10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-30684
OCLARO, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-1303994 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
2560 Junction Avenue, San Jose, California 95134
(Address of principal executive offices, zip code)
(408) 383-1400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act):
Yes o No þ
51,455,639 shares of common stock outstanding as of February 3, 2012
OCLARO, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
OCLARO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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December 31, |
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July 2, |
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2011 |
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2011 |
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(Thousands, except par value) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
53,628 |
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$ |
62,783 |
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Restricted cash |
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593 |
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574 |
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Accounts receivable, net |
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59,730 |
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82,868 |
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Inventories |
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83,306 |
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102,201 |
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Prepaid expenses and other current assets |
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11,932 |
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16,495 |
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Total current assets |
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209,189 |
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264,921 |
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Property and equipment, net |
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63,831 |
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69,374 |
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Other intangible assets, net |
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18,172 |
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19,698 |
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Goodwill |
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10,904 |
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10,904 |
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Other non-current assets |
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12,486 |
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10,277 |
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Total assets |
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$ |
314,582 |
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$ |
375,174 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
38,730 |
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$ |
66,179 |
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Accrued expenses and other liabilities |
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44,614 |
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60,703 |
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Line of credit payable |
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19,500 |
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Total current liabilities |
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102,844 |
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126,882 |
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Deferred gain on sale-leaseback |
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11,961 |
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12,920 |
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Other non-current liabilities |
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6,056 |
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6,277 |
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Total liabilities |
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120,861 |
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146,079 |
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Commitments and contingencies (Note 9) |
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Stockholders equity: |
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Preferred stock: 1,000 shares authorized; none issued and outstanding |
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Common stock: $0.01 par value per share; 90,000 shares authorized;
51,455 and 50,476 shares issued and outstanding at December 31,
2011 and July 2, 2011, respectively |
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515 |
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505 |
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Additional paid-in capital |
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1,327,114 |
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1,313,931 |
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Accumulated other comprehensive income |
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33,435 |
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40,730 |
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Accumulated deficit |
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(1,167,343 |
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(1,126,071 |
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Total stockholders equity |
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193,721 |
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229,095 |
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Total liabilities and stockholders equity |
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$ |
314,582 |
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$ |
375,174 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
3
OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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December 31, |
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January 1, |
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December 31, |
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January 1, |
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2011 |
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2011 |
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2011 |
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2011 |
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(Thousands, except per share amounts) |
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Revenues |
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$ |
86,488 |
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$ |
120,299 |
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$ |
192,309 |
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$ |
241,646 |
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Cost of revenues |
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75,613 |
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84,556 |
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157,401 |
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171,077 |
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Gross profit |
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10,875 |
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35,743 |
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34,908 |
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70,569 |
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Operating expenses: |
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Research and development |
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17,024 |
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15,696 |
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34,691 |
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29,407 |
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Selling, general and administrative |
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14,425 |
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15,149 |
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31,959 |
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29,962 |
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Amortization of intangible assets |
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723 |
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739 |
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1,449 |
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1,358 |
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Restructuring, acquisition and related costs |
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3,219 |
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903 |
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1,454 |
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1,573 |
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Flood-related expense |
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9,088 |
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9,088 |
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Legal settlements |
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1,678 |
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1,678 |
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Gain (loss) on sale of property and equipment |
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37 |
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(48 |
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97 |
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(69 |
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Total operating expenses |
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44,516 |
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34,117 |
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78,738 |
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63,909 |
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Operating income (loss) |
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(33,641 |
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1,626 |
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(43,830 |
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6,660 |
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Other income (expense): |
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Interest income (expense), net |
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(245 |
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(470 |
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(402 |
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(1,036 |
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Gain (loss) on foreign currency translation, net |
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1,298 |
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(1,119 |
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2,690 |
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(4,706 |
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Other income |
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2,238 |
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2,238 |
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Total other income (expense) |
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3,291 |
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(1,589 |
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4,526 |
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(5,742 |
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Income (loss) before income taxes |
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(30,350 |
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37 |
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(39,304 |
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918 |
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Income tax provision |
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746 |
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250 |
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1,968 |
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775 |
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Net income (loss) |
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$ |
(31,096 |
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$ |
(213 |
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$ |
(41,272 |
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$ |
143 |
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Net income (loss) per share: |
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Basic |
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$ |
(0.62 |
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$ |
0 |
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$ |
(0.83 |
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$ |
0 |
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Diluted |
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$ |
(0.62 |
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$ |
0 |
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$ |
(0.83 |
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$ |
0 |
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Shares used in computing net income (loss) per share: |
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Basic |
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50,492 |
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48,262 |
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49,970 |
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48,189 |
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Diluted |
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50,492 |
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48,262 |
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49,970 |
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51,109 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
4
OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended |
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December 31, |
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January 1, |
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2011 |
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2011 |
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(Thousands) |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(41,272 |
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$ |
143 |
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Adjustments to reconcile net income (loss) to net cash used in
operating activities: |
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Amortization of deferred gain on sale-leaseback |
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(454 |
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(458 |
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Depreciation and amortization |
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11,189 |
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8,053 |
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Adjustment in fair value of earnout obligation |
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(2,859 |
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Flood-related non-cash losses |
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7,180 |
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Stock-based compensation expense |
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3,258 |
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3,032 |
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Other non-cash adjustments |
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(2,141 |
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(70 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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20,084 |
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(6,135 |
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Inventories |
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11,748 |
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(14,450 |
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Prepaid expenses and other current assets |
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265 |
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(238 |
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Other non-current assets |
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(41 |
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105 |
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Accounts payable |
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(25,867 |
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8,033 |
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Accrued expenses and other liabilities |
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(1,772 |
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(5,348 |
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Net cash used in operating activities |
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(20,682 |
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(7,333 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(9,035 |
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(18,681 |
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Proceeds from sales of property and equipment |
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69 |
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Proceeds from sales of investments |
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3,438 |
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Transfers (to) from restricted cash |
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(52 |
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3,693 |
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Cash paid for acquisition |
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(10,482 |
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Net cash used in investing activities |
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(5,649 |
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(25,401 |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net |
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71 |
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625 |
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Proceeds from borrowings under line of credit |
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19,500 |
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Net cash provided by financing activities |
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19,571 |
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625 |
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Effect of exchange rate on cash and cash equivalents |
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(2,395 |
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2,212 |
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Net decrease in cash and cash equivalents |
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(9,155 |
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(29,897 |
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Cash and cash equivalents at beginning of period |
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62,783 |
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107,176 |
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Cash and cash equivalents at end of period |
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$ |
53,628 |
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$ |
77,279 |
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Supplemental disclosures of non-cash transactions: |
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Issuance of common stock to settle Xtellus escrow liability |
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$ |
7,000 |
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$ |
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Issuance of common stock to settle Mintera earnout liability |
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$ |
2,758 |
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$ |
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Incurrence of earnout liability related to the acquisition of Mintera |
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$ |
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$ |
15,148 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
5
OCLARO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION
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 31, 2011 and for the three and six months ended
December 31, 2011 and January 1, 2011 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 31, 2011 are not necessarily indicative of results that may
be expected for any other interim period or for the full fiscal year ending June 30, 2012.
The condensed consolidated balance sheet as of July 2, 2011 has been derived from our audited
financial statements as of such date, but does not include all disclosures required by U.S. GAAP.
These unaudited condensed consolidated financial statements should be read in conjunction with our
audited financial statements included in our Annual Report on Form 10-K for the year ended July 2,
2011 (2011 Form 10-K).
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements, as well as
the reported amounts of revenue and expenses during the reported periods. These judgments can be
subjective and complex, and consequently, actual results could differ materially from those
estimates and assumptions. Descriptions of some of the key estimates and assumptions are included
in our 2011 Form 10-K.
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 net income (loss), cash flows, cash and cash equivalents or stockholders equity as
previously reported.
NOTE 2. RECENT ACCOUNTING STANDARDS
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires us to
disclose gross information and net information about instruments and transactions eligible for
offset in the statement of financial position. ASU No. 2011-11 will be effective for our fiscal
year beginning on June 30, 2013. The adoption of this update will require a change in the format of
our current presentation.
In September 2011, the FASB issued ASU No. 2011-09, which updates Accounting Standards
Codification (ASC) Subtopic 715-80, Compensation Retirement Benefits Multiemployer Plans,
enhancing disclosures by requiring transparency about the nature of the commitments and risks
involved in participating in multiemployer pension plans. We intend to adopt ASU No. 2011-09 on
January 1, 2012, the first day of our third fiscal quarter. The adoption of this update is not
expected to have a material effect on our condensed consolidated financial statements, but will
require certain additional disclosures.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which
amends current guidance by allowing an entity the option to make a qualitative evaluation about the
likelihood of goodwill impairment in order to determine whether it should perform the two-step
goodwill impairment test to calculate the fair value of a reporting unit. The update also provides
additional examples of events and circumstances that an entity should consider between annual
impairment tests in determining whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. This update will be effective for our fiscal
quarter
beginning January 1, 2012. The adoption of this update is not expected to have a material effect on
our condensed consolidated financial statements.
6
In June 2011, the FASB issued ASU No. 2011-05, an amendment to ASC Topic 220, Comprehensive
Income, which amends current comprehensive income guidance. ASU No. 2011-05 eliminates the option
to present the components of other comprehensive income as part of our statement of stockholders
equity. Instead, we must report comprehensive income in either a single continuous statement of
comprehensive income that contains two sections, net income and other comprehensive income, or in
two separate but consecutive statements. ASU No. 2011-05 will be effective for our fiscal year
beginning July 1, 2012. The adoption of this update will require a change in the format of our
current presentation.
In May 2011, the FASB issued ASU No. 2011-04, an amendment to ASC Topic 820, Fair Value
Measurements, providing a consistent definition and measurement of fair value, as well as similar
disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU No.
2011-04 changes certain fair value measurement principles, clarifies the application of existing
fair value measurement and expands the ASC Topic 820 disclosure requirements, particularly for
Level 3 fair value measurements. This update will be effective for our fiscal quarter beginning
January 1, 2012. The adoption of this update is not expected to have a material effect on our
consolidated financial statements, but may require certain additional disclosures.
NOTE 3. 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:
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Level 1 |
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Quoted prices in active markets for identical assets or liabilities. |
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Level 2 |
|
Inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, quoted prices of identical assets or liabilities in markets with insufficient
volume or infrequent transactions (less active markets), or other inputs that are
observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities. |
|
|
Level 3 |
|
Unobservable inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or liabilities. |
Our cash equivalents and non-current marketable securities are generally classified within
Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable levels of price
transparency. The types of instruments valued based on quoted market prices in active markets
include most marketable securities and money market securities. Such instruments are generally
classified within Level 1 of the fair value hierarchy. The types of instruments valued based on
other observable inputs are foreign currency forward exchange contracts. Such instruments are
generally classified within Level 2 of the fair value hierarchy.
During the six months ended December 31, 2011, we have classified the earnout obligations
arising from our acquisition of Mintera Corporation (Mintera) within Level 3 of the fair value
hierarchy because their values were primarily derived from management estimates of future operating
results. See Note 4, Business Combinations, for additional details regarding these earnout
obligations.
We have a defined benefit pension plan in Switzerland whose assets are classified within Level
1 of the fair value hierarchy for plan assets of cash, equity investments and fixed income
investments, and Level 3 of the fair value hierarchy for plan assets of real estate and alternative
investments. These pension plan assets are not reflected in the accompanying condensed consolidated
balance sheets, and are thus not included in the following tables.
7
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value are shown in the table below by their
corresponding balance sheet caption and consisted of the following types of instruments at December
31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using |
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
|
(Thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
10,001 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10,001 |
|
Other non-current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
10,106 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnout obligation for Mintera acquisition |
|
$ |
|
|
|
$ |
|
|
|
$ |
10,024 |
|
|
$ |
10,024 |
|
Unrealized loss on currency instruments
designated as cash flow hedges |
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
|
|
|
$ |
12 |
|
|
$ |
10,024 |
|
|
$ |
10,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides details regarding the changes in accrued expenses and other
liabilities classified within Level 3 from July 2, 2011 to December 31, 2011:
|
|
|
|
|
|
|
Accrued Expenses |
|
|
|
and Other |
|
|
|
Liabilities |
|
|
|
(Thousands) |
|
Balance at July 2, 2011 |
|
$ |
16,140 |
|
Fair value adjustment to Mintera earnout obligations |
|
|
(2,867 |
) |
Payouts related to Mintera 12 month earnout obligation |
|
|
(3,256 |
) |
Interest
expense on Mintera 18 month earnout obligation |
|
|
7 |
|
|
|
|
|
Balance at December 31, 2011 |
|
$ |
10,024 |
|
|
|
|
|
Derivative Financial Instruments
At the end of each accounting period, we mark-to-market all foreign currency forward exchange
contracts that have been designated as cash flow hedges and changes in fair value are recorded in
accumulated other comprehensive income until the underlying cash flow is settled and the contract
is recognized in other income (expense) in our condensed consolidated statements of operations. As
of December 31, 2011, we
held nine outstanding foreign currency forward exchange contracts to sell U.S. dollars and buy
U.K. pounds sterling. All of these contracts have been designated as cash flow hedges. These
contracts had an aggregate notional value of approximately $7.0 million of put and call options
which expire, or expired, at various dates ranging from January 2012 through September 2012. To
date, we have not entered into any such contracts for longer than 12 months and, accordingly, all
amounts included in accumulated other comprehensive income as of December 31, 2011 will generally
be reclassified into other income (expense) within the next 12 months. As of December 31, 2011,
each of the nine designated cash flow hedges were determined to be fully effective; therefore, we
recorded an unrealized loss of $12,000 to accumulated other comprehensive income related to
recording the fair value of these foreign currency forward exchange contracts for accounting
purposes.
8
NOTE 4. BUSINESS COMBINATIONS
Asset Sale
In December 2011, we entered into an asset sale agreement to sell certain assets related to a
legacy product, including inventory, equipment and intangibles, in exchange for $3.9 million in
initial consideration plus potential earnout consideration, based on the purchasers revenues from
the legacy product over a 15 month period following the closing date. As of December 31, 2011, we
have received $1.5 million in cash proceeds and are scheduled to receive the remaining $2.4 million
of initial consideration in the third quarter of fiscal year 2012.
The transfer of assets under the agreement is expected to be completed in February 2012. As of
December 31, 2011, we have deferred a $1.3 million net gain on the sale of these assets and
classified this amount in accrued expenses and other liabilities in our condensed consolidated
balance sheet. We expect to recognize this deferred gain when the asset transfer is complete.
Earnout consideration, if any, will be recognized in the period it is reported to us as due,
provided we believe cash collections are reasonably assured.
Acquisition of Mintera
In July 2010, we acquired Mintera. For accounting purposes, the total fair value of
consideration given in connection with the acquisition of Mintera was $25.6 million. This
acquisition is more fully discussed in Note 3, Business Combinations, to our consolidated financial
statements included in our 2011 Form 10-K.
Under the terms of this acquisition, we agreed to pay certain revenue-based consideration,
whereby former security holders of Mintera are entitled to receive up to $20.0 million, determined
based on a set of sliding scale formulas, to the extent revenue from Mintera products was more than
$29.0 million in the 12 months following the acquisition and/or is more than $40.0 million in the
18 months following the acquisition. The earnout consideration is payable in cash or, at our
option, newly issued shares of our common stock, or a combination of cash and stock.
During the three months ended October 1, 2011, we reviewed the fair value of the 12 month and
18 month earnout obligations and determined that the fair value of the obligations decreased by
$3.8 million, to $12.4 million, based on revised estimates of revenues from Mintera products. The
$3.8 million decrease in fair value was recorded as a decrease in restructuring, acquisition and
related expenses in the condensed consolidated statement of operations.
During the three months ended December 31, 2011, we settled the 12 month earnout obligation
with the former security holders by paying them $0.5 million in cash and issuing 0.8 million shares
of our common stock valued at $2.8 million. We also reassessed the fair value of the 18 month
earnout obligation, determining that the fair
value of the obligations increased by $0.9 million, to $10.0 million, during the three months
ended December 31, 2011. We estimated the fair value of the 18 month obligation using management
estimates of the total amounts expected to be paid based on estimated future operating results,
discounted to present value using our incremental borrowing cost. The $10.0 million has been
recorded in accrued expenses and other liabilities in our condensed consolidated balance sheet at
December 31, 2011. The 18 month obligation is payable in April 2012.
During the three and six months ended December 31, 2011, we recorded minimal amounts in
interest expense related to the earnout obligations. During the three and six months ended January
1, 2011, we recorded $0.3 million and $0.5 million, respectively, in interest expense related to
the earnout obligations.
9
NOTE 5. BALANCE SHEET DETAILS
The following table provides details regarding our cash and cash equivalents at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash-in-bank |
|
$ |
43,627 |
|
|
$ |
42,585 |
|
Money market funds |
|
|
10,001 |
|
|
|
20,198 |
|
|
|
|
|
|
|
|
|
|
$ |
53,628 |
|
|
$ |
62,783 |
|
|
|
|
|
|
|
|
The following table provides details regarding our inventories at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
31,422 |
|
|
$ |
38,863 |
|
Work-in-process |
|
|
36,238 |
|
|
|
37,084 |
|
Finished goods |
|
|
15,646 |
|
|
|
26,254 |
|
|
|
|
|
|
|
|
|
|
$ |
83,306 |
|
|
$ |
102,201 |
|
|
|
|
|
|
|
|
The following table provides details regarding our property and equipment, net at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Buildings |
|
$ |
17,457 |
|
|
$ |
17,640 |
|
Plant and machinery |
|
|
146,247 |
|
|
|
149,120 |
|
Fixtures, fittings and equipment |
|
|
1,747 |
|
|
|
1,802 |
|
Computer equipment |
|
|
13,443 |
|
|
|
14,235 |
|
|
|
|
|
|
|
|
|
|
|
178,894 |
|
|
|
182,797 |
|
Less: Accumulated depreciation |
|
|
(115,063 |
) |
|
|
(113,423 |
) |
|
|
|
|
|
|
|
|
|
$ |
63,831 |
|
|
$ |
69,374 |
|
|
|
|
|
|
|
|
The following table presents details regarding our accrued expenses and other liabilities at the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Accrued expenses and other liabilities: |
|
|
|
|
|
|
|
|
Trade payables |
|
$ |
8,669 |
|
|
$ |
6,241 |
|
Compensation and benefits related accruals |
|
|
9,107 |
|
|
|
11,097 |
|
Warranty accrual |
|
|
2,430 |
|
|
|
2,175 |
|
Escrow liability for Xtellus acquisition |
|
|
|
|
|
|
7,000 |
|
Earnout liability for Mintera acquisition |
|
|
10,024 |
|
|
|
16,140 |
|
Other accruals |
|
|
14,384 |
|
|
|
18,050 |
|
|
|
|
|
|
|
|
|
|
$ |
44,614 |
|
|
$ |
60,703 |
|
|
|
|
|
|
|
|
10
The following table presents the components of accumulated other comprehensive income at the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
$ |
36,368 |
|
|
$ |
43,536 |
|
Unrealized gain (loss) on currency instruments designated as
cash flow hedges |
|
|
(12 |
) |
|
|
54 |
|
Unrealized loss on marketable securities |
|
|
(200 |
) |
|
|
(139 |
) |
Adjustment for Swiss defined benefit plan |
|
|
(2,721 |
) |
|
|
(2,721 |
) |
|
|
|
|
|
|
|
|
|
$ |
33,435 |
|
|
$ |
40,730 |
|
|
|
|
|
|
|
|
NOTE 6. FLOOD-RELATED EXPENSE
In October 2011, certain areas in Thailand suffered major flooding as a result of monsoons.
This flooding had a material impact on our business and results of operations. Our primary contract
manufacturer, Fabrinet, suspended operations at two factories located in Chokchai, Thailand and
Pinehurst, Thailand. The Chokchai factory suffered extensive flood damage and became inaccessible
due to high water levels inside and surrounding the manufacturing facility. As a result of this
flooding, we experienced a significant decline in product sales and we incurred significant damage
to our inventory and property and equipment located at the Chokchai facility. During the three
months ended December 31, 2011, we recorded impairment charges of $4.2 million related to the
write-off of the net book value of damaged inventory and $3.0 million related to the write-off of
the net book value of property and equipment based on our preliminary estimates of the damage
caused by the flooding. These impairment charges are recorded within the operating expense caption
flood-related expense in our condensed consolidated statement of operations for the three and six
months ended December 31, 2011. Flood-related expense for the three and six months ended December
31, 2011 also includes $1.9 million in personnel-related costs, professional fees and related
expenses incurred in connection with our recovery efforts. We continue to evaluate our preliminary
estimates of flood-related losses, and in future quarters we may record additional losses for
damaged equipment and inventory.
While we maintain both property and business interruption insurance coverage, there can be no
assurance as to the amount or timing of insurance recoveries. Insurance recoveries related to
impairment losses previously recorded and other recoverable expenses will be recognized to the
extent of the related loss or expense in the period that recoveries become probable and realizable.
Insurance recoveries under business interruption coverage and insurance recovery gains in excess of
amounts previously written off related to impaired inventory and equipment or in excess of other
recoverable expenses previously recognized will be recognized when they become realizable and all
contingencies have been resolved. The evaluation of insurance recoveries requires estimates and
judgments about future results which affect reported amounts and certain disclosures. Actual
results could differ from those estimates. Insurance recoveries we receive in future periods will
be recorded net of flood-related expense in the condensed consolidated statement of operations. As
of December 31, 2011, we have not received any insurance recoveries, nor have we recorded any
amounts relating to potential future insurance recoveries in the condensed consolidated statement
of operations.
11
NOTE 7. CREDIT AGREEMENT
On July 26, 2011, Oclaro Technology Ltd., as Borrower, and Oclaro, Inc., as Parent,
entered into an amendment and restatement to our existing senior secured credit facility (the
Credit Agreement) with Wells Fargo Capital Finance, Inc. and other lenders, increasing the facility
size from $25 million to $45 million and extending the term thereof to August 1, 2014. This Credit
Agreement is more fully discussed in Note 6, Credit Agreement, and Note 16, Subsequent Event, to
our consolidated financial statements included in our 2011 Form 10-K.
At December 31, 2011, there was $19.5 million outstanding under the Credit Agreement with an
average interest rate of 3.37 percent and we were in compliance with all covenants under the Credit
Agreement. As of July 2, 2011, there were no amounts outstanding under the Credit Agreement. At
December 31, 2011 and July 2, 2011, there were $0.1 million and $1.1 million, respectively, in
outstanding standby letters of credit secured under the Credit Agreement. These letters of credit
expire at various intervals through April 2014.
NOTE 8. POST-RETIREMENT BENEFITS
We have a pension plan covering employees of our Swiss subsidiary (the Swiss Plan). Net
periodic pension costs associated with our Swiss Plan for the three and six months ended December
31, 2011 and January 1, 2011 included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
(Thousands) |
|
Service cost |
|
$ |
613 |
|
|
$ |
436 |
|
|
$ |
1,241 |
|
|
$ |
855 |
|
Interest cost |
|
|
210 |
|
|
|
183 |
|
|
|
425 |
|
|
|
359 |
|
Expected return on plan assets |
|
|
(275 |
) |
|
|
(241 |
) |
|
|
(556 |
) |
|
|
(473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension costs |
|
$ |
548 |
|
|
$ |
378 |
|
|
$ |
1,110 |
|
|
$ |
741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended December 31, 2011, we contributed $0.3 million and $0.6
million, respectively, to our Swiss Plan. We currently anticipate contributing an additional $0.6
million to this pension plan during the remainder of fiscal year 2012.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Guarantees
We indemnify our directors and certain employees as permitted by law, and have entered into
indemnification agreements with our directors and executive officers. We have not recorded a
liability associated with these indemnification arrangements, as we historically have not incurred
any material costs associated with such indemnification
obligations. Costs associated with such indemnification obligations may be mitigated by
insurance coverage that we maintain, however, such insurance may not cover any, or may cover only a
portion of, the amounts we may be required to pay. In addition, we may not be able to maintain such
insurance coverage in the future.
We also have indemnification clauses in various contracts that we enter into in the normal
course of business, such as those issued by our bankers in favor of certain suppliers or
indemnification in favor of customers in respect of liabilities they may incur as a result of
purchasing our products should such products infringe the intellectual property rights of a third
party. We have not historically paid out any material amounts related to these indemnifications,
therefore, no accrual has been made for these indemnifications.
12
Warranty accrual
We accrue for the estimated costs to provide warranty services at the time revenue is
recognized. Our estimate of costs to service our warranty obligations is based on historical
experience and expectation of future conditions. To the extent we experience increased warranty
claim activity or increased costs associated with servicing those claims, our warranty costs would
increase, resulting in a decrease in gross profit.
The following table summarizes movements in the warranty accrual for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
(Thousands) |
|
Warranty provision beginning of period |
|
$ |
2,312 |
|
|
$ |
2,736 |
|
|
$ |
2,175 |
|
|
$ |
2,437 |
|
Warranties assumed in acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
357 |
|
Warranties issued |
|
|
621 |
|
|
|
444 |
|
|
|
1,298 |
|
|
|
876 |
|
Warranties utilized or expired |
|
|
(476 |
) |
|
|
(916 |
) |
|
|
(966 |
) |
|
|
(1,480 |
) |
Currency translation adjustment |
|
|
(27 |
) |
|
|
(23 |
) |
|
|
(77 |
) |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty provision end of period |
|
$ |
2,430 |
|
|
$ |
2,241 |
|
|
$ |
2,430 |
|
|
$ |
2,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation
On June 26, 2001, the first of a number of securities class actions was filed in the United
States District Court for the Southern District of New York against New Focus, Inc., now known as
Oclaro Photonics, Inc. (New Focus), certain of our officers and directors, and certain underwriters
for New Focus initial and secondary public offerings. A consolidated amended class action
complaint, captioned In re New Focus, Inc. Initial Public Offering Securities Litigation, No. 01
Civ. 5822, was filed on April 20, 2002. The complaint generally alleged that various underwriters
engaged in improper and undisclosed activities related to the allocation of shares in New Focus
initial public offering and sought unspecified damages for claims under the Exchange Act on behalf
of a purported class of purchasers of common stock from May 17, 2000 to December 6, 2000.
The lawsuit against New Focus was coordinated for pretrial proceedings with a number of other
pending litigations challenging underwriter practices in over 300 cases, as In re Initial Public
Offering Securities Litigation, 21 MC 92 (SAS), including actions against Bookham Technology plc,
now known as Oclaro Technology Ltd (Bookham Technology) and Avanex Corporation, now known as Oclaro
(North America), Inc. (Avanex), and certain of each entitys respective officers and directors, and
certain of the underwriters of their public offerings. In October 2002, the claims against the
directors and officers of New Focus, Bookham Technology and Avanex were dismissed, without
prejudice, subject to the directors and officers execution of tolling agreements.
The parties reached a global settlement of the litigation under which the insurers are funding
the full amount of the settlement share allocated to New Focus, Bookham Technology and Avanex, and
New Focus, Bookham Technology and Avanex bear no financial liability. New Focus, Bookham Technology
and Avanex, as well as the officer and director defendants who were previously dismissed from the
action pursuant to tolling agreements, receive complete dismissals from the case. The settlement
was approved by the Court in 2009 and during the second fiscal quarter of 2012 all remaining appeals
contesting the settlement were dismissed or withdrawn.
13
On December 6, 2010, a bankruptcy preferential transfer avoidance action was filed by Nortel
Networks Inc. (Nortel) et al. against Oclaro Technology Ltd. (formerly Bookham Technology Plc.) and
Oclaro (North America), Inc. (formerly Avanex Corporation) in the United States Bankruptcy Court
for the District of Delaware, Adversary Proceeding No. 10-55919-KG. The complaint alleges, among
other things, that Nortel Networks Inc., and/or its affiliated debtors in the Chapter 11 bankruptcy
cases also pending before the Delaware Bankruptcy Court (Jointly Administered Case No.
09-10138-KG), made at least $4,593,152 in preferential transfers to the defendants predecessors,
Bookham Technology Plc. and Avanex Corporation, in the 90 days prior to the commencement of the
Nortel Chapter 11 bankruptcy cases on January 14, 2009. Pursuant to a settlement agreement dated
October 6, 2011, Oclaro Technology Ltd. and Oclaro (North America), Inc. settled the
preference-related claims with Nortel Networks Inc. without any cash payment by Oclaro Technology
Ltd. or Oclaro (North America), Inc.. The settlement agreement was approved by the Delaware
Bankruptcy Court by an order dated November 28, 2011, and was dismissed by the plaintiff
voluntarily and with prejudice on December 14, 2011.
On May 19, 2011, Curtis and Charlotte Westley filed a purported class action complaint in the
United States District Court for the Northern District of California, against us and certain of our
officers and directors. The Court subsequently appointed the Connecticut Laborers Pension Fund
(Pension Fund) as lead plaintiff for the putative class. On October 27, 2011, the Pension Fund
filed an Amended Complaint, captioned as Westley v. Oclaro, Inc., No. 11 Civ. 2448 EMC, allegedly
on behalf of persons who purchased our common stock between May 6 and October 28, 2010, alleging
that defendants issued materially false and misleading statements during this time period regarding
our current business and financial condition, including projections for demand for our products, as
well as our revenues, earnings, and gross margins, for the first quarter of fiscal year 2011 as
well as the full fiscal year. The complaint alleges violations of section 10(b) of the Securities
Exchange Act and Securities and Exchange Commission Rule 10b-5, as well as section 20(a) of the
Securities Exchange Act. The complaint seeks damages and costs of an unspecified amount. On
December 12, 2011, defendants filed a motion to dismiss the complaint. That motion is scheduled to
be heard on March 23, 2012. Discovery has not commenced, and no trial has been scheduled in this
action. We intend to defend this litigation vigorously. We are unable at this time to estimate the
effects of these lawsuits on our financial position, results of operations or cash flows.
On June 10, 2011, a purported shareholder, Stanley Moskal, filed a purported derivative action
in the Superior Court for the State of California, County of Santa Clara, against us, as nominal
defendant, and certain of our current and former officers and directors, as defendants. The case is
styled Moskal v. Couder, No. 1:11 CV 202880 (Santa Clara County Super. Ct. filed June 10, 2011).
Four other purported shareholders, Matteo Guindani, Jermaine Coney, Jefferson Braman and Toby
Aguilar, separately filed substantially similar lawsuits in the United States District Court for
the Northern District of California on June 27, June 28, July 7 and July 26, 2011, respectively. By
Order dated September 14, 2011, the Guindani, Coney, and Braman actions were consolidated under In
re Oclaro, Inc. Derivative Litigation, Lead Case No. 11 Civ. 3176 EMC. On October
5, 2011, the Aguilar action was voluntarily dismissed. Each remaining purported derivative
complaint alleges that Oclaro has been, or will be, damaged by the actions alleged in the Westley
complaint, and the litigation of the Westley action, and any damages or settlement paid in the
Westley action. Each purported derivative complaint alleges counts for breaches of fiduciary duty,
waste, and unjust enrichment. Each purported derivative complaint seeks damages and costs of an
unspecified amount, as well as injunctive relief. By Order dated November 23, 2011, the parties in
the Moskal action agreed that defendants shall not be required to respond to the original
complaint, that plaintiff would serve an amended complaint no later than March 9, 2012, and the
stay of discovery would remain in effect until further order of the Court or agreement by the
parties. By Order dated November 29, 2011, the parties to In re Oclaro, Inc. Derivative Litigation
agreed to stay all proceedings, including motion practice and discovery, until such time as (a) the
defendants file an answer to any complaint in the Westley Action; or (b) the Westley Action is
dismissed in its entirety with prejudice. Discovery has not commenced, and no trial has been
scheduled in any of these actions. We are unable at this time to estimate the effects of these
lawsuits on our financial position, results of operations or cash flows.
14
NOTE 10. STOCKHOLDERS EQUITY
Comprehensive Income (Loss)
For the three and six months ended December 31, 2011 and January 1, 2011, comprehensive income
(loss) is primarily comprised of our net income (loss), changes in the unrealized gain (loss) on
currency instruments designated as cash flow hedges, unrealized loss on marketable securities and
currency translation adjustments. The components of comprehensive income (loss) were as follows for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
(Thousands) |
|
Net income (loss) |
|
$ |
(31,096 |
) |
|
$ |
(213 |
) |
|
|
(41,272 |
) |
|
$ |
143 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on currency
instruments designated as cash flow hedges |
|
|
13 |
|
|
|
(288 |
) |
|
|
(66 |
) |
|
|
35 |
|
Currency translation adjustments |
|
|
(2,682 |
) |
|
|
1,779 |
|
|
|
(7,168 |
) |
|
|
7,392 |
|
Unrealized loss on marketable securities |
|
|
(53 |
) |
|
|
|
|
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(33,818 |
) |
|
$ |
1,278 |
|
|
$ |
(48,567 |
) |
|
$ |
7,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
The following table summarizes activity relating to warrants to purchase our common stock for
the six months ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Warrants |
|
|
Average |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
|
(Thousands) |
|
|
|
|
Balance at July 2, 2011 |
|
|
1,398 |
|
|
$ |
16.18 |
|
Expired on September 1, 2011 |
|
|
(580 |
) |
|
|
20.00 |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
|
818 |
|
|
$ |
13.48 |
|
|
|
|
|
|
|
|
|
Common Stock
In December 2009, we acquired Xtellus, Inc. (Xtellus). As part of the consideration, we were
obligated to pay $7.0 million in consideration to the former Xtellus stockholders after an 18 month
escrow period. During the three months ended October 1, 2011, we settled the $7.0 million liability
with the former Xtellus stockholders by transferring approximately 0.9 million shares of common
stock held in escrow, valued at $7.0 million. The transfer of the shares resulted in a $7.0
million increase to our additional paid-in capital and a corresponding decrease to our accrued
expenses and other liabilities. The balance of 0.1 million shares of common stock held in escrow
were returned to us, retired and returned to the status of authorized but unissued common stock in
September 2011.
In connection with our July 2010 acquisition of Mintera, we paid $0.5 million in cash and issued
0.8 million shares of our common stock valued at $2.8 million to settle our 12 month earnout
obligation in October 2011. The transfer of the shares resulted in a $2.8
million increase to our additional paid-in capital and a corresponding decrease to our accrued
expenses and other liabilities.
Employee Stock Purchase Plan
On October 26, 2011, our 2011 Employee Stock Purchase Plan (ESPP) was approved by our stockholders.
Under the ESPP, we have reserved 1.7 million shares of our common stock for issuance. The ESPP will
be effective as of January 24, 2012.
15
NOTE 11. EMPLOYEE STOCK PLANS
We currently maintain the Amended and Restated 2004 Stock Incentive Plan (Plan). Under the
Plan, there are a total of 7.8 million shares of common stock authorized for issuance, with full
value awards being counted as 1.25 shares of common stock for purposes of the share limit. The Plan
expires in October 2020.
As of December 31, 2011, there were approximately 2.5 million shares of our common stock
available for grant under the Plan. We generally grant stock options that vest over a four year
service period, and restricted stock awards and units that vest over a one to four year service
period, and in certain cases each may vest earlier based upon the achievement of specific
performance-based objectives as set by our board of directors.
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. These PSUs will be earned through June 30, 2013 based upon the achievement of certain
revenue growth targets relative to certain comparable companies. Vesting is also contingent upon
service conditions being met through August 2015. If the performance conditions are not achieved,
then the corresponding PSUs will be forfeited in the first quarter of fiscal year 2014.
The following table summarizes the combined activity under all of our equity incentive plans
for the six months ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Weighted- |
|
|
Restricted Stock |
|
|
Weighted- |
|
|
|
Available |
|
|
Options |
|
|
Average |
|
|
Awards / Units |
|
|
Average Grant |
|
|
|
For Grant |
|
|
Outstanding |
|
|
Exercise Price |
|
|
Outstanding |
|
|
Date Fair Value |
|
|
|
(Thousands) |
|
|
(Thousands) |
|
|
|
|
|
(Thousands) |
|
|
|
|
Balances at July 2, 2011 |
|
|
3,727 |
|
|
|
3,350 |
|
|
$ |
9.38 |
|
|
|
799 |
|
|
$ |
10.15 |
|
Granted |
|
|
(1,114 |
) |
|
|
450 |
|
|
|
4.19 |
|
|
|
531 |
|
|
|
4.20 |
|
Granted performance stock |
|
|
(250 |
) |
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
4.33 |
|
Exercised or released |
|
|
|
|
|
|
(31 |
) |
|
|
2.24 |
|
|
|
(311 |
) |
|
|
9.04 |
|
Cancelled or forfeited |
|
|
132 |
|
|
|
(247 |
) |
|
|
21.46 |
|
|
|
(103 |
) |
|
|
7.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2011 |
|
|
2,495 |
|
|
|
3,522 |
|
|
$ |
8.26 |
|
|
|
1,116 |
|
|
$ |
6.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure information about our stock options outstanding as of December 31,
2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Value |
|
|
|
(Thousands) |
|
|
|
|
|
(Years) |
|
|
(Thousands) |
|
Options exercisable at December 31, 2011 |
|
|
1,917 |
|
|
$ |
9.44 |
|
|
|
6.9 |
|
|
$ |
367 |
|
Options outstanding at December 31, 2011 |
|
|
3,522 |
|
|
$ |
8.26 |
|
|
|
7.6 |
|
|
$ |
471 |
|
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 $2.82 on December 30, 2011, which would have been
received by the option holders had all option holders exercised their options as of that date.
There were approximately 0.2 million shares of common stock subject to in-the-money options which
were exercisable as of December 31, 2011. We settle employee stock option exercises with newly
issued shares of common stock.
16
NOTE 12. STOCK-BASED COMPENSATION
We recognize compensation expense in our statement of operations related to all share-based awards,
including grants of stock options, based on the grant date fair value of such share-based awards.
Estimating the grant date fair
value of such share-based awards requires us to make judgments in the determination of inputs
into the Black-Scholes stock option pricing model which we use to arrive at an estimate of the
grant date fair value for such awards. The assumptions used in this model to value stock option
grants for the three and six months ended December 31, 2011 and January 1, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
Expected life |
|
4.8 years |
|
4.5 years |
|
4.8 years |
|
4.5 years |
Risk-free interest rate |
|
|
1.1 |
% |
|
|
1.0 |
% |
|
|
1.0 |
% |
|
|
1.2 |
% |
Volatility |
|
|
89.6 |
% |
|
|
97.2 |
% |
|
|
92.2 |
% |
|
|
96.7 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts included in cost of revenues and operating expenses for stock-based compensation
for the three and six months ended December 31, 2011 and January 1, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
(Thousands) |
|
Stock-based compensation by category of expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
$ |
388 |
|
|
$ |
350 |
|
|
$ |
697 |
|
|
$ |
660 |
|
Research and development |
|
|
374 |
|
|
|
391 |
|
|
|
741 |
|
|
|
709 |
|
Selling, general and administrative |
|
|
913 |
|
|
|
933 |
|
|
|
1,820 |
|
|
|
1,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,675 |
|
|
$ |
1,674 |
|
|
$ |
3,258 |
|
|
$ |
3,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation by type of award: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
$ |
869 |
|
|
$ |
907 |
|
|
$ |
1,753 |
|
|
$ |
1,670 |
|
Restricted stock awards |
|
|
824 |
|
|
|
828 |
|
|
|
1,612 |
|
|
|
1,470 |
|
Inventory adjustment to cost of revenues |
|
|
(18 |
) |
|
|
(61 |
) |
|
|
(107 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,675 |
|
|
$ |
1,674 |
|
|
$ |
3,258 |
|
|
$ |
3,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011 and July 2, 2011, 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 six months ended December 31, 2011 is
approximately $0.1 million and $0.1 million, respectively, in compensation cost related to the issuance
of PSUs. As of December 31, 2011, we have determined that the achievement of the performance
conditions associated with the PSUs is probable at 100 percent of the target level. The amount of
stock-based compensation expense recognized in any one period can vary based on the achievement or
anticipated achievement of the performance conditions. If the performance conditions are not met or
not expected to 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.
17
NOTE 13. INCOME TAXES
For the three and six months ended December 31, 2011, our income tax provisions of $0.7
million and $2.0 million, respectively, primarily related to our foreign operations. For the three
and six months ended January 1, 2011, our income tax provisions of $0.3 million and $0.8 million,
respectively, primarily related to income taxes on our operations in Italy and China.
The total amount of our unrecognized tax benefits as of December 31, 2011 and July 2, 2011
were approximately $7.0 million. For the three and six months ended December 31, 2011, we had $1.9
million in unrecognized tax benefits that, if recognized, would affect our effective tax rate. We
are currently under tax audit in France and the United States. We believe that an adequate
provision has been made for any adjustments that may result from tax audits. However, the outcome
of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are
resolved in a manner not consistent with our expectations, we could be required to adjust our
income tax provision in the period such resolution occurs. Although timing of the resolution and/or
closure of audits is not certain, we do not believe it is reasonably possible that our unrecognized
tax benefits will materially change in the next 12 months.
NOTE 14. NET INCOME (LOSS) PER SHARE
The following table presents the calculation of basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
(Thousands, except per share amounts) |
|
Net income (loss) |
|
$ |
(31,096 |
) |
|
$ |
(213 |
) |
|
$ |
(41,272 |
) |
|
$ |
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares basic |
|
|
50,492 |
|
|
|
48,262 |
|
|
|
49,970 |
|
|
|
48,189 |
|
Effect of dilutive potential common shares from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,615 |
|
Restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
773 |
|
Obligations under escrow agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted |
|
|
50,492 |
|
|
|
48,262 |
|
|
|
49,970 |
|
|
|
51,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.62 |
) |
|
$ |
|
|
|
$ |
(0.83 |
) |
|
$ |
|
|
Diluted net income (loss) per share |
|
$ |
(0.62 |
) |
|
$ |
|
|
|
$ |
(0.83 |
) |
|
$ |
|
|
Basic net income (loss) per share is computed using only the weighted-average number of shares
of common stock outstanding for the applicable period, while diluted net income (loss) per share is
computed assuming conversion of all potentially dilutive
securities, such as stock options, unvested restricted stock awards, warrants and obligations
under escrow agreements during such period.
For the three and six months ended December 31, 2011, we excluded 5.4 million and 4.8 million,
respectively, of outstanding stock options, warrants and restricted stock units from the
calculation of diluted net income per share because their effect would have been anti-dilutive. For
the three and six months ended January 1, 2011, we excluded 5.1 million and 1.9 million,
respectively, of outstanding stock options, warrants and restricted stock units from the
calculation of diluted net income per share because their effect would have been anti-dilutive.
18
NOTE 15. GEOGRAPHIC 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 31, |
|
|
January 1, |
|
|
December 31, |
|
|
January 1, |
|
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
2011 |
|
|
|
(Thousands) |
|
United States |
|
$ |
15,953 |
|
|
$ |
17,892 |
|
|
$ |
32,855 |
|
|
$ |
37,556 |
|
Canada |
|
|
1,735 |
|
|
|
2,783 |
|
|
|
7,644 |
|
|
|
6,184 |
|
Europe |
|
|
21,894 |
|
|
|
34,859 |
|
|
|
48,188 |
|
|
|
70,283 |
|
Asia |
|
|
43,548 |
|
|
|
56,333 |
|
|
|
92,854 |
|
|
|
110,662 |
|
Rest of world |
|
|
3,358 |
|
|
|
8,432 |
|
|
|
10,768 |
|
|
|
16,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,488 |
|
|
$ |
120,299 |
|
|
$ |
192,309 |
|
|
$ |
241,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Customers and Concentration of Credit Risk
For the three months ended December 31, 2011, Fujitsu Limited (Fujitsu) accounted for 14
percent, Infinera Corporation (Infinera) accounted for 11 percent and Ciena Corporation (Ciena)
accounted for 10 percent of our revenues. For the six months ended December 31, 2011, Fujitsu
accounted for 12 percent and Huawei Technologies Co., Ltd. (Huawei) accounted for 11 percent of our
revenues.
For the three months ended January 1, 2011, Huawei accounted for 17 percent, Ciena accounted
for 12 percent and Alcatel-Lucent accounted for 11 percent of our revenues. For the six months
ended January 1, 2011, Huawei accounted for 16 percent, Alcatel-Lucent accounted for 12 percent and
Ciena accounted for 10 percent of our revenues.
As of December 31, 2011, Infinera accounted for 12 percent and Huawei accounted for 10 percent
of our accounts receivable. As of July 2, 2011, no customer accounted for 10 percent or more of
our accounts receivable.
NOTE 16. SUBSEQUENT EVENTS
On February 2, 2012, we received a $6.4 million advance payment from one of our insurers
relating to losses we incurred due to the flooding in Thailand. This payment is a general advance
from our insurer against all Thailand flood-related claims and was not specifically identified as
reimbursement for any particular loss or claim. We have not included any portion of this advance
payment in our condensed consolidated statements of operations for the three and six months ended
December 31, 2011 as we are unable to identify whether any portion of the amount received related
to losses or expenses which
were recognized in flood-related expense for the three and six months ended December 31, 2011.
ITEM 2. MANAGEMENTS 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 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
managements beliefs
19
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) the impact to our operations and financial condition attributable to the flooding in
Thailand and our ability to obtain insurance recoveries for claims related to such flooding, (ii)
our inability to enter into strategic relationships with contract manufacturers, (iii) the impact
of continued uncertainty in world financial markets and any resulting or other reduction in demand
for our products, (iv) our ability to maintain our gross margin, (v) our ability to respond to
evolving technologies and customer requirements, (vi) our ability to develop and commercialize new
products in a timely manner, (vii) our ability to protect our intellectual property rights and the
resolution of allegations that we infringe the intellectual property rights of others, (viii) our
dependence on a limited number of customers for a significant percentage of our revenues, (ix) our
ability to effectively compete with companies that have greater name recognition, broader customer
relationships and substantially greater financial, technical and marketing resources than we do,
(x) the effect of fluctuating product mix, currency prices and consumer demand on our financial
results, (xi) our performance following the closing of acquisitions, (xii) our potential inability
to realize the expected benefits and synergies from our acquisitions, (xiii) increased costs
related to downsizing and compliance with regulatory requirements in connection with such
downsizing, (xiv) the impact of events beyond our control such as natural disasters, including
additional information that will become available in the future regarding the impact of the
flooding in Thailand on our results of operations, and political unrest, (xv) the outcome of our
currently pending litigation and future litigation that may be brought by or against us, (xvi) our
ability to increase our cash reserves and the potential lack of availability of credit or
opportunity for equity-based financing on terms acceptable to us and (xvii) the risks associated
with our international operations. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity, performance or
achievements. Moreover, we assume no obligation to update forward-looking statements or update the
reasons actual results could differ materially from those anticipated in forward-looking
statements. 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 Managements 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.
OVERVIEW
We are a leading provider of high-performance core optical network components, modules and
subsystems to global telecommunications (telecom) equipment manufacturers. We leverage our
proprietary core technologies and vertically integrated product development to provide our
customers with cost-effective and innovative optical solutions in metro and long-haul network
applications. Increasingly, we have new
opportunities with customers who are managing and building out wide area networks with certain
characteristics common to telecom networks. In addition, we utilize our optical expertise to
address new and emerging optical product opportunities in selective non-telecom markets, such as
materials processing, consumer, medical, industrial, printing and biotechnology. In all markets,
our approach is to offer a differentiated solution that is designed to make it easier for our
customers to do business by combining optical technology innovation, photonic integration, and a
vertically integrated approach to manufacturing and product development.
RECENT DEVELOPMENTS
We continue to be in negotiations to transition our Shenzhen assembly and test operations to a
major contract manufacturer and we expect this could generate $30 million to $40 million in net
cash proceeds in our third or fourth fiscal quarters of 2012, with potential additional
consideration to be received in the future, and would include a long term supply agreement with the
contract manufacturer. No guarantee can be provided that such transactions will occur, the supply
agreement will result in the benefits that we expect or that the transactions will result in us
receiving the anticipated cash proceeds and the timing of receipt of such proceeds.
20
We are continuing to evaluate the broader supply chain implications of the flooding in
Thailand across our entire manufacturing operations. Although our management cannot fully quantify
the possible impact of the flooding in Thailand on our business, the supply disruption materially
and adversely impacted our results of operations, including our revenue, for the second fiscal
quarter of 2012, and will materially and adversely affect our results of operations, including our
revenue, for at least the next two fiscal quarters. While we believe our insurance coverage, both
property and business interruption, will mitigate a portion of the adverse impact, there can be no
assurance as to the amount or timing of insurance recoveries.
RESULTS OF OPERATIONS
The
following tables set forth our condensed consolidated results of
operations for the three and six month periods indicated, along with amounts expressed as a percentage of revenues, and comparative
information regarding the absolute and percentage changes in these amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Increase |
|
|
|
December 31, 2011 |
|
|
January 1, 2011 |
|
|
Change |
|
|
(Decrease) |
|
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
Revenues |
|
$ |
86,488 |
|
|
|
100.0 |
|
|
$ |
120,299 |
|
|
|
100.0 |
|
|
$ |
(33,811 |
) |
|
|
(28.1 |
) |
Cost of revenues |
|
|
75,613 |
|
|
|
87.4 |
|
|
|
84,556 |
|
|
|
70.3 |
|
|
|
(8,943 |
) |
|
|
(10.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
10,875 |
|
|
|
12.6 |
|
|
|
35,743 |
|
|
|
29.7 |
|
|
|
(24,868 |
) |
|
|
(69.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
17,024 |
|
|
|
19.7 |
|
|
|
15,696 |
|
|
|
13.0 |
|
|
|
1,328 |
|
|
|
8.5 |
|
Selling, general and administrative |
|
|
14,425 |
|
|
|
16.7 |
|
|
|
15,149 |
|
|
|
12.6 |
|
|
|
(724 |
) |
|
|
(4.8 |
) |
Amortization of intangible assets |
|
|
723 |
|
|
|
0.9 |
|
|
|
739 |
|
|
|
0.6 |
|
|
|
(16 |
) |
|
|
(2.2 |
) |
Restructuring, acquisition and
related costs |
|
|
3,219 |
|
|
|
3.7 |
|
|
|
903 |
|
|
|
0.8 |
|
|
|
2,316 |
|
|
|
256.5 |
|
Flood-related expense |
|
|
9,088 |
|
|
|
10.5 |
|
|
|
|
|
|
|
|
|
|
|
9,088 |
|
|
|
n/m |
(1) |
Legal settlements |
|
|
|
|
|
|
|
|
|
|
1,678 |
|
|
|
1.4 |
|
|
|
(1,678 |
) |
|
|
(100.0 |
) |
Gain (loss) on sale of property and
equipment |
|
|
37 |
|
|
|
|
|
|
|
(48 |
) |
|
|
|
|
|
|
85 |
|
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
44,516 |
|
|
|
51.5 |
|
|
|
34,117 |
|
|
|
28.4 |
|
|
|
10,399 |
|
|
|
30.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(33,641 |
) |
|
|
(38.9 |
) |
|
|
1,626 |
|
|
|
1.3 |
|
|
|
(35,267 |
) |
|
|
n/m |
(1) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
(245 |
) |
|
|
(0.3 |
) |
|
|
(470 |
) |
|
|
(0.4 |
) |
|
|
225 |
|
|
|
(47.9 |
) |
Gain (loss) on foreign currency
translation |
|
|
1,298 |
|
|
|
1.5 |
|
|
|
(1,119 |
) |
|
|
(0.9 |
) |
|
|
2,417 |
|
|
|
n/m |
(1) |
Other income |
|
|
2,238 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
2,238 |
|
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
3,291 |
|
|
|
3.8 |
|
|
|
(1,589 |
) |
|
|
(1.3 |
) |
|
|
4,880 |
|
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
(30,350 |
) |
|
|
(35.1 |
) |
|
|
37 |
|
|
|
|
|
|
|
(30,387 |
) |
|
|
n/m |
(1) |
Income tax provision |
|
|
746 |
|
|
|
0.9 |
|
|
|
250 |
|
|
|
0.2 |
|
|
|
496 |
|
|
|
198.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(31,096 |
) |
|
|
(36.0 |
) |
|
$ |
(213 |
) |
|
|
(0.2 |
) |
|
$ |
(30,883 |
) |
|
|
14,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
Increase |
|
|
|
December 31, 2011 |
|
|
January 1, 2011 |
|
|
Change |
|
|
(Decrease) |
|
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
Revenues |
|
$ |
192,309 |
|
|
|
100.0 |
|
|
$ |
241,646 |
|
|
|
100.0 |
|
|
$ |
(49,337 |
) |
|
|
(20.4 |
) |
Cost of revenues |
|
|
157,401 |
|
|
|
81.8 |
|
|
|
171,077 |
|
|
|
70.8 |
|
|
|
(13,676 |
) |
|
|
(8.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
34,908 |
|
|
|
18.2 |
|
|
|
70,569 |
|
|
|
29.2 |
|
|
|
(35,661 |
) |
|
|
(50.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
34,691 |
|
|
|
18.0 |
|
|
|
29,407 |
|
|
|
12.2 |
|
|
|
5,284 |
|
|
|
18.0 |
|
Selling, general and administrative |
|
|
31,959 |
|
|
|
16.6 |
|
|
|
29,962 |
|
|
|
12.4 |
|
|
|
1,997 |
|
|
|
6.7 |
|
Amortization of intangible assets |
|
|
1,449 |
|
|
|
0.8 |
|
|
|
1,358 |
|
|
|
0.5 |
|
|
|
91 |
|
|
|
6.7 |
|
Restructuring, acquisition and
related costs |
|
|
1,454 |
|
|
|
0.8 |
|
|
|
1,573 |
|
|
|
0.6 |
|
|
|
(119 |
) |
|
|
(7.6 |
) |
Flood-related expense |
|
|
9,088 |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
9,088 |
|
|
|
n/m |
(1) |
Legal settlements |
|
|
|
|
|
|
|
|
|
|
1,678 |
|
|
|
0.7 |
|
|
|
(1,678 |
) |
|
|
(100.0 |
) |
Gain (loss) on sale of property and
equipment |
|
|
97 |
|
|
|
0.1 |
|
|
|
(69 |
) |
|
|
|
|
|
|
166 |
|
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
78,738 |
|
|
|
41.0 |
|
|
|
63,909 |
|
|
|
26.4 |
|
|
|
14,829 |
|
|
|
23.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(43,830 |
) |
|
|
(22.8 |
) |
|
|
6,660 |
|
|
|
2.8 |
|
|
|
(50,490 |
) |
|
|
n/m |
(1) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
(402 |
) |
|
|
(0.2 |
) |
|
|
(1,036 |
) |
|
|
(0.4 |
) |
|
|
634 |
|
|
|
(61.2 |
) |
Gain (loss) on foreign currency
translation |
|
|
2,690 |
|
|
|
1.4 |
|
|
|
(4,706 |
) |
|
|
(2.0 |
) |
|
|
7,396 |
|
|
|
n/m |
(1) |
Other income |
|
|
2,238 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
2,238 |
|
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
4,526 |
|
|
|
2.3 |
|
|
|
(5,742 |
) |
|
|
(2.4 |
) |
|
|
10,268 |
|
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes |
|
|
(39,304 |
) |
|
|
(20.5 |
) |
|
|
918 |
|
|
|
0.4 |
|
|
|
(40,222 |
) |
|
|
n/m |
(1) |
Income tax provision |
|
|
1,968 |
|
|
|
1.0 |
|
|
|
775 |
|
|
|
0.3 |
|
|
|
1,193 |
|
|
|
153.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(41,272 |
) |
|
|
(21.5 |
) |
|
$ |
143 |
|
|
|
0.1 |
|
|
$ |
(41,415 |
) |
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues for the three months ended December 31, 2011 decreased by $33.8 million, or 28
percent, compared with the three months ended January 1, 2011. The decrease was primarily due to
the disruption in our business caused by the flooding of our contract manufacturer in Thailand
which resulted in the suspension of the manufacturing of a significant number of our products,
coupled with a decrease in demand in our telecommunications related markets, largely associated
with uncertain global macroeconomic conditions. We expect our revenues to continue to be adversely
affected by the flooding in Thailand for at least the next two fiscal quarters.
For the three months ended December 31, 2011, Fujitsu Limited (Fujitsu) accounted for $12.4
million, or 14 percent, Infinera Corporation (Infinera) accounted for $9.1 million, or 11 percent,
and Ciena Corporation (Ciena) accounted for $8.3 million, or 10 percent, of our revenues. For the
three months ended January 1, 2011, Huawei Technologies Co., Ltd. (Huawei) accounted for $20.9
million, or 17 percent, Ciena accounted for $14.7 million, or 12 percent, and Alcatel-Lucent
accounted for $13.5 million, or 11 percent, of our revenues.
Revenues for the six months ended December 31, 2011 decreased by $49.3 million, or 20 percent,
compared with the six months ended January 1, 2011. The decrease was largely due to the disruption
in our business caused by the flooding of our contract manufacturer in Thailand which resulted in
the suspension of the manufacturing of a significant number of our products and a decrease in
demand in our telecommunications related markets, largely associated with uncertain global
macroeconomic conditions.
22
For the six months ended December 31, 2011, Fujitsu accounted for $23.8 million, or 12
percent, and Huawei accounted for $21.0 million, or 11 percent, of our revenues. For the six months
ended January 1, 2011, Huawei accounted for $39.1 million, or 16 percent, Alcatel-Lucent accounted
for $29.5 million, or 12 percent, and Ciena accounted for $25.0 million, or 10 percent, of our
revenues.
Cost of Revenues
Our cost of revenues for the three months ended December 31, 2011 decreased by $8.9 million,
or 11 percent, compared with the three months ended January 1, 2011. The decrease was primarily
related to reduced costs associated with lower volumes of revenue attributable to lower product
sales. Our cost of revenues for the six months ended December 31, 2011 decreased by $13.7 million,
or 8 percent, compared with the six months ended January 1, 2011. The decrease was primarily
related to reduced costs associated with lower volumes of revenue attributable to lower product
sales. As part of our Thailand flood recovery efforts, certain of our manufacturing employees were
redirected to efforts to restore our production capacity. For the three and six months ended
December 31, 2011, costs of revenues were $0.5 million lower than they would have been otherwise as
these flood recovery costs have been included in flood-related expense.
Gross Profit
Gross profit is calculated as revenues less cost of revenues. Gross margin rate is gross
profit reflected as a percentage of revenues.
Our gross margin rate decreased to 13 percent for the three months ended December 31, 2011,
compared with 30 percent for the three months ended January 1, 2011. The decrease in gross margin
rate was primarily related to the impact of our fixed costs on lower revenues, and correspondingly
lower production volumes, caused by the disruption in our business from the flooding in Thailand.
While we experienced a significant decline in sales of our products, many of our costs are fixed
and did not decline with our revenue. Our gross profit was also unfavorably impacted by
approximately $0.5 million as a result of the U.K. pound sterling and the Swiss franc strengthening
relative to the U.S. dollar. As part of our Thailand flood recovery efforts, certain of our
manufacturing employees were redirected to efforts to restore our production capacity. For the
three and six months ended December 31, 2011, gross profit was $0.5 million higher than it would
have been otherwise as these flood recovery costs have been included in flood-related expense.
Our gross margin rate decreased to 18 percent for the six months ended December 31, 2011,
compared with 29 percent for the six months ended January 1, 2011. The decrease in gross margin
rate was primarily due to the impact of our fixed costs on lower revenues, and correspondingly
lower production volumes, which is a result of the disruption in our business from the flooding in
Thailand, coupled with a lower mix of relatively higher margin 10 Gbps transmission products and a
higher mix of less mature 40 Gbps transmission products that are not yet margin optimized. While we
experienced a significant decline in sales of our products, many of our costs are fixed and did not
decline with our revenue. Our gross profit was also unfavorably impacted by approximately $1.4
million as a result of the Swiss franc strengthening relative to the U.S. dollar and the U.K. pound
sterling weakening relative to the U.S. dollar.
Research and Development Expenses
Research and development expenses increased by $1.3 million, or 9 percent, for the three
months ended December 31, 2011, compared with the three months ended January 1, 2011. The increase
was primarily due to increased investment in research and development resources, primarily
personnel-related. Personnel-related costs increased to $9.8 million for the three months ended
December 31, 2011, compared with $8.8 million for the three months ended January 1, 2011. Other
costs, including the costs of design tools and facilities-related costs increased to $7.2 million
for the three months ended December 31, 2011, compared with $6.9 million for the three months ended
January 1, 2011. As part of our Thailand flood recovery efforts, certain of our research and
development employees were redirected to efforts to restore our production capacity. For the three
and six months ended December 31, 2011, research and development expenses were $0.6 million lower
than they would have been otherwise as these flood recovery costs have been included in
flood-related expense.
23
Research and development expenses increased by $5.3 million, or 18 percent, for the six months
ended December 31, 2011, compared with the six months ended January 1, 2011. The increase was
primarily due to increased investment in research and development resources, primarily
personnel-related. Personnel-related costs increased to $20.3 million for the six months ended
December 31, 2011, compared with $17.1 million for the six months ended January 1, 2011. Other
costs, including engineering materials, the costs of design tools and facilities-related costs
increased to $14.4 million for the six months ended December 31, 2011, compared with $12.3 million
for the six months ended January 1, 2011. Research and development expenses were unfavorably
impacted by approximately $0.7 million as a result of the U.K. pound sterling and Swiss franc
strengthening relative to the U.S. dollar.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $0.7 million, or 5 percent, for the
three months ended December 31, 2011, compared with the three months ended January 1, 2011.
Personnel-related costs increased to $9.3 million for the three months ended December 31, 2011,
compared with $8.3 million for the three months ended January 1, 2011. Other costs, including legal
and professional fees, facilities expenses and other miscellaneous expenses, decreased to $5.1
million for the three months ended December 31, 2011, compared with $6.8 million for the three
months ended January 1, 2011.
Selling, general and administrative expenses increased by $2.0 million, or 7 percent, for the
six months ended December 31, 2011, compared with the six months ended January 1, 2011.
Personnel-related costs increased to $19.4 million for the six months ended December 31, 2011,
compared with $16.2 million for the six months ended January 1, 2011. Other costs, including legal
and professional fees, facilities expenses and other miscellaneous expenses, decreased to $12.6
million for the six months ended December 31, 2011, compared with $13.8 million for the six months
ended January 1, 2011. Selling, general and administrative expenses were unfavorably impacted by
approximately $0.6 million as a result of the U.K. pound sterling and Swiss franc strengthening
relative to the U.S. dollar.
Restructuring, Acquisition and Related Costs
During the three months ended December 31, 2011 and January 1, 2011, we accrued $0.5 million
and $0.4 million, respectively, in employee separation costs related to ongoing restructuring
plans. During the three months ended December 31, 2011 and January 1, 2011, we also incurred $1.8
million and $0.6 million, respectively, in external consulting charges associated with the next
phase of our optimization of past acquisitions as we focus on the associated infrastructure and
processes required to support sustainable growth, including, for the three months ended December
31, 2011, external costs associated with potential transactions to outsource our Shenzhen
manufacturing operations.
During the three months ended December 31, 2011, we reviewed the fair value of certain
remaining earnout obligations arising from the acquisition of Mintera Corporation (Mintera) and
determined that their fair value increased by $0.9 million based on revised estimates of revenues
from Mintera products. This $0.9 million increase in fair value was recorded as an increase in
restructuring, acquisition and related expenses in the three months ended December 31, 2011.
During each of the six months ended December 31, 2011 and January 1, 2011, we accrued $1.1
million in employee separation costs related to ongoing restructuring plans. We also incurred $2.9
million and $0.6 million of expenses during the six months ended December 31, 2011 and January 1,
2011, respectively, in external consulting charges associated with the next phase of our
optimization of past acquisitions as we focus on the associated infrastructure and processes
required to support sustainable growth, including, for the six months ended December 31, 2011,
external costs associated with potential transactions to outsource of Shenzhen manufacturing
operations.
During the six months ended December 31, 2011, we reviewed the fair value of certain remaining
earnout obligations arising from the acquisition of Mintera and determined that their fair value
decreased by $2.9 million based on revised estimates of revenues from Mintera products. This $2.9
million decrease in fair value was recorded as a decrease in restructuring, acquisition and related
expenses during the six months ended December 31, 2011.
24
Flood-Related Expense
In October 2011, certain areas in Thailand suffered major flooding as a result of monsoons.
This flooding had a material impact on our business and results of operations. Our primary contract
manufacturer, Fabrinet, suspended operations at two factories located in Chokchai, Thailand and
Pinehurst, Thailand. The Chokchai factory suffered extensive flood damage and became inaccessible
due to high water levels inside and surrounding the manufacturing facility. As a result of this
flooding, we experienced a significant decline in products sales and we incurred significant damage
to our inventory and property and equipment located at the Chokchai facility. During the three
months ended December 31, 2011, we recorded impairment charges of $4.2 million related to the
write-off of the net book value of damaged inventory and $3.0 million related to the write-off of
the net book value of property and equipment based on our preliminary estimates of the damage
caused by the flooding. These impairment charges are recorded within the operating expense caption
flood-related expense in our condensed consolidated statement of operations for the three and six
months ended December 31, 2011. Flood-related expense for the three and six months ended December
31, 2011 also includes $1.9 million in personnel-related costs, professional fees and related
expenses incurred in connection with our recovery efforts. We continue to evaluate our preliminary
estimates of flood-related losses, and in future quarters we may record additional losses for
damaged equipment and inventory.
Legal Settlements
Legal settlements expense of $1.7 million during the three and six months ended January 1,
2011 includes amounts reserved in connection with a legal settlement with QinetiQ Limited and in
connection with other legal settlements and related legal costs.
Other Income (Expense)
Other income (expense) for the three months ended December 31, 2011 increased by $4.9 million
compared with the three months ended January 1, 2011. This increase was primarily due to a $2.2
million gain on the sale of a minority equity investment in a private company in the second quarter
of 2012 and a $2.4 million increase in foreign exchange gains from the re-measurement of short term
receivables and payables among certain of our wholly-owned international subsidiaries for
fluctuations in the U.S. dollar relative to our other local functional currencies during the
corresponding periods.
Other income (expense) for the six months ended December 31, 2011 increased by $10.3 million
compared with the six months ended January 1, 2011. This increase was primarily due to a $2.2
million gain on the sale of a minority equity investment in a private company in the second quarter
of 2012 and a $7.4 million increase in foreign exchange gains from the re-measurement of short term
receivables and payables among certain of our wholly-owned international subsidiaries for
fluctuations in the U.S. dollar relative to our other local functional currencies during the
corresponding periods.
Income Tax Provision
For the three months ended December 31, 2011, our income tax provision of $0.7 million
primarily related to our foreign operations. For the three months ended January 1, 2011, our income
tax provision of $0.3 million primarily related to income taxes on our operations in Italy and
China.
For the six months ended December 31, 2011, our income tax provision of $2.0 million primarily
related to our foreign operations. For the six months ended January 1, 2011, our income tax
provision of $0.8 million primarily related to income taxes on our operations in Italy and China.
Recent Accounting Pronouncements
See Note 1, Basis of Preparation, to our condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q for information regarding the effect of new
accounting pronouncements on our financial statements.
25
Application of Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based on
our condensed consolidated financial statements contained elsewhere in this Quarterly Report on
Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in
the United States (U.S. GAAP). The preparation of our financial statements requires us to make
estimates and judgments that affect our reported assets and liabilities, revenues and expenses and
other financial information. Actual results may differ significantly from those based on our
estimates and judgments or could be materially different if we used different assumptions,
estimates or conditions. In addition, our financial condition and results of operations could vary
due to a change in the application of a particular accounting standard.
We identified our critical accounting policies in our Annual Report on Form 10-K for the year
ended July 2, 2011 (2011 Form 10-K) related to revenue recognition and sales returns, inventory
valuation, business combinations, impairment of goodwill and other intangible assets, accounting
for stock-based compensation and income taxes. It is important that the discussion of our operating
results be read in conjunction with the critical accounting policies discussed in our 2011 Form
10-K.
Based on the adverse effects the flooding in Thailand has had on our business and the
potential for significant insurance recoveries, we have designated our accounting policy for
insurance recoveries as a critical accounting policy beginning in the three months ended December
31, 2011.
Insurance Recoveries
Insurance recoveries related to impairment losses previously recorded and other recoverable
expenses will be recognized up to the amount of the related loss or expense in the period that
recoveries become realizable. Insurance recoveries under business interruption coverage and
insurance recovery gains in excess of amounts previously written off related to impaired inventory
and equipment or in excess of other recoverable expenses previously recognized will be recognized
when they become realizable and all contingencies have been resolved. The evaluation of insurance
recoveries requires estimates and judgments about future results which affect reported amounts and
certain disclosures. Actual results could differ from those estimates. Insurance recoveries we
receive in future periods will be recorded net of flood-related expense in the condensed
consolidated statement of operations. As of December 31, 2011, we have not received any insurance
recoveries, nor have we recorded any amounts relating to potential future insurance recoveries in
the condensed consolidated statement of operations.
Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash used by operating activities for the six months ended December 31, 2011 was $20.7
million, primarily resulting from a net loss of $41.3 million, partially offset by $16.2 million of
non-cash adjustments and a $4.4 million increase in cash due to changes in operating assets and
liabilities. The $16.2 million of non-cash adjustments was primarily comprised of $11.2 million of
expense related to depreciation and amortization, $7.2 million related to our non-cash
flood-related impairments and $3.3 million of expense related to stock-based compensation,
partially offset by $2.9 million due to the revaluation of the Mintera earnout liability, $2.2
million gain on the sale of investments and $0.5 million from the amortization of deferred gain
from a sales-leaseback transaction. The $4.4 million increase in cash due to changes in operating
assets and liabilities was primarily comprised of a $20.1 million decrease in accounts receivable,
an $11.7 million decrease in inventory, a $0.3 million decrease in prepaid expenses and other
current assets, partially offset by a $25.9 million decrease in accounts payable and a $1.8 million
decrease in accrued expenses and other liabilities.
26
Although our management cannot yet definitively quantify the total impacts of the flooding in
Thailand on our business, it is likely that the supply disruption will materially and adversely
affect our results of operations, including our revenue, for at least the next two fiscal quarters.
There is no assurance that the adverse impact will be limited to the next two fiscal quarters.
While we believe our insurance coverage, both property and business interruption, will mitigate a
portion of the adverse impact, there can be no assurance as to the amount or timing of insurance
recoveries.
Net cash used by operating activities for the six months ended January 1, 2011 was $7.3
million, primarily resulting from an $18.0 million decrease in cash due to changes in operating
assets and liabilities, partially offset by net income of $0.1 million and non-cash adjustments of
$10.6 million. The $18.0 million decrease in cash due to changes in operating assets and
liabilities was comprised of a $14.5 million increase in inventory, a $6.1 million increase in
accounts receivable, a $5.3 million decrease in accrued expenses and other liabilities and a $0.2
million increase in prepaid expense and other current assets, partially offset by cash generated
from an $8.0 million increase in accounts payable and a $0.1 million decrease in other non-current
assets. The $10.6 million of non-cash adjustments was primarily comprised of $8.1 million of
expense related to depreciation and amortization and $3.0 million of expense related to stock-based
compensation, partially offset by $0.5 million from the amortization of deferred gain from a
sales-leaseback transaction.
Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended December 31, 2011 was $5.6
million, primarily consisting of $9.0 million used in capital expenditures and a $0.1 million
increase in restricted cash related to contractual commitments, partially offset by $3.4 million in
proceeds from the sale of an investment.
Net cash used in investing activities for the six months ended January 1, 2011 was $25.4
million, primarily consisting of $10.5 million used in the acquisition of Mintera and $18.7 million
used in capital expenditures to support new product introductions and our anticipated revenue
growth, partially offset by a reduction of $3.7 million in restricted cash related to a facility
lease from which we exited during the first quarter of the current fiscal year.
Cash Flows from Financing Activities
Net cash provided by financing activities of $19.6 million for the six months ended December
31, 2011 primarily consisted of $19.5 million in borrowings under our revolving credit facility and
$0.1 million in proceeds from the issuance of common stock through stock option exercises.
Net cash provided by financing activities of $0.6 million for the six months ended January 1,
2011 primarily resulted from $0.3 million in additional proceeds related to our
May 2010 follow-on stock offering due to finalization of our previous estimates of offering
related expenses and $0.3 million received from issuance of common stock, primarily through stock
option exercises.
Effect of Exchange Rates on Cash and Cash Equivalents for the Six months Ended December 31, 2011
and January 1, 2011
The effect of exchange rates on cash and cash equivalents for the six months ended December
31, 2011 was a decrease of $2.4 million, primarily consisting of $0.7 million in net loss due to
the revaluation of foreign currency cash balances to the functional currency of the respective
subsidiaries and from a loss of approximately $1.7 million related to the revaluation of U.S.
dollar denominated operating intercompany payables and receivables of our foreign subsidiaries.
The effect of exchange rates on cash and cash equivalents for the six months ended January 1,
2011 was an increase of $2.2 million, primarily consisting of $0.8 million in net gain due to the
revaluation of foreign currency cash balances to the functional currency of the respective
subsidiaries and from gains of approximately $0.8 million related to the revaluation of U.S. dollar
denominated operating intercompany payables and receivables of our foreign subsidiaries.
27
Credit Facility
As of December 31, 2011, we had a $45.0 million senior secured revolving credit facility with
Wells Fargo Capital Finance, Inc. and other lenders (the Credit Agreement) with an expiration date
of August 1, 2014. See Note 7, Credit Agreement, to our condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding this
credit facility. As of December 31, 2011, there was $19.5 million outstanding under the Credit
Agreement and we were in compliance with all covenants. As of July 2, 2011, there were no amounts
outstanding under the Credit Agreement. At December 31, 2011 and July 2, 2011, there were $0.1
million and $1.1 million, respectively, in outstanding standby letters of credit secured under the
Credit Agreement. These letters of credit expire at various intervals through April 2014.
Future Cash Requirements
As of December 31, 2011, we held $53.6 million in cash and cash equivalents and $0.6 million
in restricted cash. In the future, in order to strengthen our financial position, in the event of
unforeseen circumstances, in the event we need to fund our growth in future financial periods, or
in the event insurance proceeds are not sufficient or timely enough to offset our expenses or lost
revenue associated with the flooding in Thailand, we may need to raise additional funds by any one
or a combination of the following: (i) issuing equity securities, (ii) incurring indebtedness
secured by our assets, (iii) issuing debt and/or convertible debt securities, or (iv) selling
product lines, other assets and/or other portions of our business. There can be no guarantee that
we will be able to raise additional funds on terms acceptable to us, or at all. We continue to be
in negotiations to transition our Shenzhen assembly and test operations to a major contract
manufacturer and we expect this could generate $30 million to $40 million in proceeds in our third
or fourth fiscal quarters of 2012, with potential additional consideration to be received in the
future, and which would include a long term supply agreement with the contract manufacturer. In
addition to the $6.4 million insurance coverage advance payment we received in February 2012
associated with the flooding in Thailand, we also expect to receive substantial additional
insurance proceeds, although neither the amounts nor the timing of such payments can be reasonably
estimated at this time.
From time to time, we have engaged in discussions with third parties concerning potential
acquisitions of product lines, technologies and businesses, such as our merger with Avanex, our
acquisitions of Xtellus and Mintera, our exchange of assets agreement with Newport and our sale of
a legacy product line in the second quarter of fiscal year 2012. We continue to consider potential
acquisition candidates. Any such transactions could result in us issuing a significant number of
new equity or debt securities (including promissory notes), the incurrence or assumption of debt,
and the utilization of our cash and cash equivalents. We may also be required to raise additional
funds to complete any such acquisition, through either the issuance of equity securities and/or
borrowings. If we raise additional funds or acquire businesses or technologies through the issuance
of equity securities, our existing stockholders may experience significant dilution.
Off-Balance Sheet Arrangements
We indemnify our directors and certain employees as permitted by law, and have entered into
indemnification agreements with our directors and executive officers. We have not recorded a
liability associated with these indemnification arrangements, as we historically have not incurred
any material costs associated with such indemnification obligations. Costs associated with such
indemnification obligations may be mitigated by insurance coverage that we maintain, however, such
insurance may not cover any, or may cover only a portion of, the amounts we may be required to pay.
In addition, we may not be able to maintain such insurance coverage in the future.
We also have indemnification clauses in various contracts that we enter into in the normal
course of business, such as indemnification in favor of customers in respect of liabilities they
may incur as a result of purchasing our products should such products infringe the intellectual
property rights of a third party. We have not historically paid out any material amounts related to
these indemnifications; therefore, no accrual has been made for these indemnifications.
Other than as set forth above, we are not currently party to any material off-balance sheet
arrangements.
28
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rates
We finance our operations through a mixture of the issuance of equity securities, finance
leases, working capital and by drawing on our Credit Agreement. Our primary exposure to interest
rate fluctuations is on our cash deposits and for amounts borrowed under our Credit Agreement. As
of December 31, 2011, we had $19.5 million in outstanding borrowings at an average interest rate of
3.37 percent and $0.1 million in outstanding standby letters of credit secured under our Credit
Agreement. An increase in our average interest rate on our Credit Agreement of 1.0 percent would
increase our annual interest expense by $0.2 million.
We monitor our interest rate risk on cash balances primarily through cash flow forecasting.
Cash that is surplus to immediate requirements is generally invested in short-term deposits with
banks accessible within one days notice and invested in overnight money market accounts. We
believe our interest rate risk is immaterial.
Foreign currency
As our business is multinational in scope, we are subject to fluctuations based upon changes
in the exchange rates between the currencies in which we collect revenues and pay expenses. A
significant majority of our revenues are be denominated in U.S. dollars, while a significant
portion of our expenses are be denominated in U.K. pounds sterling and the Swiss franc.
Fluctuations in the exchange rate between the U.S. dollar, the U.K. pound sterling and the Swiss
franc and, to a lesser extent, other currencies in which we collect revenues and pay expenses,
could affect our operating results. This includes the Chinese yuan, the Korean won, the Israeli
shekel and the Euro in which we pay expenses in connection with operating our facilities in
Shenzhen and Shanghai, China; Daejeon, South Korea; Jerusalem, Israel and San Donato, Italy. To the
extent the exchange rate between the U.S. dollar and these currencies were to fluctuate more
significantly than experienced to date, our exposure would increase.
As of December 31, 2011, our U.K. subsidiary had $53.7 million, net, in U.S. dollar
denominated operating intercompany payables and $55.3 million in U.S. dollar denominated net
accounts receivable related to sales to external customers. It is estimated that a 10 percent
fluctuation in the U.S. dollar relative to the U.K. pound sterling would lead to a profit of $0.2
million (U.S. dollar strengthening), or a loss of $0.2 million (U.S. dollar weakening) on the
translation of these receivables, which would be recorded as gain (loss) on foreign exchange in our
condensed consolidated statement of operations.
Hedging Program
We enter into foreign currency forward exchange contracts in an effort to mitigate a portion
of our exposure to fluctuations between the U.S. dollar and the U.K. pound sterling. We do not
currently hedge our exposure to the Chinese yuan, the Korean won,
the Israeli shekel, the Swiss franc or the Euro, but we may in the future if conditions
warrant. We also do not currently hedge our exposure related to our U.S. dollar denominated
intercompany payables and receivables. We may be required to convert currencies to meet our
obligations. Under certain circumstances, foreign currency forward exchange contracts can have an
adverse effect on our financial condition. As of December 31, 2011, we held nine outstanding
foreign currency forward exchange contracts with a notional value of $7.0 million which include put
and call options which expire, or expired, at various dates from January 2012 to September 2012. We
have recorded an unrealized loss of $12,000 to accumulated other comprehensive income in connection
with marking these contracts to fair value as of December 31, 2011. It is estimated that a 10
percent fluctuation in the dollar between December 31, 2011 and the maturity dates of the put and
call instruments underlying these contracts would lead to a profit of $0.5 million dollars (U.S.
dollar weakening) or loss of $0.5 million dollars (U.S. dollar strengthening) on our outstanding
foreign currency forward exchange contracts, should they be held to maturity.
29
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2011. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures
of a company that are designed to ensure that information required to be disclosed by the company
in the reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the companys management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their objectives and
management necessarily applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on the evaluation of our disclosure controls and procedures as of
December 31, 2011, our Chief Executive Officer and Chief Financial Officer have concluded that, as
of such date, our disclosure controls and procedures were effective at the reasonable assurance
level.
There was no change in our internal control over financial reporting during the three months
ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 26, 2001, the first of a number of securities class actions was filed in the United
States District Court for the Southern District of New York against New Focus, Inc., now known as
Oclaro Photonics, Inc. (New Focus), certain of our officers and directors, and certain underwriters
for New Focus initial and secondary public offerings. A consolidated amended class action
complaint, captioned In re New Focus, Inc. Initial Public Offering Securities Litigation, No. 01
Civ. 5822, was filed on April 20, 2002. The complaint generally alleged that various underwriters
engaged in improper and undisclosed activities related to the allocation of shares in New Focus
initial public offering and sought unspecified damages for claims under the Exchange Act on behalf
of a purported class of purchasers of common stock from May 17, 2000 to December 6, 2000.
The lawsuit against New Focus was coordinated for pretrial proceedings with a number of other
pending litigations challenging underwriter practices in over 300 cases, as In re Initial Public
Offering Securities Litigation, 21 MC 92 (SAS), including actions against Bookham Technology plc,
now known as Oclaro Technology Ltd (Bookham
Technology) and Avanex Corporation, now known as Oclaro (North America), Inc. (Avanex), and
certain of each entitys respective officers and directors, and certain of the underwriters of
their public offerings. In October 2002, the claims against the directors and officers of New
Focus, Bookham Technology and Avanex were dismissed, without prejudice, subject to the directors
and officers execution of tolling agreements.
The parties reached a global settlement of the litigation under which the insurers are funding
the full amount of the settlement share allocated to New Focus, Bookham Technology and Avanex, and
New Focus, Bookham Technology and Avanex bear no financial liability. New Focus, Bookham Technology
and Avanex, as well as the officer and director defendants who were previously dismissed from the
action pursuant to tolling agreements, receive complete dismissals from the case. The settlement
was approved by the Court in 2009 and during the second fiscal quarter of 2012 all remaining appeals
contesting the settlement were dismissed or withdrawn.
On December 6, 2010, a bankruptcy preferential transfer avoidance action was filed by Nortel
Networks Inc. (Nortel) et al. against Oclaro Technology Ltd. (formerly Bookham Technology Plc.) and
Oclaro (North America), Inc. (formerly Avanex Corporation) in the United States Bankruptcy Court
for the District of Delaware, Adversary Proceeding No. 10-55919-KG. The complaint alleges, among
other things, that Nortel Networks Inc., and/or its affiliated debtors in the Chapter 11 bankruptcy
cases also pending before the Delaware Bankruptcy Court (Jointly
Administered Case No. 09-10138-KG), made at least $4,593,152 in
preferential transfers to the
defendants predecessors, Bookham Technology Plc. and Avanex Corporation, in the 90 days prior to
the commencement of the Nortel Chapter 11 bankruptcy cases on January 14, 2009. Pursuant to a
settlement agreement dated October 6, 2011, Oclaro Technology Ltd. and Oclaro (North America), Inc.
settled the preference-related claims with Nortel Networks Inc. without any cash payment by Oclaro
Technology Ltd. or Oclaro (North America), Inc.. The settlement agreement was approved by the
Delaware Bankruptcy Court by an order dated November 28, 2011, and was dismissed by the plaintiff
voluntarily and with prejudice on December 14, 2011.
30
On May 19, 2011, Curtis and Charlotte Westley filed a purported class action complaint in the
United States District Court for the Northern District of California, against us and certain of our
officers and directors. The Court subsequently appointed the Connecticut Laborers Pension Fund
(Pension Fund) as lead plaintiff for the putative class. On October 27, 2011, the Pension Fund
filed an Amended Complaint, captioned as Westley v. Oclaro, Inc., No. 11 Civ. 2448 EMC, allegedly
on behalf of persons who purchased our common stock between May 6 and October 28, 2010, alleging
that defendants issued materially false and misleading statements during this time period regarding
our current business and financial condition, including projections for demand for our products, as
well as our revenues, earnings, and gross margins, for the first quarter of fiscal year 2011 as
well as the full fiscal year. The complaint alleges violations of section 10(b) of the Securities
Exchange Act and Securities and Exchange Commission Rule 10b-5, as well as section 20(a) of the
Securities Exchange Act. The complaint seeks damages and costs of an unspecified amount. On
December 12, 2011, defendants filed a motion to dismiss the complaint. That motion is scheduled to
be heard on March 23, 2012. Discovery has not commenced, and no trial has been scheduled in this
action. We intend to defend this litigation vigorously. We are unable at this time to estimate the
effects of these lawsuits on our financial position, results of operations or cash flows.
On June 10, 2011, a purported shareholder, Stanley Moskal, filed a purported derivative action
in the Superior Court for the State of California, County of Santa Clara, against us, as nominal
defendant, and certain of our current and former officers and directors, as defendants. The case is
styled Moskal v. Couder, No. 1:11 CV 202880 (Santa Clara County Super. Ct. filed June 10, 2011).
Four other purported shareholders, Matteo Guindani, Jermaine Coney, Jefferson Braman and Toby
Aguilar, separately filed substantially similar lawsuits in the United States District Court for
the Northern District of California on June 27, June 28, July 7 and July 26, 2011, respectively. By
Order dated September 14, 2011, the Guindani, Coney, and Braman actions were consolidated under In
re Oclaro, Inc. Derivative Litigation, Lead Case No. 11 Civ. 3176 EMC. On October 5, 2011, the
Aguilar action was voluntarily dismissed. Each remaining purported derivative complaint alleges
that Oclaro has been, or will be, damaged by the actions alleged in the Westley complaint, and the
litigation of the Westley action, and any damages or settlement paid in the Westley action. Each
purported derivative complaint alleges counts for breaches of fiduciary duty, waste, and unjust
enrichment. Each purported derivative complaint seeks damages and costs of an unspecified amount,
as well as injunctive relief. By Order dated November 23, 2011, the parties in the Moskal
action agreed that defendants shall not be required to respond to the original complaint, that
plaintiff would serve an amended complaint no later than March 9, 2012, and the stay of discovery
would remain in effect until further order of the Court or agreement by the parties. By Order
dated November 29, 2011, the parties to In re Oclaro, Inc. Derivative Litigation agreed to stay all
proceedings, including motion practice and discovery, until such time as (a) the defendants file an
answer to any complaint in the Westley Action; or (b) the Westley Action is dismissed in its
entirety with prejudice. Discovery has not commenced, and no trial has been scheduled in any of
these actions. We are unable at this time to estimate the effects of these lawsuits on our
financial position, results of operations or cash flows.
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. The risks described below are not
the only ones facing us. Additional risks not currently known to us or that we currently believe
are immaterial also may impair our business, operations, liquidity and stock price materially and
adversely. You should carefully consider the risks and uncertainties described below in addition to
the other information included or incorporated by reference in this Quarterly Report on Form
10-Q. If any of the following risks actually occur, our business, financial condition or results of
operations would likely suffer. In that case, the trading price of our common stock could fall and
you could lose all or part of your investment.
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RISKS RELATED TO OUR BUSINESS
Our results of operations have been and will be materially and adversely affected by the flooding
in Thailand.
In October 2011, certain areas in Thailand suffered major flooding as a result of monsoons.
This flooding had a material impact on our business and results of operations. Our primary contract
manufacturer, Fabrinet, suspended operations at two factories located in Chokchai, Thailand and
Pinehurst, Thailand. The Chokchai factory suffered extensive flood damage and became inaccessible
due to high water levels inside and surrounding the manufacturing facility. As a result of this
flooding, we experienced a significant decline in products sales and we incurred significant damage
to our inventory and property and equipment located at the Chokchai facility. During the three and
six months ended December 31, 2011, we recorded impairment charges of $4.2 million related to the
write-off of the net book value of damaged inventory and $3.0 million related to the write-off of
the net book value of property and equipment based on our preliminary estimates of the damage
caused by the flooding and we incurred $1.9 million in personnel-related costs, professional fees
and related expenses incurred in connection with our recovery efforts. We continue to evaluate our
preliminary estimates of flood-related losses, and in future quarters we may record additional
losses for damaged equipment and inventory.
It is possible that our customers could experience supply chain disruptions as a result of
other suppliers whose manufacturing operations in Thailand have been impacted by the flooding which
could impact our customers demand, or the timing of their demand, for our products. It is also
possible that our customers will seek alternative suppliers of comparable products if we are unable
to meet their supply needs as a result of the flooding in Thailand. Although our management cannot
yet definitively quantify the total impacts of the flooding in Thailand on our business, it is
likely that the supply disruption will continue to materially and adversely affect our results of
operations, including our revenue, for at least the next two fiscal quarters. There is no assurance
that the adverse impact will be limited to the next two fiscal quarters. While we believe our
insurance coverage, both property and business interruption, will mitigate a portion of the adverse
impact, there can be no assurance as to the amount or timing of insurance recoveries, or that the
timing or amounts will be sufficient to fully compensate for negative impacts on our operating cash
flow during the recovery period. If we do not efficiently and effectively mitigate the impact of
the flooding on our business or if the adverse impact extends for a longer period of time than
expected, our results of operations would be materially and adversely affected.
We depend on a limited number of suppliers who could disrupt our business if they stopped,
decreased, delayed or were unable to meet our demand for shipments of their products.
We depend on a limited number of suppliers of raw materials and equipment used to manufacture
our products. We also depend on a limited number of contract
manufacturers, principally Fabrinet in Thailand, to manufacture certain of our products. Some
of these suppliers are sole sources. We typically have not entered into long-term agreements with
our suppliers other than Fabrinet and, therefore, these suppliers generally may stop supplying us
materials and equipment at any time. Our reliance on a sole supplier or limited number of suppliers
could result in delivery problems, reduced control over product pricing and quality, and an
inability to identify and qualify another supplier in a timely manner. Given the recent
macroeconomic downturn, some of our suppliers that may be small or undercapitalized may experience
financial difficulties that could prevent them from supplying us materials and equipment. In
addition, our suppliers, including our sole source suppliers, may experience manufacturing delays
or shut downs due to circumstances beyond their control such as earthquakes, floods, fires or other
natural disasters.
Fabrinets manufacturing operations are located in Thailand. In October 2011, due to flooding
in Thailand, Fabrinet suspended operations at both of their factories that supply us with finished
goods. Thailand has also been subject to political unrest in the recent past, including the
temporary interruption of service at one of its international airports, and may again experience
such political unrest in the future. If Fabrinet is unable to supply us with materials or
equipment, or if they are unable to ship our materials or equipment out of Thailand due to future
flooding or political unrest, this could materially adversely affect our ability to fulfill
customer orders and our results of operations.
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Any supply deficiencies relating to the quality or quantities of materials or equipment we use to
manufacture our products could materially adversely affect our ability to fulfill customer orders
and our results of operations. Lead times for the purchase of certain materials and equipment from
suppliers have increased and in some cases
have limited our ability to rapidly respond to increased demand, and may continue to do so in
the future. These conditions have been exacerbated by suppliers, customers and companies reducing
their inventory levels in response to the recent macroeconomic downturn. We are currently
evaluating the capabilities of additional potential contract manufacturing partners to ensure we
have a scalable and cost effective manufacturing strategy appropriate for executing our business
objectives over a long-term horizon. To the extent we introduce additional contract manufacturing
partners, introduce new products with new partners and/or move existing internal or external
production lines to new partners, we could experience supply disruptions during the transition
process. In addition, due to our customers requirements relating to the qualification of our
suppliers and contract manufacturing facilities and operations, we cannot quickly enter into
alternative supplier relationships, which prevents us from being able to respond immediately to
adverse events affecting our suppliers.
We are negotiating the transition of our Shenzhen assembly and test operations, and a corresponding
long term supply agreement, to a major contract manufacturer.
There can be no assurance that our negotiations to transition our Shenzhen assembly and test
operations and to enter into a corresponding long term supply agreement with a major contract
manufacturer will result in definitive agreements, the closing of such agreements or result in the
benefits that we expect. There can be no assurance, therefore, that we will receive the $30
million to $40 million we would expect from such a transition, or the potential additional
consideration to be received in the future, or enter into a long term supply agreement on terms
acceptable to us. In addition, there can be no assurance that announcing these negotiations will
not have an adverse impact on the efficiency of our Shenzhen manufacturing facility prior to, or
subsequent to, resolution of these negotiations, which could have an adverse impact on our
production output and/or the levels and gross margins of the corresponding product revenues
supported by the production output.
In addition, during a similar transition by a competitor, the competitor experienced a work
stoppage by their employees. There can be no assurance that transitioning our Shenzhen assembly and
test operations will not result in similar adverse impacts, which may negatively impact our
revenues and ability to deliver products to our customers.
We have a history of large operating losses and we may not be able to achieve profitability in the
future.
We have historically incurred losses and negative cash flows from operations since our
inception. As of December 31, 2011, we had an accumulated deficit of $1,167.3 million. For the six
months ended December 31, 2011, we incurred a net loss of $41.3 million. For the year ended July 2,
2011 we incurred a loss from continuing operations of $46.4 million. Even though we generated
income of $11.0 million from continuing operations for the year ended July 3, 2010, our results of
operations are currently being materially and adversely impacted by the flooding in Thailand, and
we may not be able to achieve profitability in any future periods. If we are unable to do so, we
may need
additional financing, which may not be available to us on commercially acceptable terms or at
all, to execute on our current or future business strategies. In addition, we are likely to incur
material operating losses for at least the next two fiscal quarters as a result of decreased
revenue attributable to the flooding in Thailand discussed above.
We may not be able to maintain gross margin levels.
We may not be able to maintain or improve our historical gross margin levels, due to the
current economic uncertainty, changes in customer demand (including a change in product mix between
different areas of our business) and pricing pressure from increased competition or other factors.
During fiscal year 2011, our gross margin decreased compared with fiscal year 2010, and has further
decreased for the six months ended December 31, 2011. We attempt to reduce our product costs and
improve our product mix to offset price competition and erosion expected in most product
categories, but there is no assurance that we will be successful. Our gross margins have been, and
will be in the future, adversely impacted for reasons including, but not limited to, fixed
manufacturing costs that will not decrease in tandem with lower revenues due to the flooding in
Thailand, unfavorable production yields or variances, increases in costs of input parts and
materials, the timing of movements in our inventory balances, warranty costs and related returns,
changes in foreign currency exchange rates, and possible exposure to inventory valuation reserves.
Any failure to maintain, or improve, our gross margins will adversely affect our financial results,
including our goal to achieve sustainable cash flow positive operations.
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Our business and results of operations may be negatively impacted by general economic and financial
market conditions and such conditions may increase the other risks that affect our business.
Over the past few years, the worlds financial markets have experienced significant turmoil,
resulting in reductions in available credit, increased costs of credit, extreme volatility in
security prices, potential changes to existing credit terms, rating downgrades of investments and
reduced valuations of securities generally. In light of these economic conditions, many of our
customers reduced their spending plans, leading them to draw down their existing inventory and
reduce orders for our products. It is possible that economic conditions could result in further
setbacks, and that these customers, or others, could as a result significantly reduce their capital
expenditures, draw down their inventories, reduce production levels of existing products, defer
introduction of new products or place orders and accept delivery for products for which they do not
pay us due to their economic difficulties or other reasons. These actions could have an adverse
impact on our revenues. In addition, the financial downturn affected the financial strength of
certain of our customers, including their ability to obtain credit to finance purchases of our
products, and could adversely affect additional customers in the future. Our suppliers may also be
adversely affected by economic conditions that may impact their ability to provide important
components used in our manufacturing processes on a timely basis, or at all.
These conditions could also result in reduced capital resources because of the potential lack
of credit availability, higher costs of credit and the stretching of payables by creditors seeking
to preserve their own cash resources. We are unable to predict the likely duration, severity and
potential continuation of any disruption in financial markets and adverse economic conditions in
the U.S. and other countries, but the longer the duration the greater the risks we face in
operating our business.
Our success will depend on our ability to anticipate and respond to evolving technologies and
customer requirements.
The market for telecommunications equipment is characterized by substantial capital
investment, rapid and unpredictable changes in customer demand and diverse and evolving
technologies. For example, the market for optical components is currently characterized by a trend
toward the adoption of pluggable components and tunable transmitters that do not require the
customized interconnections of traditional fixed wavelength gold box devices and the increased
integration of components on subsystems. Our ability to anticipate and respond to these and other
changes in technology, industry standards, customer requirements and product offerings and to
develop and introduce new and enhanced products will be significant factors in our ability to
succeed. We expect that new technologies will continue to emerge as competition in the
telecommunications industry increases and the need for higher and more cost efficient bandwidth
expands. The introduction of new products embodying new technologies or the emergence of new
industry standards could render our existing products or products in development uncompetitive from
a pricing standpoint, obsolete or
unmarketable, which would negatively affect our financial condition and results of operations.
We depend on a limited number of customers for a significant percentage of our revenues.
Historically, we have generated most of our revenues from a limited number of customers. Our
dependence on a limited number of customers is due to the fact that the optical telecommunications
systems industry is dominated by a small number of large companies. These companies in turn depend
primarily on a limited number of major telecommunications carrier customers to purchase their
products that incorporate our optical components. For example, for the six months ended December
31, 2011 and the years ended July 2, 2011 and July 3, 2010, our three largest customers accounted
for 33 percent, 36 percent and 29 percent of our revenues, respectively. Because we rely on a
limited number of customers for significant percentages of our revenues, a decrease in demand for
our products from any of our major customers for any reason (including due to market conditions,
catastrophic events or otherwise) could have a materially adverse impact on our financial
conditions and results of operations. For example, our revenues for the fiscal quarter ended July
2, 2011 were adversely impacted by a change in customer demand expectations, including a
significant change in demand expectations from a particular major customer. Further, the industry
in which our customers operate is subject to a trend of consolidation. To the extent this trend
continues, we may become dependent on even fewer customers to maintain and grow our revenues.
34
The majority of our long-term customer contracts do not commit customers to specified buying
levels, and our customers may decrease, cancel or delay their buying levels at any time with little
or no advance notice to us.
The majority of our customers typically purchase our products pursuant to individual purchase
orders or contracts that do not contain purchase commitments. Some customers provide us with their
expected forecasts for our products several months in advance, but many of these customers may
decrease, cancel or delay purchase orders already in place, and the impact of any such actions may
be intensified given our dependence on a small number of large customers. If any of our major
customers decrease, stop or delay purchasing our products for any reason, our business and results
of operations would be harmed. Cancellation or delays of such orders may cause us to fail to
achieve our short-term and long-term financial and operating goals and result in excess and
obsolete inventory. For example, in mid-September 2010, we did experience certain deferrals and
cancellation of orders which adversely impacted our financial results. In addition, our revenues
for the fiscal quarter ended July 2, 2011 were adversely impacted by a change in customer demand
expectations, including a significant change in demand expectations from a particular major
customer.
We have significant manufacturing and research and development operations in China, which exposes
us to risks inherent in doing business in China.
The majority of our assembly and test operations, chip-on-carrier operations and manufacturing
and supply chain management operations are concentrated in our facility in Shenzhen, China. In
addition, we have substantial research and development related activities in Shenzhen and Shanghai,
China. To be successful in China we will need to:
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qualify our manufacturing lines and the products we produce in Shenzhen, as required
by our customers; |
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attract and retain qualified personnel to operate our Shenzhen facility; and |
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attract and retain research and development employees at our Shenzhen and Shanghai
facilities. |
We cannot be assured that we will be able to do any of these.
Employee turnover in China is high due to the intensely competitive and fluid market for
skilled labor. To operate our Shenzhen facility under these conditions, we will need to continue to
hire direct manufacturing personnel, administrative personnel and technical personnel; obtain and
retain required legal authorization to hire such personnel; and incur the time and expense to hire
and train such personnel.
Inflation rates in China are higher than in most jurisdictions in which we operate. We believe
that salary inflation rates for the skilled personnel we hire and seek to retain in Shenzhen and
Shanghai are likely to be higher than overall inflation rates.
Operations in China are subject to greater political, legal and economic risks than our
operations in other countries. In particular, the political, legal and economic climate in China,
both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be
adversely affected by changes in Chinese laws and regulations such as those related to, among other
things, taxation, import and export tariffs, environmental regulations, land use rights,
intellectual property, currency controls, employee benefits and other matters. In addition, we may
not obtain or retain the requisite legal permits to continue to operate in China, and costs or
operational limitations may be imposed in connection with obtaining and complying with such
permits.
We intend to continue to export the products manufactured at our Shenzhen facility, whether we own
and operate the Shenzhen facility or whether we contract with a provider that owns and operates the
facility. Under current regulations, upon application and approval by the relevant governmental
authorities, we will not be subject to certain Chinese taxes and will be exempt from certain duties
on imported materials that are used in the manufacturing process and subsequently exported from
China as finished products. However, Chinese trade regulations are in a state of flux, and we may
become subject to other forms of taxation and duties in China or may be required to pay export fees
in the future. In the event that we become subject to new forms of taxation or export fees in
China, our business and results of operations could be materially adversely affected. We may also
be
required to expend greater amounts than we currently anticipate in connection with increasing
production at our Shenzhen facility. Any one of the factors cited above, or a combination of them,
could result in unanticipated costs or interruptions in production, which could materially and
adversely affect our business.
35
Our results of operations may suffer if we do not effectively manage our inventory, and we may
incur inventory-related charges.
We need to manage our inventory of component parts and finished goods effectively to meet
changing customer requirements. Accurately forecasting customers product needs is difficult. Even
though our inventory balances decreased to $83.3 million as of December 31, 2011 from $102.2
million as of July 2, 2011, our quarterly revenues also decreased, to $86.5 million for the fiscal
quarter ended December 31, 2011 from $109.2 million for the fiscal quarter ended July 2, 2011. Some
of our products and supplies have in the past, and may in the future, become obsolete while in
inventory due to rapidly changing customer specifications or a decrease in customer demand. We also
have exposure to contractual liabilities to our contract manufacturers for inventories purchased by
them on our behalf, based on our forecasted requirements, which may become excess or obsolete. Our
inventory balances also represent an investment of cash. To the extent our inventory turns are
slower than we anticipate based on historical practice, our cash conversion cycle extends and more
of our cash remains invested in working capital. If we are not able to manage our inventory
effectively, we may need to write down the value of some of our existing inventory or write off
non-saleable or obsolete inventory. We have from time to time incurred significant
inventory-related charges. Any such charges we incur in future periods could materially and
adversely affect our results of operations. Should we enter into a contract to transition our
Shenzhen manufacturing facility to a major contract manufacturer we may need to invest in
additional inventories during the corresponding transition period, and in the future may be exposed
to contractual liabilities to the new contract manufacturer for inventories purchased by them on
our behalf.
We may undertake mergers or acquisitions that do not prove successful.
From time to time we consider mergers or acquisitions, collectively referred to as
acquisitions, of other businesses, assets or companies that would complement our current product
offerings, enhance our intellectual property rights or offer other competitive opportunities.
However, we may not be able to identify suitable acquisition candidates at prices we consider
appropriate. In addition, we are in an industry that is actively consolidating and, as a result,
there is no guarantee that we will successfully and satisfactorily bid against third parties,
including competitors, when we identify a critical target we want to acquire. Our management may
not be able to effectively implement our acquisition plans and internal growth strategy
simultaneously.
We cannot readily predict the timing, size or success of our future acquisitions. Failure to
successfully implement our acquisition plans could have a material adverse effect on our business,
prospects, financial condition and results of operations. Even
successful acquisitions could have the effect of reducing our cash balances, diluting the
ownership interests of existing stockholders or increasing our indebtedness. For example, our
acquisition of Xtellus required an immediate issuance of a significant number of newly issued
shares of our common stock. In addition, during the first quarter of fiscal year 2012, we issued
0.9 million shares of our common stock related to the settlement of our Xtellus escrow liability.
In October 2011, we also issued 0.8 million shares of our common stock to pay a portion of the 12
month Mintera earnout obligation. We could also choose to use shares of our common stock to pay a
portion the 18 month Mintera earnout obligation.
We cannot predict with certainty which strategic, financial or operating synergies or other
benefits, if any, will actually be achieved from any transaction we undertake, the timing of any
such benefits, or whether those benefits which have been achieved will be sustainable on a
long-term basis. Our failure to identify, consummate or integrate suitable acquisitions could
adversely affect our business and results of operations.
Acquisitions could involve a number of other potential risks to our business, including the
following, any of which could harm our business:
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failure to realize the potential financial or strategic benefits of the acquisition; |
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increased costs associated with acquired operations; |
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economic dilution to gross and operating profit and earnings (loss) per share; |
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failure to successfully further develop the combined, acquired or remaining technology,
which could, among other things, result in the impairment of amounts recorded as goodwill
or other intangible assets; |
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unanticipated costs and liabilities and unforeseen accounting charges; |
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difficulty in integrating product offerings; |
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difficulty in coordinating and rationalizing research and development activities to
enhance introduction of new products and technologies with reduced cost; |
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difficulty in coordinating and integrating the manufacturing activities of our acquired
businesses, including with respect to third-party manufacturers, including executing a
production capacity ramp up of our South Korea facility and our contract manufacturers to
support the potential revenue demand for the WSS-related products of Xtellus, managing the
manufacturing activities of the laser diode business acquired from Newport while these
activities are being transferred from Tucson, Arizona to Europe and Asia, and transferring
certain production of Mintera products to our internal facilities; |
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delays and difficulties in delivery of products and services; |
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failure to effectively integrate or separate management information systems, personnel,
research and development, marketing, sales and support operations; |
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difficulty in maintaining internal control procedures and disclosure controls that
comply with the requirements of the Sarbanes-Oxley Act of 2002, or poor integration of a
targets procedures and controls; |
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difficulty in preserving important relationships of our acquired businesses and
resolving potential conflicts between business cultures; |
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uncertainty on the part of our existing customers, or the customers of an acquired
company, about our ability to operate effectively after a transaction, and the potential
loss of such customers; |
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loss of key employees; |
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difficulty in coordinating the international activities of our acquired businesses; |
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the effect of tax laws due to increasing complexities of our global operating
structure; |
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the effect of employment law or regulations or other limitations in foreign
jurisdictions that could have an impact on timing, amounts or costs of achieving expected
synergies; and |
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substantial demands on our management as a result of these transactions that may limit
their time to attend to other operational, financial, business and strategic issues. |
Our integration with acquired businesses has been and will continue to be a complex,
time-consuming and expensive process. We cannot assure you that we will be able to successfully
integrate these businesses in a timely manner, or at all, or that any of the anticipated benefits
from our acquisition of these businesses will be realized. We may have difficulty, and may incur
unanticipated expenses related to, integrating management and personnel from these acquired
entities with our management and personnel. Our failure to achieve the strategic objectives of our
acquisitions could have a material adverse effect on our revenues, expenses and our other operating
results and cash resources and could result in us not achieving the anticipated potential benefits
of these transactions. In addition, we cannot assure you that the growth rate of the combined
company will equal the historical growth rate experienced by any of the companies that we have
acquired. Comparable risks would accompany any divestiture of business or assets we might
undertake.
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Sales of our products could decline if customer and/or supplier relationships are disrupted by our
recent acquisition activities.
The customers of acquired businesses, and/or of predecessor companies, may not continue their
historical buying patterns. Customers may defer purchasing decisions as they evaluate the
likelihood of successful integration of our products and our future product strategy, or consider
purchasing products of our competitors.
Customers may also seek to modify or terminate existing agreements, or prospective customers
may delay entering into new agreements or purchasing our products or may decide not to purchase any
products from us. In addition, by increasing the breadth of our business, the transactions may make
it more difficult for us to enter into relationships, including customer relationships, with
strategic partners, some of whom may view us as a more direct competitor than any of the
predecessor and/or acquired businesses as independent companies.
Competitive positions in the market, including relative to suppliers who are also competitors,
could change as a result of an acquisition, and this could impact supplier relationships, including
the terms under which we do business with such suppliers.
As a result of our recent business combinations, we have become a larger and more geographically
diverse organization, with greater available market opportunities. If our management is unable to
manage the combined organization efficiently, including the challenges of managing the growth
potentially available from expanded market opportunities, our operating results will suffer.
As of December 31, 2011, we had approximately 2,745 employees in a total of 15 facilities
around the world. As a result, we face challenges inherent in efficiently managing an increased
number of employees over large geographic distances, including the need to implement appropriate
systems, policies, benefits and compliance programs. Our inability to manage successfully the
geographically more diverse (including from a cultural perspective) and substantially larger
combined organization could have a material adverse effect on our operating results and, as a
result, on the market price of our common stock. Certain of these acquisitions have increased our
serviceable available markets and scaling the company to address the growth potentially available
from addressing these markets, and potentially available within our previously existing markets,
creates additional challenges of a similar nature.
Our products are complex and may take longer to develop than anticipated and we may not recognize
revenues from new products until after long field testing and customer acceptance periods.
Many of our new products must be tailored to customer specifications. As a result, we are
developing new products and using new technologies in those products. For example, while we
currently manufacture and sell discrete gold box technology, we expect that many of our sales of
gold box technology will soon be replaced by pluggable modules.
New products or modifications to existing products often take many quarters or even years to
develop because of their complexity and because customer specifications sometimes change during the
development cycle. We often incur substantial costs associated with the research and development,
design, sales and marketing activities in connection with products that may be purchased long after
we have incurred such costs. In addition, due to the rapid technological changes in our market, a
customer may cancel or modify a design project before we begin large-scale manufacture of the
product and receive revenues from the customer. It is unlikely that we would be able to recover the
expenses for cancelled or unutilized design projects. It is difficult to predict with any
certainty, particularly in the present economic climate, the frequency with which customers will
cancel or modify their projects, or the effect that any cancellation or modification would have on
our results of operations.
As a result of our global operations, our business is subject to currency fluctuations that have
adversely affected our results of operations in recent quarters and may continue to do so in the
future.
Our financial results have been and will continue to be materially impacted by foreign
currency fluctuations. At certain times in our history, declines in the value of the U.S. dollar
versus the U.K. pound sterling have had a major negative effect on our margins and our cash flow. A
significant portion of our expenses are denominated in U.K. pounds sterling and substantially all
of our revenues are denominated in U.S. dollars.
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Fluctuations in the exchange rate between these two currencies and, to a lesser extent, other
currencies in which we collect revenues and/or pay expenses could have a material effect on our
future operating results. For example during fiscal year 2011, the Swiss franc appreciated
approximately 28 percent relative to the U.S. dollar, and the U.K. pound sterling appreciated 7
percent relative to the U.S. dollar, causing increases of approximately $3.1 million related to the
Swiss franc and $4.4 million related to the U.K. pound sterling, respectively, in our annual
manufacturing overhead and operating expenses. If the U.S. dollar maintains the same value or
depreciates relative to the Swiss franc and/or U.K. pound sterling in the future, our future
operating results may be materially impacted. Additional exposure could also result should the
exchange rate between the U.S. dollar and the Chinese yuan, the South Korean won, the Israeli
shekel, or the Euro vary more significantly than they have to date.
We engage in currency hedging transactions in an effort to cover some of our exposure to U.S.
dollar to U.K. pound sterling currency fluctuations, and we may be required to convert currencies
to meet our obligations. These transactions may not operate to fully hedge our exposure to currency
fluctuations, and under certain circumstances, these transactions could have an adverse effect on
our financial condition.
We may record additional impairment charges that will adversely impact our results of operations.
We review our goodwill, intangible assets and long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amounts of these assets may not be
recoverable, and also review goodwill annually.
During the fourth quarter of fiscal year 2011 we completed our annual first step analysis for
potential impairment of our goodwill, which included examining the impact of current general
economic conditions on our future prospects and the current level of our market capitalization.
Based on this analysis, we concluded that goodwill related to our WSS reporting unit was impaired.
Our WSS reporting units goodwill was originally recorded in connection with our acquisition of
Xtellus. During the fourth quarter of fiscal year 2011 we also completed our second step analysis
of goodwill impairment, determining that the $20.0 million of goodwill related to our WSS reporting
unit was fully impaired. Based upon this evaluation, we recorded $20.0 million for the goodwill
impairment loss in our consolidated statement of operations for the fiscal year ended July 2,
2011.
As of December 31, 2011, we had $10.9 million in goodwill and $18.2 million in other
intangible assets on our condensed consolidated balance sheet. In the event that we determine in a
future period that impairment of our goodwill, other intangible assets or long-lived assets exists
for any reason, we would record additional impairment charges in the period such determination is
made, which would adversely impact our financial position and results of operations.
We may incur additional significant restructuring charges that will adversely affect our results of
operations.
We have previously enacted a series of restructuring plans and cost reduction plans designed
to reduce our manufacturing overhead and our operating expenses that have resulted in significant
restructuring charges. Such charges have adversely affected, and will continue to adversely affect,
our results of operations for the periods in which such charges have been, or will be, incurred.
Additionally, actual costs have in the past, and may in the future, exceed the amounts estimated
and provided for in our financial statements. Significant additional charges could materially and
adversely affect our results of operations in the periods that they are incurred and recognized.
For instance, we accrued $2.2 million in restructuring charges during fiscal year 2010 in
connection with our merger with Avanex. On July 4, 2009, we completed the exchange of our New Focus
business to Newport in exchange for Newports high powered laser diode business, which resulted in
us incurring $0.5 million in
restructuring charges in fiscal year 2010 in connection with the transfer of the Tucson
manufacturing operations to our European facilities. During fiscal year 2011, we incurred $0.6
million in restructuring charges related to a restructuring plan specific to our acquisition of
Mintera.
39
If our customers do not qualify our manufacturing lines or the manufacturing lines of our
subcontractors for volume shipments, our operating results could suffer.
Most of our customers do not purchase products, other than limited numbers of evaluation
units, prior to qualification of the manufacturing line for volume production. Our existing
manufacturing lines, as well as each new manufacturing line, must pass through varying levels of
qualification with our customers. Our manufacturing lines have passed our qualification standards,
as well as our technical standards. However, our customers also require that our manufacturing
lines pass their specific qualification standards and that we, and any subcontractors that we may
use, be registered under international quality standards. In addition, we have in the past, and may
in the future, encounter quality control issues as a result of relocating our manufacturing lines
or introducing new products to fill production. We may be unable to obtain customer qualification
of our manufacturing lines or we may experience delays in obtaining customer qualification of our
manufacturing lines. Such delays or failure to obtain qualifications would harm our operating
results and customer relationships. We are currently evaluating the capabilities of additional
potential contract manufacturing partners to ensure we have a scalable and cost effective
manufacturing strategy appropriate for executing to our business objectives over a long-term
horizon. To the extent we introduce new contract manufacturing partners and move any production
lines from existing internal or external facilities the new production lines will likely need to be
requalified with customers.
Delays, disruptions or quality control problems in manufacturing could result in delays in product
shipments to customers and could adversely affect our business.
We may experience delays, disruptions or quality control problems in our manufacturing
operations or the manufacturing operations of our subcontractors. As a result, we could incur
additional costs that would adversely affect our gross margins, and our product shipments to our
customers could be delayed beyond the shipment schedules requested by our customers, which would
negatively affect our revenues, competitive position and reputation. Furthermore, even if we are
able to deliver products to our customers on a timely basis, we may be unable to recognize revenues
at the time of delivery based on our revenue recognition policies.
We may experience low manufacturing yields.
Manufacturing yields depend on a number of factors, including the volume of production due to
customer demand and the nature and extent of changes in specifications required by customers for
which we perform design-in work. Higher volumes due to demand for a fixed, rather than continually
changing, design generally results in higher manufacturing yields, whereas lower volume production
generally results in lower yields. In addition, lower yields may result, and have in the past
resulted, from commercial shipments of products prior to full manufacturing qualification to the
applicable specifications. Changes in manufacturing processes required as a result of
changes in product specifications, changing customer needs and the introduction of new product
lines have historically caused, and may in the future cause, significantly reduced manufacturing
yields, resulting in low or negative margins on those products. Moreover, an increase in the
rejection rate of products during the quality control process, before, during or after manufacture,
results in lower yields and margins. Finally, manufacturing yields and margins can also be lower if
we receive or inadvertently use defective or contaminated materials from our suppliers. Any
reduction in our manufacturing yields will adversely affect our gross margins and could have a
material impact on our operating results.
Our intellectual property rights may not be adequately protected.
Our future success will depend, in large part, upon our intellectual property rights, including
patents, copyrights, design rights, trade secrets, trademarks and know-how. We maintain an active
program of identifying technology appropriate for patent protection. Our practice is to require
employees and consultants to execute non-disclosure and proprietary rights agreements upon
commencement of employment or consulting arrangements. These agreements acknowledge our exclusive
ownership of all intellectual property developed by the individuals during their work for us and
require that all proprietary information disclosed will remain confidential. Although such
agreements may be binding, they may not be enforceable in full or in part in all jurisdictions and any breach of
a confidentiality obligation could have a negative effect on our business and our remedy for such
breach may be limited.
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Our intellectual property portfolio is an important corporate asset. The steps we have taken
and may take in the future to protect our intellectual property may not adequately prevent
misappropriation or ensure that others will not develop competitive technologies or products. We
cannot assure you that our competitors will not successfully challenge the validity of our patents
or design products that avoid infringement of our proprietary rights with respect to our
technology. There can be no assurance that other companies are not investigating or developing
other similar technologies, that any patents will be issued from any application pending or filed
by us or that, if patents are issued, that the claims allowed will be sufficiently broad to deter
or prohibit others from marketing similar products. In addition, we cannot assure you that any
patents issued to us will not be challenged, invalidated or circumvented, or that the rights under
those patents will provide a competitive advantage to us or that our products and technology will
be adequately covered by our patents and other intellectual property. Further, the laws of certain
regions in which our products are or may be developed, manufactured or sold, including
Asia-Pacific, Southeast Asia and Latin America, may not be enforceable to protect our products and
intellectual property rights to the same extent as the laws of the United States, the U.K. and
continental European countries. This is especially relevant now that we have transferred all of our
assembly and test operations and chip-on-carrier operations, including certain engineering-related
functions, from our facilities in the U.K. to Shenzhen, China.
Our products may infringe the intellectual property rights of others, which could result in
expensive litigation or require us to obtain a license to use the technology from third parties, or
we may be prohibited from selling certain products in the future.
Companies in the industry in which we operate frequently are sued or receive informal claims
of patent infringement or infringement of other intellectual property rights. We have, from time to
time, received such claims, including from competitors and from companies that have substantially
more resources than us.
Third parties may in the future assert claims against us concerning our existing products or
with respect to future products under development, or with respect to products that we may acquire
through acquisitions. We have entered into and may in the future enter into indemnification
obligations in favor of some customers that could be triggered upon an allegation or finding that
we are infringing other parties proprietary rights. If we do infringe a third partys rights, we
may need to negotiate with holders of those rights in order to obtain a license to those rights or
otherwise settle any infringement claim. We have from time to time received notices from third
parties alleging infringement of their intellectual property and where appropriate have entered
into license agreements with those third parties with respect to that intellectual property. Any
license agreements that we wish to enter into the future with respect to intellectual property
rights may not be available to us on commercially reasonable terms, or at all.
We may not in all cases be able to resolve allegations of infringement through licensing
arrangements, settlement, alternative designs or otherwise. We may take legal action to determine
the validity and scope of the third-party rights or to defend against any allegations of
infringement. The recent economic downturn could result in holders of intellectual property rights
becoming more aggressive in alleging infringement of their intellectual property rights and we may
be the subject of such claims asserted by a third party. In the course of pursuing any of these
means or defending against any lawsuits filed against us, we could incur significant costs and
diversion of our resources and our managements attention. Due to the competitive nature of our
industry, it is unlikely that we could increase our prices to cover such costs. In addition, such
claims could result in significant penalties or injunctions that could prevent us from selling some
of our products in certain markets or result in settlements or judgments that require payment of
significant royalties or damages.
If we fail to obtain the right to use the intellectual property rights of others necessary to
operate our business, our business and results of operations will be materially and adversely
affected.
Certain companies in the telecommunications and optical components markets in which we sell our
products have experienced frequent litigation regarding patent and other intellectual property
rights. Numerous patents in these industries are held by others, including academic institutions
and our competitors. Optical component suppliers may seek to gain a competitive advantage or other
third parties, inside or outside our market, may seek an economic return on their intellectual
property portfolios by making infringement claims against us. We currently in-license certain
intellectual property of third parties, and in the future, we may need to obtain license rights to
patents or other intellectual property held by others to the extent necessary for our business. Unless
we are able to obtain such licenses on commercially reasonable terms, patents or other intellectual
property held by others could be used to inhibit or prohibit our production and sale of existing
products and our development of new products for our markets.
Licenses granting us
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the right to use
third-party technology may not be available on commercially reasonable terms, or at all. Generally,
a license, if granted, would include payments of up-front fees, ongoing royalties or both. These
payments or other terms could have a significant adverse impact on our operating results. In
addition, in the event we are granted such a license, it is likely such license would be
non-exclusive and other parties, including competitors, may be able to utilize such technology. Our
larger competitors may be able to obtain licenses or cross-license their technology on better terms
than we can, which could put us at a competitive disadvantage. In addition, our larger competitors
may be able to buy such technology and preclude us from licensing or using such technology.
The inability to obtain government licenses and approvals for desired international trading
activities or technology transfers may prevent the profitable operation of our business.
Many of our present and future business activities are subject to licensing by the United
States government under the Export Administration Act, the Export Administration Regulations and
other laws, regulations and requirements governing international trade and technology transfer. We
presently manufacture products in China and Thailand that require such licenses. The profitable
operations of our business may require the continuity of these licenses and may require further
licenses and approvals for future products in these and other countries. However, there is no
certainty to the continuity of these licenses, nor that further desired licenses and approvals may
be obtained.
The markets in which we operate are highly competitive, which could result in lost sales and lower
revenues.
The market for optical components and modules is highly competitive and this competition could
result in our existing customers moving their orders to our competitors. We are aware of a number
of companies that have developed or are developing optical component products, including tunable
lasers, pluggables, wavelength selective switches and thin film filter products, among others, that
compete directly with our current and proposed product offerings.
Certain of our competitors may be able to more quickly and effectively:
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develop or respond to new technologies or technical standards; |
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react to changing customer requirements and expectations; |
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devote needed resources to the development, production, promotion and sale of
products; and |
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deliver competitive products at lower prices. |
Some of our current competitors, as well as some of our potential competitors, have longer
operating histories, greater name recognition, broader customer relationships and industry
alliances and substantially greater financial, technical and marketing resources than we do. In
addition, market leaders in industries such as semiconductor and data communications, who may also
have significantly more resources than we do, may in the future enter our market with competing
products. Our competitors and new Chinese companies are establishing manufacturing operations in
China to take advantage of comparatively low manufacturing costs. All of these risks may be
increased if the market were to further consolidate through mergers or other business combinations
between competitors.
Certain of our competitors may not be impacted by the flooding in Thailand and this may place
competitive pressures on our ability to recover our flood-affected revenue losses.
We may not be able to compete successfully with our competitors and aggressive competition in
the market may result in lower prices for our products and/or decreased gross margins. Any such
development could have a material adverse effect on our business, financial condition and results
of operations.
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We generate a significant portion of our revenues internationally and therefore are subject to
additional risks associated with the extent of our international operations.
For the six months ended December 31, 2011 and the fiscal years ended July 2, 2011 and July 3,
2010, 17 percent, 17 percent and 19 percent of our revenues, respectively, were derived from sales
to customers located in the United States and 83 percent, 83 percent and 81 percent of our
revenues, respectively, were derived from sales to customers located outside the United States. We
are subject to additional risks related to operating in foreign countries, including:
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currency fluctuations, which could result in increased operating expenses and reduced
revenues; |
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greater difficulty in accounts receivable collection and longer collection periods; |
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difficulty in enforcing or adequately protecting our intellectual property; |
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ability to hire qualified candidates; |
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foreign taxes; |
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political, legal and economic instability in foreign markets; |
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foreign regulations; |
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changes in, or impositions of, legislative or regulatory requirements; |
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trade restrictions, including restrictions imposed by the United States government on
trading with parties in foreign countries; |
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transportation delays; |
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epidemics and illnesses; |
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terrorism and threats of terrorism; |
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work stoppages and infrastructure problems due to adverse weather conditions or
natural disasters; |
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work stoppages related to employee dissatisfaction; |
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changes in import/export regulations, tariffs, and freight rates; and |
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the effective protections of, and the ability to enforce, contractual arrangements. |
Any of these risks, or any other risks related to our foreign operations, could materially
adversely affect our business, financial condition and results of operations.
Changes in effective tax rates or adverse outcomes resulting from examination of our income tax
returns could adversely affect our results.
Our future effective tax rates could be adversely affected by earnings being lower than anticipated
in countries where we have lower statutory rates and higher than anticipated in countries where we
have higher statutory rates, by changes in the valuation of our deferred tax assets and
liabilities, or by changes in tax laws, regulations, accounting principles or interpretations
thereof. In addition, we are subject to the continuous examination of our income tax returns by the
Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse
outcomes resulting from these examinations to determine the adequacy of our provision for income
taxes. There can be no assurance that the outcomes from these continuous examinations will not have
an adverse effect on our operating results and financial condition.
43
We may face product liability claims.
Despite quality assurance measures, defects may occur in our products. The occurrence of any
defects in our products could give rise to liability for damages caused by such defects, including
consequential damages. Such defects could, moreover, impair market acceptance of our products. Both
could have a material adverse effect on our business and financial condition. In addition, we may
assume product warranty liabilities related to companies we acquire, which could have a material
adverse effect on our business and financial condition. In order to mitigate the risk of liability
for damages, we carry product liability insurance with a $25.0 million aggregate annual limit and
errors and omissions insurance with a $5.0 million annual limit. We cannot assure you that this
insurance would adequately cover our costs arising from any defects in our products or otherwise.
If we fail to attract and retain key personnel, our business could suffer.
Our future success depends, in part, on our ability to attract and retain key personnel.
Competition for highly skilled technical personnel is extremely intense and we continue to face
difficulty identifying and hiring qualified engineers in many areas of our business. We may not be
able to hire and retain such personnel at compensation levels consistent with our existing
compensation and salary structure. Our future success also depends on the continued contributions
of our executive management team and other key management and technical personnel, each of whom
would be difficult to replace. The loss of services of these or other executive officers or key
personnel or the inability to continue to attract qualified personnel could have a material adverse
effect on our business.
In addition, certain employees of companies we have acquired that are now employed by us may
decide to no longer work for us with little or no notice for a number of reasons, including
dissatisfaction with our corporate culture, compensation, and new roles or responsibilities, among
others.
Our business and operating results may be adversely affected by natural disasters or other
catastrophic events beyond our control.
Our business and operating results are vulnerable to natural disasters, such as earthquakes,
fires and floods, as well as other events beyond our control such as power loss, telecommunications
failures and uncertainties arising out of terrorist attacks in the United States and armed
conflicts overseas. For example, in the second quarter of fiscal year 2012, our results of
operations were materially and adversely impacted by the flooding in Thailand, and we expect the
results of the flooding in Thailand to continue to materially and adversely impact our results of
operations for at least the next two fiscal quarters. Additionally, our corporate headquarters and
a portion of our research and development and manufacturing operations are located in Silicon Valley, California. This
region in particular has been vulnerable to natural disasters, such as earthquakes. The occurrence
of any of these events could pose physical risks to our property and personnel, which may adversely
affect our ability to produce and deliver products to our customers. Although we presently maintain
insurance against certain of these events, we cannot be certain that our insurance will be adequate
to cover any damage sustained by us or by our customers.
RISKS RELATED TO REGULATORY COMPLIANCE AND LITIGATION
We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S.
Foreign Corrupt Practices Act, or the FCPA. Our failure to comply with these laws could result in
penalties which could harm our reputation and have a material adverse effect on our business,
results of operations and financial condition.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from
making improper payments to foreign officials for the purpose of obtaining or keeping business
and/or other benefits, along with various other anticorruption laws. Although we have implemented
policies and procedures designed to ensure that we, our employees and other intermediaries comply
with the FCPA and other anticorruption laws to which we are subject, there is no assurance that
such policies or procedures will work effectively all of the time or protect us against liability
under the FCPA or other laws for actions taken by our employees and other intermediaries with
respect to our business or any businesses that we may acquire. We have manufacturing
operations in China and other jurisdictions, many of which pose elevated risks of anti-corruption
violations, and we export our products for sale internationally. This puts us in frequent contact
with persons who may be considered foreign officials under
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the FCPA, resulting in an elevated
risk of potential FCPA violations. If we are not in compliance with the FCPA and other laws
governing the conduct of business with government entities (including local laws), we may be
subject to criminal and civil penalties and other remedial measures, which could have an adverse
impact on our business, financial condition, results of operations and liquidity. Any investigation
of any potential violations of the FCPA or other anticorruption laws by U.S. or foreign authorities
could harm our reputation and have an adverse impact on our business, financial condition and
results of operations.
A lack of effective internal control over our financial reporting could result in an inability to
report our financial results accurately, which could lead to a loss of investor confidence in our
financial reports and have an adverse effect on our stock price.
Effective internal controls over financial reporting are necessary for us to provide reliable
financial reports. If we cannot provide reliable financial reports or prevent fraud, our business
and operating results could be harmed. Our failure to implement and maintain effective internal
control over financial reporting could result in a material misstatement of our financial
statements or otherwise cause us to fail to meet our financial reporting obligations. This, in
turn, could result in a loss of investor confidence in the accuracy and completeness of our
financial reports, which could have an adverse effect on our business, financial condition,
operating results and our stock price, and we could be subject to stockholder litigation as a
result. Even if we are able to implement and maintain effective internal control over financial
reporting, the costs of doing business may increase and our management may be required to dedicate
greater time and resources to that effort. In addition, we have in the past, and may in the future,
acquire companies that have either experienced material weaknesses in their internal controls over
financial reporting or have had no previous reporting obligations under Sarbanes-Oxley. Failure to
integrate acquired businesses into our internal controls over financial reporting could cause those
controls to fail.
Litigation may substantially increase our costs and harm our business.
We are a party to numerous lawsuits and will continue to incur legal fees and other costs
related thereto, including potentially expenses for the reimbursement of legal fees of officers and
directors under indemnification obligations. The expense of continuing to defend such litigation
may be significant. In addition, there can be no assurance that we will be successful in any
defense. Further, the amount of time that will be required to resolve these lawsuits is
unpredictable and these actions may divert managements attention from the day-to-day operations of
our business, which could adversely affect our business, results of operations and cash flows.
Litigation is subject to inherent uncertainties, and an adverse result in these or other matters
that may arise from time to time could have a material adverse effect on our business, results of operations and financial
condition.
For a description of our current material litigation, see Part II, Item 1 Legal Proceedings
of this Quarterly Report on Form 10-Q.
In addition, from time to time, we have been a party to certain intellectual property
infringement litigation as more fully described above under Risks Related to Our Business Our
products may infringe the intellectual property rights of others, which could result in expensive
litigation or require us to obtain a license to use the technology from third parties, or we may be
prohibited from selling certain products in the future.
Our business involves the use of hazardous materials, and we are subject to environmental and
import/export laws and regulations that may expose us to liability and increase our costs.
We historically handled hazardous materials as part of our manufacturing activities. Consequently,
our operations are subject to environmental laws and regulations governing, among other things, the
use and handling of hazardous substances and waste disposal. We may incur costs to comply with
current or future environmental laws. As with other companies engaged in manufacturing activities
that involve hazardous materials, a risk of environmental liability is inherent in our
manufacturing activities, as is the risk that our facilities will be shut down in the event of a
release of hazardous waste, or that we would be subject to extensive monetary liabilities. The
costs associated with environmental compliance or remediation efforts or other environmental
liabilities could adversely affect our business. Under applicable European Union regulations, we, along with other
electronics component manufacturers, are prohibited from using lead and certain other hazardous
materials in our products. We could lose business or face product returns if we fail to maintain
these requirements properly.
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In addition, the sale and manufacture of certain of our products require on-going compliance
with governmental security and import/export regulations. We may, in the future, be subject to
investigation which may result in fines for violations of security and import/export regulations.
Furthermore, any disruptions of our product shipments in the future, including disruptions as a
result of efforts to comply with governmental regulations, could adversely affect our revenues,
gross margins and results of operations.
RISKS RELATED TO OUR COMMON STOCK
A variety of factors could cause the trading price of our common stock to be volatile or to decline
and we may incur significant costs from class action litigation due to our expected stock
volatility.
The trading price of our common stock has been, and is likely to continue to be, highly
volatile. Many factors could cause the market price of our common stock to rise and fall. In
addition to the matters discussed in other risk factors included herein, some of the reasons for
the fluctuations in our stock price are:
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fluctuations in our results of operations, including our gross margins; |
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changes in our business, operations or prospects; |
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hiring or departure of key personnel; |
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new contractual relationships with key suppliers or customers by us or our
competitors; |
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proposed acquisitions by us or our competitors; |
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financial results or projections that fail to meet public market analysts
expectations and changes in stock market analysts recommendations regarding us, other
optical technology companies or the telecommunication industry in general; |
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future sales of common stock, or securities convertible into or exercisable for
common stock; |
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adverse judgments or settlements obligating us to pay damages; |
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future issuances of common stock in connection with acquisitions or other
transactions; |
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acts of war, terrorism, natural disasters and other events that are either
unanticipated or uncontrollable by us; |
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industry, domestic and international market and economic conditions, including the
global macroeconomic downturn over the last three years and related sovereign debt issues
in certain parts of the world; |
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low trading volume in our stock; |
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developments relating to patents or property rights; and |
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government regulatory changes. |
In connection with our acquisition of Xtellus, during the first quarter of fiscal year 2012 we
issued 0.9 million shares of our common stock to settle our escrow liability. In October 2011, we
also issued 0.8 million shares of our common stock to pay a portion of the 12 month earnout
obligation associated with our acquisition of Mintera. These issuances and the subsequent sale of
these shares will dilute our existing stockholders and could potentially have a negative impact on
our stock price.
We could also choose to use shares of our common stock to pay a portion the 18 month earnout
obligation associated with our acquisition of Mintera. The issuance, if any, and subsequent sale of
these shares, would dilute our existing stockholders and potentially have a negative impact on our
stock price.
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Our shares of common stock have experienced substantial price and volume fluctuations, in many
cases without any direct relationship to our operating performance. An outgrowth of this market
volatility is the significant vulnerability of our stock price to any actual or perceived
fluctuation in the strength of the markets we serve, regardless of the actual consequence of such
fluctuations. As a result, the market price for our stock is highly volatile. These broad market
and industry factors have caused the market price of our common stock to fluctuate, and may in the
future cause the market price of our common stock to fluctuate, regardless of our actual operating
performance.
We are subject to pending securities class action and shareholder derivative legal proceedings.
When the market price of a stock experiences a sharp decline, as our stock price recently has,
holders of that stock have occasionally brought securities class action litigation against the
company that issued the stock. Several securities class action lawsuits have been filed against us
and certain of our current and former officers and directors. Each purported derivative complaint
alleges, among other things, counts for breaches of fiduciary duty, waste, and unjust enrichment.
For a description of these lawsuits, see Part II, Item 1 Legal Proceedings of this Quarterly
Report on Form 10-Q. These lawsuits will likely divert the time and attention of our management. In
addition, if these suits are resolved in a manner adverse to us, the damages we could be required
to pay may be substantial and could have an adverse impact on our results of operations and our
ability to operate our business.
Fluctuations in our operating results could adversely affect the market price of our common stock.
Our revenues and other operating results are likely to fluctuate significantly in the future.
In particular, we anticipate that our results of operations will be adversely affected for at least
the next two fiscal quarters as a result of the flooding in Thailand. In addition, the timing of
order placement, size of orders and satisfaction of contractual customer acceptance criteria,
changes in the pricing of our products due to competitive pressures as well as order or shipment
delays or deferrals, with respect to our products, may cause material fluctuations in revenues. Our
lengthy sales cycle, which may extend to more than one year, may cause our revenues and operating
results to vary from period to period and it may be difficult to predict the timing and amount of
any variation. Delays or deferrals in purchasing decisions by our customers may increase as we
develop new or enhanced products for new markets, including data communications, industrial,
research, consumer and biotechnology markets. Our current and anticipated future dependence on a
small number of customers increases the revenue impact of each such customers decision to delay or
defer purchases from us, or decision not to purchase products from us. Our expense levels in the future will be based, in large part, on our expectations
regarding future revenue sources and, as a result, operating results for any quarterly period in
which material orders fail to occur, or are delayed or deferred, could vary significantly.
Because of these and other factors, quarter-to-quarter comparisons of our results of
operations may not be indicative of our future performance. In future periods, our results of
operations may differ, in some cases materially, from the estimates of public market analysts and
investors. Such a discrepancy, or our failure to meet published financial projections, could cause
the market price of our common stock to decline.
We may not be able to raise capital when desired on favorable terms without dilution to our
stockholders, or at all.
As of December 31, 2011, we held $53.6 million in cash and cash equivalents and $0.6 million
in restricted cash. The rapidly changing industry in which we operate, the length of time between
developing and introducing a product to market and frequent changing customer specifications for
products, among other things, makes our prospects difficult to evaluate. It is possible that we may
not generate sufficient cash flow from operations, or be able to draw down on our $45.0 million
senior secured revolving credit facility, or otherwise have sufficient capital resources to meet
our future capital needs. If this occurs, we may need additional financing to execute on our
current or future business strategies.
If we raise funds through the issuance of equity, equity-linked or convertible debt
securities, our stockholders may be significantly diluted, and these newly-issued securities may
have rights, preferences or privileges senior to those of securities held by existing stockholders.
If we raise funds through the issuance of debt instruments, the agreements governing such debt
instruments may contain covenant restrictions that limit our ability to, among other
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things: (i) incur additional debt, assume obligations in connection with letters of credit, or issue
guarantees; (ii) create liens; (iii) make certain investments or acquisitions; (iv) enter into
transactions with our affiliates; (v) sell certain assets; (vi) redeem capital stock or make other
restricted payments; (vii) declare or pay dividends or make other distributions to stockholders;
and (viii) merge or consolidate with any entity. We cannot assure you that additional financing
will be available on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, if and when needed, our ability to fund our operations, develop
or enhance our products, or otherwise respond to competitive pressures and operate effectively
could be significantly limited.
Because we do not intend to pay dividends, stockholders will benefit from an investment in our
common stock only if it appreciates in value.
We have never declared or paid any dividends on our common stock. We anticipate that we will
retain any future earnings to support operations and to finance the development of our business and
do not expect to pay cash dividends in the foreseeable future. As a result, the success of an
investment in our common stock will depend entirely upon any future appreciation in its value.
There is no guarantee that our common stock will appreciate in value or even maintain the price at
which stockholders have purchased their shares.
We can issue shares of preferred stock that may adversely affect your rights as a stockholder of
our common stock.
Our certificate of incorporation authorizes us to issue up to 1,000,000 shares of preferred
stock with designations, rights and preferences determined from time-to-time by our board of
directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of
holders of our common stock. For example, an issuance of shares of preferred stock could:
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adversely affect the voting power of the holders of our common stock; |
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make it more difficult for a third-party to gain control of us; |
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discourage bids for our common stock at a premium; |
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limit or eliminate any payments that the holders of our common stock could expect to
receive upon our liquidation; or |
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otherwise adversely affect the market price of our common stock. |
We may in the future issue shares of authorized preferred stock at any time.
Delaware law and our charter documents contain provisions that could discourage or prevent a
potential takeover, even if such a transaction would be beneficial to our stockholders.
Some provisions of our certificate of incorporation and bylaws, as well as provisions of
Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These include provisions:
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authorizing the board of directors to issue preferred stock; |
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prohibiting cumulative voting in the election of directors; |
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limiting the persons who may call special meetings of stockholders; |
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prohibiting stockholder actions by written consent; |
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creating a classified board of directors pursuant to which our directors are elected
for staggered three-year terms; |
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permitting the board of directors to increase the size of the board and to fill
vacancies; |
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requiring a super-majority vote of our stockholders to amend our bylaws and certain
provisions of our certificate of incorporation; and |
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establishing advance notice requirements for nominations for election to the board of
directors or for proposing matters that can be acted on by stockholders at stockholder
meetings. |
We are subject to the provisions of Section 203 of the Delaware General Corporation Law which
limit the right of a corporation to engage in a business combination with a holder of 15 percent or
more of the corporations outstanding voting securities, or certain affiliated persons. We do not
currently have a stockholder rights plan in place.
Although we believe that these charter and bylaw provisions, and provisions of Delaware law,
provide an opportunity for the board to assure that our stockholders realize full value for their
investment, they could have the effect of delaying or preventing a change of control, even under
circumstances that some stockholders may consider beneficial.
Item 6. Exhibits
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed
as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by
reference.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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Date: February 8, 2012 |
OCLARO, INC.
(Registrant)
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By: |
/s/ Jerry Turin
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Jerry Turin |
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Chief Financial Officer
(Principal Financial and Accounting
Officer) |
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description of Exhibit |
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3.1 |
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Amended and Restated Bylaws of Oclaro, Inc., including Amendments No. 1 and No. 2 thereto (formerly
Bookham, Inc.) (previously filed as Exhibit 3.1 to Registrants Registration Statement on Form S-8
dated May 5, 2009 and incorporated herein by reference). |
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3.2 |
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Amendment No. 3 to Amended and Restated By-Laws of Oclaro, Inc. (previously filed as Exhibit 3.1 to
Registrants Current Report on Form 8-K filed on July 28, 2011 and incorporated herein by
reference). |
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3.3 |
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Restated Certificate of Incorporation of Oclaro, Inc. (previously filed as Exhibit 3.2 to
Registrants Annual Report on Form 10-K filed on September 1, 2010 and incorporated herein by
reference). |
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10.1 |
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2011 Employee Stock Purchase Plan (previously filed as Appendix A to our Proxy Statement for our
2011 Annual Meeting of Stockholders, filed with the SEC on September 9, 2011 and incorporated herein
by reference). |
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10.2 |
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Variable Pay Program (previously filed as Appendix B to our Proxy Statement for our 2011 Annual
Meeting of Stockholders, filed with the SEC on September 9, 2011 and incorporated herein by
reference). |
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10.3 |
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Form of Executive Severance and Retention Agreement, between Oclaro, Inc. and its executive officers
(previously filed as Exhibit 10.3 to Registrants Quarterly Report on Form 10-Q for the quarter
ended October 1, 2011, and incorporated herein by reference). |
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10.4 |
(1)(2) |
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Manufacturing and Purchase Agreement, dated November 9, 2011, between Oclaro, Inc. and Fabrinet. |
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31.1 |
(1) |
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Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
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31.2 |
(1) |
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Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
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32.1 |
(1) |
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
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32.2 |
(1) |
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
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101.INS
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(3) |
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XBRL Instance Document |
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101.SCH
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(3) |
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XBRL Taxonomy Extension Schema Document |
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101.CAL
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(3) |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF
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(3) |
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XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB
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(3) |
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XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE
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(3) |
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XBRL Taxonomy Extension Presentation Linkbase Document |
(1) |
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Filed herewith. |
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(2) |
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Portions of this exhibit have been omitted pursuant to a request for confidential
treatment submitted to the Securities and Exchange Commission. |
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(3) |
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Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language)
information is
furnished and not filed herewith, is not a part of a registration statement or prospectus
for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for
purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject
to liability under these sections. |
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