e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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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 March 31, 2007
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 0-30684
BOOKHAM, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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20-1303994 |
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(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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2584 Junction Avenue |
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San Jose, California
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95134 |
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(Address of Principal Executive Offices)
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(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 is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
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
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. As of May 4, 2007,
there were 83,274,560 shares of common stock
outstanding.
BOOKHAM, INC.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BOOKHAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
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March 31, 2007 |
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July 1, 2006 |
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(Unaudited) |
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(a) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
55,466 |
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$ |
37,750 |
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Restricted cash |
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6,222 |
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1,428 |
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Accounts receivable, net |
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29,129 |
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26,280 |
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Amounts due from related party, net |
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1,905 |
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7,499 |
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Inventories |
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49,818 |
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53,860 |
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Current deferred tax asset |
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348 |
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348 |
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Prepaid expenses and other current assets |
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7,847 |
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11,436 |
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Total current assets |
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150,735 |
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138,601 |
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Long-term restricted cash |
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4,119 |
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Goodwill |
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8,881 |
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8,881 |
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Other intangible assets, net |
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13,615 |
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19,667 |
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Property and equipment, net |
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35,610 |
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52,163 |
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Non-current deferred tax asset |
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12,568 |
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12,911 |
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Other non-current assets |
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357 |
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455 |
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Total assets |
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$ |
221,766 |
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$ |
236,797 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
18,286 |
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$ |
26,143 |
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Liabilities to related party |
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5,000 |
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4,250 |
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Accrued expenses and other liabilities |
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29,063 |
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33,087 |
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Current deferred tax liability |
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12,568 |
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12,911 |
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Total current liabilities |
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64,917 |
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76,391 |
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Non-current deferred tax liability |
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348 |
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348 |
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Other long-term liabilities |
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2,614 |
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4,989 |
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Deferred gain on sale-leaseback |
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20,682 |
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19,928 |
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Total liabilities |
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88,561 |
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101,656 |
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Commitments and contingencies (Note 10) |
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Stockholders equity: |
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Common stock: |
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$.01 par value; 175,000,000 shares authorized;
83,274,144 and 57,978,908 shares issued and
outstanding at March 31, 2007 and July 1, 2006,
respectively |
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832 |
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580 |
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Additional paid-in capital |
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1,113,700 |
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1,053,626 |
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Accumulated other comprehensive income |
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41,759 |
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35,460 |
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Accumulated deficit |
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(1,023,086 |
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(954,525 |
) |
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Total stockholders equity |
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133,205 |
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135,141 |
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Total liabilities and stockholders equity |
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$ |
221,766 |
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$ |
236,797 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
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(a) |
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The information in this column was derived from the Companys
consolidated balance sheet included in the Companys Form 10-K
filed with the Securities and Exchange Commission for the year
ended July 1, 2006. |
3
BOOKHAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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March 31, 2007 |
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April 1, 2006 |
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March 31, 2007 |
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April 1, 2006 |
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Revenue |
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$ |
41,845 |
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$ |
29,266 |
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$ |
125,415 |
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$ |
84,599 |
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Revenue from related party |
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3,144 |
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24,094 |
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32,293 |
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92,058 |
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Net revenue |
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44,989 |
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53,360 |
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157,708 |
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176,657 |
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Costs of revenue |
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40,707 |
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47,561 |
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135,760 |
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139,806 |
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Gross profit |
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4,282 |
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5,799 |
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21,948 |
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36,851 |
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Operating expenses: |
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Research and development |
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10,853 |
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10,914 |
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33,871 |
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31,322 |
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Selling, general and administrative |
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12,043 |
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13,204 |
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36,983 |
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39,309 |
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Amortization of intangible assets |
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2,170 |
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2,326 |
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6,928 |
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7,510 |
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Restructuring charges |
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4,273 |
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2,441 |
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8,475 |
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6,009 |
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Legal settlement |
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7,150 |
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490 |
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7,150 |
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Acquired in-process research and development |
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118 |
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118 |
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Impairment/(recovery) of other long-lived assets |
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1,901 |
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(1,263 |
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(Gain)/loss on sale of property and equipment and
other long-lived assets |
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6 |
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(313 |
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(824 |
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(1,945 |
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Total operating expenses |
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29,345 |
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35,840 |
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87,824 |
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88,210 |
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Operating loss |
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(25,063 |
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(30,041 |
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(65,876 |
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(51,359 |
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Other income/(expense), net: |
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Loss on conversion and early extinguishment of debt |
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(18,592 |
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(18,592 |
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Other income/(expense), net |
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(167 |
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170 |
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Interest income |
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277 |
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171 |
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699 |
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751 |
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Interest expense |
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(164 |
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(154 |
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(270 |
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(5,008 |
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Gain/(loss) on foreign exchange |
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664 |
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771 |
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(3,031 |
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1,779 |
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Total other income/(expense), net |
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777 |
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(17,971 |
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(2,602 |
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(20,900 |
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Loss before income taxes |
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(24,286 |
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(48,012 |
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(68,478 |
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(72,259 |
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Income tax provision/(benefit) |
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37 |
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36 |
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83 |
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(11,747 |
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Net loss |
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$ |
(24,323 |
) |
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$ |
(48,048 |
) |
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$ |
(68,561 |
) |
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$ |
(60,512 |
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Net loss per share (basic and diluted) |
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$ |
(0.35 |
) |
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$ |
(0.90 |
) |
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$ |
(1.03 |
) |
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$ |
(1.40 |
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Weighted average shares of common stock outstanding (basic and diluted) |
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70,077 |
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53,246 |
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66,297 |
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43,266 |
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The accompanying notes form an integral part of these condensed consolidated financial statements.
4
BOOKHAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended |
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March 31, 2007 |
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April 1, 2006 |
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Cash flows used in operating activities: |
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Net loss |
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$ |
(68,561 |
) |
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$ |
(60,512 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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17,797 |
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22,248 |
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Stock-based compensation |
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5,145 |
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6,631 |
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Impairment/(recovery) of long-lived assets |
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1,901 |
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(1,263 |
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Gain on sale of property and equipment |
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(836 |
) |
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(2,127 |
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One time tax gain |
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(11,785 |
) |
Legal settlement |
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7,150 |
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Acquired in-process research and development |
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118 |
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Loss on conversion and early extinguishment of debt |
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18,592 |
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Foreign currency re-measurement of notes payable |
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|
916 |
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Amortization of deferred gain on sale leaseback |
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(868 |
) |
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Amortization of interest expense for warrants and beneficial
conversion feature |
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1,292 |
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Changes in assets and liabilities, net of effects of acquisitions: |
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Accounts receivable, net |
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4,769 |
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(2,220 |
) |
Inventories |
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5,934 |
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(646 |
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Prepaid and other current assets |
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4,400 |
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7,465 |
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Accounts payable |
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(3,828 |
) |
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(4,756 |
) |
Accrued expense and other liabilities |
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(11,762 |
) |
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(14,274 |
) |
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Net cash used in operating activities |
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(45,909 |
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(33,171 |
) |
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Cash flows provided by investing activities: |
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Purchases of property and equipment |
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(5,861 |
) |
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(5,415 |
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Proceeds from sale of property and equipment |
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3,174 |
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2,113 |
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Acquisitions, net of cash acquired |
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9,724 |
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Proceeds from sale-leaseback of Caswell facility |
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23,444 |
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Proceeds from sale of land held for re-sale |
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9,402 |
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14,734 |
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Transfer (to)/from restricted cash |
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(624 |
) |
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2,305 |
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Cash flows provided by investing activities |
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6,091 |
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46,905 |
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Cash flows provided by financing activities: |
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Proceeds from issuance of common stock, net |
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55,423 |
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49,421 |
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Cash paid in connection with early extinguishment of notes payable |
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(21,000 |
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Cash paid in connection with conversion of convertible debentures |
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(3,032 |
) |
Repayment of loans |
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(39 |
) |
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(56 |
) |
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Net cash provided by financing activities |
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|
55,384 |
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|
25,333 |
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Effect of exchange rate on cash |
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2,150 |
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(2,922 |
) |
Net increase in cash and cash equivalents |
|
|
17,716 |
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|
36,145 |
|
Cash and cash equivalents at beginning of period |
|
|
37,750 |
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|
24,934 |
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|
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Cash and cash equivalents at end of period |
|
$ |
55,466 |
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|
$ |
61,079 |
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|
The accompanying notes form an integral part of these condensed consolidated financial statements.
5
BOOKHAM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Business
Bookham Technology plc was incorporated under the laws of England and Wales on September 22, 1988.
On September 10, 2004, pursuant to a scheme of arrangement under the laws of the United Kingdom,
Bookham Technology plc became a wholly-owned subsidiary of Bookham, Inc., a Delaware corporation.
Bookham, Inc. designs, manufactures and markets optical components, modules and subsystems
principally for use in the telecommunications industry. Bookham, Inc. also manufactures high-speed
electronic components for the telecommunications, defense and aerospace industries. References
herein to the Company mean Bookham, Inc. and its subsidiaries consolidated business activities
since September 10, 2004 and Bookham Technology plcs consolidated business activities prior to
September 10, 2004.
Note 2. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements as of March 31, 2007 and for
the three and nine months ended March 31, 2007 and April 1, 2006 have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) for interim financial statements and
with the instructions to Form 10-Q and Regulation S-X, and include the accounts of Bookham, Inc.
and all of its subsidiaries. Information and footnote disclosures required to be included in annual
financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to
such rules and regulations. In the opinion of management, the unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Companys consolidated financial position at March 31,
2007 and the consolidated operating results for the three and nine months ended March 31, 2007 and
April 1, 2006 and cash flows for the nine months ended March 31, 2007 and April 1, 2006. The
consolidated results of operations for the three and nine months ended March 31, 2007 are not
necessarily indicative of results that may be expected for any other interim period or for the full
fiscal year ending June 30, 2007.
The condensed consolidated balance sheet at July 1, 2006 has been derived from the audited
consolidated financial statements at that date, but does not include all of the information and
footnotes required by GAAP for complete financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with the
Companys audited financial statements and accompanying notes for the year ended July 1, 2006
included in the Companys Annual Report on Form 10-K for the fiscal year ended July 1, 2006.
On August 2, 2006, the Company, with Bookham Technology plc, New Focus, Inc. and Bookham (US) Inc.,
each a wholly-owned subsidiary of the Company (collectively, the Borrowers), entered into a
credit agreement (the Credit Agreement) with Wells Fargo Foothill, Inc. and other lenders
regarding a three-year $25 million senior secured revolving credit facility. Advances are available
under the Credit Agreement based on 80% of the Companys qualified accounts receivable, as
defined in the Credit Agreement, at the time an advance is requested.
On August 31, 2006, the Company entered into an agreement for a private placement of common stock
and warrants pursuant to which it issued and sold 8,696,000 shares of common stock and warrants to
purchase up to 2,174,000 shares of common stock, which sale closed on September 1, 2006, and issued
and sold an additional 2,892,667 shares of common stock and additional warrants to purchase 724,667
shares of common stock in a second closing on September 19, 2006. In both cases, such shares of
common stock and warrants were issued and sold to accredited investors. Net proceeds to the Company
from this private placement, including the second closing, were $28.8 million. The warrants are
exercisable during the period beginning on March 2, 2007 through September 1, 2011, at an exercise
price of $4.00 per share.
In the Companys Annual Report of Form 10-K for the fiscal year ended July 1, 2006, the Company
disclosed that, based on its cash balances and its continuing and expected losses for the
foreseeable future, if it fails to meet managements current cash flow forecasts, or is unable to
draw sufficient amounts under the Credit Agreement for any reason, it will need to raise additional
funding of at least $10 million to $20 million through external sources prior to July 2007 in order
to maintain sufficient financial resources to operate as a going concern through the end of fiscal
2007. The Company also disclosed that, if necessary, it will attempt to raise additional funds by
any one or combination of the following: (i) completing the sale of certain assets; (ii) issuing
equity, debt or convertible debt; and (iii) selling certain non-core businesses, and that there can
be no assurance of the Companys ability to raise sufficient capital
through these, or any other efforts.
6
Since the filing of the Companys Annual Report on Form 10-K for the fiscal year ended July 1,
2006, the Company completed the second closing of the private placement referred to above,
resulting in proceeds of approximately $7.3 million, net of commissions.
In November 2006, the Company sold its Paignton U.K. manufacturing site for £4.8 million
(approximately $9.4 million based on an exchange rate of $1.96 to £1.00), net of selling costs.
On March 22, 2007, the Company entered into a definitive agreement for a private placement pursuant
to which it issued, on March 22, 2007, 13,640,224 shares of common stock, and warrants to purchase
up to 4,092,066 shares of common stock with accredited investors for net proceeds to the Company of
approximately $26.9 million. The warrants have a five year term and are exercisable beginning on
September 23, 2007 at an exercise price of $2.80 per share, subject to adjustment based on a
weighted average antidilution formula if the Company effects certain equity issuances in the future
for consideration per share that is less than the then current exercise price per share set forth
in such warrants.
The preparation of the Companys financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses reported in those financial statements. These judgments can be subjective and complex,
and consequently actual results could differ from those estimates and assumptions. Descriptions of
these estimates and assumptions are included in the Companys Annual Report on Form 10-K for the
year ended July 1, 2006.
Note 3. Stock-based Compensation Expense
On July 3, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R
Share-Based Payments, which requires companies to recognize in their statement of operations all
share-based payments, including grants of stock options, based on the grant date fair value using
either the prospective transition method or the modified prospective transition method. The Company
has elected to use the modified-prospective-transition method. The application of SFAS No. 123R
requires the Companys management to make judgments in the determination of inputs into the
Black-Scholes option pricing model which the Company uses to determine the grant date fair value of
stock options it grants. Inherent in this model are assumptions related to expected stock price
volatility, option life, risk free interest rate and dividend yield. While the risk free interest
rate and dividend yield are less subjective assumptions, typically based on factual data derived
from public sources, the expected stock-price volatility and option life assumptions require a
greater level of judgment which make them critical accounting estimates.
The Company has not issued and does not anticipate issuing dividends to stockholders and
accordingly uses a 0% dividend yield assumption for all Black-Scholes option pricing calculations.
The Company uses an expected stock-price volatility assumption that is primarily based on
historical realized volatility of the underlying stock during a period of time. With regard to the
weighted average option life assumption, the Company evaluates the exercise behavior of past grants
as a basis to predict future activity.
The assumptions used to value option grants for the three and nine months ended March 31, 2007 and
April 1, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, 2007 |
|
April 1, 2006 |
|
March 31, 2007 |
|
April 1, 2006 |
Expected life |
|
4.5 years |
|
4.5 years |
|
4.5 years |
|
4.5 years |
Risk-free interest rate |
|
|
4.79 |
% |
|
|
4.50 |
% |
|
|
4.70 |
% |
|
|
4.50 |
% |
Volatility |
|
|
83.00 |
% |
|
|
84.00 |
% |
|
|
83.00 |
% |
|
|
84.00 |
% |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
7
The amounts included in cost of revenue and operating expenses for stock-based compensation
expenses for the three and nine months ended March 31, 2007 and April 1, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
|
(In thousands) |
|
Costs of revenues |
|
$ |
478 |
|
|
$ |
344 |
|
Research and development |
|
|
260 |
|
|
|
455 |
|
Selling, general and administrative |
|
|
557 |
|
|
|
1,048 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,295 |
|
|
$ |
1,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
|
(In thousands) |
|
Costs of revenues |
|
$ |
1,660 |
|
|
$ |
1,690 |
|
Research and development |
|
|
1,168 |
|
|
|
1,465 |
|
Selling, general and administrative |
|
|
2,317 |
|
|
|
3,479 |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,145 |
|
|
$ |
6,631 |
|
|
|
|
|
|
|
|
Note 4. Comprehensive Loss
For the three months and nine months ended March 31, 2007 and April 1, 2006, the Companys
comprehensive loss was comprised of its net loss, the change in the unrealized gain on currency
instruments designated as hedges and foreign currency translation adjustments. The components of
comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
|
(In thousands) |
|
Net loss |
|
$ |
(24,323 |
) |
|
$ |
(48,048 |
) |
|
$ |
(68,561 |
) |
|
$ |
(60,512 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain/(loss) on currency
instruments designated as hedges |
|
|
(198 |
) |
|
|
117 |
|
|
|
(148 |
) |
|
|
117 |
|
Foreign currency translation adjustments |
|
|
(41 |
) |
|
|
573 |
|
|
|
6,446 |
|
|
|
(2,813 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(24,562 |
) |
|
$ |
(47,358 |
) |
|
$ |
(62,263 |
) |
|
$ |
(63,208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Earnings Per Share
SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted earnings per
share on the face of the statement of operations. Basic earnings per share is computed using only
the weighted average number of common shares outstanding for the applicable period, while diluted
earnings per share is computed assuming conversion of all potentially dilutive securities, such as
options, convertible debt and warrants, during such period.
Because the Company incurred a net loss for the three months and nine months ended March 31, 2007
and April 1, 2006, the effect of potentially dilutive securities totaling 17,736,926 and 12,415,975
shares, respectively, has been excluded from the calculation of diluted net loss per share because
they would have been anti-dilutive.
Note 6. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
July 1, 2006 |
|
|
|
(In thousands) |
|
Raw materials |
|
$ |
18,613 |
|
|
$ |
17,006 |
|
Work in process |
|
|
17,709 |
|
|
|
20,823 |
|
Finished goods |
|
|
13,496 |
|
|
|
16,031 |
|
|
|
|
|
|
|
|
Total |
|
$ |
49,818 |
|
|
$ |
53,860 |
|
|
|
|
|
|
|
|
Note 7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
July 1, 2006 |
|
|
|
(In thousands) |
|
Accounts payable accruals |
|
$ |
4,537 |
|
|
$ |
4,497 |
|
Compensation and benefits related accruals |
|
|
5,424 |
|
|
|
5,465 |
|
Warranty accrual |
|
|
2,922 |
|
|
|
3,429 |
|
Other accruals |
|
|
9,541 |
|
|
|
6,763 |
|
Current portion of restructuring accrual |
|
|
6,639 |
|
|
|
12,933 |
|
|
|
|
|
|
|
|
Total |
|
$ |
29,063 |
|
|
$ |
33,087 |
|
|
|
|
|
|
|
|
8
Note 8. Assets Held for Resale; Impairment (Recovery) of Long Lived Assets
During the quarter ended September 30, 2006, the Company designated the assets underlying its
Paignton U.K. manufacturing site as held for sale. The Company recorded an impairment charge of
$1.9 million as a result of this designation. During the quarter ended December 31, 2006, Bookham
Technology plc, a wholly-owned subsidiary of the Company, sold the site to a third party, resulting
in proceeds of £4.8 million (approximately $9.4 million based on an exchange rate of $1.96 to
£1.00), net of selling costs. In connection with this transaction, the Company recorded a loss of
$0.1 million which is included in loss on sale of property and equipment and other long-lived
assets on the Companys statement of operations for the nine month period ended March 31, 2007. In
accordance with the agreement pursuant to which the manufacturing site was sold, the Company was
granted an option to lease back a portion of the Paignton U.K. site from the buyer for a two-year
term at a market-based rent. The Company has exercised the option and has the right to terminate
the lease at any time on three months prior notice. The Company plans to move its remaining
Paignton-based research and development personnel and operations to a smaller site toward the end
of calendar year 2007.
On September 13, 2005, the Company sold a parcel of land for gross proceeds of $15.5 million. The
land, which had a carrying value of $13.7 million as of July 2, 2005, had previously been disclosed
as an asset held for resale. The transaction resulted in a gain of $1.3 million net of related
costs. The book value of the land sold had previously been written down, so this gain has been
reflected as a recovery of impairment on the Companys statement of operations for the nine months
ended April 1, 2006.
Note 9. Credit Agreement
On August 2, 2006, the Borrowers entered into the Credit Agreement with Wells Fargo Foothill, Inc.
and other lenders regarding a three-year $25.0 million senior secured revolving credit facility.
Advances are available under the Credit Agreement based on 80% of qualified accounts receivable,
as defined in the Credit Agreement, at the time an advance is requested.
The obligations of the Borrowers under the Credit Agreement are guaranteed by the Company, Onetta,
Inc., Focused Research, Inc., Globe Y. Technology, Inc., Ignis Optics, Inc., Bookham (Canada) Inc.,
Bookham Nominees Limited and Bookham International Ltd., each a wholly-owned subsidiary of the
Company (together, the Guarantors and together with the Borrowers, the Obligors), and are
secured pursuant to a security agreement (the Security Agreement) by the assets of the Obligors,
including a pledge of the capital stock holdings of the Obligors in certain of their direct
subsidiaries. Any new direct subsidiary of the Obligors is required to execute a security agreement
in substantially the same form as the Security Agreement and become a party to the Security
Agreement.
Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear
interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75% or the
prime rate plus 1.25%. In the absence of an event of default, any amounts outstanding under the
Credit Agreement may be repaid and borrowed again any time until maturity on August 2, 2009. A
termination of the commitment line by the Borrowers any time prior to August 2, 2008 will subject
the Borrowers to a prepayment premium of 1.0% of the maximum revolver amount.
The obligations of the Borrowers under the Credit Agreement may be accelerated upon the occurrence
of an event of default under the Credit Agreement, which includes payment defaults, defaults in the
performance of affirmative and negative covenants, the material inaccuracy of representations or
warranties, a cross-default related to other indebtedness in an aggregate amount of $1.0 million or
more, bankruptcy and insolvency related defaults, defaults relating to such matters as ERISA,
judgments, and a change of control default. The Credit Agreement contains negative covenants
applicable to the Company, the Borrowers and their subsidiaries, including financial covenants
requiring the Borrowers to maintain a minimum level of EBITDA (if the Borrowers have not maintained
specified levels of liquidity), as well as restrictions on liens, capital expenditures,
investments, indebtedness, fundamental changes, dispositions of property, making certain restricted
payments (including restrictions on dividends and stock repurchases), entering into new lines of
business, and transactions with affiliates. As of March 31, 2007, there were no amounts
drawn under this credit facility and the Company was in compliance with all covenants under the
Credit Agreement.
9
Note 10. Commitments and Contingencies
Guarantees
The Company has entered into the following financial guarantees:
|
|
|
In connection with the sale by New Focus, Inc. of its
passive component line to Finisar, Inc., New Focus agreed
to indemnify Finisar for claims related to the intellectual
property sold to Finisar. This obligation expires in May
2009 and has no maximum liability. In connection with the
sale by New Focus of its tunable laser technology to Intel
Corporation, New Focus agreed to indemnify Intel against
losses for certain intellectual property claims. This
obligation expires in May 2008 and has a maximum liability
of $7.0 million. The Company does not currently expect to
pay out any amounts in respect of these obligations,
therefore no accrual has been made in the accompanying
financial statements. |
|
|
|
|
The Company indemnifies its directors and certain employees
as permitted by law. The Company has not recorded a
liability associated with these obligations as the Company
historically has not incurred any costs associated with
such obligations. Costs associated with such obligations
may be mitigated by insurance coverage that the Company
maintains. |
|
|
|
|
The Company is also bound by indemnification obligations
under various contracts that it enters into in the normal
course of business, such as those issued by its bankers in
favor of several of its suppliers and indemnification
obligations in favor of customers in respect of liabilities
they may incur as a result of any infringement of a third
partys intellectual property rights by the Companys
products. The Company has not historically paid out any
amounts related to these obligations and currently does not
expect to in the future, therefore no accrual has been made
for these obligations in the accompanying financial
statements. |
Provision for warranties
The Company accrues for the estimated costs to provide warranty services at the time revenue is
recognized. The Companys estimate of costs to service its warranty obligations is based on
historical experience and expectation of future conditions. To the extent the Company experiences
increased warranty claim activity or increased costs associated with servicing those claims, the
Companys warranty costs will increase, resulting in a decrease to gross profit and an increase to
net loss.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
|
(In thousands) |
|
Warranty provision at beginning of period |
|
$ |
3,429 |
|
|
$ |
3,782 |
|
Warranties issued |
|
|
227 |
|
|
|
558 |
|
Warranties utilized |
|
|
|
|
|
|
(61 |
) |
Warranties expired, and other changes in liability |
|
|
(985 |
) |
|
|
(502 |
) |
Foreign currency translation |
|
|
251 |
|
|
|
(104 |
) |
|
|
|
|
|
|
|
Warranty provision at end of period |
|
$ |
2,922 |
|
|
$ |
3,673 |
|
|
|
|
|
|
|
|
Litigation
On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et al.,
Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and
directors, or the Individual Defendants, in the United States District Court for the Southern
District of New York. Also named as defendants were Credit Suisse First Boston Corporation, Chase
Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp., or the Underwriter
Defendants, the underwriters in New Focuss initial public offering. Three subsequent lawsuits were
filed containing substantially similar allegations. These complaints have been consolidated. On
April 19, 2002, plaintiffs filed an Amended Class Action Complaint, described below, naming as
defendants the Individual Defendants and the Underwriter Defendants.
On November 7, 2001, a Class Action Complaint was filed against Bookham Technology plc and others
in the United States District Court for the Southern District of New York. On April 19, 2002,
plaintiffs filed an Amended Class Action Complaint, described below. The Amended Class Action
Complaint names as defendants Bookham Technology plc, Goldman, Sachs & Co. and FleetBoston
Robertson Stephens, Inc., two of the underwriters of Bookham Technology
plcs initial public offering in April 2000, and Andrew G. Rickman, Stephen J. Cockrell and David
Simpson, each of whom was an officer and/or director at the time of the initial public offering.
The Amended Class Action Complaint asserts claims under certain provisions of the securities laws
of the United States. It alleges, among other things, that the prospectuses for Bookham Technology
plcs and New Focuss initial public offerings were materially false and misleading in describing
the compensation to be earned by the underwriters in connection with the offerings, and in not
disclosing certain alleged arrangements among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the
underwriters. The Amended Class Action Complaint seeks unspecified damages (or in the alternative
rescission for those class members who no longer hold shares of the Company or New Focus), costs,
attorneys fees, experts fees, interest
10
and other expenses. In October 2002, the Individual
Defendants were dismissed, without prejudice, from the action. In July 2002, all defendants filed
Motions to Dismiss the Amended Class Action Complaint. The motion was denied as to Bookham Technology plc and
New Focus in February 2003. Special committees of the board of directors authorized the companies
to negotiate a settlement of pending claims substantially consistent with a memorandum of
understanding negotiated among class plaintiffs, all issuer defendants and their insurers.
Plaintiffs and most of the issuer defendants and their insurers have entered into a stipulation of
settlement for the claims against the issuer defendants, including
the Company and New Focus. Under the
stipulation of settlement, the plaintiffs will dismiss and release all claims against participating
defendants in exchange for a payment guaranty by the insurance companies collectively responsible
for insuring the issuers in the related cases, and the assignment or surrender to the plaintiffs of
certain claims the issuer defendants may have against the underwriters. On February 15, 2005, the
District Court issued an Opinion and Order preliminarily approving the settlement provided that the
defendants and plaintiffs agree to a modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to the modification narrowing the scope of
the bar order, and on August 31, 2005, the District Court issued an order preliminarily approving
the settlement. On December 5, 2006, the United States Court of Appeals for the Second Circuit
overturned the District Courts certification of the class of plaintiffs who are pursuing the
claims that would be settled in the settlement against the underwriter defendants. Plaintiffs filed
a Petition for Rehearing and Rehearing En Banc with the Second Circuit on January 5, 2007 in
response to the Second Circuits decision and have informed the District Court that they would like
to be heard as to whether the settlement may still be approved even if the decision of the Court of
Appeals is not reversed. The District Court indicated that it would defer consideration of final
approval of the settlement pending plaintiffs request for further appellate review. On April 6,
2007, plaintiffs petition for rehearing of the Second Circuits decision was denied. The Company
believes that both Bookham Technology, plc and New Focus have meritorious defenses to the claims
made in the Amended Class Action Complaint and therefore believes that such claims will not have a material
effect on its financial position, results of operations or cash flows.
Note 11. Restructuring
The following table summarizes the activity related to the Companys restructuring liability for
the three months ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring costs |
|
|
Amounts charged to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
at December 30, |
|
|
restructuring costs |
|
|
|
|
|
|
Amounts paid or |
|
|
|
|
|
|
restructuring costs |
|
(In thousands) |
|
2006 |
|
|
and other |
|
|
Amounts reversed |
|
|
written-off |
|
|
Adjustments |
|
|
at March 31, 2007 |
|
Lease cancellations and commitments |
|
$ |
8,154 |
|
|
$ |
58 |
|
|
$ |
|
|
|
$ |
(2,217 |
) |
|
$ |
3 |
|
|
|
5,998 |
|
Termination payments to employees and related costs |
|
|
640 |
|
|
|
4,215 |
|
|
|
|
|
|
|
(1,998 |
) |
|
|
6 |
|
|
|
2,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued restructuring |
|
|
8,794 |
|
|
$ |
4,273 |
|
|
$ |
|
|
|
$ |
(4,215 |
) |
|
$ |
9 |
|
|
|
8,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued restructuring charges |
|
|
(2,383 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges included within
accrued expenses and other liabilities |
|
$ |
6,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity related to the Companys restructuring liability for
the nine months ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Amounts charged |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
restructuring costs |
|
|
to restructuring |
|
|
|
|
|
|
Amounts paid or |
|
|
|
|
|
|
restructuring costs |
|
(In thousands) |
|
at July 1, 2006 |
|
|
costs and other |
|
|
Amounts reversed |
|
|
written-off |
|
|
Adjustments |
|
|
at March 31, 2007 |
|
Lease cancellations and commitments |
|
$ |
11,487 |
|
|
$ |
829 |
|
|
$ |
|
|
|
$ |
(6,260 |
) |
|
$ |
(57 |
) |
|
$ |
5,999 |
|
Termination payments to employees and related costs |
|
|
4,643 |
|
|
|
7,646 |
|
|
|
(6 |
) |
|
|
(9,773 |
) |
|
|
352 |
|
|
|
2,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued restructuring |
|
|
16,130 |
|
|
$ |
8,475 |
|
|
$ |
(6 |
) |
|
$ |
(16,033 |
) |
|
$ |
295 |
|
|
|
8,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued restructuring charges |
|
|
(3,197 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges included within
accrued expenses and other liabilities |
|
$ |
12,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May, September and December 2004, the Company announced restructuring plans, including the
transfer of its assembly and test operations from Paignton, U.K. to Shenzhen, China, along with
reductions in research and development and selling, general and administrative expenses. These cost
reduction efforts were expanded in November 2005 to include the transfer of the Companys
chip-on-carrier assembly from Paignton to Shenzhen. The transfer of these operations was
substantially completed in the quarter ended March 31, 2007. In May 2006, the Company announced
further cost reduction plans, which included transitioning all remaining manufacturing support and
supply chain management, along with pilot line production and production planning, from Paignton to
Shenzhen, which was substantially completed in the quarter ended March 31, 2007. As of March 31,
2007, the Company had spent $31.7 million on all of its restructuring programs.
On January 31, 2007, the Company adopted an overhead cost reduction plan which includes workforce
reductions, facility and site consolidation of its Caswell, U.K. semiconductor operations within
existing local facilities and the transfer of certain research and development
11
activities to its
Shenzhen, China facility. The Company began implementing the overhead cost reduction plan in the
quarter ended March 31, 2007. A substantial portion of this overhead cost reduction plan is
expected to be completed by the end of the fourth quarter of its fiscal year ending June 30, 2007,
with the remainder to be completed in the fiscal quarter ending September 29, 2007. The overhead
cost reduction plan is expected to save an aggregate of $6.0 million to $7.0 million per quarter,
in comparison to the fiscal quarter ended December 30, 2006, with a substantial portion of that
savings expected to be initially realized in the fiscal quarter ending September 29, 2007. The
total cost associated with this overhead cost reduction plan, the substantial portion being
personnel severance and retention related expenses, is expected to range from $8.0 million to $9.0
million, with most of the restructuring charges expected to be incurred and paid by the end of the
June 30, 2007 fiscal quarter and the remainder expected to be incurred and paid by the end of the
September 29, 2007 fiscal quarter. As of March 31, 2007, the Company had spent $1.4 million on
this cost reduction plan.
In connection with earlier plans of restructuring, and the assumption of restructuring accruals
upon the acquisition of New Focus in March 2004, in the quarter ended March 31, 2007, the Company
continued to make scheduled payments drawing down the related lease cancellations and commitments.
The Company also accrued an additional $0.1 million and $0.9 million for revised estimates related
to one of these commitments in the three and nine months ended March 31, 2007 respectively.
Remaining net payments of lease cancellations and commitments in connection with the Companys
earlier restructuring efforts are included in the restructuring accrual as of March 31, 2007.
Note 12. Segments of an Enterprise and Related Information
The Company is currently organized and operates as two operating segments: (i) optics, and (ii)
research and industrial. The optics segment designs, develops, manufactures, markets and sells
optical solutions for telecommunications and industrial applications. The research and industrial
segment designs, develops, manufactures, markets and sells photonic and microwave solutions. The
Company evaluates the performance of its segments and allocates resources based on consolidated
revenues and overall performance.
Segment information for the three and nine months ended March 31, 2007 and April 1, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
March 31, |
|
|
April 1, |
|
|
March 31, |
|
|
April 1, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics |
|
$ |
36,735 |
|
|
$ |
46,906 |
|
|
$ |
134,673 |
|
|
$ |
157,898 |
|
Research and industrial |
|
|
8,254 |
|
|
|
6,454 |
|
|
|
23,035 |
|
|
|
18,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
|
44,989 |
|
|
|
53,360 |
|
|
|
157,708 |
|
|
|
176,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics |
|
|
(24,553 |
) |
|
$ |
(47,661 |
) |
|
$ |
(67,898 |
) |
|
$ |
(58,990 |
) |
Research and industrial |
|
|
230 |
|
|
|
(387 |
) |
|
|
(663 |
) |
|
|
(1,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss |
|
$ |
(24,323 |
) |
|
$ |
(48,048 |
) |
|
|
(68,561 |
) |
|
|
(60,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13. Significant Related Party Transactions
During the three and nine months ended April 1, 2006, and during a portion of the three and nine
months ended March 31, 2007, Nortel Networks owned 3,999,999 shares of the outstanding common stock
of the Company. During the nine month period ended March 31, 2007, the Company believes Nortel
Networks had sold its stock and, as of March 31, 2007, no longer owned any shares of the Companys
common stock. The Company had revenues of $3.1 million and $32.3 million attributable to sales to
Nortel Networks in the three months and nine months ended March 31, 2007, respectively, and had
accounts receivable, net, due from Nortel Networks of $1.9 million as of March 31, 2007 and had
liabilities payable to Nortel Networks of $5.0 million as of March 31, 2007. The Company had
revenues of $24.1 million and $92.1 million from Nortel Networks in the three and nine months ended
April 1, 2006, respectively.
Note 14. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN)
No. 48 Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement 109. FIN
48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken on a tax return, including a
decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for
fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of
application of FIN 48, these will be accounted for as an adjustment to retained earnings. The
Company is currently assessing the impact of FIN 48 on its consolidated financial position and
results of operations.
12
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS
No. 157 establishes a common definition for fair value to be applied to GAAP guidance requiring
use of fair value, establishes a framework for measuring fair value, and expands disclosure about
such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007. The Company is currently assessing the impact of SFAS No. 157 on its consolidated
financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 requires that employers recognize,
on a prospective basis, the funded status of their defined benefit pension and other postretirement
plans on their consolidated balance sheet and recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that arise during the
period but are not recognized as components of net periodic benefit cost. SFAS No. 158 also
requires additional disclosures in the notes to financial statements. SFAS No. 158 is effective as
of the end of fiscal years ending after December 15, 2006. The implementation of SFAS No. 158 is
not expected to have a material impact on the Companys consolidated financial position or results
of operations.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1 Accounting for Planned Major
Maintenance Activities (FSP AUG AIR-1). FSP AUG AIR-1 amends the guidance on the accounting for
planned major maintenance activities; specifically it precludes the use of the previously
acceptable accrue in advance method. FSP AUG AIR-1 is effective for fiscal years beginning after
December 15, 2006. The implementation of FSP AUG AIR-1 is not expected to have a material impact on
the Companys consolidated financial position or results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin 108 Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB
108). SAB 108 requires that public companies utilize a dual-approach to assessing the
quantitative effects of financial misstatements. This
dual approach includes both an income statement focused assessment and a balance sheet focused
assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years
ending after November 15, 2006. The implementation of SAB 108 is
not expected to have a material impact on the Companys
consolidated financial position or results of operations.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and intentions. You can
identify these statements by words such as expect, anticipate, intend, scheduled,
designed, plan, believe, seek, estimate, may, will, continue and similar words. You
should read these forward looking statements carefully. They discuss our future expectations,
contain projections of our future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which we have limited or
no control. You should not place undue reliance on forward-looking statements and actual results
may differ materially from those contained in 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, except as required by law.
The factors discussed 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
(including our need for additional funding to continue as a going concern) and the documents
incorporated in it by reference identify important factors that may cause our actual results to
differ materially from the expectations we describe in our forward-looking statements.
Overview
We design, manufacture and market optical components, modules and subsystems that generate, detect,
amplify, combine and separate light signals principally for use in high-performance fiber optics
communications networks. We principally sell our optical component products to optical systems
vendors as well as to customers in the data communications, military, aerospace, industrial and
manufacturing industries. Customers for our photonics and microwave product portfolio include
academic and governmental research institutions that engage in advanced research and development
activities. Our products typically have a long sales cycle. The period of time between our initial
contact with a customer and the receipt of a purchase order is frequently a year or more. In
addition, many customers perform, and require us to perform, extensive process and product
evaluation and testing of components before entering into purchase arrangements.
We operate in two business segments: (i) optics, and (ii) research and industrial. The optics
segment relates to the design, development, manufacture, marketing and sale of optical solutions
for telecommunications and industrial applications. The research and industrial segment relates to
the design, development, manufacture, marketing and sale of photonics and microwave solutions.
13
In our Annual Report of Form 10-K for the fiscal year ended July 1, 2006, we disclosed that, based
on cash balances and our continuing and expected losses for the foreseeable future, if we fail to
meet our managements current cash flow forecasts, or are unable to draw sufficient amounts under
the $25 million senior secured credit facility we entered into with Wells Fargo Foothill, Inc. and
other lenders in August 2006, for any reason, we will need to raise additional funding of at least
$10 million to $20 million through external sources prior to July 2007 in order to maintain
sufficient financial resources to operate as a going concern through the end of fiscal 2007. We
also disclosed that, if necessary, we will attempt to raise additional funds by any one or
combination of the following: (i) completing the sale of certain assets; (ii) issuing equity, debt
or convertible debt; and (iii) selling certain non core businesses, and that there can be no
assurance of our ability to raise sufficient capital through these or any other efforts.
Recent Developments
On January 31, 2007, our board of directors adopted an overhead cost reduction plan, which we refer
to as the Plan. The Plan was adopted as a result of our determination that it was necessary to
reduce our overall costs to be more closely aligned with anticipated revenues. The Plan includes
workforce reductions, facility and site consolidation of our Caswell, U.K. semiconductor operations
within existing local facilities and the transfer of certain research and development activities to
our Shenzhen, China facility. We began implementing the Plan in the quarter ending March 31, 2007
and a substantial portion of the Plan is expected to be completed by the end of the fourth quarter
of our fiscal year ending June 30, 2007 with the remainder to be completed in the fiscal quarter
ending September 29, 2007. The Plan is expected to save an aggregate of $6.0 million to $7.0
million per quarter, in comparison to the fiscal quarter ended December 30, 2006, with a
substantial portion of these savings expected to be initially realized in the fiscal quarter ending
September 29, 2007. The total cost associated with this Plan, the substantial portion being
personnel severance and retention related expenses, is expected to range from $8.0 million to $9.0
million, with most of the restructuring charges expected to be incurred and paid by the end of the
June 30, 2007 fiscal quarter and the remainder
expected to be incurred and paid by the end of the September 29, 2007 fiscal quarter. This Plan is
expected to reduce our cost of sales, research and development, and general and administrative
expenses.
On March 22, 2007, we entered into a definitive agreement for a private placement pursuant to which
we issued, on March 22, 2007, 13,640,224 shares of common stock and warrants to purchase up to
4,092,066 shares of common stock to accredited investors for net proceeds to us of approximately
$26.9 million. The warrants have a five year term and are exercisable beginning on September 23,
2007 at an exercise price of $2.80 per share, subject to adjustment based on a weighted average
anti-dilution formula if we effect certain equity issuances in the future for consideration per
share that is less than the then current exercise price.
Critical Accounting Policies
We believe that several accounting policies we have implemented are important to understanding our
historical and future performance. We refer to such policies as critical because they generally
require us to make judgments and estimates about matters that are uncertain at the time we make the
estimate, and different estimateswhich also would have been reasonable at the timecould have been
used, and would have resulted in different financial results.
The critical accounting policies we identified in our Annual Report on Form 10-K for the year ended
July 1, 2006 related to revenue recognition and sales returns, inventory valuation, accounting for
acquisitions and goodwill, impairment of goodwill and other intangible assets, accounting for
acquired in-process research and development and accounting for share-based payments. It is
important that the discussion of our operating results that follows be read in conjunction with the
critical accounting policies discussed in our Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission on September 14, 2006.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement 109, or FIN 48.
FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in
the financial statements tax positions taken or expected to be taken on a tax return, including a
decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for
fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of
application of FIN 48, these will be accounted for as an adjustment to retained earnings. We are
currently assessing the impact of FIN 48 on our consolidated financial position and results of
operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards, or SFAS No. 157,
Fair Value Measurements, or SFAS No. 157. SFAS No. 157 establishes a common definition for fair
value to be applied to generally accepted accounting principles in the United States guidance
requiring use of fair value, establishes a framework for measuring fair value, and expands
disclosure about such fair value
14
measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. We are currently assessing the impact of SFAS No. 157 on our consolidated
financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, or SFAS No. 158. SFAS No. 158 requires that employers recognize,
on a prospective basis, the funded status of their defined benefit pension and other postretirement
plans on their consolidated balance sheet and recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that arise during the
period but are not recognized as components of net periodic benefit cost. SFAS No. 158 also
requires additional disclosures in the notes to financial statements. SFAS No. 158 is effective as
of the end of fiscal years ending after December 15, 2006. We do not expect the implementation of
SFAS No. 158 to have a material impact on our consolidated financial position or results of
operations.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1 Accounting for Planned Major
Maintenance Activities, or FSP AUG AIR-1. FSP AUG AIR-1 amends the guidance on the accounting for
planned major maintenance activities; specifically it precludes the use of the previously
acceptable accrue in advance method. FSP AUG AIR-1 is effective for fiscal years beginning after
December 15, 2006. We do not expect the implementation of FSP AUG AIR-1 to have a material impact
on our consolidated financial position or results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin or, SAB 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, or SAB 108. SAB 108 requires that public companies utilize a dual-approach to
assessing the quantitative effects of financial misstatements. This dual approach includes both an
income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108
must be applied to annual financial statements for fiscal years ending after November 15, 2006. We
are currently assessing the impact of SAB 108 on our consolidated financial position and results of
operations.
Results of Operations
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
For Three Months Ended |
|
|
For Nine Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
% Change |
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
% Change |
|
Net revenues |
|
$ |
45.0 |
|
|
$ |
53.4 |
|
|
|
(16%) |
|
|
$ |
157.7 |
|
|
$ |
176.7 |
|
|
|
(11%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues in the three and nine month period ended March 31, 2007 decreased by $8.4 million and
$19.0 million, or 16% and 11%, respectively, compared to revenues in the three and nine month
period ended April 1, 2006. The decrease in both periods was largely due to sales to Nortel
Networks, decreasing to $3.1 million and $32.3 million in the three and nine month period ended
March 31, 2007, respectively, from $24.1 million and $92.1 million, in the comparable periods last
year as a result of the expiration of Nortel Networks purchase obligations under our Supply
Agreement described below. Revenues from customers other than Nortel Networks increased by $12.6
million and $40.8 million in the three and nine months ended March 31, 2007, respectively, when
compared to the same periods in the prior year.
Pursuant to the second addendum to our Supply Agreement with Nortel Networks, entered into in May
2005, Nortel issued non-cancelable purchase orders, based on revised pricing, totaling
approximately $100 million, for certain products to be delivered through March 2006, which included
$50 million of products we were discontinuing, referred to as Last-Time Buy products. Our revenues
in the three and nine months ended March 31, 2007 included no revenue and $1.7 million of revenues
from Last-Time Buy products, respectively, as compared to $9.1 million and $37.3 million in the
three and nine months ended April 1, 2006, respectively. We expect that revenues from Last Time Buy
products will be negligible in future quarters. In addition, Nortel Networks obligations to
purchase a minimum of $72 million of our products pursuant to the third addendum to the Supply
Agreement, which was entered into in January 2006, expired at the end of calendar 2006. As of
December 31, 2006, Nortel Networks had purchased in excess of the $72.0 million of our products
required to be purchased pursuant to the third addendum. As a result of the expiration of these
various purchase obligations under the Supply Agreement with Nortel Networks, revenues from Nortel
Networks decreased significantly in the quarter ended March 31, 2007, as compared to the quarter
ended December 30, 2006, and we expect it to moderately increase through the remainder of calendar
2007.
Revenues from customers other than Nortel Networks increased by 43% in the three month period ended
March 31, 2007, to $41.8 million, compared to $29.3 million in same period of the prior year as a
result of increased product sales volumes to these customers. Revenues from customers other than
Nortel Networks increased by 48% in the nine months period ended March 31, 2007, to $125.4 million,
compared to $84.6 million in same period of the prior year also due to increased sales volume. In
particular, revenues from Cisco Systems accounted for 11% and 14% of our total revenues in the
three and nine months periods ended March 31, 2007, respectively, compared to 5% and 6% in the same
periods in the prior year. Revenues from Huawei accounted for 9% of our total revenues in both the
three and nine months periods ended March 31, 2007, respectively, compared to 7% and 6% in the same
periods in the prior year.
15
Revenues from our research and industrial segment, comprised primarily of our New Focus division,
which designs, manufactures, markets and sells photonic and microwave solutions, increased to $8.3
million and $23.0 million in the three and nine months periods ended March 31, 2007, respectively,
compared to $6.5 million and $18.8 million in the same periods ended April 1, 2006, primarily as a
result of increased product sales volumes.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
% Change |
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
% Change |
|
Cost of revenues |
|
$ |
40.7 |
|
|
$ |
47.6 |
|
|
|
(14 |
%) |
|
$ |
135.8 |
|
|
$ |
139.8 |
|
|
|
(3%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our cost of revenues consists of the costs associated with manufacturing our products, and includes
the purchase of raw materials, and manufacturing-related labor costs and related overhead,
including stock-based compensation expenses. It also includes the costs associated with
under-utilized production facilities and resources, as well as the charges for the write-down of
impaired manufacturing assets and any related restructuring costs. Charges for inventory
obsolescence, the cost of product returns and warranty costs are also included in cost of revenues.
Costs and expenses of the
manufacturing resources which relate to the development of new products are included as a research
and development expense.
Our cost of revenues for the three and nine month period ended March 31, 2007 decreased 14% and 3%,
respectively, from the same periods ended April 1, 2006, primarily due to lower costs corresponding
to lower sales volumes and reductions in our manufacturing overhead costs as a result of our
restructuring plans and cost reduction plans. Our cost of revenues for the three and nine month
period ended March 31, 2007 included $0.5 million and $1.7 million of stock-based compensation
charges, respectively. Stock-based compensation charges for the comparable period in the prior year
was $0.3 million and $1.7 million, respectively.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
% Change |
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
% Change |
|
Gross margin |
|
$ |
4.3 |
|
|
$ |
5.8 |
|
|
|
(26%) |
|
|
$ |
21.9 |
|
|
$ |
36.9 |
|
|
|
(41%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin rate |
|
|
10 |
% |
|
|
11 |
% |
|
|
|
|
|
|
14 |
% |
|
|
21 |
% |
|
|
|
|
Gross margin is calculated as revenues less cost of revenues. The gross margin rate is the
resulting gross margin reflected as a percentage of revenues.
Our gross margin rate decreased to 10% and 14% in the three and nine months ended March 31, 2007,
respectively, compared to 11% and 21% in the three and nine months ended April 1, 2006,
respectively. The decrease in gross margin rate in both periods was primarily due to decreased
revenues from sales of products to Nortel Networks under the second addendum to the Supply
Agreement, including Last Time Buy products, all of which had favorable pricing terms. In addition,
during the three and nine month period ended March 31, 2007, we had negligible revenues from the
sale of inventory we obtained in connection with our 2003 purchase of the optical components
business of Nortel Networks, that had been carried on our books at zero value. In the three and
nine months periods ended April 1, 2006, we had revenues of $2.9 million and $7.1 million,
respectively, related to, and recognized profits of $0.8 million and $2.6 million, respectively,
on, such inventory that had been carried on our books at zero value. While certain of this
inventory remains on our books at zero value, and its potential future sale would generate higher
margins than most of our new products, we incur additional costs to complete the manufacturing of
these products prior to sale. We believe revenues from this zero value inventory will continue to
be negligible through the remainder of fiscal 2007.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
Research and development expenses |
|
$ |
10.9 |
|
|
$ |
10.9 |
|
|
|
0 |
% |
|
$ |
33.9 |
|
|
$ |
31.3 |
|
|
|
8% |
|
As a percentage of net revenues |
|
|
24 |
% |
|
|
20 |
% |
|
|
|
|
|
|
21 |
% |
|
|
18 |
% |
|
|
|
|
16
Research and development expenses consist primarily of salaries and related costs of employees
engaged in research and design activities, including stock-based compensation charges related to
those employees, costs of design tools and computer hardware, and costs related to prototyping.
Research and development expenses were $10.9 million and $33.9 million in the three and nine month
period ended March 31, 2007, respectively, compared to $10.9 million and $31.3 million in the three
and nine month period ended April 1, 2006, respectively. The increase in the nine month period
ended March 31, 2007 was primarily related to the costs of new product introduction efforts, as
well as the classification of additional costs as research and development in connection with a
change in the profile of our Paignton U.K site from primarily an assembly and test site to
primarily a research and development site. The three and nine months ended March 31, 2007 also
included $0.3 million and $1.2 million, respectively, of stock-based compensation charges, compared
to $0.5 million and $1.5 million in the three and nine months ended April 1, 2006, respectively.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
Selling, general and administrative expenses |
|
$ |
12.0 |
|
|
$ |
13.2 |
|
|
|
(9 |
%) |
|
$ |
37.0 |
|
|
$ |
39.3 |
|
|
|
(6 |
%) |
As a percentage of net revenues |
|
|
27 |
% |
|
|
25 |
% |
|
|
|
|
|
|
23 |
% |
|
|
22 |
% |
|
|
|
|
Selling, general and administrative expenses consist primarily of personnel-related expenses,
including stock-based compensation charges, related to employees engaged in sales, general and
administrative functions, legal and professional fees, facilities expenses, insurance expenses and
certain information technology costs.
Selling, general and administrative expenses decreased to $12.0 million and $37.0 million in the
three and nine month period ended March 31, 2007, respectively, from $13.2 million and $39.3
million in the three and nine month period ended April 1, 2006, respectively. The decrease in
selling, general and administrative expenses in both periods was primarily the result of a decrease
in stock-based compensation to $0.6 million and $2.3 million in the three and nine month period
ended March 31, 2007, respectively, from $1.0 million and
$3.5 million in the three and nine month
period ended April 1, 2006, respectively, as well as lower headcount and professional fees in the
three and nine months ended March 31, 2007 compared to the three and nine months ended April 1,
2006.
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
Amortization of intangible assets |
|
$ |
2.2 |
|
|
$ |
2.3 |
|
|
|
(4 |
%) |
|
$ |
6.9 |
|
|
$ |
7.5 |
|
|
|
(8 |
%) |
As a percentage of net revenues |
|
|
5 |
% |
|
|
4 |
% |
|
|
|
|
|
|
4 |
% |
|
|
4 |
% |
|
|
|
|
Since 2001, we have acquired six optical components companies and businesses, and one photonics and
microwave company, which has added to the balances of our purchased intangible assets subject to
amortization. We did not complete any business combinations in the three or nine months ended March
31, 2007, and certain purchased intangible assets from our earlier business acquisitions became
fully amortized during the nine months ended March 31, 2007, which resulted in a decrease in
expense for amortization of purchased intangible assets from the nine months ended March 31, 2007
as compared to the same nine month period in the prior year.
Restructuring Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
% Change |
|
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
% Change |
|
Lease cancellation and commitments |
|
$ |
0.1 |
|
|
$ |
|
|
|
|
|
|
|
$ |
0.8 |
|
|
$ |
0.8 |
|
|
|
8% |
|
Termination payments to employees and related costs |
|
|
4.2 |
|
|
|
2.4 |
|
|
|
76% |
|
|
|
7.6 |
|
|
|
5.2 |
|
|
|
46% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4.3 |
|
|
$ |
2.4 |
|
|
|
|
|
|
$ |
8.5 |
|
|
$ |
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May, September and December 2004, we announced restructuring plans, including the transfer of
our assembly and test operations from Paignton, U.K. to Shenzhen, China, along with reductions in
research and development and selling, general and administrative expenses. These cost reduction
efforts were expanded in November 2005 to include the transfer of the our chip-on-carrier assembly
from Paignton to Shenzhen. The transfer of these operations was substantially completed in the
quarter ended March 31, 2007. In May 2006, the we announced further cost reduction plans, which
included transitioning all remaining manufacturing support and supply chain management, along with
pilot line production and production planning, from Paignton to Shenzhen, which was substantially
completed in the
quarter ended March 31, 2007. As of March 31, 2007, we had spent $31.7 million on all of our
restructuring programs.
17
On January 31, 2007, we adopted an overhead cost reduction plan which includes workforce
reductions, facility and site consolidation of our Caswell, U.K. semiconductor operations within
existing local facilities and the transfer of certain research and development activities to our
Shenzhen, China facility. We began implementing our overhead cost reduction plan in the quarter
ended March 31, 2007. A substantial portion of this overhead cost reduction plan is expected to be
completed by the end of the fourth quarter of our fiscal year ending June 30, 2007, with the
remainder to be completed in the fiscal quarter ending September 29, 2007. The overhead cost
reduction plan is expected to save an aggregate of $6.0 million to $7.0 million per quarter, in
comparison to the fiscal quarter ended December 31, 2006, with a substantial portion of that
savings expected to be initially realized in the fiscal quarter ending September 29, 2007. The
total cost associated with this overhead cost reduction plan, the substantial portion being
personnel severance and retention related expenses, is expected to range from $8.0 million to $9.0
million, with most of the restructuring charges expected to be incurred and paid by the end of the
June 30, 2007 fiscal quarter and the remainder expected to be incurred and paid by the end of the
September 29, 2007 fiscal quarter. As of March 31, 2007, we had spent $1.4 million on this cost
reduction plan.
In connection with earlier plans of restructuring, and the assumption of restructuring accruals
upon the acquisition of New Focus in March 2004, in the quarter ended March 31, 2007, we continued
to make scheduled payments drawing down the related lease cancellations and commitments. We also
accrued an additional $0.1 million and $0.9 million for revised estimates related to one of these
commitments in the three and nine months ended March 31, 2007, respectively. Remaining net payments
of lease cancellations and commitments in connection with our earlier restructuring efforts are
included in the restructuring accrual as of March 31, 2007.
Legal Settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
Legal settlement |
|
$ |
|
|
|
$ |
7.2 |
|
|
|
|
|
|
$ |
0.5 |
|
|
$ |
7.2 |
|
|
|
(93 |
%) |
In the nine months period ended March 31, 2007, we recorded $0.5 million for additional legal fees
and other professional costs related to a settlement of the litigation with Howard Yue, the former
sole shareholder of Globe Y. Technology, Inc. (a company acquired by New Focus, Inc. in February
2001), which was reached in fiscal year 2006. Other than a $7.2 million charge recorded in the
quarter ended April 1, 2006 related to this same case, there were no legal settlements, or related
legal fees and professional costs, recorded in the corresponding quarter of the prior year.
Impairment/(Recovery) of Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
Impairment/(recovery) of long-lived assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
1.9 |
|
|
$ |
(1.3 |
) |
|
|
N/A |
|
During the quarter ended September 30, 2006, we designated the assets underlying our Paignton U.K.
manufacturing site as held for sale. In connection with that designation we recorded an impairment
charge of $1.9 million.
In the quarter ended October 1, 2005, we sold a parcel of land in Swindon, U.K., which had
previously been accounted for as held for sale. The proceeds were $15.5 million, resulting in a
recovery of previous impairment of $1.3 million, net of transaction costs. The book value of this
Swindon, U.K. land had previously been impaired and written-down to fair market value, and
therefore the net gain is being reflected as a recovery of this impairment.
Other Income/(Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions |
|
Three Months Ended |
|
Nine Months Ended |
|
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
|
March 31, 2007 |
|
April 1, 2006 |
|
% Change |
Other income/(expense), net |
|
$ |
0.8 |
|
|
$ |
(18.0 |
) |
|
|
(104 |
%) |
|
$ |
(2.6 |
) |
|
$ |
(20.9 |
) |
|
|
(88 |
%) |
Other income/(expense), net primarily consists of interest expense, interest income, loss on
conversion and early extinguishment of debt and foreign currency gains and losses primarily related
to the re-measurement of short term balances between our international subsidiaries, the
re-measurement of United States dollar denominated cash and receivable accounts of foreign
subsidiaries with local functional currencies and unrealized gains or losses on forward contracts
not designated as hedges. The increase in other income/(expense), net in the three and nine months
period ended March 31, 2007 from the three and nine months period ended April 1, 2006 was primarily
related to an $18.6 million loss on conversion and early extinguishment of debt included in our
results for the three and nine month periods ended April 1, 2006.
18
Income Tax Provision/(Benefit)
In the quarter ended October 1, 2005, we recorded a one time tax gain of $11.8 million related to
our anticipated use of capital allowance carry forwards to offset deferred tax liabilities assumed
upon our acquisition of Creekside in August 2005. The acquisition of Creekside is described further
below.
Liquidity, Capital Resources and Contractual Obligations
Liquidity and Capital Resources
Operating activities
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
$ Millions |
|
March 31, 2007 |
|
|
April 1, 2006 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Net loss |
|
$ |
(68.6 |
) |
|
$ |
(60.5 |
) |
Non-cash accounting items: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
17.8 |
|
|
|
22.2 |
|
Stock-based compensation |
|
|
5.1 |
|
|
|
6.6 |
|
Impairment/(Recovery) of long-lived assets |
|
|
1.9 |
|
|
|
(1.3 |
) |
Gain on sale of property and equipment |
|
|
(0.8 |
) |
|
|
(2.1 |
) |
One time tax gain |
|
|
|
|
|
|
(11.8 |
) |
Legal settlement |
|
|
|
|
|
|
7.2 |
|
Acquired in-process research and development |
|
|
|
|
|
|
0.1 |
|
Loss on conversion and early extinguishment of debt |
|
|
|
|
|
|
18.6 |
|
Foreign currency re-measurement of notes payable |
|
|
|
|
|
|
0.9 |
|
Amortization of deferred gain on sale leaseback |
|
|
(0.9 |
) |
|
|
|
|
Amortization of interest expense for warrants and beneficial conversion feature |
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
|
Total non-cash accounting charges |
|
|
23.1 |
|
|
|
41.7 |
|
(Decrease)/increase in working capital |
|
|
(0.4 |
) |
|
|
(14.4 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(45.9 |
) |
|
$ |
(33.2 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities for the nine month period ended March 31, 2007 was $45.9
million, which was our net loss of $68.6 million reduced by $23.1 million of non-cash accounting
items and increase by $0.4 million due to the net change in our operating assets and liabilities,
which arose primarily from cash generated from reductions in (i) accounts receivable, (ii)
inventories, related to inventories at our Paignton U.K. site as operations have moved to Shenzhen,
China, and (iii) prepaid and other assets, offset in part by decreases in accounts payable and
accrued expenses and other liabilities, including the payment of professional fees and accrued
restructuring costs.
Net cash used in operating activities for the nine month period ended April 1, 2006 was $33.2
million, which included our net loss of $60.5 million reduced by
$41.7 million of non-cash
accounting items and increased by $14.4 million due to the net change in our working capital, which
arose primarily from increases in inventories related to ramping up our Shenzhen manufacturing
facility while still operating our Paignton facility, and decreases in our accounts payable and
accrued liabilities as a result of payments of amounts owed to suppliers after generating funds
from our October 2005 public offering.
Investing activities
Investing activities generated cash of $6.1 million in the nine months periods ended March 31,
2007, primarily consisting of $9.4 million and $3.2 million in net proceeds from sale of land held
for re-sale at Paignton and from sale of Paignton property and equipment, respectively, offset by
$5.9 million and $0.6 million in cash used in capital expenditures and of cash transferred to
restricted cash, respectively. Investing activities generated net cash of $46.9 million in nine
month period ended April 1, 2006, primarily from $14.7 million in net proceeds from sale of land
held for re-sale at Paignton, $23.4 million in proceeds from sale-leaseback of Caswell facility,
$9.7 million of cash, excluding restricted cash, assumed in connection with our acquisition of
Creekside in August 2005, $2.1 million from proceeds from sale of property and equipment and $2.3
million of cash transferred from restricted cash, offset by $5.4 million used in capital
expenditures.
During the quarter ended September 30, 2006, we designated the assets underlying our Paignton U.K.
manufacturing site as held for sale. We recorded an impairment charge of $1.9 million as a result
of this designation. During the quarter ended December 30, 2006, Bookham Technology plc, our
wholly-owned subsidiary, sold the site to a third party for proceeds of £4.8 million (approximately
$9.4 million based on an exchange rate of $1.96 to £1.00), net of selling costs. In connection with
this transaction, we recorded a loss of $0.1 million which is included in loss on sale of property
and equipment and other long-lived assets. In accordance with the agreement pursuant to which the
manufacturing site was sold, we were granted an option to lease back a portion of the Paignton U.K.
site from the buyer for a two-year term
19
at a market-based rent. We have exercised the option and
have the right to terminate the lease at any time on three months prior notice. We plan to move our
remaining Paignton research and development personnel and operations to a smaller site during
calendar year 2007.
On August 10, 2005, Bookham Technology plc, our wholly owned subsidiary, entered into a share
purchase agreement pursuant to which Bookham Technology plc purchased all of the issued share
capital of City Leasing (Creekside) Limited, a subsidiary of Deutsche Bank, for consideration of
£1.00, plus professional fees of approximately £455,000 (approximately $837,000, based on an
exchange rate of £1.00 to $1.8403). The parties to the share purchase agreement are Bookham
Technology plc, Deutsche Bank and London Industrial Leasing Limited, a subsidiary of Deutsche Bank,
which we refer to as London Industrial. Creekside was utilized by Deutsche Bank in connection with
the leasing of four aircraft to a third party. The leasing arrangement is structured as follows:
Phoebus Leasing Limited, a subsidiary of Deutsche Bank, which we refer to as Phoebus, leases the
four aircraft to Creekside under the primary leases and Creekside in turn subleases the aircraft to
a third party. Under the sub-lease arrangement, the third party lessee who utilizes the aircraft,
whom we refer to as the Sub-Lessee, makes sublease payments to Creekside, who in turn must make
lease payments to Phoebus under the primary leases. To insulate Creekside from any risk that the
Sub-Lessee will fail to make payments under the sub-lease arrangement, prior to the execution of
the share purchase agreement, Creekside assigned its interest in the Sub-Lessee payments to
Deutsche Bank in return for predetermined deferred consideration amounts, which we refer to as the
Deferred Consideration, which are paid directly from Deutsche Bank. Additionally, on closing the
transaction, Deutsche Bank loaned Creekside funds to (i) pay substantially all of the rentals under
the primary lease with Phoebus, excluding an amount equal to £400,000 (approximately $736,000), and
(ii) repay an existing loan made by another wholly owned subsidiary of Deutsche Bank to Creekside.
The obligation of Creekside to repay the Deutsche Bank loans may be fully offset against the
obligation of Deutsche Bank to pay the Deferred Consideration to Creekside.
Under the terms of the agreement, Bookham Technology plc received £4.2 million (approximately $7.5
million) of available cash when the transaction closed on August 10, 2005. An additional £1 million
(approximately $1.8 million) has since been received on October 14, 2005, £1 million (approximately
$1.8 million) was received on July 14, 2006 and the balance of approximately £431,000
(approximately $793,000) is expected to be available on July 16, 2007, as a result of which Bookham
Technology plc will have received approximately £6.63 million (approximately $12.2 million, based
on an exchange rate of £1.00 to $1.8403).
At the closing of this transaction, Creekside had receivables (including services and interest
charges) of £73.8 million (approximately $135.8 million) due from Deutsche Bank in connection with
certain aircraft subleases of Creekside and cash of £4.7 million (approximately $8.6 million), of
which £4.2 million was immediately available. The assignment was made in exchange for the
receivables, which are to be paid by Deutsche Bank to Creekside in three installments, with the
last payment being made on July 16, 2007. We have recorded these receivables and payables as net
assets on our balance sheet as of March 31, 2007.
Creekside and Deutsche Bank entered into two facility agreements relating to a loan in the
principal amount of £18.3 million (approximately $33.7 million) and a loan in the principal amount
of £42.5 million including interest (approximately $78.2 million), which together will accrue
approximately £3.6 million (approximately $6.6 million) in interest during the term of these loans.
At the closing, Creekside used the loans to repay amounts outstanding under a loan dated April 12,
2005 between Creekside, as borrower, and City Leasing (Donside) Limited, a subsidiary of Deutsche
Bank, as lender, and to pay part of Creeksides rental obligations under the lease agreements.
At August 10, 2005, Creekside had long-term liabilities to Deutsche Bank under the loans, an
agreement to pay
Deutsche Bank £8.3 million (approximately $15.3 million, including principal and interest) to cover
settlement of current Creekside tax liabilities and £0.4 million (approximately $0.7 million) of
outstanding payments due to Deutsche Bank under the lease agreements; we refer to these
collectively as the Obligations.
Creekside will use the Deferred Consideration to pay off the Obligations over a period of two
years, or the Term, such that the Obligations will be offset in full by the receivables and we
expect will result in Bookham Technology plc having excess cash of approximately £6.63 million
(approximately $12.2 million) available to it during the Term. Bookham Technology plc expects to
surrender certain of its tax losses against any U.K. taxable income that may arise as a result of
the Deferred Consideration, to reduce any U.K. taxes that would otherwise be due from Creekside.
The loans issued by Deutsche Bank may be prepaid in whole at any time with 30 days prior written
notice to Deutsche Bank. The loan for £18.3 million plus interest was repaid by Creekside on
October 14, 2005, and the loan for £42.5 million is repayable by Creekside in installments: the
first installment of £23.5 million (approximately $43.2 million) was paid on July 14, 2006; and the
second installment of £22.5 million (approximately $41.4 million) is payable on July 16, 2007. The
remaining loan accrues interest a rate of 5.68% per year. Events of default under the loan include
failure by Creekside to pay amounts under the loans when due, material breach by Creekside of the
terms of the lease agreements and related documentation, a judgment or order made against Creekside
that is not stayed or complied with within seven
20
days or an attachment by creditors that is not
discharged within seven days, insolvency of Creekside or failure by Creekside to make payments with
respect to all or any class of its debts, presentation of a petition for the winding up of
Creekside, and appointment of any administrative or other receiver with respect to Creekside or any
material part of Creeksides assets. While Deutsche Bank may accelerate repayment under the
facility agreements upon an event of default, the loan will be fully offset against the
receivables, as described above.
Pursuant to the terms of the agreements governing this transaction, we believe that we have not
assumed any material credit risk in connection with these arrangements. The material cash flow
obligations associated with Creekside are directly related to Deutsche Banks obligations to pay
Creekside the Deferred Consideration, and Creeksides obligation to repay the loans to Deutsche
Bank. The obligations of Creekside to repay the Deutsche Bank loan can be fully offset against
Deutsche Banks obligation to pay the Deferred Consideration. Any Sub-Lessee default has no impact
on Deutsche Banks obligation to pay Creekside the Deferred Consideration. Regarding the primary
leases between Phoebus and Creekside, all but £400,000 has been paid. For these reasons, we believe
we do not bear a material risk and have no substantial continuing payments or obligations.
Under the Creekside share purchase agreement and related documents, London Industrial and Deutsche
Bank have indemnified us, Bookham Technology plc and Creekside with respect to contractual
obligations and liabilities entered into by Creekside prior to the closing of the transaction and
certain tax liabilities of Creekside that may arise in taxable periods both prior to and after the
closing.
Pursuant to an administration agreement between Creekside, City Leasing Limited, a subsidiary of
Deutsche Bank, and Deutsche Bank, Creekside is to be administered during the Term by City Leasing
Limited to ensure Creekside complies with its obligations under the lease agreements.
In accordance with the terms of the primary leases and the sub-leases, Phoebus is ultimately
entitled to the four aircraft in the event of default by the Sub-Lessee. An event of default will
not impact the payment obligations described above.
Financing activities
On March 22, 2007, we entered into a definitive agreement for a private placement pursuant to which
we issued, on March 22, 2007, 13,640,224 shares of common stock and warrants to purchase up to
4,092,066 shares of common stock with accredited investors for net proceeds of approximately $26.9
million. The warrants have a five year term, expiring March 22, 2012, and are exercisable
beginning on September 23, 2007 at an exercise price of $2.80 per share, subject to adjustment
based on a weighted average antidilution formula if we effect certain equity issuances in the
future for consideration per share that is less than the then current exercise price.
On August 31, 2006, we entered into an agreement for a private placement of common stock and
warrants pursuant to which we issued and sold 8,696,000 shares of common stock and warrants to
purchase up to 2,174,000 shares of common stock, which sale closed on September 1, 2006, and issued
and sold an additional 2,892,667 shares of common stock and warrants to purchase up to an
additional 724,667 shares of common stock in a second closing on September 19, 2006. In both cases
such shares of common stock and warrants were issued and sold to accredited investors. Our net
proceeds from this private placement, including the second closing, were $28.7 million. The
warrants are exercisable during the period beginning on March 2, 2007 through September 1, 2011, at
an exercise price of $4.00 a share.
In the nine months period ended April 1, 2006, we generated $25.3 million of cash from financing
activities primarily
consisting of $49.4 million of net proceeds from our public offering, offset by $24.0 million used
in connection with the early retirement of our notes payable to Nortel and our convertible
debentures.
Sources of Cash
In the past five years, we have funded our operations from several sources, including through
public and private offerings of equity, issuance of debt and convertible debt, sale of assets and
net cash from acquisitions.
On March 22, 2007, we entered into a definitive agreement for a private placement pursuant to which
we issued, on March 22, 2007, 13,640,224 shares of common stock and warrants to purchase up to
4,092,066 shares of common stock with accredited investors (the Investors) for net proceeds of
approximately $26.9 million. The warrants have a five year term, expiring March 22, 2012, and are
exercisable beginning on September 23, 2007 at an exercise price of $2.80 per share, subject to
adjustment based on a weighted average anti dilution formula if we effect certain equity issuances
in the future for consideration per share that is less than the then current exercise price.
On August 31, 2006, we entered into an agreement for a private placement of common stock and
warrants pursuant to which we issued and sold 8,696,000 shares of common stock and warrants to
purchase up to 2,174,000 shares of common stock, which sale closed on September 1, 2006,
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and issued
and sold an additional 2,892,667 shares of common stock and warrants to purchase up to an
additional 724,667 shares of common stock in a second closing on September 19, 2006, in both cases
such shares of common stock and warrants were issued and sold to accredited investors. Our net
proceeds from this private placement, including the second closing, were $28.7 million. The
warrants are exercisable during the period beginning on March 2, 2007 through September 1, 2011, at
an exercise price of $4.00 a share.
On August 2, 2006, we, with Bookham Technology plc, New Focus, Inc. and Bookham (US) Inc., each a
wholly-owned subsidiary, which we collectively refer to as the Borrowers, entered into a credit
agreement, or Credit Agreement, with Wells Fargo Foothill, Inc. and other lenders regarding a
three-year $25 million senior secured revolving credit facility. Advances are available under the
Credit Agreement based on 80 percent of the Companys qualified accounts receivable, as defined
in the Credit Agreement, at the time an advance is requested.
The obligations of the Borrowers under the Credit Agreement are guaranteed by us, Onetta, Inc.,
Focused Research, Inc., Globe Y. Technology, Inc., Ignis Optics, Inc., Bookham (Canada) Inc.,
Bookham Nominees Limited and Bookham International Ltd., each also a wholly-owned subsidiary (which
we refer to collectively as the Guarantors and together with the Borrowers, as the Obligors), and
are secured pursuant to a security agreement, or the Security Agreement, by the assets of the
Obligors, including a pledge of the capital stock holdings of the Obligors in certain of their
direct subsidiaries. Any new direct subsidiary of the Obligors is required to execute a security
agreement in substantially the same form as the Security Agreement, and become a party to the
Security Agreement.
Pursuant to the terms of the Credit Agreement, borrowings made under the Credit Agreement bear
interest at a rate based on either the London Interbank Offered Rate (LIBOR) plus 2.75 percentage
points or the prime rate plus 1.25 percentage points. In the absence of an event of default, any
amounts outstanding under the Credit Agreement may be repaid and borrowed again anytime until
maturity on August 2, 2009. A termination of the commitment line by the Borrower any time prior to
August 2, 2008 will subject the Borrowers to a prepayment premium of 1.0% of the maximum revolver
amount.
The obligations of the Borrowers under the Credit Agreement may be accelerated upon the occurrence
of an event of default under the Credit Agreement, which includes payment defaults, defaults in the
performance of affirmative and negative covenants, the material inaccuracy of representations or
warranties, a cross-default related to other indebtedness in an aggregate amount of $1,000,000 or
more, bankruptcy and insolvency related defaults, defaults relating to such matters as ERISA,
judgments, and a change of control default. The Credit Agreement contains negative covenants
applicable to the Borrowers and their subsidiaries, including financial covenants requiring the
Borrowers to maintain a minimum level of EBITDA (if the Borrowers have not maintained specified
levels of liquidity), as well as restrictions on liens, capital expenditures, investments,
indebtedness, fundamental changes, dispositions of property, making certain restricted payments
(including restrictions on dividends and stock repurchases), entering into new lines of business,
and transactions with affiliates. As of March 31, 2007, there were no amounts drawn under the
credit facility and we were in compliance with all covenants under the Credit Agreement.
In connection with the Credit Agreement, we agreed to pay a monthly servicing fee of $3,000 and an
unused line fee equal to 0.375% per annum, payable monthly on the unused amount of revolving credit
commitments. To the extent there are letters of credit outstanding under the Credit Agreement, the
Borrowers will pay to the administrative agent a letter of credit fee at a rate equal to 2.75% per
annum.
During the quarter ended September 30, 2006, we designated the assets underlying our Paignton U.K.
manufacturing
site as held for sale. We recorded an impairment charge of $1.9 million as a result of this
designation. During the quarter ended December 31, 2006, Bookham Technology plc, our wholly-owned
subsidiary, sold the site to a third party resulting in proceeds of £4.8 million (approximately
$9.4 million based on an exchange rate of $1.96 to £1.00), net of selling costs. In connection with
this transaction, we recorded a loss of $0.1 million which is included in loss on sale of property
and equipment and other long-lived assets. In accordance with the agreement pursuant to which the
manufacturing site was sold, we were granted an option to lease back a portion of the Paignton U.K.
site from the buyer for a two-year term at a market-based rent. We have exercised the option and
have the right to terminate the lease at any time on three months prior notice. We plan to move our
remaining Paignton research and development personnel and operations to a smaller site during
calendar year 2007.
Future Cash Requirements
In our Annual Report of Form 10-K for the fiscal year ended July 1, 2006, we disclosed that, based
on our cash balances and our continuing and expected losses for the foreseeable future, if we fail
to meet our managements current cash flow forecasts, or are unable to draw sufficient amounts
under the Credit Agreement for any reason, we will need to raise additional funding of at least $10
million to $20 million through external sources prior to July 2007 in order to maintain sufficient
financial resources to operate as a going concern through the end of fiscal
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2007. We also disclosed that, if necessary, we will attempt to raise additional funds by any one or a combination of the
following: (i) completing the sale of certain assets; (ii) issuing equity, debt or convertible
debt; and (iii) selling certain non core businesses, and that there can be no assurance of our
ability to raise sufficient capital through these, or any other efforts.
Since the filing of our Annual Report on Form 10-K for the fiscal year ended July 1, 2006, we
completed the second closing of the private placement referred to above, resulting in proceeds of
approximately $7.3 million, net of commissions. We sold our Paignton U.K. manufacturing site in a
transaction that closed and under which we collected £4.8 million (approximately $9.4 million based
on an exchange rate of $1.96 to £1.00), net of selling costs, in November 2006. We also completed
a private placement on March 22, 2007, also referred to above, which resulted in net proceeds of
$26.9 million.
We believe these financings have provided sufficient funds for us to continue as a going concern
through at least the next twelve month period, however, there can be no assurance that we will
not choose to raise additional funds during that twelve month period, or that we will not need to
raise additional funds to continue as a going concern beyond that twelve month period, or of our
ability to raise any such capital through financings, or any other effort, if necessary to continue as
a going concern.
Risk ManagementForeign Currency Risk
We are exposed to fluctuations in foreign currency exchange rates and interest rates. As our
business has become more multinational in scope, we have become subject to fluctuations based upon
changes in the exchange rates between the currencies in which we collect revenues and pay expenses.
Despite our change in domicile from the United Kingdom to the United States, in the future we
expect that a substantial portion of our revenues will be denominated in U.S. dollars, while a
substantial portion of our expenses will continue to be denominated in U.K. pounds sterling.
Fluctuations in the exchange rate between the U.S. dollar and the U.K. pound sterling 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, in which we pay local expenses in connection
with the operation of our Shenzhen facility. To the extent the exchange rate between the U.S.
dollar and the Chinese Yuan were to begin to fluctuate more significantly than experienced to date,
our results of operations could be adversely impacted. We enter into foreign currency forward
exchange contracts in an effort to mitigate our exposure to such fluctuations between the U.S.
dollar and the U.K. pound sterling, and 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 March 31, 2007, we held thirteen foreign currency
forward exchange contracts with a nominal value of $13.5 million which include put and call options
which expire, or expired, at various dates from April 2007 to February 2008. As of March 31, 2007,
the fair value of our outstanding foreign currency forward exchange contracts was an asset of $0.5
million and we recorded an unrealized loss of $0.2 million during the quarter ended March 31, 2007
to other comprehensive income in connection with marking these contracts to fair value.
Contractual Obligations
There have been no material changes to the contractual obligations disclosed as at July 1, 2006 in
our Annual Report on Form 10-K filed with the SEC on September 14, 2006.
Off-Balance Sheet Arrangements
We are not currently party to any material off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates
We finance our operations through a mixture of stockholders funds, loan notes, finance leases and
working capital. In the three month period ended September 30, 2006, we entered into a $25 million
revolving credit line facility with Wells Fargo Foothill. During the three and nine months ended
March 31, 2007, we did not draw down on this facility and therefore had no exposure to interest
rate fluctuations, other than exposure created by our cash deposits. We monitor our interest rate
risk on cash balances primarily through cash flow forecasting. Cash that is surplus to immediate
requirements is invested in short-term deposits with banks accessible with one days notice and
invested in overnight money market accounts.
Foreign currency
Due to our multinational operations, we are subject to fluctuations based upon changes in the
exchange rates between the currencies in which we collect revenue and pay expenses. Our expenses
are not necessarily incurred in the currency in which revenue is generated, and, as a result, we
may from time to time have to exchange currency to meet our obligations. These currency conversions
are subject to exchange rate fluctuations, in particular, changes in the value of the U.K. pound
sterling compared to the U.S. dollar, and to a lesser degree fluctuations between the Chinese Yuan
and both the U.S. dollar and the U.K. pound sterling, among others. In an effort to mitigate
exposure to those
23
fluctuations, we enter into foreign currency forward exchange contracts with
respect to portions of our forecasted expenses denominated in U.K. pound sterling. At March 31,
2007, we held thirteen foreign currency forward exchange contracts, including put and call options,
to purchase U.K. pound sterling with a nominal value of $13.5 million and a fair value of $14.0
million at March 31, 2007, including a recorded unrealized gain of $0.5 million at that date. These
contracts include put and call options which expire, or expired, on dates ranging from April 2007
to February 2008. It is estimated that a 10% fluctuation in the U.S. dollar between March 31, 2007
and the maturity dates of the put and call instruments underlying the contracts would lead to a
gain of $1.8 million (dollar weakening), or a loss of $0.8 million (dollar strengthening) on our
outstanding foreign currency forward exchange contracts, should they be held to maturity.
Item 4. Controls and Procedures
Evaluation of disclosure 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 March 31, 2007. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are 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 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 of March 31, 2007, our chief executive officer
and chief financial officer concluded that, as of such date, our disclosure controls and procedures
were effective at the reasonable assurance level.
In our Annual Report on Form 10-K for the year ended July 1, 2006, we identified a material
weakness in our systems of internal control over financial reporting related to the inconsistent
treatment of translation/transaction gains and losses in respect to certain intercompany loan
balances. We have since implemented review procedures we believe are adequate to remedy the
material weakness. We note, however, that our next management report on internal control over
financial reporting and the related report of our independent registered public accounting firm is
not due until our annual report on Form 10-K for the year ended June 30, 2007.
Except as noted above, there was no change in our internal control over financial reporting during
the quarter ended March 31, 2007 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, a putative securities class action captioned Lanter v. New Focus, Inc. et
al., Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and
directors, or the Individual Defendants, in the United States District Court for the Southern
District of New York. Also named as defendants were Credit Suisse
First Boston Corporation, Chase Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World
Markets Corp., or the Underwriter Defendants, the underwriters in New Focuss initial public
offering. Three subsequent lawsuits were filed containing substantially similar allegations. These
complaints have been consolidated. On April 19, 2002, plaintiffs filed an Amended Class Action
Complaint, described below, naming as defendants the Individual Defendants and the Underwriter
Defendants.
On November 7, 2001, a Class Action Complaint was filed against Bookham Technology plc and
others in the United States District Court for the Southern District of New York. On April 19,
2002, plaintiffs filed an Amended Class Action Complaint, described
below. The Amended Class Action Complaint names
as defendants Bookham Technology plc, Goldman, Sachs & Co. and FleetBoston Robertson Stephens,
Inc., two of the underwriters of Bookham Technology plcs initial public offering in April 2000,
and Andrew G. Rickman, Stephen J. Cockrell and David Simpson, each of whom was an officer and/or
director at the time of Bookham Technology plcs initial public offering.
The
Amended Class Action Complaint asserts claims under certain provisions of the securities laws of the
United States. It alleges, among other things, that the prospectuses for Bookham Technology plcs
and New Focuss initial public offerings were materially false and misleading in describing the
compensation to be earned by the underwriters in connection with the offerings, and in not
disclosing certain alleged
24
arrangements among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the
underwriters. The Amended Class Action Complaint seeks unspecified damages (or in the alternative rescission for
those class members who no longer hold our or New Focus common stock), costs, attorneys fees,
experts fees, interest and other expenses. In October 2002, the Individual Defendants were
dismissed, without prejudice, from the action. In July 2002, all defendants filed Motions to
Dismiss the Amended Class Action Complaint. The motion was denied as to Bookham Technology plc and New Focus in
February 2003. Special committees of the board of directors authorized the companies to negotiate a
settlement of pending claims substantially consistent with a memorandum of understanding negotiated
among class plaintiffs, all issuer defendants and their insurers.
Plaintiffs and most of the issuer defendants and their insurers have entered into a
stipulation of settlement for the claims against the issuer defendants, including us. Under the
stipulation of settlement, the plaintiffs will dismiss and release all claims against participating
defendants in exchange for a payment guaranty by the insurance companies collectively responsible
for insuring the issuers in the related cases, and the assignment or surrender to the plaintiffs of
certain claims the issuer defendants may have against the underwriters. On February 15, 2005, the
District Court issued an Opinion and Order preliminarily approving the settlement provided that the
defendants and plaintiffs agree to a modification narrowing the scope of the bar order set forth in
the original settlement agreement. The parties agreed to the modification narrowing the scope of
the bar order, and on August 31, 2005, the District Court issued an order preliminarily approving the
settlement. On December 5, 2006, the United States Court of Appeals for the Second Circuit
overturned the District Courts certification of the class of plaintiffs who are pursuing the
claims that would be settled in the settlement against the underwriter defendants. Plaintiffs filed
a Petition for Rehearing and Rehearing En Banc with the Second Circuit on January 5, 2007 in
response to the Second Circuits decision and have informed the District Court that they would like
to be heard as to whether the settlement may still be approved even if the decision of the Court of
Appeals is not reversed. The District Court indicated that it would defer consideration of final
approval of the settlement pending plaintiffs request for further appellate review. On April 6,
2007, plaintiffs petition for rehearing at the Second Circuits decision was denied. We believe
that both Bookham Technology plc and New Focus have meritorious defenses to the claims made in the
Amended Class Action Complaint and therefore believe that such claims will not have a material effect on our
financial position, results of operations or cash flows.
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. 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
occur, our business, financial condition or results of operations would likely suffer. In that
case, the trading price of our common stock could fall. The following risk factors have been
updated from those provided in our Annual Report on Form 10-K for the fiscal year ended July 1,
2006 to, among other things, update the risk factors regarding our history of large operating
losses; our business relationship with Nortel Networks; our liquidity, current cash resources and
capital resources; our ability to continue as a going concern; our restructuring efforts; our
ability to manage our inventories; the risks of doing business in China and incurring additional
significant restructuring charges; our ability to monitor our effective system of internal controls
and the future sale of substantial amounts of our common stock. In addition, we have added a risk
factor regarding our need to generate additional revenues from customers other than Nortel
Networks.
We have a history of large operating losses and we expect to generate losses in the future unless
we achieve further cost reductions and revenue increases.
We have never been profitable. We have incurred losses and negative cash flow from operations
since our inception.
As of March 31, 2007, we had an accumulated deficit of $1,023.7 million.
Our net loss for the nine months period ended March 31, 2007 was $69.2 million. Our net loss
for the year ended July 1, 2006 was $87.5 million, which included an $18.8 million loss on
conversion of convertible debt and early extinguishment of debt, and an aggregate of $11.2 million
of restructuring charges, partially offset by an $11.7 million tax gain. For the year ended July 2,
2005, our net loss was $248 million, which included goodwill and intangibles impairment charges of
$114.2 million and restructuring charges of $20.9 million.
Even though we generated positive gross margins in each of the past nine fiscal quarters, we
have a history of negative gross margins. We may not be able to maintain positive gross margins due
to, among other things, new product transitions, changing product mix or semiconductor facility
under utilization, or if we do not continue to reduce our costs, improve our product mix and
generate sufficient revenues from new and existing customers to offset the revenues we lost as a
result of the expiration of minimum purchase requirements under the supply agreement with Nortel
Networks.
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We must generate significant additional revenues from existing or new customers in order to offset
the anticipated decrease in revenues attributable to Nortel Networks
Historically Nortel Networks has been our largest customer. In the nine-month period ended
March 31, 2007, our revenues from Nortel Networks were $32.3 million, or 20% of our total revenues.
In the fiscal year ended July 1, 2006, and in the fiscal year ended July 2, 2005, we sold $110.5
million and $89.5 million of products and services to Nortel Networks, or 48% and 45% of our total
revenues, respectively. The sales of our products to Nortel Networks were made pursuant to the
terms of a supply agreement. Certain minimum purchase obligations and favorable pricing provisions
within that supply agreement expired in December, 2006. Nortel Networks is therefore no longer
obligated to buy any of our products, and revenues from Nortel Networks significantly decreased to
$3.1 million in the first quarter of calendar 2007. In order to increase our revenue levels, we
must replace the loss of revenues from Nortel Networks with revenues from our other existing
customers or obtain new customers, or both. There can be no assurance of the degree to which Nortel
Networks will continue to purchase products from us, if any. Additionally, we may be required to
increase our sales and marketing efforts to maintain our current revenue levels, and despite these
efforts, we still may not be able to offset any decreased revenues from Nortel Networks with sales
to new or existing customers. Our inability to replace these revenues will have an adverse impact
on our business and results of operations.
In order to continue as a going concern, we may need capital in excess of our current cash
resources.
In our Annual Report on Form 10-K for the fiscal year ended July 1, 2006, we disclosed that,
based on our cash balances, and given our continuing and expected losses for the foreseeable
future, if we fail to meet managements current cash flow forecasts, or we are unable to draw
sufficient amounts under the three year $25 million senior secured revolving credit agreement with
Wells Fargo Foothill, Inc. and other lenders, which was entered into in August 2006, for any
reason, we would need to raise additional funding of at least $10 million to $20 million through
external sources prior to July 2007 in order to maintain sufficient financial resources in order to
operate as a going concern through the end of fiscal 2007, and that if necessary, we would attempt
to raise additional funds by any one or a combination of the following: (i) completing the sale of
certain assets; (ii) issuing equity, debt or convertible debt or (iii) selling certain non core
businesses.
Since the filing of our Annual Report on Form 10-K for the fiscal year ended July 1, 2006, we
completed the second closing of our private placement of shares of our common stock and warrants to
purchase shares of common stock pursuant to an agreement entered into on August 31, 2006 resulting
in proceeds of approximately $7.3 million, net of commissions. In November 2006, we sold our
Paignton U.K. site for approximately $9.4 million, net of selling costs. We also completed a
private placement on March 22, 2007, which resulted in net proceeds of $26.9 million. In the
future we may need to raise additional funds to continue as a going concern and there can be no
assurance of our ability to raise any such capital through the above, or any other efforts.
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 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 wave length 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 uncompetitive from a pricing standpoint, obsolete or unmarketable.
The market for optical components continues to be characterized by excess capacity and intense
price competition which has had, and will continue to have, a material adverse affect on our
results of operations.
In 2002, actual demand for optical communications equipment and components was dramatically
less than that forecasted by leading market researchers only two years before. Even though the
market for optical components has been recovering recently, particularly in the metro market
segment, there continues to be excess capacity, intense price competition among optical component
manufacturers and continued consolidation of the industry. As a result of this excess capacity, and
other industry factors, pricing pressure remains intense. The continued uncertainties in the
telecommunications industry and the global economy make it difficult for us to anticipate revenue
levels and therefore to make appropriate estimates and plans relating to cost management. Continued
uncertain demand for optical components has had, and will continue to have, a material adverse
effect on our results of operations.
26
We and our customers are each dependent upon a limited number of customers.
Historically, we have generated most of our revenues from a limited number of customers. Sales
to one customer, Nortel Networks, accounted for 20% of our revenues for the nine months period
ended March 31, 2007, and 48% and 45% of our revenues for the year ended July 1, 2006 and the year
ended July 2, 2005, respectively. In addition to the significantly reduced outlook for revenue from
Nortel Networks as a result of the expiration of minimum purchase requirements under the supply
agreement, as amended, we expect that revenue from our other major customers may decline or
fluctuate significantly during the remainder of calendar year 2007 and beyond. We may not be able
to offset any such decline in revenues from our existing major customers with revenues from new
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. Similarly,
our customers depend primarily on a limited number of major telecommunications carrier customers to
purchase their products that incorporate our optical components. Many major telecommunication
systems companies and telecommunication carriers are experiencing losses from operations. The
further consolidation of the industry, coupled with declining revenues from our major customers,
may have a material adverse impact on our business.
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 materially impacted by foreign currency fluctuations and our
future financial results may also 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 profit margins and our cash flow. Despite our
change in domicile from the United Kingdom to the United States and the implementation of our
restructuring program to move all assembly and test operations from Paignton, U.K. to Shenzhen,
China, the majority of our expenses are still 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 pay
expenses will continue to have a material affect on our operating results. Additional exposure
could result should the exchange rate between the U.S. dollar and the Chinese Yuan vary more
significantly than it has to date.
We engage in currency transactions in an effort to cover any exposure to such fluctuations,
and we may be required to convert currencies to meet our obligations. Under certain circumstances,
these transactions can have an adverse effect on our financial condition.
We are increasing manufacturing operations in China, which exposes us to risks inherent in doing
business in China.
We are taking advantage of the comparatively low costs in China. We have recently transferred
substantially all of our assembly and test operations, chip-on-carrier operations and manufacturing
and supply chain management operations to our facility in Shenzhen, China. We are also planning to
transfer certain research and development related activities to Shenzhen, China. To be successful
in China we will need to continue 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 qualified personnel to operate our Shenzhen facility; |
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retain employees at our Shenzhen facility. |
There can be no assurance we will be able to continue one or any of these.
Operations in China are subject to greater political, legal and economic risks than our
operations in other countries. In order to operate the facility, we must obtain and retain required
legal authorization and train and hire a workforce. 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 taxation, import and export tariffs, environmental regulations, land use rights,
intellectual property 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 have been advised that power may be rationed in the location of our Shenzhen facility, and
were power rationing to be implemented, it could either have an adverse impact on our ability to
complete manufacturing commitments on a timely basis or, alternatively, could require significant
investment in generating capacity to sustain uninterrupted operations at the facility.
We intend to export the majority of the products manufactured at our Shenzhen 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
27
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 in China, our business and
results of operation could be materially adversely affected. We may also be required to expend
greater amounts than we currently anticipate in connection with increasing production at the
Shenzhen facility. Any one of the factors cited above, or a combination of them, could result in
unanticipated costs, which could materially and adversely affect our business.
Fluctuations in operating results could adversely affect the market price of our common stock.
Our revenues and 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, 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 may
increase as we develop new or enhanced products for new markets, including data communications,
aerospace, industrial and military markets. Our current and anticipated future dependence on a
small number of customers increases the revenue impact of each customers decision to delay or
defer purchases from us. Our expense levels in the future will be based, in large part, on our
expectations regarding future revenues and, as a result, net income for any quarterly period in
which material orders fail to occur, or are delayed or deferred could vary significantly.
Because of these and other factors, quarter-to-quarter comparisons of our results of
operations may not be an indication of future performance. In future periods, results of operations
may differ from the estimates of public market analysts and investors. Such a discrepancy could
cause the market price of our common stock to decline.
We may incur additional significant restructuring charges that will adversely affect our results of
operations.
Over the past five years, we have enacted a series of restructuring plans and cost reduction
plans designed to reduce our manufacturing overhead and our operating expenses. In 2001, we reduced
manufacturing overhead and our operating expenses in response to the initial decline in demand in
the optics components industry. In connection with our acquisitions of Nortel Networks optical
components business in November 2002 and New Focus in March 2004, we enacted restructuring plans
related to the consolidation of our operations, which we expanded in September 2004 to include the
transfer of our main corporate functions, including consolidated accounting, financial reporting,
tax and treasury, from Abingdon, U.K. to our U.S headquarters in San Jose, California.
In May, September and December 2004, we announced restructuring plans, including the transfer
of our assembly and test operations from Paignton, U.K. to Shenzhen, China, along with reductions
in research and development and selling, general and administrative expenses. These cost reduction
efforts were expanded in November 2005 to include the transfer of the our chip-on-carrier assembly
from Paignton to Shenzhen. The transfer of these operations was substantially completed in the
quarter ended March 31, 2007. In May 2006, the we announced further cost reduction plans, which
included transitioning all remaining manufacturing support and supply chain management, along with
pilot line production and production planning, from Paignton to Shenzhen, which was substantially
completed in the quarter ended March 31, 2007. As of
March 31, 2007, we had spent $31.7 million on
all of our restructuring programs.
On January 31, 2007, we adopted an overhead cost reduction plan which includes workforce
reductions, facility and site consolidation of our Caswell, U.K. semiconductor operations within
existing local facilities and the transfer of certain research and development activities to our
Shenzhen, China facility. We began implementing our overhead cost
reduction plan in the quarter ended March 31, 2007. We expect a substantial portion of this
overhead cost reduction plan to be completed by the end of the fourth quarter of our fiscal year
ending June 30, 2007, with the remainder to be completed in the fiscal quarter ending September 29,
2007. We expect the plan to save an aggregate amount between $6.0 million and $7.0 million a
quarter, in comparison to the fiscal quarter ended December 30, 2006, with a substantial portion of
that savings expected to be initially realized in the fiscal quarter ending September 29, 2007. The
total cost associated with this plan, the substantial portion being personnel severance and
retention related expenses, is expected to range from $8.0 million to $9.0 million, with most of
the restructuring charges expected to be incurred and paid by the end of the June 30, 2007, fiscal
quarter and the remainder expected to be incurred and paid by the end of the September 29, 2007
fiscal quarter. As of March 31, 2007, we had spent $1.4 million on this cost reduction plan.
We may incur charges in excess of amounts currently estimated for these restructuring and cost
reduction plans. We may incur additional charges in the future in connection with future
restructurings and cost reduction plans. These charges, along with any other 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.
28
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. The ability to accurately forecast customers product needs is
difficult. 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 expect that the challenges we face in properly managing our inventory will
become more difficult as a result of the expiration of minimum purchase requirements under the
supply agreement, as amended, with Nortel Networks. Our ability to anticipate minimum customer
demands for our products, and consequently the amount of component parts and finished goods we have
on hand, is more difficult as a result of the expiration of the purchase obligations under the
supply agreement. 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 un-saleable or obsolete inventory, which
would adversely affect our results of operations. We have from time to time incurred significant
inventory-related charges. During the year ended July 1, 2006, we incurred significant costs for
inventory production variances associated with unanticipated shifts in the mix of our customers
product orders. Any such charges we incur in future periods could significantly adversely affect
our results of operations.
Charges to earnings resulting from the application of the purchase method of accounting may
adversely affect the market value of our common stock.
We account for our acquisitions using the purchase method of accounting. In accordance with
U.S. GAAP, we allocate the total estimated purchase price to the acquired companys net tangible
assets, amortizable intangible assets, and in-process research and development based on their fair
values as of the date of announcement of the transaction, and record the excess of the purchase
price over those fair values as goodwill. With respect to our acquisition of New Focus, we expensed
the portion of the estimated purchase price allocated to in-process research and development in the
third quarter of fiscal 2004. We will incur an increase in the amount of amortization expense over
the estimated useful lives of certain of the intangible assets acquired in connection with the
acquisition on an annual basis. To the extent the value of goodwill or intangible assets with
indefinite lives becomes impaired, we may be required to incur material charges relating to the
impairment of those assets. In the year ended July 2, 2005, in accordance with our policy of
evaluating long-lived assets for impairment, we recorded charges totaling $114.2 million related to
the impairment of goodwill and purchased intangible assets. In addition, in the past, after the
completion of a transaction, we have amended the provisional values of assets and liabilities we
obtained as part of transactions, specifically the acquisition of the optical components business
of Nortel Networks. This amendment resulted in the value of our inventory being increased by $20.2
million, current liabilities being increased by approximately $1.3 million, intangible assets being
decreased by approximately $9.1 million and property, plant and equipment being increased by $9.8
million. In March 2006, we acquired Avalon Photonics AG, and recorded $2.5 million as the value of
goodwill and $2.2 million as the value of purchased intangible assets, both of which will be
subject to reviews for impairment of value in the future. We may incur charges in the future as a
result of any such transaction, which charges may have an adverse effect on our earnings.
Bookham Technology plc may not be able to utilize tax losses and other tax attributes against the
receivables that arise as a result of its transaction with Deutsche Bank.
On August 10, 2005, Bookham Technology plc purchased all of the issued share capital of City
Leasing (Creekside) Limited, a subsidiary of Deutsche Bank. Creekside is entitled to receivables of
£73.8 million (approximately $135.8 million, based on an exchange rate of £1.00 to $1.8403,) from
Deutsche Bank in connection with certain aircraft subleases and will in turn apply those payments
over a two-year term to obligations of £73.1 million (approximately $134.5 million based on an
exchange rate of £1.00 to $1.8403) owed to Deutsche Bank. As a result of these
transactions, Bookham Technology plc will have available through Creekside cash of approximately
£6.63 million (approximately $12.2 million based on an exchange rate of £1.00 to $1.8403). We
expect Bookham Technology plc to utilize certain expected tax losses and other tax attributes to
reduce the taxes that might otherwise be due by Creekside as the receivables are paid. In the event
that Bookham Technology plc is not able to utilize these tax losses and other tax attributes when
U.K. tax returns are filed for the relevant periods (or these tax losses and other tax attributes
do not arise), Creekside may have to pay taxes, reducing the cash available from Creekside. In the
event there is a future change in applicable U.K. tax law, Creekside, and in turn Bookham
Technology plc, would be responsible for any resulting tax liabilities, which amounts could be
material to our financial condition or operating results.
Our products are complex and may take longer to develop than anticipated and, as a result, 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
constantly 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 to develop because of their complexity and because
customer specifications sometimes change during the
29
development cycle. We often incur substantial
costs associated with the research and development and sales and marketing activities in connection
with products that may be purchased long after we have incurred the costs associated with
designing, creating and selling such products. 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 revenue 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.
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 may also require that we 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 would harm our operating results and customer relationships.
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 to remedy such matters that would adversely affect gross margins, and 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 result 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, either 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.
We depend on a number of suppliers who could disrupt our business if they stopped, decreased or
delayed shipments.
We depend on a number of suppliers of raw materials and equipment used to manufacture our
products. Some of these suppliers are sole sources. We typically have not entered into long-term
agreements with our suppliers and, therefore, these suppliers generally may stop supplying
materials and equipment at any time. The 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. Any supply deficiencies
relating to the quality or quantities of materials or equipment we use to manufacture our products
could adversely affect our ability to fulfill customer orders and our financial results of
operations.
Our intellectual property rights may not be adequately protected.
Our future success will depend, in large part, upon our intellectual property rights,
including patents, design rights, trade secrets, trademarks, know-how and continuing technological
innovation. We maintain an active program of identifying material and critical 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.
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Although such agreements may be binding, they may not be
enforceable in all jurisdictions and any breach of a confidentiality obligation could have a very
serious effect on our business and the 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 investors 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, the claims allowed will be sufficiently broad to deter or
prohibit others from marketing similar products. In addition, we cannot assure investors 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. 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 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 as substantially all of our assembly and test operations and chip-on-carrier
operations are now conducted in Shenzhen, China and as our competitors establish manufacturing
operations in China to take advantage of comparatively low manufacturing costs.
Our products may infringe the intellectual property rights of others which could result in
expensive litigation, 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 receive claims of patent infringement
or infringement of other intellectual property rights. In this regard, third parties may in the
future assert claims against us concerning our existing products or with respect to future products
under development. 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 patents relevant to our business. We have from time to time
received notices from third parties alleging infringement of their intellectual property. At times
we have entered into license agreements with scertain third parties with respect to that
intellectual property. 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. 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. 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 that
require payment of significant royalties that could adversely affect our ability to price our
products profitably.
If we fail to obtain the right to use the intellectual property rights of others necessary to
operate our business, our ability to succeed will be 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 may seek an economic return on their intellectual property
portfolios by making infringement claims against us. 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 inhibit 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, if 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. 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.
The markets in which we operate are highly competitive, which could result in lost sales and lower
revenues.
The market for fiber optic components is highly competitive and such competition could result
in our existing customers moving their orders to competitors. Certain of our competitors may be
able more quickly and effectively to:
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Many of our current competitors, as well as a number 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. 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 or decreased gross profit margins. Any such
development would 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 nine months period ended March 31, 2007, 22% of our revenues were derived in the
United States and 78% of our revenues were derived outside the United States. For the year ended
July 1, 2006, the year ended July 2, 2005, the nine months ended July 3, 2004, and the year ended
December 31, 2003, 21%, 28%, 26%, and 9% of our revenues, respectively, were derived in the United
States and 79%, 72%, 74%, and 91%, respectively, were derived outside the United States. We are
subject to additional risks related to operating in foreign countries, including:
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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.
Our business will be adversely affected if we cannot manage the significant changes in the number
of our employees and the size of our operations.
We have significantly reduced the number of employees and scope of our operations because of
declining demand for certain of our products and continue to reduce our headcount in connection
with our on-going restructuring and cost reduction efforts. There is a risk that, during periods of
growth or decline, management will not sufficiently coordinate the roles of individuals to ensure
that all areas of our operations receive appropriate focus and attention. If we are unable to
manage our headcount, manufacturing capacity and scope of operations effectively, the cost and
quality of our
products may suffer, we may be unable to attract and retain key personnel and we may be unable to
market and develop new products. Further, the inability to successfully manage the substantially
larger and geographically more diverse organization, or any significant delay in achieving
successful management, could have a material adverse effect on us and, as a result, on the market
price of our common stock.
We may be faced with product liability claims.
Despite quality assurance measures, there remains a risk that 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 and for consequential damages. They could, moreover, impair the markets
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 $26 million
aggregate annual limit and errors and omissions insurance with a $5 million annual limit. This
insurance may not adequately cover our costs arising from defects in our products or otherwise.
32
If we fail to attract and retain key personnel, our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel. Competition
for highly skilled technical people 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 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. We recently experienced a change in our chief executive officer position and Peter Bordui
is currently serving as our interim president and chief executive officer. We anticipate replacing
Dr. Bordui with a permanent president and chief executive officer, however, we cannot assure you
that we will be able to do so. Our inability to find a permanent president and chief executive
officer could have a material adverse effect on our business.
Similar to other technology companies, we rely upon our ability to use stock options and other
forms of equity-based compensation as key components of our executive and employee compensation
structure. Historically, these components have been critical to our ability to retain important
personnel and offer competitive compensation packages. Without these components, we would be
required to significantly increase cash compensation levels (or develop alternative compensation
structures) in order to retain our key employees. Accounting rules relating to the expensing of
equity compensation may cause us to substantially reduce, modify, or even eliminate, all or
portions of our equity compensation programs.
Our business and future operating results may be adversely affected by events outside of our
control.
Our business and operating results are vulnerable to interruption by events outside of our
control, such as earthquakes, fire, power loss, telecommunications failures, political instability,
military conflict and uncertainties arising out of terrorist attacks, including a global economic
slowdown, the economic consequences of additional military action or additional terrorist
activities and associated political instability, and the effect of heightened security concerns on
domestic and international travel and commerce.
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results, which may cause stockholders to lose confidence in the accuracy of
our financial statements .
Effective internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our
brand and operating results could be harmed. In addition, compliance with the internal control
requirements, as well as other financial reporting standards applicable to a public company,
including the Sarbanes-Oxley Act of 2002, has in the past and will in the future continue to
involve substantial cost and investment of our managements time. We will continue to spend
significant time and incur significant costs to assess and report on the effectiveness of internal
controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act. As of July
1, 2006, we reported a material weakness in our internal control over financial reporting related
to the inconsistent treatment of translation/transaction gains and losses in respect to certain
intercompany loan balances.
Although we have implemented adequate review procedures to remedy this material weakness, and
have concluded as to the satisfactory remediation of this material weakness as of the end of our
December 2006 quarter, finding more material weaknesses in the future could make it more difficult
for us to attract and retain qualified persons to serve on our board of directors or as executive
officers, which could harm our business. In addition, if we discover future
material weaknesses, disclosure of that fact could reduce the markets confidence in our
financial statements, which could harm our stock price and our ability to raise capital.
Our business involves the use of hazardous materials, and environmental laws and regulations may
expose us to liability and increase our costs.
We historically handled small amounts of hazardous materials as part of our manufacturing
activities and now handle more and different hazardous materials as a result of the manufacturing
processes related to New Focus, the optical components business acquired from Nortel Networks and
the product lines we acquired from Marconi. 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 be required to 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.
The costs associated with environmental compliance or remediation efforts or other environmental
liabilities could adversely affect our business. In addition, under applicable EU regulations, we,
along with other electronics component manufacturers, are prohibited from using lead and certain
other hazardous materials in our products. We have incurred unanticipated expenses in connection
with the related reconfiguration of our products, and could lose business or face product returns
if we failed to implement these requirements properly or on a timely basis.
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Litigation regarding Bookham Technology plcs initial public offering and follow-on offering and
any other litigation in which we become involved, including as a result of acquisitions, may
substantially increase our costs and harm our business.
On June 26, 2001, a putative securities class action captioned Lanter v. New Focus, Inc. et
al., Civil Action No. 01-CV-5822, was filed against New Focus, Inc. and several of its officers and
directors, or the Individual Defendants, in the United States District Court for the
Southern District of New York. Also named as defendants were Credit Suisse First Boston
Corporation, Chase Securities, Inc., U.S. Bancorp Piper Jaffray, Inc. and CIBC World Markets Corp.,
or the Underwriter Defendants, the underwriters in New Focuss initial public offering. Three
subsequent lawsuits were filed containing substantially similar allegations. These complaints have
been consolidated. On April 19, 2002, plaintiffs filed an Amended Class Action Complaint, described
below, naming as defendants the Individual Defendants and the Underwriter Defendants.
On November 7, 2001, a Class Action Complaint was filed against Bookham Technology plc and
others in the United States District Court for the Southern District of New York. On April 19,
2002, plaintiffs filed an Amended Class Action Complaint described
below. The Class
Action Amended Complaint names
as defendants Bookham Technology plc, Goldman, Sachs & Co. and FleetBoston Robertson Stephens,
Inc., two of the underwriters of Bookham Technology plcs initial public offering in April 2000,
and Andrew G. Rickman, Stephen J. Cockrell and David Simpson, each of whom was an officer and/or director at the time of the initial public offering.
The
Amended Class Action Complaint asserts claims under certain provisions of the securities laws of the
United States. It alleges, among other things, that the prospectuses for Bookham Technology plcs
and New Focuss initial public offerings were materially false and misleading in describing the
compensation to be earned by the underwriters in connection with the offerings, and in not
disclosing certain alleged arrangements among the underwriters and initial purchasers of ordinary
shares, in the case of Bookham Technology plc, or common stock, in the case of New Focus, from the
underwriters. The Amended Class Action Complaint seeks unspecified damages (or in the alternative rescission for
those class members who no longer hold our or New Focus common stock), costs, attorneys fees,
experts fees, interest and other expenses. In October 2002, the Individual Defendants
were dismissed, without prejudice, from the action. In July
2002, all defendants filed Motions to Dismiss the Amended Class
Action Complaint. The motion was denied as to
Bookham Technology plc and New Focus in February 2003. Special committees of the board of directors
authorized the companies to negotiate a settlement of pending claims substantially consistent with
a memorandum of understanding negotiated among class plaintiffs, all issuer defendants and their
insurers.
Plaintiffs and most of the issuer defendants and their insurers have entered into a
stipulation of settlement for the claims against the issuer defendants, including Bookham and New
Focus. Under the stipulation of settlement, the plaintiffs will dismiss and release all claims
against participating defendants in exchange for a payment guaranty by the insurance companies
collectively responsible for insuring the issuers in the related cases, and the assignment or
surrender to the plaintiffs of certain claims the issuer defendants may have against the
underwriters. On February 15, 2005, the District Court issued an Opinion and Order preliminarily approving
the settlement provided that the defendants and plaintiffs agree to a modification narrowing the
scope of the bar order set forth in the original settlement agreement. The parties agreed to the
modification narrowing the scope of the bar order, and on
August 31, 2005, the District Court issued an
order preliminarily approving the settlement. On December 5, 2006, the United States Court of
Appeals for the Second
Circuit overturned the District Courts certification of the class of plaintiffs who are pursuing
the claims that would be settled in the settlement against the underwriter defendants. Plaintiffs
filed a Petition for Rehearing and Rehearing En Banc with the Second Circuit on January 5, 2007 in
response to the Second Circuits decision and have informed the District Court that they would like
to be heard as to whether the settlement may still be approved even if the decision of the Court of
Appeals is not reversed. The District Court indicated that it would defer consideration of final
approval of the settlement pending plaintiffs request for further appellate review. On April 6,
2007, plaintiffs petition for rehearing of the Second Circuits decision was denied.
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. Any litigation to which we are subject may be costly
and, further, could require significant involvement of our senior management and may divert
managements attention from our business and operations.
A variety of factors could cause the trading price of our common stock to be volatile or decline.
The market price of our common stock has been, and is likely to continue to be, highly
volatile due to causes in addition to publication of our business results, such as:
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announcements by our competitors and customers of their historical results or technological innovations or new products; |
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developments with respect to patents or proprietary rights; |
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governmental regulatory action; and |
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general market conditions. |
Since Bookham Technology plcs initial public offering in April 2000, Bookham Technology plcs
ADSs and ordinary shares, our shares of common stock and the shares of our customers and
competitors have experienced substantial price and volume fluctuations, in many cases without any
direct relationship to the affected companys operating performance. An outgrowth of this market
volatility is the significant vulnerability of our stock price and the stock prices of our
customers and competitors 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 prices
for these companies are highly volatile. These broad market and industry factors caused the market
price of Bookham Technology plcs ADSs and ordinary shares, and 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 or the operating performance of our customers.
The future sale of substantial amounts of our common stock could adversely affect the price of our
common stock.
On March 22, 2007, pursuant to a private placement pursuant, we issued 13,640,224 shares of
common stock and warrants to purchase up to 4,092,066 shares of common stock. In September 2006,
pursuant to a private placement, we issued an aggregate of 11,594,667 shares of common stock and
warrants to purchase an aggregate of 2,898,667 shares of common stock. In January and March 2006,
pursuant to a private placement we issued an aggregate of 10,507,158 shares of common stock and
warrants to purchase an aggregate of 1,086,001 shares of common stock. Sales by holders of
substantial amounts of shares of our common stock in the public or private market could adversely
affect the market price of our common stock by increasing the supply of shares available for sale
compared to the demand in the public and private markets to buy our common stock. These sales may
also make it more difficult for us to sell equity securities in the future at a time and price that
we deem appropriate to meet our capital needs.
Some anti-takeover provisions contained in our charter and under Delaware laws could hinder a
takeover attempt.
We are subject to the provisions of Section 203 of the General Corporation Law of the State of
Delaware prohibiting, under some circumstances, publicly-held Delaware corporations from engaging
in business combinations with some stockholders for a specified period of time without the approval
of the holders of substantially all of our outstanding voting stock. Such provisions could delay or
impede the removal of incumbent directors and could make more difficult a merger, tender offer or
proxy contest involving us, even if such events could be beneficial, in the short-term, to the
interests of the stockholders. In addition, such provisions could limit the price that some
investors might be willing to pay in the future for shares of our common stock. Our certificate of
incorporation and bylaws contain provisions relating to the limitations of liability and
indemnification of our directors and officers, dividing our board of directors into three classes
of directors serving three-year terms and providing that our stockholders can take action only at a
duly called annual or special meeting of stockholders. These provisions also may have the effect of
deterring hostile takeovers or delaying changes in control or management of us.
Item 6. Exhibits
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed
as part of this quarterly
report, which Exhibit Index is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements 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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BOOKHAM, INC. |
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By:
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/s/ Stephen Abely |
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Stephen Abely |
May 8, 2007
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Chief Financial Officer (Principal Financial
and Accounting Officer) |
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description of Exhibit |
10.1(1)
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Securities Purchase Agreement, dated as of March 22, 2007, by and among Bookham, Inc. and the Investors
(as such term is defined therein). |
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10.2(1)
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Registration Rights Agreement, dated as of March 22, 2007, by and among Bookham, Inc. and the Investors
(as such term is defined therein). |
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10.3(1)
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Form of Warrant. |
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31.1
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Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer. |
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31.2
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Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer. |
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32.1
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Section 1350 Certification of Chief Executive Officer. |
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32.2
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Section 1350 Certification of Chief Financial Officer. |
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(1) |
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Incorporated by reference to the Registrants Form 8-K (File No. 0-30684) filed on March 26,
2007. |