Form 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 October 1, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission file number 000-30684
OCLARO, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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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
50,561,677 shares of common stock outstanding as of November 4, 2011
OCLARO, INC.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS (UNAUDITED) |
OCLARO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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October 1, 2011 |
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July 2, 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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$ |
51,051 |
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$ |
62,783 |
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Restricted cash |
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631 |
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574 |
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Accounts receivable, net |
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81,219 |
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82,868 |
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Inventories |
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100,535 |
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102,201 |
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Prepaid expenses and other current assets |
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12,887 |
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16,495 |
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Total current assets |
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246,323 |
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264,921 |
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Property and equipment, net |
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69,470 |
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69,374 |
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Goodwill |
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10,904 |
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10,904 |
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Other intangible assets, net |
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18,919 |
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19,698 |
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Other non-current assets |
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13,964 |
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10,277 |
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Total assets |
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$ |
359,580 |
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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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$ |
51,349 |
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$ |
66,179 |
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Accrued expenses and other liabilities |
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47,111 |
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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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117,960 |
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126,882 |
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Deferred gain on sale-leaseback |
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12,345 |
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12,920 |
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Other non-current liabilities |
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6,196 |
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6,277 |
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Total liabilities |
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136,501 |
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146,079 |
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Commitments and contingencies (Note 8) |
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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: $0.01 par value per share; 90,000 shares authorized;
50,560 and 50,476 shares issued and outstanding at October 1,
2011 and July 2, 2011, respectively |
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506 |
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505 |
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Additional paid-in capital |
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1,322,663 |
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1,313,931 |
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Accumulated other comprehensive income |
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36,157 |
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40,730 |
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Accumulated deficit |
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(1,136,247 |
) |
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(1,126,071 |
) |
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Total stockholders equity |
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223,079 |
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229,095 |
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Total liabilities and stockholders equity |
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$ |
359,580 |
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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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October 1, |
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October 2, |
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2011 |
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2010 |
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(Thousands, except per share amounts) |
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Revenues |
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$ |
105,821 |
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$ |
121,347 |
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Cost of revenues |
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81,788 |
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86,521 |
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Gross profit |
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24,033 |
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34,826 |
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Operating expenses: |
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Research and development |
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17,667 |
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13,711 |
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Selling, general and administrative |
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17,534 |
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14,813 |
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Amortization of intangible assets |
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726 |
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619 |
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Restructuring, acquisition and related costs |
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(1,765 |
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670 |
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(Gain) loss on sale of property and equipment |
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60 |
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(21 |
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Total operating expenses |
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34,222 |
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29,792 |
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Operating income (loss) |
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(10,189 |
) |
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5,034 |
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Other income (expense): |
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Interest income (expense), net |
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(157 |
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(566 |
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Gain (loss) on foreign currency translation |
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1,392 |
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(3,587 |
) |
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Total other income (expense) |
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1,235 |
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(4,153 |
) |
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Income (loss) before income taxes |
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(8,954 |
) |
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881 |
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Income tax provision |
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1,222 |
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525 |
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Net income (loss) |
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$ |
(10,176 |
) |
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$ |
356 |
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Net income (loss) per share: |
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Basic |
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$ |
(0.21 |
) |
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$ |
0.01 |
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Diluted |
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$ |
(0.21 |
) |
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$ |
0.01 |
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Shares used in computing net income (loss) per share: |
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Basic |
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49,448 |
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48,115 |
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Diluted |
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49,448 |
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50,984 |
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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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Three Months Ended |
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October 1, |
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October 2, |
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2011 |
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2010 |
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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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$ |
(10,176 |
) |
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$ |
356 |
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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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(228 |
) |
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(231 |
) |
Depreciation and amortization |
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5,842 |
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3,833 |
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Adjustment in fair value of earnout obligation |
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(3,789 |
) |
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Stock-based compensation expense |
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1,583 |
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1,358 |
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Other non-cash adjustments |
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60 |
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(21 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(435 |
) |
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(583 |
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Inventories |
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(262 |
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(4,902 |
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Prepaid expenses and other current assets |
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(370 |
) |
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(258 |
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Other non-current assets |
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(337 |
) |
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86 |
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Accounts payable |
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(13,833 |
) |
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6,252 |
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Accrued expenses and other liabilities |
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(1,564 |
) |
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(6,896 |
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Net cash used in operating activities |
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(23,509 |
) |
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(1,006 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(6,220 |
) |
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(6,882 |
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Proceeds from sales of property and equipment |
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21 |
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Transfer from (to) restricted cash |
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(78 |
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1,696 |
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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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(6,298 |
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(15,647 |
) |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net |
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61 |
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516 |
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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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19,561 |
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516 |
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Effect of exchange rate on cash and cash equivalents |
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(1,486 |
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78 |
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Net decrease in cash and cash equivalents |
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(11,732 |
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(16,059 |
) |
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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$ |
51,051 |
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$ |
91,117 |
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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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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 October 1, 2011 and for the three months ended October 1, 2011
and October 2, 2010 have been prepared in accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP) for interim financial information and with the
instructions to Article 10 of Securities and Exchange Commission (SEC) Regulation S-X, and include
the accounts of Oclaro and all of 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
months ended October 1, 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.
NOTE 2. RECENT ACCOUNTING STANDARDS
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (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, 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. We intend to adopt ASU No. 2011-08 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 may impact amounts we record, if any, as goodwill impairment
in the future.
In June 2011, the FASB issued ASU No. 2011-05, which amends current comprehensive income
guidance. This update 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, 2013. The adoption of this update will not have
an impact on our condensed consolidated financial statements as it only requires a change in the
format of our current presentation.
6
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 |
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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. |
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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 three months ended October 1, 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 Combination, 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 table.
7
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are shown in the table
below by their corresponding balance sheet caption and consisted of the following types of
instruments at October 1, 2011:
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Fair Value Measurement at Reporting Date Using |
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Quoted Prices |
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Significant |
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in Active |
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Other |
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Significant |
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Markets for |
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Observable |
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Unobservable |
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Identical Assets |
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Inputs |
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Inputs |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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Total |
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(Thousands) |
|
Assets: |
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Cash and cash equivalents: |
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Money market funds |
|
$ |
19,734 |
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$ |
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$ |
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$ |
19,734 |
|
Prepaid expenses and other current assets: |
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Unrealized loss on currency instruments
designated as cash flow hedges |
|
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(25 |
) |
|
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|
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|
(25 |
) |
Other non-current assets: |
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Marketable securities |
|
|
158 |
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|
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|
158 |
|
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|
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|
|
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Total assets measured at fair value |
|
$ |
19,892 |
|
|
$ |
(25 |
) |
|
$ |
|
|
|
$ |
19,867 |
|
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Liabilities: |
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Accrued expenses and other liabilities: |
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|
|
|
|
|
|
Earnout obligations for Mintera acquisition |
|
$ |
|
|
|
$ |
|
|
|
$ |
12,351 |
|
|
$ |
12,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
12,351 |
|
|
$ |
12,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides details regarding the changes in assets and liabilities
classified within Level 3 from July 2, 2011 to October 1, 2011:
|
|
|
|
|
|
|
Accrued Expenses |
|
|
|
and Other Liabilities |
|
|
|
(Thousands) |
|
Balance at July 2, 2011 |
|
$ |
16,140 |
|
Fair value adjustment to Mintera earnout obligations |
|
|
(3,789 |
) |
|
|
|
|
Balance at October 1, 2011 |
|
$ |
12,351 |
|
|
|
|
|
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 October 1, 2011, we held 14 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 $11.5 million of put and
call options which expire, or expired, at various dates ranging from October 2011 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 October 1, 2011
will generally be reclassified into other income (expense) within the next 12 months. As of October
1, 2011, each of the 14 designated cash flow hedges was determined to be fully effective;
therefore, we recorded an unrealized loss of $25,000 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 COMBINATION
Acquisition of Mintera
On July 21, 2010, we acquired Mintera, a privately-held company providing high-performance
optical transport sub-systems solutions. For accounting purposes, the total fair value of
consideration given in connection with the acquisition of Mintera was $25.6 million, which we
allocated to the assets acquired and liabilities assumed as of the acquisition date based on their
estimated fair values. 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 agreement, 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 these obligations and determined
that their fair value decreased by $3.8 million based on revised estimates of revenues from Mintera
products. This $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 for the
three months ended October 1, 2011. During the three months ended October 2, 2010, we recorded
$0.2 million in interest expense related to these obligations.
Based on sales in the 12 month period following the acquisition, earnout consideration of $3.3
million became payable for the 12 month obligation during the three months ended October 1, 2011.
This amount has been recorded in accrued expenses and other liabilities in our condensed
consolidated balance sheet at October 1, 2011. On October 21, 2011, we paid $0.5 million in cash
and issued 0.8 million shares of our common stock valued at $2.8 million to settle the 12 month
obligation. See Note 15, Subsequent Events.
At October 1, 2011, the estimated fair value of the 18 month obligation of $9.0 million was
determined 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. This
amount has been recorded, along with accrued interest, in accrued expenses and other liabilities in
our condensed consolidated balance sheet at October 1, 2011. The 18 month obligation is payable in
April 2012.
NOTE 5. BALANCE SHEET DETAILS
The following table provides details regarding our cash and cash equivalents at the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash-in-bank |
|
$ |
31,317 |
|
|
$ |
42,585 |
|
Money market funds |
|
|
19,734 |
|
|
|
20,198 |
|
|
|
|
|
|
|
|
|
|
$ |
51,051 |
|
|
$ |
62,783 |
|
|
|
|
|
|
|
|
The following table provides details regarding our inventories at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Inventories: |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
39,093 |
|
|
$ |
38,863 |
|
Work-in-process |
|
|
38,884 |
|
|
|
37,084 |
|
Finished goods |
|
|
22,558 |
|
|
|
26,254 |
|
|
|
|
|
|
|
|
|
|
$ |
100,535 |
|
|
$ |
102,201 |
|
|
|
|
|
|
|
|
9
The following table provides details regarding our property and equipment, net at the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Property and equipment, net: |
|
|
|
|
|
|
|
|
Buildings |
|
$ |
17,513 |
|
|
$ |
17,640 |
|
Plant and machinery |
|
|
154,647 |
|
|
|
149,120 |
|
Fixtures, fittings and equipment |
|
|
1,779 |
|
|
|
1,802 |
|
Computer equipment |
|
|
15,467 |
|
|
|
14,235 |
|
|
|
|
|
|
|
|
|
|
|
189,406 |
|
|
|
182,797 |
|
Less: Accumulated depreciation |
|
|
(119,936 |
) |
|
|
(113,423 |
) |
|
|
|
|
|
|
|
|
|
$ |
69,470 |
|
|
$ |
69,374 |
|
|
|
|
|
|
|
|
The following table presents details regarding our accrued expenses and other liabilities
at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Accrued expenses and other liabilities: |
|
|
|
|
|
|
|
|
Trade payables |
|
$ |
3,386 |
|
|
$ |
6,241 |
|
Compensation and benefits related accruals |
|
|
8,958 |
|
|
|
11,097 |
|
Earnout obligations for Mintera acquisition |
|
|
12,351 |
|
|
|
16,140 |
|
Escrow liability for Xtellus acquisition |
|
|
|
|
|
|
7,000 |
|
Warranty accrual |
|
|
2,312 |
|
|
|
2,175 |
|
Other accruals |
|
|
20,104 |
|
|
|
18,050 |
|
|
|
|
|
|
|
|
|
|
$ |
47,111 |
|
|
$ |
60,703 |
|
|
|
|
|
|
|
|
The following table presents the components of accumulated other comprehensive income at
the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
October 1, 2011 |
|
|
July 2, 2011 |
|
|
|
(Thousands) |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
$ |
39,050 |
|
|
$ |
43,536 |
|
Unrealized gain (loss) on currency instruments designated as
cash flow hedges |
|
|
(25 |
) |
|
|
54 |
|
Unrealized loss on marketable securities |
|
|
(147 |
) |
|
|
(139 |
) |
Adjustment for Swiss defined benefit plan |
|
|
(2,721 |
) |
|
|
(2,721 |
) |
|
|
|
|
|
|
|
|
|
$ |
36,157 |
|
|
$ |
40,730 |
|
|
|
|
|
|
|
|
NOTE 6. 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.
As of October 1, 2011 there was $19.5 million outstanding under the Credit Agreement at an
average interest rate of 3.24% and we were in compliance with all covenants. As of July 2, 2011,
there were no amounts outstanding under the Credit Agreement. At October 1, 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.
10
NOTE 7. 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 months ended October 1, 2011
and October 2, 2010 included the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 1, |
|
|
October 2, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
Service cost |
|
$ |
628 |
|
|
$ |
419 |
|
Interest cost |
|
|
215 |
|
|
|
176 |
|
Expected return on plan assets |
|
|
(281 |
) |
|
|
(232 |
) |
|
|
|
|
|
|
|
Net periodic pension costs |
|
$ |
562 |
|
|
$ |
363 |
|
|
|
|
|
|
|
|
During the three months ended October 1, 2011 and October 2, 2010, we contributed $0.3
million and $0.4 million, respectively, to our Swiss Plan. We currently anticipate contributing an
additional $0.9 million to this pension plan during the remainder of fiscal year 2012.
NOTE 8. 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 indemnifications in favor of customers in respect of liabilities they
may incur as a result of purchasing our products should such products infringe the intellectual
property rights of a third party. We have not historically paid out any material amounts related to
these indemnifications, therefore, no accrual has been made for these indemnifications.
Warranty accrual
We 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 |
|
|
|
October 1, |
|
|
October 2, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
Warranty provision beginning of period |
|
$ |
2,175 |
|
|
$ |
2,437 |
|
Warranties assumed in acquisitions |
|
|
|
|
|
|
357 |
|
Warranties issued |
|
|
677 |
|
|
|
432 |
|
Warranties utilized or expired |
|
|
(490 |
) |
|
|
(564 |
) |
Currency translation adjustment |
|
|
(50 |
) |
|
|
74 |
|
|
|
|
|
|
|
|
Warranty provision end of period |
|
$ |
2,312 |
|
|
$ |
2,736 |
|
|
|
|
|
|
|
|
11
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 alleges that various underwriters
engaged in improper and undisclosed activities related to the allocation of shares in New Focus
initial public offering and seeks unspecified damages for claims under the Exchange Act on behalf
of a purported class of purchasers of common stock from May 17, 2000 to December 6, 2000.
The lawsuit against New Focus is coordinated for pretrial proceedings with a number of other
pending litigations challenging underwriter practices in over 300 cases, as In re Initial Public
Offering Securities Litigation, 21 MC 92 (SAS), including actions against Bookham Technology plc,
now known as Oclaro Technology Ltd (Bookham Technology) and Avanex Corporation, now known as Oclaro
(North America), Inc. (Avanex), and certain of each entitys respective officers and directors, and
certain of the underwriters of their public offerings. In October 2002, the claims against the
directors and officers of New Focus, Bookham Technology and Avanex were dismissed, without
prejudice, subject to the directors and officers execution of tolling agreements.
The parties have reached a global settlement of the litigation. On October 5, 2009, the Court
entered an order certifying a settlement class and granting final approval of the settlement. Under
the settlement, the insurers will pay the full amount of the settlement share allocated to New
Focus, Bookham Technology and Avanex, and New Focus, Bookham Technology and Avanex will bear no
financial liability. New Focus, Bookham Technology and Avanex, as well as the officer and director
defendants who were previously dismissed from the action pursuant to tolling agreements, will
receive complete dismissals from the case. Certain objectors have appealed the Courts October 5,
2009 order to the Second Circuit Court of Appeals. If for any reason the settlement does not become
effective, we believe that Bookham Technology, New Focus and Avanex have meritorious defenses to
the claims and therefore believe that such claims will not have a material effect on our financial
position, results of operations or cash flows.
On 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 is subject to approval by the
Delaware Bankruptcy Court, and the hearing to approve the settlement agreement is currently
scheduled for November 29, 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. Discovery
has not commenced, and no trial has been scheduled in this action. We intend to defend this
litigation vigorously.
12
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. Discovery has not commenced, and no trial has
been scheduled in any of these actions.
NOTE 9. STOCKHOLDERS EQUITY
Comprehensive Income
For the three months ended October 1, 2011 and October 2, 2010, comprehensive income is
primarily comprised of our net income, changes in the unrealized gain (loss) on currency
instruments designated as cash flow hedges, unrealized loss on short-term investments and currency
translation adjustments. The components of comprehensive income were as follows for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 1, |
|
|
October 2, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
Net income (loss) |
|
$ |
(10,176 |
) |
|
$ |
356 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
(4,486 |
) |
|
|
5,613 |
|
Unrealized gain (loss) on currency instruments
designated as cash flow hedges |
|
|
(79 |
) |
|
|
323 |
|
Unrealized loss on marketable securities |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(14,749 |
) |
|
$ |
6,292 |
|
|
|
|
|
|
|
|
Warrants
The following table summarizes activity relating to warrants to purchase our common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 October 1, 2011 |
|
|
818 |
|
|
$ |
13.48 |
|
|
|
|
|
|
|
|
|
Common Stock
On December 17, 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. In the fiscal quarter ended January 2, 2010, we issued approximately 1.0
million shares of our common stock into a third-party escrow account to secure this obligation.
13
During the quarter 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, to the former Xtellus stockholders. The transfer of the shares
resulted in a $7.0 million increase to our additional paid-in capital and a $7.0 million decrease
in our accrued expenses and other liabilities within our condensed consolidated balance sheet at
October 1, 2011. The balance of 0.1 million shares of common stock held in escrow was returned to
us, retired and returned to the status of authorized but unissued common stock in September 2011.
NOTE 10. 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 October 1, 2011, there were approximately 2.7 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 vest upon the achievement of certain revenue growth targets through June 30,
2013, 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 three months ended October 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Weighted- |
|
|
Restricted Stock |
|
|
Weighted- |
|
|
|
Available |
|
|
Options |
|
|
Average |
|
|
Awards / Units |
|
|
Average Grant |
|
|
|
For Grant |
|
|
Outstanding |
|
|
Exercise Price |
|
|
Outstanding |
|
|
Date Fair Value |
|
|
|
(Thousands) |
|
|
(Thousands) |
|
|
|
|
|
|
(Thousands) |
|
|
|
|
|
Balances at July 2, 2011 |
|
|
3,727 |
|
|
|
3,350 |
|
|
$ |
9.38 |
|
|
|
799 |
|
|
$ |
10.15 |
|
Granted |
|
|
(906 |
) |
|
|
359 |
|
|
|
4.37 |
|
|
|
438 |
|
|
|
4.35 |
|
Granted performance stock units |
|
|
(250 |
) |
|
|
|
|
|
|
|
|
|
|
200 |
|
|
|
4.33 |
|
Exercised or released |
|
|
|
|
|
|
(23 |
) |
|
|
2.65 |
|
|
|
(125 |
) |
|
|
11.88 |
|
Cancelled or forfeited |
|
|
82 |
|
|
|
(150 |
) |
|
|
17.09 |
|
|
|
(37 |
) |
|
|
10.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at October 1, 2011 |
|
|
2,653 |
|
|
|
3,536 |
|
|
|
8.93 |
|
|
|
1,275 |
|
|
|
7.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure information about our stock options outstanding as of October 1,
2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Value |
|
|
|
(Thousands) |
|
|
|
|
|
|
(Years) |
|
|
(Thousands) |
|
Options exercisable at October 1, 2011 |
|
|
1,738 |
|
|
$ |
9.97 |
|
|
|
6.4 |
|
|
$ |
640 |
|
Options outstanding at October 1, 2011 |
|
|
3,536 |
|
|
$ |
8.93 |
|
|
|
7.5 |
|
|
|
972 |
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic
value, based on the closing price of our common stock of $3.64 on September 30, 2011, which would
have been received by the option holders had all option holders exercised their options as of that
date (our closing stock price was $4.37 on November 4, 2011). There were approximately 0.6 million
shares of common stock subject to in-the-money options which were exercisable as of October 1,
2011. We settle employee stock option exercises with newly issued shares of common stock.
14
NOTE 11. STOCK-BASED COMPENSATION
We recognize compensation expense in our statement of operations related to all share-based
awards, including grants of stock options, based on the grant date fair value of such share-based
awards. Estimating the grant date fair value of such share-based awards requires us to make
judgments in the determination of inputs into the Black-Scholes stock option pricing model which we
use to arrive at an estimate of the grant date fair value for such awards. The assumptions used in
this model to value stock option grants for the three months ended October 1, 2011 and October 2,
2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 1, |
|
|
October 2, |
|
|
|
2011 |
|
|
2010 |
|
Expected life |
|
4.8 years |
|
|
4.5 years |
|
Risk-free interest rate |
|
|
1.0 |
% |
|
|
1.3 |
% |
Volatility |
|
|
92.8 |
% |
|
|
96.6 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
The amounts included in cost of revenues and operating expenses for stock-based
compensation for the three months ended October 1, 2011 and October 2, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 1, |
|
|
October 2, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
Stock-based compensation by category of expense: |
|
|
|
|
|
|
|
|
Cost of revenues |
|
$ |
309 |
|
|
$ |
310 |
|
Research and development |
|
|
367 |
|
|
|
318 |
|
Selling, general and administrative |
|
|
907 |
|
|
|
730 |
|
|
|
|
|
|
|
|
|
|
$ |
1,583 |
|
|
$ |
1,358 |
|
|
|
|
|
|
|
|
Stock-based compensation by type of award: |
|
|
|
|
|
|
|
|
Stock options |
|
$ |
884 |
|
|
$ |
763 |
|
Restricted stock awards |
|
|
788 |
|
|
|
642 |
|
Inventory adjustment to cost of revenues |
|
|
(89 |
) |
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,583 |
|
|
$ |
1,358 |
|
|
|
|
|
|
|
|
As of October 1, 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 months ended October 1, 2011, is
approximately $27,000 in compensation cost related to the issuance of PSUs. As of October 1, 2011,
we have determined that the achievement of the performance conditions associated with the PSUs is
probable at the 100 percent 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.
NOTE 12. INCOME TAXES
The total amount of our unrecognized tax benefits as of October 1, 2011 and July 2, 2011 were
approximately $6.9 million. For the three months ended October 1, 2011, we had $1.8 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.
15
NOTE 13. NET INCOME (LOSS) PER SHARE
The following table presents the calculation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 1, |
|
|
October 2, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands,except per share amounts) |
|
Net income (loss) |
|
$ |
(10,176 |
) |
|
$ |
356 |
|
|
|
|
|
|
|
|
Weighted-average shares basic |
|
|
49,448 |
|
|
|
48,115 |
|
Effect of dilutive potential common shares from: |
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
1,657 |
|
Restricted stock awards |
|
|
|
|
|
|
770 |
|
Obligations under escrow agreement |
|
|
|
|
|
|
442 |
|
|
|
|
|
|
|
|
Weighted-average shares diluted |
|
|
49,448 |
|
|
|
50,984 |
|
|
|
|
|
|
|
|
Net income (loss) per share basic |
|
$ |
(0.21 |
) |
|
$ |
0.01 |
|
Net income (loss) per share diluted |
|
$ |
(0.21 |
) |
|
$ |
0.01 |
|
Basic net income per share is computed using only the weighted-average number of shares
of common stock outstanding for the applicable period, while diluted net income per share is
computed assuming conversion of all potentially dilutive securities, such as stock options,
unvested restricted stock awards, warrants and obligations under escrow agreements during such
period.
For the three months ended October 1, 2011 and October 2, 2010, respectively, we excluded 4.6
million and 1.8 million of outstanding stock options, warrants and unvested restricted stock awards
from the calculation of diluted net income per share because their effect would have been
anti-dilutive.
NOTE 14. 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 |
|
|
|
October 1, |
|
|
October 2, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Thousands) |
|
United States |
|
$ |
16,902 |
|
|
$ |
19,664 |
|
Canada |
|
|
5,909 |
|
|
|
3,401 |
|
Europe |
|
|
26,294 |
|
|
|
35,424 |
|
Asia |
|
|
49,306 |
|
|
|
54,329 |
|
Rest of world |
|
|
7,410 |
|
|
|
8,529 |
|
|
|
|
|
|
|
|
|
|
$ |
105,821 |
|
|
$ |
121,347 |
|
|
|
|
|
|
|
|
16
Significant Customers and Concentration of Credit Risk
For the three months ended October 1, 2011, Huawei Technologies Co., Ltd. (Huawei) accounted
for 13 percent, Cisco Systems, Inc. accounted for 11 percent, Fujitsu Limited accounted for 11
percent and Alcatel-Lucent accounted for 10 percent of our revenues. For the three months ended
October 2, 2010, Huawei accounted for 15 percent and Alcatel-Lucent accounted for 13 percent of our
revenues.
As of October 1, 2011, Alcatel-Lucent accounted for 15 percent and Huawei accounted for 13
percent of our accounts receivable. As of July 2, 2011, no customer accounted for 10 percent or
more of our accounts receivable.
NOTE 15. SUBSEQUENT EVENTS
In connection with our July 2010 acquisition of Mintera, on October 21, 2011 we paid $0.5
million in cash and issued 0.8 million shares of our common stock valued at $2.8 million to settle
the 12 month earnout obligation. See Note 4, Business Combination.
On October 22, 2011, Fabrinet, our primary contract manufacturer, announced that, as a result
of the flooding in Thailand, it has suspended operations at two factories located in Chokchai and
Pinehurst. Fabrinet manufactures approximately 30 percent of our total finished goods in these
factories. Subsequently, on October 24, Fabrinet announced its Chokchai factory suffered extensive
flood damage and is now largely inaccessible due to high water levels inside and surrounding the
manufacturing facility. Although our management cannot yet quantify the possible impact 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. Our current evaluation is that revenues for the second quarter of fiscal 2012 could be
$25 million to $30 million less as a result of this disruption than would otherwise be expected.
While we maintain both property and business interruption insurance coverage, there can be no
assurance as to the extent or timing of insurance recoveries.
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 on a date determined by our board of directors within 12 months
following stockholder approval.
17
|
|
|
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. These forward-looking statements include statements
concerning (i) potential future financial results, (ii) the impact of acquisitions on our financial
performance, including without limitation, accretion or dilution, gross margin, operating income
and cash usage, (iii) future expense levels and sources for improvement of gross margin and
operating expenses, including supply chain synergies, optimizing mix of product offerings,
transition to higher margin product offerings and benefits of combined research and development and
sales organizations, (iv) the expected financial opportunities after mergers or acquisitions and
the expected synergies related thereto, (v) opportunities to grow in adjacent markets, (vi) our
organizational restructuring with the formation of two new business units focused on photonic
components and optical networks solutions, (vii) the potential impact of the flooding in Thailand
on our product supply and on results of operations (viii) the potential outsourcing of our Shenzhen assembly and test operations to a major contract manufacturer and the expected
proceeds to us from such transaction, and the entrance into a supply agreement in connection with such transaction, and (ix) the assumptions underlying such
statements. We have based our forward looking statements on our managements beliefs and
assumptions based on information available to our management at the time the statements are made.
There are a number of important factors that could cause our actual results or events to differ
materially from those indicated by such forward-looking statements including (i) the impact to our operations and financial condition attributable to the flooding in Thailand, (ii) our inability to reach final terms,
enter into a definitive agreement or consummate the outsourcing of our Shenzhen assembly and test operations to a major contract manufacturer (and no guarantee can be provided that such transaction will occur, the supply agreement will result
in the benefits that we expect or the transaction will result in us receiving the anticipated cash proceeds
and the timing of receipt of such proceeds), (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) the potential lack of availability of credit or
opportunity for equity-based financing 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. 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.
18
RECENT DEVELOPMENTS
On October 22, 2011, Fabrinet, our primary contract manufacturer, announced that, as a result
of the flooding in Thailand, it has suspended operation at two factories located in Chokchai and
Pinehurst. Fabrinet manufactures approximately 30 percent of our total finished goods in these
factories. As a result, we immediately began to deploy our contingency planning to assess
alternative manufacturing options. Subsequently, on October 24, Fabrinet announced its Chokchai
factory suffered extensive flood damage and is now largely inaccessible due to high water levels
inside and surrounding the manufacturing facility. Our assessment of the damage to equipment and
inventory on site is affected by the limited site accessibility at this time. Our and Fabrinets
management teams are actively investigating alternative production locations and have enacted
business continuity plans. Fabrinets Pinehurst facility remains secure from flood water at this
time, but remains closed. Shipments continue from our Shenzhen, China manufacturing facility, and
other locations which account for approximately 70 percent of our finished goods output. However,
we are still evaluating the broader supply chain implications of the flooding in Thailand across
our entire manufacturing operations. Although our management cannot yet quantify the possible
impact 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. Our current evaluation is that revenues for the second quarter of fiscal
2012 could be $25 million to $30 million less as a result of this disruption than would otherwise
be expected. There is no assurance that the disruption in our second quarter fiscal 2012 revenues
will be limited to this range, nor can it be assured that the adverse impact will be limited to the
next two fiscal quarters. In addition, certain of our customers may seek alternative sources of
supply if we are unable to meet their supply needs as a result of the flooding in Thailand. 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
extent or timing of insurance recoveries.
We are currently in negotiations to outsource our Shenzhen assembly and test operations to a major
contract manufacturer in a transaction which we expect could generate $30 million to
$40 million in net cash proceeds in our third fiscal quarter of 2012, with potential
additional consideration to be received in the future, and would include a long term supply
agreement with the contract manufacturer. We are also evaluating selling our building in Shenzhen. No guarantee can be provided that such transactions will occur, the supply agreement will result in the benefits that we expect or the transactions will result in us receiving the anticipated cash proceeds and the timing of receipt of such proceeds.
RESULTS OF OPERATIONS
The following tables set forth our condensed consolidated results of operations for the three
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 |
|
|
|
October 1,2011 |
|
|
October 2, 2010 |
|
|
Change |
|
|
(Decrease) |
|
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
|
(Thousands) |
|
|
% |
|
Revenues |
|
$ |
105,821 |
|
|
|
100.0 |
|
|
$ |
121,347 |
|
|
|
100.0 |
|
|
$ |
(15,526 |
) |
|
|
(12.8 |
) |
Cost of revenues |
|
|
81,788 |
|
|
|
77.3 |
|
|
|
86,521 |
|
|
|
71.3 |
|
|
|
(4,733 |
) |
|
|
(5.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
24,033 |
|
|
|
22.7 |
|
|
|
34,826 |
|
|
|
28.7 |
|
|
|
(10,793 |
) |
|
|
(31.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
17,667 |
|
|
|
16.7 |
|
|
|
13,711 |
|
|
|
11.3 |
|
|
|
3,956 |
|
|
|
28.9 |
|
Selling, general and administrative |
|
|
17,534 |
|
|
|
16.6 |
|
|
|
14,813 |
|
|
|
12.2 |
|
|
|
2,721 |
|
|
|
18.4 |
|
Amortization of intangible assets |
|
|
726 |
|
|
|
0.7 |
|
|
|
619 |
|
|
|
0.5 |
|
|
|
107 |
|
|
|
17.3 |
|
Restructuring, acquisition and
related costs |
|
|
(1,765 |
) |
|
|
(1.7 |
) |
|
|
670 |
|
|
|
0.6 |
|
|
|
(2,435 |
) |
|
|
n/m |
(1) |
(Gain) loss on sale of property
and equipment |
|
|
60 |
|
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
81 |
|
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
34,222 |
|
|
|
32.3 |
|
|
|
29,792 |
|
|
|
24.6 |
|
|
|
4,430 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(10,189 |
) |
|
|
(9.6 |
) |
|
|
5,034 |
|
|
|
4.1 |
|
|
|
(15,223 |
) |
|
|
n/m |
(1) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
(157 |
) |
|
|
(0.1 |
) |
|
|
(566 |
) |
|
|
(0.5 |
) |
|
|
409 |
|
|
|
(72.3 |
) |
Gain (loss) on foreign currency
translation |
|
|
1,392 |
|
|
|
1.3 |
|
|
|
(3,587 |
) |
|
|
(2.9 |
) |
|
|
4,979 |
|
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
1,235 |
|
|
|
1.2 |
|
|
|
(4,153 |
) |
|
|
(3.4 |
) |
|
|
5,388 |
|
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(8,954 |
) |
|
|
(8.4 |
) |
|
|
881 |
|
|
|
0.7 |
|
|
|
(9,835 |
) |
|
|
n/m |
(1) |
Income tax provision |
|
|
1,222 |
|
|
|
1.2 |
|
|
|
525 |
|
|
|
0.4 |
|
|
|
697 |
|
|
|
132.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,176 |
) |
|
|
(9.6 |
) |
|
$ |
356 |
|
|
|
0.3 |
|
|
$ |
(10,532 |
) |
|
|
n/m |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Revenues
Revenues for the three months ended October 1, 2011 decreased by $15.5 million, or 13 percent,
compared to the three months ended October 2, 2010. The decrease was primarily due to inventory
corrections and a decrease in demand in our telecommunications related markets, largely associated
with uncertain global macroeconomic conditions. See "Recent Developments" for a discussion of the
impact on our future results of operations as a result of the flooding in Thailand.
For the three months ended October 1, 2011, Huawei Technologies Co., Ltd. (Huawei) accounted
for $13.3 million, or 13 percent, of our revenues; Cisco Systems, Inc. accounted for $11.6 million,
or 11 percent, of our revenues; Fujitsu Limited accounted for $11.4 million, or 11 percent, of our
revenues; and Alcatel-Lucent accounted for $10.5 million, or 10 percent of our revenues. For the
three months ended October 2, 2010, Huawei accounted for $18.3 million, or 15 percent, of our
revenues and Alcatel-Lucent accounted for $16.0 million, or 13 percent, of our revenues.
Cost of Revenues
Our cost of revenues for the three months ended October 1, 2011 decreased by $4.7 million, or
5 percent, from the three months ended October 2, 2010. The decrease was primarily related to
reduced costs associated with lower volumes of revenue.
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 23 percent for the
three months ended October 1, 2011, compared to 29 percent for the three months ended October 2,
2010. The decrease in gross margin rate was primarily due to the impact of our fixed costs on lower
revenues, centered around a lower mix of relatively higher margin
10 G/bps transmission products, a higher mix of less mature 40 G/bps transmission products that are not yet margin optimized, and a
$1.5 million increase in depreciation expense. Our gross profit was also favorably impacted by
approximately $1.8 million as a result of the U.K. pound sterling and the Swiss franc weakening
relative to the U.S. dollar.
Research and Development Expenses
Research and development expenses increased to $17.7 million for the three months ended
October 1, 2011 from $13.7 million for the three months ended October 2, 2010. The increase was
primarily due to increased investment in research and development resources, primarily
personnel-related. Personnel-related costs increased to $10.5 million for the three months ended
October 1, 2011, compared with $8.2 million for the three months ended October 2, 2010. Other
costs, including the costs of design tools and facilities-related costs increased to $7.2 million
for the three months ended October 1, 2011, compared with $5.5 million for the three months ended
October 2, 2010. Research and development expenses were favorably impacted by approximately $0.6
million as a result of the U.K. pound sterling and the Swiss franc weakening relative to the U.S.
dollar.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $17.5 million for the three months
ended October 1, 2011, from $14.8 million for the three months ended October 2, 2010.
Personnel-related costs increased to $10.0 million for the three months ended October 1, 2011,
compared with $7.8 million for the three months ended October 2, 2010. Other costs, including legal
and professional fees, facilities expenses and other miscellaneous expenses, increased to $7.5
million for the three months ended October 1, 2011, compared with $7.0 million for the three months
ended October 2, 2010. Selling, general and administrative expenses were favorably impacted by
approximately $0.6 million as a result of the U.K. pound sterling and the Swiss franc weakening
relative to the U.S. dollar.
Restructuring, Acquisition and Related Costs
During each of the three months ended October 1, 2011 and October 2, 2010, we accrued $0.6
million in employee separation costs related to previously announced restructuring plans. We also
incurred $1.1 million of expenses during the three months ended October 1, 2011 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.
20
During the three months ended October 1, 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 decreased by $3.8 million based on revised estimates of revenues from Mintera
products. This $3.8 million decrease in fair value was recorded as a decrease in restructuring,
acquisition and related expenses in the first quarter of fiscal year 2012.
Other Income (Expense)
Other income (expense) for the three months ended October 1, 2011 was $1.2 million in income,
an increase of $5.4 million from an expense of $4.2 million for the three months ended October 2,
2010. This increase was primarily due to recording income of $2.3 million 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
three months ended October 1, 2011, as compared to a $2.3 million expense for the three months
ended October 2, 2010. In addition, there was also a $0.5 million decrease in interest expense,
which related to reduced interest expense related to liabilities recognized in the acquisitions of
Xtellus, Inc. (Xtellus) and Mintera.
Income Tax Provision (Benefit)
For the three months ended October 1, 2011 and October 2, 2010, our income tax provisions of
$1.2 million and $0.5 million, respectively, primarily related to our foreign operations.
In the fourth quarter of fiscal year 2010, we determined that it is more-likely-than-not that
we will utilize net operating losses in one of our foreign jurisdictions due to current earnings
and projections of future profitability. Accordingly, we released $1.3 million of our valuation
allowance against $1.3 million of previously unrecognized deferred tax assets during the fourth
quarter of fiscal year 2010. This amount represented the entire remaining deferred tax asset
related to the accumulated net operating losses of the foreign jurisdiction. Due to the
uncertainty surrounding the realization of the tax attributes in other jurisdictions, we have
recorded a full valuation allowance against our remaining foreign and domestic deferred tax assets
as of October 1, 2011.
RECENT ACCOUNTING STANDARDS
See Note 2, Recent Accounting Standards, 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 condensed consolidated financial statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations is based on
our condensed consolidated financial statements contained elsewhere in this Quarterly Report on
Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in
the United States (U.S. GAAP). The preparation of our financial statements requires us to make
estimates and judgments that affect our reported assets and liabilities, revenues and expenses and
other financial information. Actual results may differ significantly from those based on our
estimates and judgments or could be materially different if we used different assumptions,
estimates or conditions. In addition, our financial condition and results of operations could vary
due to a change in the application of a particular accounting policy.
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 share-based payments and income taxes. It is important that the discussion of our operating
results be read in conjunction with the critical accounting policies discussed in our 2011 Form
10-K.
21
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
Net cash used by operating activities for the three months ended October 1, 2011 was $23.5
million, primarily resulting from a net loss of $10.2 million and a $16.8 million decrease in cash
due to changes in operating assets and liabilities, partially offset by non-cash adjustments of
$3.5 million. The $16.8 million decrease in cash due to changes in operating assets and liabilities
was comprised of a $13.8 million decrease in accounts payable, $1.6 million decrease in accrued
expenses and other liabilities, a $0.4 million increase in accounts receivable, a $0.4 million
increase in prepaid expense and other current assets, a $0.3 million increase in other non-current
assets, and a $0.3 million increase in inventory. The $3.5 million increase in cash resulting from
non-cash adjustments primarily consisted of $5.8 million of expense related to depreciation and
amortization and $1.6 million of expense related to stock-based compensation, offset in part by
$3.8 million due to the revaluation of the Mintera earnout liability and $0.2 million from the
amortization of deferred gain from a sales-leaseback transaction.
Net cash used by operating activities for the three months ended October 2, 2010 was $1.0
million, primarily resulting from a $6.3 million decrease in cash due to changes in operating
assets and liabilities, partially offset by net income of $0.4 million and non-cash adjustments of
$4.9 million. The $6.3 million decrease in cash due to changes in operating assets and liabilities
was comprised of a $6.9 million decrease in accrued expenses and other liabilities, a $4.9 million
increase in inventory, a $0.6 million increase in accounts receivable and a $0.3 million increase
in prepaid expense and other current assets, offset in part by cash generated from a $6.3 million
increase in accounts payable and a $0.1 million decrease in other non-current assets. The $4.9
million increase in cash resulting from non-cash adjustments primarily consisted of $3.8 million of
expense related to depreciation and amortization and $1.4 million of expense related to stock-based
compensation, offset in part by $0.2 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 three months ended October 1, 2011 was $6.3
million, primarily consisting of $6.2 million used in capital expenditures and a $0.1 million
increase in restricted cash related to contractual commitments.
Net cash used in investing activities for the three months ended October 2, 2010 was $15.6
million, primarily consisting of $10.5 million used in the acquisition of Mintera and $6.9 million
used in capital expenditures, which were partially offset by a reduction of $1.7 million in
restricted cash related to a facility lease from which we exited during the quarter.
Cash Flows from Financing Activities
Net cash provided by financing activities of $19.6 million for the three months ended October
1, 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 $0.5 million for the three months ended October
2, 2010 primarily resulted from $0.3 million in additional proceeds related to our May 2010
follow-on stock offering and $0.2 million received from the issuance of common stock through stock
option exercises.
Effect of Exchange Rates on Cash and Cash Equivalents for the Three Months Ended October 1, 2011
and October 2, 2010
The effect of exchange rates on cash and cash equivalents for the three months ended
October 1, 2011 was a decrease of $1.5 million, primarily consisting of $0.9 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 $0.6 million related to the revaluation of
U.S. dollar denominated operating intercompany balances on the books of our subsidiaries.
The effect of exchange rates on cash and cash equivalents for the three months ended
October 2, 2010 was an increase of $0.1 million, primarily consisting of $0.9 million in net gain
due to the revaluation of foreign currency cash balances to the functional currency of the
respective subsidiaries and from a loss of approximately $1.1 million related to the revaluation of
U.S. dollar denominated operating intercompany payables on the books of our subsidiaries.
22
Credit Facility
As of October 1, 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 6, Credit Facility, for additional information regarding this credit
facility. As of October 1, 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 October 1, 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 October 1, 2011, we held $51.1 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 Thailand floods, 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 and/or portions of
our business. There can be no guarantee that we will be able to raise additional funds on terms
acceptable to us, or at all. We are currently in negotiations to outsource our Shenzhen assembly and
test operations to a major contract manufacturer, in a transaction
which we expect could generate $30 million to $40 million in proceeds in our third fiscal quarter of 2012,
with potential additional consideration to be received in the future, and would include a long
term supply agreement with the contract manufacturer. We are also evaluating selling our building
in Shenzhen. We also expect to receive advance payments under insurance coverage
associated with the Thailand flooding, 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, and our exchange of assets agreement with Newport. 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.
23
|
|
|
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 October 1, 2011, we had $19.5 million in outstanding borrowings at an average interest rate of
3.25% 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% 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 has grown and become multinational in scope, we have become increasingly
subject to fluctuations based upon changes in the exchange rates between the currencies in which we
collect revenues and pay expenses. In the future we expect that a majority of our revenues will be
denominated in U.S. dollars, while a significant portion of our expenses will 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 October 1, 2011, our U.K. subsidiary had $53.0 million, net, in U.S. dollar denominated
operating intercompany payables and $65.1 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 $1.3 million (U.S.
dollar strengthening), or a loss of $1.3 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
October 1, 2011, we held 14 outstanding foreign currency forward exchange contracts with a notional
value of $11.5 million which include put and call options which expire, or expired, at various
dates from October 2011 to September 2012 and we have recorded an unrealized loss of $25,000 to
accumulated other comprehensive income in connection with marking these contracts to fair value as
of October 1, 2011. It is estimated that a 10 percent fluctuation in the dollar between October 1,
2011 and the maturity dates of the put and call instruments underlying these contracts would lead
to a profit of $0.9 million dollars (U.S. dollar weakening) or loss of $0.6 million dollars (U.S.
dollar strengthening) on our outstanding foreign currency forward exchange contracts, should they
be held to maturity.
24
|
|
|
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 October 1,
2011. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures
of a company that are designed to ensure that information required to be disclosed by the company
in the reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of October 1,
2011, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
There was no change in our internal control over financial reporting during the three months
ended October 1, 2011 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
On June 26, 2001, the first of a number of securities class actions was filed in the United
States District Court for the Southern District of New York against New Focus, Inc., now known as
Oclaro Photonics, Inc. (New Focus), certain of 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 alleges that various
underwriters engaged in improper and undisclosed activities related to the allocation of shares in
New Focus initial public offering and seeks unspecified damages for claims under the Exchange Act
on behalf of a purported class of purchasers of common stock from May 17, 2000 to December 6, 2000.
The lawsuit against New Focus is coordinated for pretrial proceedings with a number of other
pending litigations challenging underwriter practices in over 300 cases, as In re Initial Public
Offering Securities Litigation, 21 MC 92 (SAS), including actions against Bookham Technology plc,
now known as Oclaro Technology Ltd (Bookham Technology) and Avanex Corporation, now known as
Oclaro (North America), Inc. (Avanex), and certain of each entitys respective officers and
directors, and certain of the underwriters of their public offerings. In October 2002, the claims
against the directors and officers of New Focus, Bookham Technology and Avanex were dismissed,
without prejudice, subject to the directors and officers execution of tolling agreements.
The parties have reached a global settlement of the litigation. On October 5, 2009, the Court
entered an order certifying a settlement class and granting final approval of the settlement. Under
the settlement, the insurers will pay the full amount of the settlement share allocated to New
Focus, Bookham Technology and Avanex, and New Focus, Bookham Technology and Avanex will bear no
financial liability. New Focus, Bookham Technology and Avanex, as well as the officer and director
defendants who were previously dismissed from the action pursuant to tolling agreements, will
receive complete dismissals from the case. Certain objectors have appealed the Courts October 5,
2009 order to the Second Circuit Court of Appeals. If for any reason the settlement does not become
effective, we believe that Bookham Technology, New Focus and Avanex have meritorious defenses to
the claims and therefore believe that such claims will not have a material effect on our financial
position, results of operations or cash flows.
On 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 is subject to approval by the
Delaware Bankruptcy Court, and the hearing to approve the settlement agreement is currently
scheduled for November 29, 2011.
25
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. Discovery
has not commenced, and no trial has been scheduled in this action. We intend to defend this
litigation vigorously.
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. Discovery has not commenced, and no trial has been scheduled in any
of these actions.
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.
RISKS RELATED TO OUR BUSINESS
Our results of operations will be materially and adversely affected by the flooding in Thailand.
On October 22, 2011, Fabrinet, our primary contract manufacturer, announced that, as a result
of the flooding in Thailand, it has suspended operations at two factories located in Chokchai and
Pinehurst. Fabrinet manufactures approximately 30 percent of our total finished goods in these
factories. Subsequently, on October 24, Fabrinet announced its Chokchai factory suffered extensive
flood damage and is now largely inaccessible due to high water levels inside and surrounding the
manufacturing facility. It is possible that our customers could experience other supply chain
disruptions as a result of the flooding in Thailand that could impact their 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 possible impact
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. Our current evaluation is that revenues for the second quarter of fiscal
2012 could be $25 million to $30 million less as a result of this disruption than would otherwise
be expected. There is no assurance that the disruption in our second quarter fiscal 2012 revenues
will be limited to this range, nor can it be assured 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
extent or timing of insurance recoveries.
26
We are negotiating the outsourcing of our Shenzhen assembly and test operations, and a
corresponding long term supply agreement, with a major contract manufacturer
There can be no assurance that our negotiations to outsource 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 net cash proceeds of
$30 million to $40 million we would expect from the outsourcing transaction, 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 transaction by a competitor, the competitor experienced a
work stoppage by their employees. There can be no assurance that outsourcing 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 October 1, 2011, we had an accumulated deficit of $1,136.2 million. For the three
months ended October 1, 2011, we incurred a net loss of $10.2 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, we may not be
able to achieve profitability in any future periods. If we are unable to do so, we may need
additional financing, which may not be available to us on commercially acceptable terms or at all,
to execute on our current or future business strategies.
We may not be able to maintain gross margin levels.
We may not be able to maintain or improve our gross margins, 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 as compared to fiscal year 2010. We attempt to reduce our
product costs and improve our product mix to offset price competition and erosion expected in most
product categories, but there is no assurance that we will be successful. Our gross margins can
also be adversely impacted for reasons including, but not limited to, unfavorable production 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.
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.
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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 three months ended October
1, 2011 and the years ended July 2, 2011 and July 3, 2010, our three largest customers accounted
for 35 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.
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.
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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.
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 $100.5 million as of October 1, 2011 from $102.2 million
as of July 2, 2011, our quarterly revenues also decreased, to $105.8 million for the fiscal quarter
ended October 1, 2011 from $109.2 million for the fiscal quarter ended July 2, 2011. Although, the
decrease was partly as a result of actual customer demand decreasing from earlier forecast
expectations. 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.
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, should all, or a portion, of this earnout be achieved in the eighteen month period
subsequent to the acquisition date. We cannot predict with certainty which strategic, financial or
operating synergies or other benefits, if any, will actually be achieved from any transaction we
undertake, the timing of any such 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.
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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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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 October 1, 2011, we had approximately 2,888 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.
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As a result of our global operations, our business is subject to currency fluctuations that have
adversely affected our results of operations in recent quarters and may continue to do so in the
future.
Our financial results have been and will continue to be materially impacted by foreign
currency fluctuations. At certain times in our history, declines in the value of the U.S. dollar
versus the U.K. pound sterling have had a major negative effect on our margins and our cash flow. A
significant portion of our expenses are denominated in U.K. pounds sterling and substantially all
of our revenues are denominated in U.S. dollars.
Fluctuations in the exchange rate between these two currencies and, to a lesser extent, other
currencies in which we collect revenues and/or pay expenses could have a material effect on our
future operating results. 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 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. For example, in October
2011, due to flooding in Thailand, Fabrinet suspended operations at both of their factories that
supply us with finished goods.
In addition, Fabrinets manufacturing operations are located in Thailand. Thailand has been
subject to political unrest in the recent past, including the temporary interruption of service at
one of its international airports, and may again experience such political unrest in the future. If
Fabrinet is unable to supply us with materials or equipment, or if they are unable to ship our
materials or equipment out of Thailand due to political unrest, this could materially adversely
affect our ability to fulfill customer orders and our results of operations.
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.
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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 October 1, 2011, we had $10.9 million in goodwill and $18.9 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.
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.
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Delays, disruptions or quality control problems in manufacturing could result in delays in product
shipments to customers and could adversely affect our business.
We may experience delays, disruptions or quality control problems in our manufacturing
operations or the manufacturing operations of our subcontractors. As a result, we could incur
additional costs that would adversely affect our gross margins, and our product shipments to our
customers could be delayed beyond the shipment schedules requested by our customers, which would
negatively affect our revenues, competitive position and reputation. Furthermore, even if we are
able to deliver products to our customers on a timely basis, we may be unable to recognize revenues
at the time of delivery based on our revenue recognition policies.
We may experience low manufacturing yields.
Manufacturing yields depend on a number of factors, including the volume of production due to
customer demand and the nature and extent of changes in specifications required by customers for
which we perform design-in work. Higher volumes due to demand for a fixed, rather than continually
changing, design generally results in higher manufacturing yields, whereas lower volume production
generally results in lower yields. In addition, lower yields may result, and have in the past
resulted, from commercial shipments of products prior to full manufacturing qualification to the
applicable specifications. Changes in manufacturing processes required as a result of changes in
product specifications, changing customer needs and the introduction of new product lines have
historically caused, and may in the future cause, significantly reduced manufacturing yields,
resulting in low or negative margins on those products. Moreover, an increase in the rejection rate
of products during the quality control process, before, during or after manufacture, results in
lower yields and margins. Finally, manufacturing yields and margins can also be lower if we receive
or inadvertently use defective or contaminated materials from our suppliers. Any reduction in our
manufacturing yields will adversely affect our gross margins and could have a material impact on
our operating results.
Our intellectual property rights may not be adequately protected.
Our future success will depend, in large part, upon our intellectual property rights,
including patents, copyrights, design rights, trade secrets, trademarks and know-how. We maintain
an active program of identifying technology appropriate for patent protection. Our practice is to
require employees and consultants to execute non-disclosure and proprietary rights agreements upon
commencement of employment or consulting arrangements. These agreements acknowledge our exclusive
ownership of all intellectual property developed by the individuals during their work for us and
require that all proprietary information disclosed will remain confidential. Although such
agreements may be binding, they may not be enforceable in full or in part in all jurisdictions and
any breach of a confidentiality obligation could have a negative effect on our business and our
remedy for such breach may be limited.
Our intellectual property portfolio is an important corporate asset. The steps we have taken
and may take in the future to protect our intellectual property may not adequately prevent
misappropriation or ensure that others will not develop competitive technologies or products. We
cannot assure you that our competitors will not successfully challenge the validity of our patents
or design products that avoid infringement of our proprietary rights with respect to our
technology. There can be no assurance that other companies are not investigating or developing
other similar technologies, that any patents will be issued from any application pending or filed
by us or that, if patents are issued, that the claims allowed will be sufficiently broad to deter
or prohibit others from marketing similar products. In addition, we cannot assure you that any
patents issued to us will not be challenged, invalidated or circumvented, or that the rights under
those patents will provide a competitive advantage to us or that our products and technology will
be adequately covered by our patents and other intellectual property. Further, the laws of certain
regions in which our products are or may be developed, manufactured or sold, including
Asia-Pacific, Southeast Asia and Latin America, may not be enforceable to protect our products and
intellectual property rights to the same extent as the laws of the United States, the U.K. and
continental European countries. This is especially relevant now that we have transferred 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.
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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 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.
35
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.
We may not be able to compete successfully with our competitors and aggressive competition in
the market may result in lower prices for our products and/or decreased gross margins. Any such
development could have a material adverse effect on our business, financial condition and results
of operations.
We generate a significant portion of our revenues internationally and therefore are subject to
additional risks associated with the extent of our international operations.
For the three months ended October 1, 2011 and the fiscal years ended July 2, 2011 and July 3,
2010, 16 percent, 17 percent and 19 percent of our revenues, respectively, were derived from sales
to customers located in the United States and 84 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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political, legal and economic instability in foreign markets; |
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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; |
36
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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.
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.
37
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. 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 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.
38
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.
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; |
39
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adverse judgments or settlements obligating us to pay damages; |
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future issuances of common stock in connection with acquisitions or other transactions; |
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acts of war, terrorism, or natural disasters; |
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industry, domestic and international market and economic conditions, including the
global macroeconomic downturn over the last 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, should all, or a portion, of this earnout be
achieved in the eighteen month period subsequent to the acquisition date. 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.
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.
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.
40
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.
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 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.
41
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.
The exhibits filed as part of this Quarterly Report on Form 10-Q, or incorporated by
reference, are listed on the Exhibit Index immediately preceding such exhibits, which Exhibit Index
is incorporated herein by reference.
42
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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OCLARO, INC.
(Registrant)
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Date: November 10, 2011 |
By: |
/s/ Jerry Turin
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Jerry Turin |
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Chief Financial Officer
(Principal Financial and Accounting Officer) |
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43
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 |
(1) |
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Form of Executive Severance and Retention Agreement, between Oclaro, Inc. and its executive officers. |
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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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(2) |
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XBRL Instance Document |
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101.SCH
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(2) |
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XBRL Taxonomy Extension Schema Document |
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101.CAL
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(2) |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF
|
(2) |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
|
|
101.LAB
|
(2) |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
|
|
101.PRE
|
(2) |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
(1) |
|
Filed herewith. |
|
(2) |
|
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. |
44