarter of fiscal year 2017, with early adoption permitted. We are currently evaluating the impact that the implementation of this standard will have on our financial statements and footnote disclosures.
In April 2015, the FASB issued ASU No. 2015-04, Compensation – Retirement Benefits: Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets. ASU 2015-04 provides a practical expedient for employers with fiscal year-ends that do not fall on a month-end by permitting those employers to measure defined benefit plan assets and obligations as of the month-end that is closest to the entity's fiscal year-end. This guidance is effective for us prospectively in the first quarter of fiscal year 2017, with early adoption permitted. We are currently evaluating the impact that the implementation of this standard will have on our financial statements and footnote disclosures.

8


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 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 and footnote disclosures.
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 and footnote disclosures.

NOTE 3. BALANCE SHEET DETAILS
Cash and Cash Equivalents
The following table provides details regarding our cash and cash equivalents at the dates indicated:
 
December 26, 2015
 
June 27, 2015
 
(Thousands)
Cash and cash equivalents:
 
     Cash-in-bank
$
114,058

 
$
110,196

     Money market funds

 
1,644

 
$
114,058

 
$
111,840

Restricted Cash
As of December 26, 2015, we had restricted cash of $1.9 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 collateral to secure certain of our credit card accounts and deposits for value-added taxes in foreign jurisdictions.
Inventories
The following table provides details regarding our inventories at the dates indicated:
 
December 26, 2015
 
June 27, 2015
 
(Thousands)
Inventories:
 
Raw materials
$
23,485

 
$
19,610

Work-in-process
27,299

 
19,812

Finished goods
20,497

 
26,920

 
$
71,281

 
$
66,342


9


Property and Equipment, Net
The following table provides details regarding our property and equipment, net at the dates indicated:
 
December 26, 2015
 
June 27, 2015
 
(Thousands)
Property and equipment, net:
 
Buildings and improvements
$
11,523

 
$
11,837

Plant and machinery
41,285

 
33,603

Fixtures, fittings and equipment
6,255

 
4,785

Computer equipment
12,026

 
12,401

 
71,089

 
62,626

Less: Accumulated depreciation
(25,022
)
 
(20,860
)
 
$
46,067

 
$
41,766

Property and equipment includes assets under capital leases of $3.8 million at December 26, 2015 and $4.7 million at June 27, 2015, respectively. Amortization associated with assets under capital leases is recorded in depreciation expense.
Other Intangibles Assets, Net
The following table summarizes the activity related to our other intangible assets for the six months ended December 26, 2015:
 
Core and
Current
Technology
 
Development
and Supply
Agreements
 
Customer
Relationships
 
Patent
Portfolio
 
Other
Intangibles
 
Amortization
 
Total
 
(Thousands)
Balance at June 27, 2015
$
6,249

 
$
4,595

 
$
2,402

 
$
915

 
$
3,338

 
$
(14,920
)
 
$
2,579

Amortization

 

 

 

 

 
(501
)
 
(501
)
Translations and adjustments
(5
)
 
(26
)
 
(2
)
 

 

 

 
(33
)
Balance at December 26, 2015
$
6,244

 
$
4,569

 
$
2,400

 
$
915

 
$
3,338

 
$
(15,421
)
 
$
2,045

We expect the amortization of intangible assets to be $0.5 million for the remainder of fiscal year 2016, $0.8 million for fiscal year 2017, $0.6 million for fiscal year 2018 and $0.1 million for fiscal year 2019, based on the current level of our other intangible assets as of December 26, 2015.
Accrued Expenses and Other Liabilities
The following table presents details regarding our accrued expenses and other liabilities at the dates indicated:
 
December 26, 2015
 
June 27, 2015
 
(Thousands)
Accrued expenses and other liabilities:
 
Trade payables
$
9,236

 
$
5,250

Compensation and benefits related accruals
14,429

 
11,298

Warranty accrual
3,097

 
2,932

Accrued restructuring, current
264

 
712

Purchase commitments in excess of future demand, current
2,593

 
3,162

Other accruals
10,611

 
12,294

 
$
40,230

 
$
35,648


10


Accrued Restructuring
The following table summarizes the activity related to our accrued restructuring charges for the six months ended December 26, 2015:
 
Lease Cancellations,
Commitments and
Other Charges
 
Termination
Payments to
Employees and
Related Costs
 
Total Accrued
Restructuring Charges
 
(Thousands)
Balance at June 27, 2015
$
228

 
$
484

 
$
712

Charged to restructuring costs

 
265

 
265

Paid or other adjustments
(215
)
 
(498
)
 
(713
)
Balance at December 26, 2015
$
13

 
$
251

 
$
264

  Current portion
13

 
251

 
264

  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 months ended December 26, 2015, we recorded minimal restructuring charges. During the six months ended December 26, 2015, we recorded restructuring charges of $0.3 million in connection with this restructuring plan, which related to workforce reductions. During the three and six months ended December 27, 2014, we recorded a net reversal of restructuring charges of $0.5 million and a restructuring charge of $0.2 million, respectively, in connection with this restructuring plan. The restructuring charges for the three months ended December 27, 2014 include a $0.7 million reversal of restructuring charges related to revised estimates for certain commitments, partially offset by $0.2 million related to workforce reductions. The restructuring charges for the six months ended December 27, 2014 include $0.3 million related to workforce reductions and a $0.1 million reversal of restructuring charges related to revised estimates for lease cancellations and commitments. During the three months ended December 26, 2015, we made minimal scheduled payments. During the six months ended December 26, 2015, we made scheduled payments of $0.4 million. During the three and six months ended December 27, 2014, we made scheduled payments of $0.3 million and $1.8 million, respectively. As of December 26, 2015, we had $0.3 million in 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 completed in fiscal year 2015. In connection with this transition, we recorded restructuring charges related to employee separation charges of $0.8 million and $1.8 million during the three and six months ended December 27, 2014, respectively and made scheduled payments of $0.8 million and $2.1 million, respectively, to settle a portion of these restructuring liabilities. As of December 26, 2015 and June 27, 2015, we had no remaining accrued restructuring liabilities related to this restructuring plan.
Common Stock
On November 10, 2015, our stockholders approved an amendment to our Restated Certificate of Incorporation, increasing the number of authorized shares of our common stock from 175.0 million shares to 275.0 million shares.
Accumulated Other Comprehensive Income
The following table presents the components of accumulated other comprehensive income at the dates indicated:
 
December 26, 2015
 
June 27, 2015
 
(Thousands)
Accumulated other comprehensive income:
 
Currency translation adjustments
$
38,872

 
$
41,351

Japan defined benefit plan
165

 
175

 
$
39,037

 
$
41,526



11


NOTE 4. FAIR VALUE
We define fair value as the estimated price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. We apply the following fair value hierarchy, which ranks the quality and reliability of the information used to determine fair values:
Level 1-
Quoted prices in active markets for identical assets or liabilities.
Level 2-
Inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices of identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets), or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3-
Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Our cash equivalents 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 December 26, 2015, the fair value of this contingent obligation is estimated at zero. 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 December 26, 2015 and June 27, 2015:
 
Fair Value Measurement at December 26, 2015 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:
 
 
 
 
 
 
 
Restricted cash:
 
 

 

 
 
Money market funds
1,215

 

 

 
1,215

Total assets measured at fair value
$
1,215

 
$

 
$

 
$
1,215

 

 
 
Fair Value Measurement at June 27, 2015 Using
 
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Assets:
(Thousands)
Cash and cash equivalents: (1)
 
 
 
 
 
 
 
Money market funds
 
1,644

 

 

 
1,644

Restricted cash:
 
 
 
 
 
 
 
Money market funds
 
1,215

 

 

 
1,215

Total assets measured at fair value
$
2,859

 
$

 
$

 
$
2,859

(1) 
Excludes $110.2 million in cash held in our bank accounts at June 27, 2015.


12


NOTE 5. BUSINESS COMBINATIONS AND DISPOSITIONS
Sale of Komoro, Japan Industrial and Consumer Business ("Komoro Business")
On August 5, 2014, Oclaro Japan, Inc., our wholly-owned subsidiary (“Oclaro Japan”), entered into a Master Separation Agreement (“MSA”) with Ushio Opto and Ushio, Inc. (“Ushio”), whereby Ushio Opto agreed to acquire the industrial and consumer business of Oclaro Japan located at its Komoro, Japan facility (the “Komoro Business”). On October 27, 2014, the sale was completed. In connection with the sale of the Komoro Business, we transferred net assets with a book value of $6.3 million to Ushio Opto. 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 were 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.
We completed the transfer of net assets in the second quarter of fiscal year 2015 and recognized a gain of $8.3 million within restructuring, acquisition and related (income) expense, net in the condensed consolidated statements of operations.
Income (loss) from continuing operations before income taxes attributable to the Komoro Business was $0.3 million loss and $1.3 million income for the three and six months ended December 27, 2014 (up through October 27, 2014, the date the sale was completed).
This sale is more fully discussed in Note 3, Business Combinations and Dispositions, to our consolidated financial statements included in our 2015 Form 10-K.
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. We classified the sale of our Amplifier Business as a discontinued operation as of September 12, 2013, the date management committed to sell the business.
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. 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.
The following table presents the statements of operations for the discontinued operations of the Amplifier Business:
 
Three Months Ended
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
(Thousands)
Revenues
$

 
$

 
$

 
$

Cost of revenues

 

 

 

Gross profit

 

 

 

Operating expenses

 
(54
)
 

 
161

Other income (expense), net

 
(3,060
)
 

 
(3,060
)
Loss from discontinued operations before income taxes

 
(3,006
)
 

 
(3,221
)
Income tax provision

 

 

 

Loss from discontinued operations
$

 
$
(3,006
)
 
$

 
$
(3,221
)
This sale is more fully discussed in Note 3, Business Combinations and Dispositions, to our consolidated financial statements included in our 2015 Form 10-K.

13


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, which includes the GaAs fabrication facility, and also the corresponding high power laser diodes, VCSEL and 980 nm pump laser product lines, including intellectual property, inventory, equipment and a related research and development facility in Tucson. 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 have classified the sale of our Zurich Business as a discontinued operation.
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 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 further 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. In connection with the Settlement Agreement, we also agreed with the II-VI parties to a mutual release of certain claims related to the Share and Asset Purchase Agreement, and certain related documents and transactions.
The following table presents the statements of operations for the discontinued operations of the Zurich Business:
 
Three Months Ended
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
(Thousands)
 
(Thousands)
Revenues
$

 
$

 
$

 
$

Cost of revenues

 

 

 
163

Gross loss

 

 

 
(163
)
Operating expenses

 
484

 

 
484

Other income (expense), net

 
(4,590
)
 

 
(4,590
)
Loss from discontinued operations before income taxes

 
(5,074
)
 

 
(5,237
)
Income tax provision

 

 

 

Loss from discontinued operations
$

 
$
(5,074
)
 
$

 
$
(5,237
)
This acquisition is more fully discussed in Note 3, Business Combinations and Dispositions, to our consolidated financial statements included in our 2015 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 six months ended December 26, 2015, we recorded $1.2 million and $2.4 million, respectively, in interest expense, including the amortization of the debt discount and the issuance costs, and made interest payments of $1.9 million related to the 6.00% Notes during the six months ended December 26, 2015.
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

14


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 of the 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 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)). Once notified, the holders of the 6.00% Notes could elect to convert, at which point they would receive their shares of common stock based on the initial exchange rate plus up to an additional 11.2 million shares.
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 December 26, 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 December 26, 2015 and June 27, 2015:
 
 
December 26, 2015
 
June 27, 2015
 
 
(Thousands)
Principal value of the liability component
 
$
65,000

 
$
65,000

Unamortized value of the debt discount and issuance costs
(3,348
)
 
(3,754
)
       Net carrying value of the liability component
$
61,652

 
$
61,246

At December 26, 2015, the $2.8 million debt discount and the $0.5 million issuance costs are recorded as a contra-liability in convertible notes payable within the condensed consolidated balance sheet.

15


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 December 26, 2015 and June 27, 2015, there were no amounts outstanding under the Loan Agreement.
On September 17, 2015, we entered into an amendment to the Loan Agreement with the Bank increasing from $5.0 million to $15.0 million the amount of equipment liens that may qualify as "Permitted Liens" thereunder.
The Loan Agreement is more fully discussed in Note 7, Credit Line and Notes, to our consolidated financial statements included in our 2015 Form 10-K.

NOTE 7. POST-RETIREMENT BENEFITS
Japan Defined Contribution 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 $0.2 million for the three and six months ended December 26, 2015, respectively, and $0.1 million and $0.3 million for the three and six months ended December 27, 2014, respectively. Employees can elect to receive the benefit as additional salary or contribute the benefit to the plan on a tax-deferred basis.
Japan Defined Benefit Plan
Under the defined benefit plan in Japan (the “Japan Plan”), we calculate benefits based on an employee’s individual grade level and expected 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 December 26, 2015, there were no plan assets associated with the Japan Plan. As of December 26, 2015, there was $0.1 million in accrued expenses and other liabilities and $5.1 million in other non-current liabilities in our condensed consolidated balance sheet to account for the projected benefit obligations under the Japan Plan. Net periodic pension costs for the Japan Plan included the following:
 
Three Months Ended
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
(Thousands)
Service cost
$
122

 
$
177

 
$
244

 
$
376

Interest cost
11

 
18

 
21

 
38

Net amortization

 
12

 

 
27

Net periodic pension costs
$
133

 
$
207

 
$
265

 
$
441


16


We made benefit payments under the Japan Plan of zero and $0.1 million during the three and six months ended December 26, 2015, respectively, and $0.1 million and $0.1 million during the three and six months ended December 27, 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:
 
Three Months Ended
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
(Thousands)
Warranty provision—beginning of period
$
3,168

 
$
4,054

 
$
2,932

 
$
4,672

Warranties issued
353

 
764

 
857

 
893

Warranties utilized or expired
(435
)
 
(1,184
)
 
(688
)
 
(1,859
)
Currency translation and other adjustments
11

 
(160
)
 
(4
)
 
(232
)
Warranty provision—end of period
$
3,097

 
$
3,474

 
$
3,097

 
$
3,474

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

17


The following table shows the future minimum lease payments due under non-cancelable capital leases with Hitachi Capital Corporation at December 26, 2015:
 
Capital Leases
 
(Thousands)
Fiscal Year Ending:
 
2016 (remaining)
$
2,069

2017
1,791

2018
43

2019
29

2020
71

Thereafter

Total minimum lease payments
4,003

Less amount representing interest
(170
)
Present value of capitalized payments
3,833

Less: current portion
(3,516
)
Long-term portion
$
317

Purchase Commitments
We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with suppliers and contract manufacturers that either allow them to procure inventory based upon criteria as defined by us or establish the parameters defining our requirements. A significant portion of our reported purchase commitments arising from these agreements consist of firm, non-cancelable and unconditional commitments.
We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. As of December 26, 2015 and June 27, 2015, the liability for these purchase commitments was $2.6 million and $3.2 million, respectively, and was included in accrued expenses and other liabilities in our condensed consolidated balance sheets.
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 adverse effect on our results of operations, financial position or cash flows.
Raysung Commercial Litigation
On October 23, 2013, Xi’an Raysung Photonics Inc., or Raysung, filed a civil suit against our wholly-owned subsidiary, Oclaro Technology (Shenzhen) Co., Ltd. (formerly known as Bookham Technology (Shenzhen) Co., Ltd.), or Oclaro Shenzhen, in the Xi’an Intermediate People’s Court in Shaanxi Province of the People’s Republic of China, or the Xi’an Court. The complaint filed by Raysung alleges that Oclaro Shenzhen terminated its purchase order pursuant to which Raysung had supplied certain products and was to supply certain products to Oclaro Shenzhen.
Raysung initially requested that the court award damages of approximately RMB 4.8 million (equivalent to approximately $0.8 million at the exchange rate in effect December 26, 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 approximately RMB 13.5 million (equivalent to

18


approximately $2.2 million at the exchange rate in effect December 26, 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 15.0 million (equivalent to approximately $2.5 million at the exchange rate in effect December 26, 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 $0.5 million 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 $2.5 million at the exchange rate in effect December 26, 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 December 26, 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 December 26, 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 December 26, 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 December 26, 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. On June 30, 2015, the Shaanxi High Court conducted an appeal hearing, at which time Oclaro Shenzhen and Raysung presented arguments supporting their respective positions and rebutting each other's claims. During July 2015, the Shaanxi High Court conducted ex parte meetings with each of Oclaro Shenzhen and Raysung and asked for additional information, but did not subsequently schedule or hold any additional hearings with both parties present. On August 21, 2015, the Shaanxi High Court's judgment was delivered to Oclaro Shenzhen's Chinese counsel and became effective on this date. The Shaanxi High Court found that Oclaro Shenzhen was the breaching party and, therefore, required that Oclaro Shenzhen pay Raysung a total of approximately RMB 15.0 million (equivalent to approximately $2.5 million at the exchange rate in effect December 26, 2015), which includes damages and fees. We determined to make the payment required by the judgment of the Shaanxi High Court and to close this matter.
Following the delivery of the Shaanxi High Court judgment to Oclaro Shenzhen on August 21, 2015, we recorded a $2.5 million charge in selling, general and administrative expense within our statement of operations for fiscal year 2015 and $2.5 million in accrued expenses and other liabilities in our condensed consolidated balance sheet at June 27, 2015. As of December 26, 2015, we have fully satisfied the judgment and each of the related judicial proceedings has been closed.
Kunst Worker Compensation Matter
On June 18, 2015, Gerald Kunst, or Kunst, filed a civil suit against us and Travelers Property Casualty Company of America, or Travelers, in Massachusetts Superior Court, Civil Action No. SUCV2015-01818F. Travelers is our general liability insurance carrier. The complaint filed by Kunst, an employee of a third party service provider, alleges that he was injured while performing air conditioning repair services on the premises of our Acton, Massachusetts facility and seeks judgment in an amount to be determined by the court or jury, together with interest and costs. On July 24, 2015, we filed an answer to the complaint, which included our affirmative defenses. The parties have begun to conduct initial discovery. As of February 4, 2016, no hearing has been scheduled in this matter. We intend to vigorously defend against this litigation.

19



NOTE 9. EMPLOYEE STOCK PLANS

Stock Incentive Plans
On November 10, 2015, our stockholders approved an amendment to the Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan (the "Plan"), adding 8.0 million shares of our common stock to the share reserve under the Plan.
As of December 26, 2015, there were 12.5 million shares of our common stock available for grant under the Plan.
We generally grant stock options that vest over a two to four year service period, and restricted stock awards and restricted stock unit awards 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.
Performance Stock Units
In July 2011, our board of directors approved the grant of 0.2 million performance-based restricted stock units ("PSUs") to certain executive officers with an aggregate estimated grant date fair value of $0.9 million. In October 2013, the board of directors determined that achievement of the performance conditions was reached at the 100 percent target level. Approximately 0.1 million of the grants outstanding, or 50 percent, vested on October 22, 2013, with the remaining 50 percent scheduled to vest upon a two-year service condition through August 2015. As of December 26, 2015, there were no PSUs outstanding related to this grant.
In March 2014, our board of directors approved a grant of 0.2 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $0.5 million. These PSUs vest upon the achievement of non-GAAP operating income break-even for calendar year 2015. Vesting is also contingent upon service conditions being met through February 2018. If the performance condition is not achieved, then the corresponding PSUs will be forfeited in the third quarter of fiscal year 2016. As of December 26, 2015, there were 0.1 million PSUs outstanding related to this grant, after adjustments for forfeitures due to terminations, 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 condition associated with these PSUs was improbable and reversed approximately $0.1 million in previously recognized stock-based compensation expense related to these PSUs. On January 27 2016, the compensation committee of our board of directors confirmed that the performance condition associated with these PSUs was not met and the PSUs expired.
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 adjusted earnings before interest, taxes, depreciation and amortization ("AEBITDA") 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. During the second quarter of fiscal year 2016, the performance condition related to these PSUs was achieved. On February 2, 2016, the compensation committee of our board of directors certified that the performance condition was achieved and the PSUs immediately vested 100 percent.
In August 2015, our board of directors approved a grant of 0.9 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $2.5 million. Subject to the achievement of positive free cash flow (defined as AEBITDA less capital expenditures) in any fiscal quarter ending prior to June 30, 2018, vesting of these PSUs is contingent upon service conditions being met through August 10, 2018. On October 29 2015, the compensation committee of our board of directors certified that this performance condition was achieved during the quarter ended September 26, 2015. As a result, these PSUs will cliff vest with respect to 33.4 percent of the underlying shares on August 10, 2016, and with respect to 8.325 percent of the underlying shares each subsequent quarter over the following two years, subject to continuous service.
Restricted Stock Units
In July 2015, our board of directors approved a retention grant of 0.9 million restricted stock units ("RSUs") to certain executive officers and 1.5 million RSUs to other employees, which vest over three years.

20


Stock Incentive Plan Activity
The following table summarizes the combined activity under all of our equity incentive plans for the six months ended December 26, 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 27, 2015
8,921

 
3,381

 
$
7.07

 
4,545

 
$
1.80

Increase in share reserve
8,000

 

 

 

 

Granted
(4,985
)
 

 

 
3,561

 
2.07

Exercised or released
192

 
(43
)
 
2.82

 
(1,427
)
 
1.82

Forfeited or expired
339

 
(181
)
 
11.54

 
(96
)
 
2.41

Balance at December 26, 2015
12,467

 
3,157

 
6.87

 
6,583

 
1.93

Supplemental disclosure information about our stock options and stock appreciation rights ("SARs") outstanding as of December 26, 2015 is as follows:
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic
Value
 
(Thousands)
 
 
 
(Years)
 
(Thousands)
Options and SARs exercisable
2,850

 
$
7.40

 
3.9
 
$
516

Options and SARs outstanding
3,157

 
6.87

 
4.3
 
981

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 $3.54 on December 24, 2015, which would have been received by the option holders had all option holders exercised their options as of that date. There were approximately 0.6 million shares of common stock subject to in-the-money options which were exercisable as of December 26, 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 (assumptions are not applicable for the three and six months ended December 26, 2015, as there were no stock options granted during those periods):
 
Three Months Ended
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
Stock options:
 
 
 
 
 
 
 
Expected life
N/A
 
5.3 years
 
N/A
 
5.3 years

Risk-free interest rate
N/A
 
1.6%
 
N/A
 
1.6
%
Volatility
N/A
 
76.0%
 
N/A
 
76.9
%
Dividend yield
N/A
 
 
N/A
 


21


The amounts included in cost of revenues and operating expenses for stock-based compensation were as follows:
 
Three Months Ended
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
(Thousands)
Stock-based compensation by category of expense:
Cost of revenues
$
472

 
$
576

 
$
928

 
$
906

Research and development
491

 
410

 
915

 
742

Selling, general and administrative
1,580

 
770

 
2,524

 
1,394

 
$
2,543

 
$
1,756

 
$
4,367

 
$
3,042

Stock-based compensation by type of award:
 
 
 
 
 
 
 
Stock options
$
53

 
$
88

 
$
115

 
$
230

Restricted stock awards
2,535

 
1,551

 
4,296

 
2,736

Inventory adjustment to cost of revenues
(45
)
 
117

 
(44
)
 
76

 
$
2,543

 
$
1,756

 
$
4,367

 
$
3,042

As of December 26, 2015 and June 27, 2015, we had capitalized approximately $0.5 million and $0.5 million, respectively, of stock-based compensation as inventory.
As of December 26, 2015, we had $0.4 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 2.3 years, and $8.4 million in unrecognized stock-based compensation expense related to unvested time-based restricted stock awards, net of estimated forfeitures, that will be recognized over a weighted-average period of 1.8 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 shares underlying the PSUs, and any previously recognized compensation expense related to those PSUs would be reversed. During the three and six months ended December 26, 2015, we recorded $0.8 million and $1.0 million, respectively, in stock-based compensation in connection with the PSUs issued in July 2011, March 2014, August 2014 and August 2015, including approximately $0.5 million related to the acceleration of the stock-based compensation in connection with the PSUs issued in August 2014 upon the achievement of the performance conditions. During the three and six months ended December 27, 2014, we recorded minimal stock-based compensation expense in connection with the PSUs issued in July 2011, March 2014 and August 2014.

NOTE 11. INCOME TAXES
The income tax provision of $1.0 million and $1.9 million for the three and six months ended December 26, 2015, respectively, and the income tax benefit of $38,000 and the income tax provision of $0.9 million for the three and six months ended December 27, 2014, respectively, relates primarily to our foreign operations.
The total amount of our unrecognized tax benefits as of December 26, 2015 and June 27, 2015 were approximately $4.5 million and $4.1 million, respectively. As of December 26, 2015, we had $2.9 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 $1.1 million in the next twelve months.

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.

22


The following table presents the calculation of basic and diluted net income (loss) per share:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
 
 
(Thousands, except per share amounts)
Net income (loss)
 
$
157

 
(12,283
)
 
(3,353
)
 
(32,637
)
 
 
 
 
 
 
 
 
 
Weighted-average shares - Basic
 
110,296

 
107,849

 
109,877

 
107,549

Effect of dilutive potential common shares from:
 
 
 
 
 
 
 
 
Stock options and stock appreciation rights
 
82

 

 

 

Restricted stock awards
 
2,016

 

 

 

Weighted-average shares - Diluted
 
112,394

 
107,849

 
109,877

 
107,549

 
 
 
 
 
 
 
 
 
Basic net income (loss) per share
 
$
0.00

 
$
(0.11
)
 
$
(0.03
)
 
$
(0.30
)
Diluted net income (loss) per share
 
$
0.00

 
$
(0.11
)
 
$
(0.03
)
 
$
(0.30
)
For the three and six months ended December 26, 2015, we excluded 36.2 million and 39.9 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 income (loss) per share because their effect would have been anti-dilutive.
For the three and six months ended December 27, 2014, we excluded 9.7 million and 9.1 million, respectively, of outstanding stock options, stock appreciation rights and unvested restricted stock awards from the calculation of diluted net 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
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
(Thousands)
China
$
35,179

 
$
25,531

 
$
68,235

 
$
46,253

United States
16,916

 
13,386

 
29,967

 
27,923

Mexico
14,196

 
10,899

 
26,534

 
22,890

Malaysia
8,307

 
13,761

 
16,160

 
29,461

Italy
6,818

 
6,768

 
13,889

 
10,903

Germany
4,010

 
6,233

 
8,952

 
14,387

Japan
1,344

 
1,704

 
2,966

 
5,448

Rest of world
7,359

 
8,538

 
14,976

 
18,796

 
$
94,129

 
$
86,820

 
$
181,679

 
$
176,061


23


Product Groups
The following table sets forth revenues by product group:
 
Three Months Ended
 
Six Months Ended
 
December 26, 2015
 
December 27, 2014
 
December 26, 2015
 
December 27, 2014
 
(Thousands)
100 Gb/s transmission modules
$
49,554

 
$
33,670

 
$
90,382

 
$
55,000

40 Gb/s transmission modules
11,308

 
19,300

 
22,136

 
41,466

10 Gb/s and lower transmission modules
33,267

 
32,005

 
69,161

 
70,231

Industrial and consumer

 
1,845

 

 
9,364

 
$
94,129

 
$
86,820

 
$
181,679

 
$
176,061


During the second quarter of fiscal year 2015, we sold our Komoro Business, which included the industrial and consumer product group of Oclaro Japan.
Significant Customers and Concentration of Credit Risk
For the three months ended December 26, 2015, three customers accounted for 10 percent or more of our revenues, representing approximately 21 percent, 16 percent and 10 percent of our revenues, respectively. For the six months ended December 26, 2015, three customers accounted for 10 percent or more of our revenues, representing approximately 19 percent, 16 percent and 10 percent of our revenues, respectively.
For the three months ended December 27, 2014, three customers accounted for 10 percent or more of our revenues, representing approximately 20 percent, 14 percent and 13 percent of our revenues, respectively. For the six months ended December 27, 2014, four customers accounted for 10 percent or more of our revenues, representing approximately 23 percent, 13 percent, 10 percent and 10 percent of our revenues, respectively.
As of December 26, 2015, three customers accounted for 10 percent or more of our accounts receivable, representing approximately 19 percent, 11 percent and 11 percent of our accounts receivable, respectively. As of June 27, 2015, four customers accounted for 10 percent of our accounts receivable, representing approximately 24 percent, 13 percent, 11 percent and 11 percent of our accounts receivable, respectively.

NOTE 14. RELATED PARTY TRANSACTIONS
As of December 26, 2015, Hitachi, Ltd. ("Hitachi") held slightly less than 5 percent of our outstanding common stock based on Hitachi’s Schedule 13G filed with the Securities and Exchange Commission on December 2, 2015. During the second quarter of fiscal year 2016, Hitachi sold approximately 6.6 million shares of our common stock. Hitachi initially acquired these shares as a result of our acquisition of Opnext on July 23, 2012.
We continue to enter into transactions with Hitachi in the normal course of business. Sales to Hitachi were $1.0 million and $1.9 million for the three and six months ended December 26, 2015, respectively, and $0.8 million and $2.0 million for the three and six months ended December 27, 2014, respectively. Purchases from Hitachi were $5.5 million and $10.4 million for the three and six months ended December 26, 2015, respectively, and $3.9 million and $7.3 million for the three and six months ended December 27, 2014, respectively. At December 26, 2015, we had $1.1 million accounts receivable due from Hitachi and $4.8 million accounts payable due to Hitachi. At June 27, 2015 we had $0.7 million accounts receivable due from Hitachi and $4.8 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

24


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 respond to evolving technologies, customer requirements and demands, and product design challenges, (iii) our dependence on a limited number of customers for a significant percentage of our revenues, (iv) our manufacturing yields, (v) our ability to effectively manage our inventory, (vi) competition and pricing pressure, (vii) our ability to meet or exceed our gross margin expectations, (viii) our ability to continue increasing the percentage of sales associated with our new products, (ix) the effects of fluctuating product mix on our results, (x) the effects of fluctuations in foreign currency exchange rates, (xi) our dependence on a limited number of suppliers and key contract manufacturers, (xii) our ability to timely capitalize on any increase in market demand, (xiii) our ability to maintain or increase our cash reserves and obtain debt or equity-based financing on acceptable terms or at all, (xiv) our ability to effectively compete with companies that have greater name recognition, broader customer relationships and substantially greater financial, technical and marketing resources, (xv) our ability to service and repay our outstanding indebtedness pursuant to the terms of the applicable agreements, (xvi) our ability to further reduce costs and operating expenses, (xvii) the risks associated with our international operations, (xviii) the impact of continued uncertainty in world financial markets and any resulting reduction in demand for our products, (xix) the outcome of tax audits or similar proceedings, (xx) the outcome of pending litigation against us, and (xxi) 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, 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, application virtualization and other bandwidth-intensive and high-speed applications.
We have research and development ("R&D") and chip fabrication facilities in China, Italy, Japan, United Kingdom and the United States. We also have contract manufacturing sites in China, Japan, Malaysia, Taiwan and Thailand, with design, sales and service organizations in most of the major regions around the world.
Our customers include ADVA Optical Networking ("ADVA"); Ciena Corporation ("Ciena"); Cisco Systems, Inc. ("Cisco"); Coriant GmbH ("Coriant"); Huawei Technologies Co. Ltd ("Huawei"); InnoLight Technology Corporation ("InnoLight"); Juniper Networks, Inc. ("Juniper"); Nokia/Alcatel-Lucent; Telefonaktiebolaget LM Ericsson ("Ericsson") and ZTE Corporation ("ZTE").


25


RESULTS OF OPERATIONS
On September 12, 2013, we completed a Share and Asset Purchase Agreement with II-VI Incorporated ("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 exclude the financial results of the Zurich and Amplifier Businesses, unless otherwise indicated.

The following table 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
 
 
December 26, 2015
 
December 27, 2014
 
Change
 
(Decrease)
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
94,129

 
100.0

 
$
86,820

 
100.0

 
$
7,309

 
8.4

 
Cost of revenues
67,521

 
71.7

 
73,054

 
84.1

 
(5,533
)
 
(7.6
)
 
Gross profit
26,608

 
28.3

 
13,766

 
15.9

 
12,842

 
93.3

  
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
11,075

 
11.8

 
11,721

 
13.5

 
(646
)
 
(5.5
)
 
Selling, general and administrative
12,791

 
13.6

 
13,646

 
15.7

 
(855
)
 
(6.3
)
 
Amortization of other intangible assets
250

 
0.3

 
269

 
0.3

 
(19
)
 
(7.1
)
 
Restructuring, acquisition and related (income) expense, net
6

 

 
(8,038
)
 
(9.3
)
 
8,044

 
n/m

(1) 
Gain on sale of property and equipment
(46
)
 

 
(26
)
 

 
(20
)
 
76.9

 
Total operating expenses
24,076

 
25.6

 
17,572

 
20.2

 
6,504

 
37.0

  
Operating income (loss)
2,532

 
2.7

 
(3,806
)
 
(4.4
)
 
6,338

 
n/m

(1) 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
(1,247
)
 
(1.3
)
 
(89
)
 
(0.1
)
 
(1,158
)
 
1,301.1

 
Gain (loss) on foreign currency transactions, net
(500
)
 
(0.5
)
 
(675
)
 
(0.8
)
 
175

 
(25.9
)
 
Other income (expense), net
357

 
0.4

 
329

 
0.4

 
28

 
8.5

 
Total other income (expense)
(1,390
)
 
(1.5
)
 
(435
)
 
(0.5
)
 
(955
)
 
219.5

 
Income (loss) from continuing operations before income taxes
1,142

 
1.2

 
(4,241
)
 
(4.9
)
 
5,383

 
n/m

(1) 
Income tax (benefit) provision
985

 
1.0

 
(38
)
 
(0.1
)
 
1,023

 
n/m

(1) 
Income (loss) from continuing operations
157

 
0.2

 
(4,203
)
 
(4.8
)
 
4,360

 
n/m

(1) 
Loss from discontinued operations, net of tax

 

 
(8,080
)
 
(9.3
)
 
8,080

 
(100.0
)
 
Net income (loss)
$
157

 
0.2

 
$
(12,283
)
 
(14.1
)
 
$
12,440

 
n/m

(1) 
(1)
Not meaningful.


26


 
 
Six Months Ended
 
 
 
 Increase
 
 
 
December 26, 2015
 
December 27, 2014
 
Change
 
(Decrease)
 
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
181,679

 
100.0

 
$
176,061

 
100.0

 
$
5,618

 
3.2

 
Cost of revenues
132,374

 
72.9

 
147,886

 
84.0

 
(15,512
)
 
(10.5
)
 
Gross profit
49,305

 
27.1

 
28,175

 
16.0

 
21,130

 
75.0

 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
     Research and development
22,020

 
12.1

 
25,634

 
14.6

 
(3,614
)
 
(14.1
)
 
     Selling, general and administrative
25,999

 
14.3

 
29,060

 
16.5

 
(3,061
)
 
(10.5
)
 
     Amortization of other intangible assets
501

 
0.3

 
687

 
0.4

 
(186
)
 
(27.1
)
 
Restructuring, acquisition and related (income) expense, net
38

 

 
(6,308
)
 
(3.6
)
 
6,346

 
n/m

(1) 
(Gain) loss on sale of property and equipment
167

 
0.1

 
371

 
0.2

 
(204
)
 
(55.0
)
 
Total operating expenses
48,725

 
26.8

 
49,444

 
28.1

 
(719
)
 
(1.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
580

 
0.3

 
(21,269
)
 
(12.1
)
 
21,849

 
n/m

(1) 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
     Interest income (expense), net
(2,523
)
 
(1.4
)
 
(193
)
 
(0.1
)
 
(2,330
)
 
1,207.3

 
Gain (loss) on foreign currency transactions, net
4

 

 
(2,685
)
 
(1.5
)
 
2,689

 
n/m

(1) 
     Other income (expense), net
470

 
0.3

 
884

 
0.5

 
(414
)
 
(46.8
)
 
Total other income (expense)
(2,049
)
 
(1.1
)
 
(1,994
)
 
(1.1
)
 
(55
)
 
2.8

 
Loss from continuing operations before income taxes
(1,469
)
 
(0.8
)
 
(23,263
)
 
(13.2
)
 
21,794

 
(93.7
)
 
Income tax provision
1,884

 
1.0

 
916

 
0.5

 
968

 
105.7

 
Loss from continuing operations
(3,353
)
 
(1.8
)
 
(24,179
)
 
(13.7
)
 
20,826

 
(86.1
)
 
Loss from discontinued operations, net of tax

 

 
(8,458