UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended December 29, 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
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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
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Incorporation or Organization)
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Identification No.)
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2584 Junction Avenue
San Jose, California
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95134
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(Address of Principal Executive Offices)
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(Zip Code)
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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, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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þ
Accelerated filer
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o
Non-accelerated filer
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o
Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act):
Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. As of February 1, 2008, there were
100,204,638 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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December 29, 2007
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June 30, 2007
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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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$
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63,002
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$
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36,631
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Restricted cash
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1,657
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6,079
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Accounts receivable, net
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40,235
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33,685
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Inventories
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58,447
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52,114
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Prepaid expenses and other current assets
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4,531
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9,121
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Total current assets
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167,872
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137,630
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Goodwill
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7,881
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7,881
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Other intangible assets,
net
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8,556
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11,766
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Property and equipment, net
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34,082
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33,707
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Non-current deferred tax
asset
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13,248
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Other non-current assets
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152
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294
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Total assets
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$
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218,543
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$
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204,526
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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24,731
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$
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21,101
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Bank loan payable
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3,812
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Accrued expenses and other liabilities
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21,246
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22,704
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Current deferred tax
liability
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13,248
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Total current liabilities
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45,977
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60,865
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Other long-term liabilities
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1,511
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1,908
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Deferred gain on
sale-leaseback
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20,072
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20,786
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Total liabilities
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67,560
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83,559
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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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$.01 par value per share; 175,000,000 shares
authorized; 99,892,778 and
83,275,394 shares issued and outstanding at December
29, 2007 and June
30, 2007, respectively
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999
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832
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Additional paid-in capital
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1,159,481
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1,114,391
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Accumulated other comprehensive income
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42,783
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42,444
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Accumulated deficit
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(1,052,280
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(1,036,700
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Total stockholders equity
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150,983
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120,967
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Total liabilities and stockholders equity
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$
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218,543
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$
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204,526
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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 Annual Report on Form 10-K for the year ended June 30, 2007.
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The accompanying notes form an integral part of these condensed consolidated financial statements.
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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Six Months Ended
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December 29,
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December 30,
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December 29,
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December 30,
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2007
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2006
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2007
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2006
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Revenues
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$
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58,956
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$
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41,808
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$
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113,238
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$
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83,570
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Revenues from related party
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14,520
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29,149
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Net revenues
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58,956
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56,328
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113,238
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112,719
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Costs of revenues
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45,522
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48,103
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87,467
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95,053
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Gross profit
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13,434
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8,225
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25,771
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17,666
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Operating expenses:
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Research and development
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8,168
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11,525
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16,860
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23,018
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Selling, general and administrative
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13,039
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12,081
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24,365
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24,940
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Amortization of intangible assets
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1,353
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2,484
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3,350
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4,758
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Restructuring and severance charges
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562
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1,301
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1,779
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4,202
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Legal settlements
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490
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Impairment of other long-lived assets
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1,901
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(Gain)/Loss on sale of property and equipment and other long-lived assets
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(1,481
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270
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(1,716
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(830
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Total operating expenses
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21,641
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27,661
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44,638
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58,479
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Operating loss
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(8,207
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(19,436
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(18,867
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(40,813
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Other income/(expense):
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Interest income
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494
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245
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746
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422
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Interest expense
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(253
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(63
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(387
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(106
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Gain/(Loss) on foreign exchange
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2,732
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(2,044
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2,320
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(3,695
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Total other income/(expense)
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2,973
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(1,862
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2,679
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(3,379
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Loss before income taxes
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(5,234
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(21,298
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(16,188
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(44,192
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Income tax (benefit)/provision
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(47
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50
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(47
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46
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Net loss
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$
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(5,187
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$
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(21,348
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$
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(16,141
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$
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(44,238
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Net loss per share:
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Net loss per share (basic and diluted)
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$
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(0.06
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$
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(0.31
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$
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(0.19
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$
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(0.69
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Weighted average shares of common stock outstanding (basic and diluted)
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90,963
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68,635
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86,775
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64,406
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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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Six Months Ended
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December 29, 2007
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December 30, 2006
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Cash flows used in operating activities:
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Net loss
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$
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(16,141
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$
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(44,238
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)
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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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9,604
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12,344
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Stock-based compensation
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4,409
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3,850
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Impairment of long-lived assets
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1,901
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Gain on sale of property,
equipment and other long-lived
assets
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(1,716
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(830
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Amortization of deferred gain on
sale leaseback
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(714
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(550
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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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(6,614
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)
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1,925
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Inventories
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(4,524
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5,587
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Prepaid expenses and
other current assets
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4,925
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2,875
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Accounts payable
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3,714
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(6,471
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Accrued expenses and
other liabilities
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(1,884
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(7,397
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Net cash used in operating activities
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(8,941
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(31,004
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Cash flows provided by investing activities:
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Purchases of property and equipment
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(5,688
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(4,209
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Proceeds from sale of property, equipment
and other long-lived assets
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1,775
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2,938
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Proceeds from sale of land held for resale
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9,402
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Transfer (to)/from restricted cash
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4,480
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(563
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)
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Cash flows provided by investing activities
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567
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7,568
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Cash flows provided by financing activities:
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Amount paid to repurchase shares from
former officer
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(2
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Proceeds from issuance of common stock,
net
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40,902
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28,676
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Repayment bank loan payable
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(3,812
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)
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Repayment of other loans
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(12
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)
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(26
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)
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Net cash provided by financing activities
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37,076
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28,650
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Effect of exchange rate on cash
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(2,331
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)
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|
|
2,414
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Net increase in cash and cash equivalents
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|
|
26,371
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|
|
|
7,628
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Cash and cash equivalents at beginning of period
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36,631
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|
|
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37,750
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Cash and cash equivalents at end of period
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$
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63,002
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$
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45,378
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Supplemental disclosures of cash flow information:
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Cash paid for interest
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104
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|
1
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Cash paid for income taxes
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|
33
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|
65
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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 high-performance fiber optics communications networks. Bookham, Inc. also
manufactures high-speed electronic components for the industrial, research, semiconductor capital
equipment, military and biotechnology 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 December 29, 2007 and
for the three and six months ended December 29, 2007 and December 30, 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. Certain 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 contained herein reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the Companys condensed
consolidated financial position at December 29, 2007 and the condensed consolidated operating
results for the three and six months ended December 29, 2007 and December 30, 2006 and cash flows
for the six months ended December 29, 2007 and December 30, 2006. The consolidated results of
operations for the three and six months ended December 29, 2007 are not necessarily indicative of
results that may be expected for any other interim period or for the full fiscal year ending June
28, 2008.
The condensed consolidated balance sheet as of June 30, 2007 has been derived from the audited
consolidated financial statements at that date. These unaudited condensed consolidated financial
statements should be read in conjunction with the Companys audited financial statements and
accompanying notes for the year ended June 30, 2007 included in the Companys Annual Report on Form
10-K for the fiscal year ended June 30, 2007.
The preparation of the Companys financial statements in conformity with GAAP requires management
to make estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses reported in those financial statements. These estimates,
judgments and assumptions can be subjective and complex, and consequently actual results could
differ from the results based on these estimates, judgments and assumptions. Descriptions of these
estimates, judgments and assumptions are included in the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 2007.
Note 3. Stockholders Equity and Stock-based Compensation Expense
On November 13, 2007, the Company completed a public offering of 16,000,000 shares of its common
stock at a price to the public of $2.75 per share that generated $40.9 million of cash, net of commission and expenses.
The Company accounts for stock-based compensation under 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 of such share-based awards. 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 common 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.
6
The assumptions used to value option grants for the three and six months ended December 29, 2007
and December 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
December 29,
|
December 30,
|
December 29,
|
|
December 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Expected life
|
|
4.5 years
|
|
4.5 years
|
|
4.5 years
|
|
4.5 years
|
Risk-free interest rate
|
|
3.19% to 4.19%
|
|
4.40% to 4.57%
|
|
3.19% to 4.89%
|
|
4.40% to 5.12%
|
Volatility
|
|
77%
|
|
83%
|
|
77% to 79%
|
|
83% to 85%
|
Dividend yield
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
The amounts included in costs of revenues and operating expenses for stock-based compensation
expense for the three and six months ended December 29, 2007 and December 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Costs of revenues
|
|
$
|
708
|
|
|
$
|
608
|
|
|
$
|
1,323
|
|
|
$
|
1,182
|
|
Research and development
|
|
|
643
|
|
|
|
448
|
|
|
|
1,094
|
|
|
|
908
|
|
Selling, general and administrative
|
|
|
1,332
|
|
|
|
871
|
|
|
|
1,992
|
|
|
|
1,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,683
|
|
|
$
|
1,927
|
|
|
$
|
4,409
|
|
|
$
|
3,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4. Comprehensive Loss
For the three and six months ended December 29, 2007 and December 30, 2006, the Companys
comprehensive loss was comprised of its net loss, the change in the unrealized gain/(loss) on
currency instruments designated as hedges and foreign currency translation adjustments. The
components of comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net loss
|
|
$
|
(5,187
|
)
|
|
$
|
(21,348
|
)
|
|
$
|
(16,141
|
)
|
|
$
|
(44,238
|
)
|
Other comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain/(loss) on currency
instruments designated as hedges
|
|
|
(384
|
)
|
|
|
267
|
|
|
|
(222
|
)
|
|
|
50
|
|
Foreign currency translation adjustments
|
|
|
(1,175
|
)
|
|
|
3,480
|
|
|
|
562
|
|
|
|
6,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(6,746
|
)
|
|
$
|
(17,601
|
)
|
|
$
|
(15,801
|
)
|
|
$
|
(37,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Earnings Per Share
Statement of Financial Accounting Standards (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 shares of common
stock outstanding for the applicable period, while diluted earnings per share is computed assuming
the exercise or conversion of all potentially dilutive securities, such as options, convertible
debt and warrants, during such period.
Because the Company incurred a net loss for each of the three and six month periods ended December
29, 2007 and December 30, 2006, the effect of potentially dilutive securities totaling 18,125,633
and 13,754,307 shares, respectively, has been excluded from the calculation of diluted net loss per
share because their inclusion would have been anti-dilutive.
Note 6. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007
|
|
|
June 30, 2007
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
20,974
|
|
|
$
|
20,238
|
|
Work in process
|
|
|
22,355
|
|
|
|
18,489
|
|
Finished goods
|
|
|
15,118
|
|
|
|
13,387
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,447
|
|
|
$
|
52,114
|
|
|
|
|
|
|
|
|
7
Note 7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007
|
|
|
June 30, 2007
|
|
|
|
(In thousands)
|
|
Accounts payable
|
|
$
|
4,686
|
|
|
$
|
4,324
|
|
Compensation and benefits related accruals
|
|
|
6,352
|
|
|
|
5,212
|
|
Warranty accrual
|
|
|
2,331
|
|
|
|
2,569
|
|
Other accruals
|
|
|
6,012
|
|
|
|
7,886
|
|
Current portion of restructuring accrual
|
|
|
1,865
|
|
|
|
2,713
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,246
|
|
|
$
|
22,704
|
|
|
|
|
|
|
|
|
Note 8. Credit Agreement
On August 2, 2006, the Company and its wholly-owned subsidiaries Bookham Technology plc, New Focus,
Inc. and Bookham (US) Inc. (the Borrowers) entered into a 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 by the assets of the Obligors pursuant to a security agreement (the Security Agreement),
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 December 29, 2007, the Company had no outstanding
borrowings under the Credit Agreement, was in compliance with all covenants and had $4.9 million in
outstanding letters of credit with vendors and landlords secured by the Credit Agreement.
Note 9. Commitments and Contingencies
Guarantees
The Company or its subsidiaries have 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 limitation on 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 limitation on
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, and has entered into existing indemnification
agreements with its directors and has or expects to enter into new
indemnification agreements with its directors and officers. 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, in
certain circumstances, be mitigated, in whole or in part, by insurance
coverage that the Company maintains.
|
8
|
|
The Company is also bound by indemnification obligations under various
contracts that it enters into in the normal course of business, such
as guarantees or letters of credit issued by its commercial banks 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 do so 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.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
|
(In thousands)
|
|
Warranty provision at beginning of period
|
|
$
|
2,569
|
|
|
$
|
3,429
|
|
Warranties issued
|
|
|
1,303
|
|
|
|
1,457
|
|
Warranties utilized
|
|
|
(1,262
|
)
|
|
|
(1,786
|
)
|
Warranties expired, and other changes in liability
|
|
|
(288
|
)
|
|
|
(510
|
)
|
Foreign currency translation
|
|
|
9
|
|
|
|
243
|
|
|
|
|
|
|
|
|
Warranty provision at end of period
|
|
$
|
2,331
|
|
|
$
|
2,833
|
|
|
|
|
|
|
|
|
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 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.
The plaintiffs and most of the issuer defendants and their insurers entered into a stipulation of
settlement for the claims against the issuer defendants, including Bookham Technology plc. This
stipulation of settlement was subject to, among other things, certification of the underlying class
of plaintiffs. Under the stipulation of settlement, the plaintiffs would 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.
9
On December 5, 2006, following an appeal from the underwriter defendants, 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, the Second Circuit denied plaintiffs petition for rehearing, but clarified that the
plaintiffs may seek to certify a more limited class in the District Court. In light of the
overturned class certification on June 25, 2007, the District Court signed an Order terminating the
settlement. 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.
On
November 12, 2007, Xian Raysung Photonics Inc. filed a
civil suit against the Company, and its
wholly-owned subsidiary, Bookham Technology (Shenzhen) Co., Ltd., in the Xian Intermediate
Peoples Court in Shanxi Province of the Peoples Republic of China. The complaint filed by Xian
Raysung Photonics Inc. alleges that the Company and Bookham Technology (Shenzhen) Co., Ltd.
breached an agreement between the parties pursuant to which Xian Raysung Photonics Inc. had
supplied certain sample components and was to supply certain components to the Company and Bookham
Technology (Shenzhen) Co., Ltd. Xian Raysung Photonics Inc. has requested the court award damages
of 12,353,728 Chinese Yuan (approximately $1.72 million based on an exchange rate of $1.00 to
7.1845 Chinese Yuan as in effect on February 1, 2008) and require that the Company and Bookham Technology
(Shenzhen) Co., Ltd. pay its legal fees in connection with the suit. The Company and Bookham
Technology (Shenzhen) Co., Ltd. believes they have meritorious defenses to the claims made by Xian
Raysung Photonics Inc. and therefore believes that such claims will not have a material effect on
its financial position, results of operations or cash flows.
Note 10. Restructuring and Severance
The following table summarizes the activity related to the Companys restructuring liability for
the three months ended December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
restructuring costs
|
|
|
Amounts charged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring costs
|
|
|
|
at September 29,
|
|
|
to restructuring
|
|
|
|
|
|
|
Amounts paid or
|
|
|
|
|
|
|
at December 29,
|
|
(In thousands)
|
|
2007
|
|
|
costs and other
|
|
|
Amounts reversed
|
|
|
written-off
|
|
|
Adjustments
|
|
|
2007
|
|
Lease cancellations and commitments
|
|
$
|
3,090
|
|
|
$
|
161
|
|
|
$
|
(5
|
)
|
|
$
|
(758
|
)
|
|
$
|
|
|
|
$
|
2,488
|
|
Asset impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination payments to employees and related costs
|
|
|
793
|
|
|
|
442
|
|
|
|
(36
|
)
|
|
|
(549
|
)
|
|
|
21
|
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued restructuring
|
|
|
3,883
|
|
|
$
|
603
|
|
|
$
|
(41
|
)
|
|
$
|
(1,307
|
)
|
|
$
|
21
|
|
|
|
3,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued restructuring charges
|
|
|
(1,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges included within accrued expenses and
other liabilities
|
|
$
|
2,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity related to the Companys restructuring liability for
the six months ended December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Accrued
|
|
|
Amounts charged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring costs
|
|
|
|
restructuring costs
|
|
|
to restructuring
|
|
|
|
|
|
|
Amounts paid or
|
|
|
|
|
|
|
at December 29,
|
|
(In thousands)
|
|
at June 30, 2007
|
|
|
costs and other
|
|
|
Amounts reversed
|
|
|
written-off
|
|
|
Adjustments
|
|
|
2007
|
|
Lease cancellations and commitments
|
|
$
|
3,845
|
|
|
$
|
537
|
|
|
$
|
(20
|
)
|
|
$
|
(1,886
|
)
|
|
$
|
12
|
|
|
$
|
2,488
|
|
Asset impairment
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
Termination payments to employees and related costs
|
|
|
546
|
|
|
|
1,263
|
|
|
|
(36
|
)
|
|
|
(1,149
|
)
|
|
|
47
|
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued restructuring
|
|
|
4,391
|
|
|
$
|
1,835
|
|
|
$
|
(56
|
)
|
|
$
|
(3,070
|
)
|
|
$
|
59
|
|
|
|
3,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less non-current accrued restructuring charges
|
|
|
(1,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges included within accrued expenses and
other liabilities
|
|
$
|
2,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 31, 2007, the Company adopted an overhead cost reduction plan which included workforce
reductions, facility and site consolidation of its Caswell, U.K. semiconductor operations within
existing U.K. facilities and the transfer of certain research and development activities to its
Shenzhen, China facility. As of December 29, 2007, this cost reduction plan, which had been
expected to cost $8.0 million to $9.0 million, was substantially complete. As of December 29,
2007, the Company incurred expenses of $7.3 million with respect to the cost reduction plan, of
which $6.5 million was paid in cash as of December 29, 2007. The restructuring and severance
expense for the three months and six months ended December 29, 2007 includes $0.2 million
associated with the consolidation of certain administrative functions at the Companys San Jose,
California. facility. Any remaining expense, which the Company expects to be less than $0.2
million, is expected to be incurred and along with any other unpaid amounts, to be paid by the end
of the fiscal year ending June 28, 2008.
10
In connection with earlier restructuring plans, and the assumption of restructuring accruals upon
the March 2004 acquisition of New Focus, in the fiscal quarter ended December 29, 2007, the Company
continued to make scheduled payments drawing down the related
lease cancellations and commitments. The Company accrued $0.2 million in the six months ended
December 29, 2007 in expenses for revised estimates related to these cancellations and commitments.
For all periods presented, separation payments under the restructuring and cost reduction efforts
were accrued and charged to restructuring in the period in which both the benefit amounts were
determined and the amounts had been communicated to the affected employees.
Note 11. Accounting for Uncertainty in Income Taxes
Effective July 1, 2007, the Company adopted Financial Accounting Standards Interpretation, or FIN,
No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109.
FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of uncertain tax positions taken, or expected to be taken, in a
companys income tax return; and also provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 utilizes a
two-step approach for evaluating uncertain tax positions accounted for in accordance with SFAS No.
109, Accounting for Income Taxes. Step one, Recognition, requires a company to determine if the
weight of available evidence indicates that a tax position is more likely than not to be sustained
upon audit, including resolution of related appeals or litigation processes, if any. Step two,
Measurement, is based on the largest amount of benefit, which is more likely than not to be
realized on ultimate settlement. In accordance with FIN No. 48, the Company recognized the
cumulative effect of adopting FIN No. 48 as a change in accounting principle recorded as an
adjustment to the opening balance of retained earnings on July 1, 2007, the adoption date. As a
result of the implementation of FIN No. 48, the Company recognized a decrease in the liability for
unrecognized tax benefits related to tax positions taken in prior periods and therefore the Company
made a corresponding adjustment of $562,000 to its opening balance of retained earnings at July 1,
2007.
The Companys total amount of unrecognized tax benefits as of July 1, 2007, was $2.4 million
approximately. There was no material change in this amount during the quarters ended September 30,
2007 or December 31, 2007. The Company had no unrecognized tax benefits that, if recognized, would
affect its effective tax rate as of September 30, 2007 or
December 29, 2007.
Upon adoption of FIN No. 48, the Company did not change its policy of including interest and
penalties related to unrecognized tax benefits within the Companys provision for/(benefit from)
income taxes. The Company did not have any accrual for payment of interest and penalties related to
unrecognized tax benefits as of September 30, 2007 or
December 29, 2007.
The Company files U.S. federal, U.S. state, and foreign tax returns and has determined its major
tax jurisdictions are the United States, the United Kingdom, and China. Certain jurisdictions
remain open to examination by the appropriate governmental agencies; U.S. federal and China for tax
years 2004-2007, various U.S. states for tax years 2003-2007, and the United Kingdom for tax years
2005-2007. The Company is not currently under audit in any major tax jurisdiction.
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, comprised of our New Focus business, designs, develops, manufactures, markets and sells photonic solutions. The Company
evaluates the performance of its segments and allocates resources based on consolidated revenues
and overall performance.
11
Segment information for the three and six months ended December 29, 2007 and December 30, 2006 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics
|
|
$
|
50,818
|
|
|
$
|
48,727
|
|
|
$
|
97,505
|
|
|
$
|
97,938
|
|
Research and industrial
|
|
|
8,138
|
|
|
|
7,601
|
|
|
|
15,733
|
|
|
|
14,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
58,956
|
|
|
$
|
56,328
|
|
|
$
|
113,238
|
|
|
$
|
112,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optics
|
|
$
|
(5,224
|
)
|
|
$
|
(21,241
|
)
|
|
$
|
(16,325
|
)
|
|
$
|
(43,345
|
)
|
Research and industrial
|
|
|
37
|
|
|
|
(107
|
)
|
|
|
184
|
|
|
|
(893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(5,187
|
)
|
|
$
|
(21,348
|
)
|
|
$
|
(16,141
|
)
|
|
$
|
(44,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13. Significant Related Party Transactions and Significant Customer Revenues
As of December 30, 2006, Nortel Networks Corporation owned 3,999,999 shares of the Companys common
stock. For the three and
six months ended December 30, 2006, the Company had revenues from Nortel Networks of $14.5 million
and $29.1 million, respectively, which are disclosed as related party revenues for those periods.
The Company believes Nortel Networks sold its shares of the Companys common stock prior to the
start of the six month period ended December 29, 2007 and as a result no longer considers Nortel
Networks to be a related party.
For the three and six months ended December 29, 2007 and December 30, 2006, significant customers
included Nortel Networks with revenues of $8.8 million, $17.1 million, $14.6 million and $29.1
million, respectively, and Cisco Systems with revenues of $6.6 million, $12.7 million, $8.9 million
and $16.4 million, respectively. In addition, the Company had revenues of $5.4 million in the three
months ended December 30, 2006 from Huawei.
Note 14. Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board, or the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115 (SFAS 159). SFAS 159 gives companies the option of applying at specified election dates
fair value accounting to certain financial instruments and other items that are not currently
required to be measured at fair value. If a company chooses to record eligible items at fair value,
the company must report unrealized gains and losses on those items in earnings at each subsequent
reporting date. SFAS 159 also prescribes presentation and disclosure requirements for assets
and liabilities that are measured at fair value pursuant to this standard and pursuant to the
guidance in SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 159 is effective for
years beginning after November 15, 2007. The Company is currently
evaluating the potential impact, if any, of the adoption of SFAS 159
on its consolidated results of operations or financial condition.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
provides guidance for using fair value to measure assets and
liabilities. It also requires requests for expanded information about the extent to which companys measure assets and
liabilities at fair value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, and does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the effect that the adoption of
SFAS 157 will have on its consolidated financial position and results of operations.
In
June 2007, the FASB also ratified Emerging Issues Task Force 07-3, Accounting for Nonrefundable Advance Payments for
Goods or Services Received for Use in Future Research and Development Activities (EITF 07-3).
EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and capitalized and recognized
as an expense as the goods are delivered or the related services are performed. EITF 07-3 is
effective, on a prospective basis, for fiscal years beginning after December 15, 2007. The Company
does not expect the adoption of EITF 07-3 to have a material effect on its consolidated results of
operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 141R on
its consolidated results of operations and financial condition.
12
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains 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, proposed 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 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. Due to its advantages of higher capacity and transmission speed, optical
transmission has become the predominant technology for large-scale communications networks. We are
one of the largest vertically-integrated vendors of optical components used for fiber optic
telecommunications network applications. Our customers include leading equipment systems vendors,
including ADVA, Alcatel-Lucent, Ciena, Cisco, Huawei, Nortel Networks and Tyco. We also leverage
our optical component technologies and expertise in manufacturing optical subsystems to address
opportunities in other markets, including industrial, research, semiconductor capital equipment,
military and biotechnology, where we believe the use of our technologies is expanding.
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, comprised of our New Focus division, relates to
the design, development, manufacture, marketing and sale of photonics solutions.
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 estimates, judgments and assumptions about matters that are uncertain at the
time we make such estimates, judgments and assumptions and different estimates, judgments and
assumptionswhich also would have been reasonable at the timecould have been used, and would have
resulted in materially different financial results.
The critical accounting policies we identified in our Annual Report on Form 10-K for the year ended
June 30, 2007 related to revenue recognition and sales returns, inventory valuation, accounting for
acquisitions and goodwill, impairment of goodwill and other intangible assets 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 for the year ended June 30, 2007.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159 gives
companies the option of applying at specified election dates fair value accounting to certain
financial instruments and other items that are not currently required to be measured at fair value.
If a company chooses to record eligible items at fair value, the company must report unrealized
gains and losses on those items in earnings
at each subsequent reporting date. SFAS 159 also prescribes presentation and disclosure
requirements for assets and liabilities that are measured at fair value pursuant to this standard
and pursuant to the guidance in SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the impact, if
any, of the adoption of SFAS 159 on our consolidated results of
operations or financial condition.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
provides guidance for using fair value to measure assets and liabilities. It also responds to
investors requests for expanded information about the extent to which companys measure assets and
liabilities at fair value, the information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, and does not expand the use of fair value in any new
circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS 157 will
have on its consolidated financial position and results of operations.
13
In
June 2007, the FASB also ratified Emerging Issues Task Force 07-3, Accounting for Nonrefundable Advance Payments for
Goods or Services Received for Use in Future Research and Development Activities (EITF 07-3).
EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and capitalized and recognized
as an expense as the goods are delivered or the related services are performed. EITF 07-3 is
effective, on a prospective basis, for fiscal years beginning after December 15, 2007. We do not
expect the adoption of EITF 07-3 to have a material effect on
our consolidated results of
operations and financial condition.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any
non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. We
are currently evaluating the potential impact, if any, of the
adoption of SFAS 141R on our
consolidated results of operations and financial condition.
Results of Operations
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Three Months Ended
|
|
|
For Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
$ Millions
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
Net revenues
|
|
$
|
59.0
|
|
|
$
|
56.3
|
|
|
|
5
|
%
|
|
$
|
113.2
|
|
|
$
|
112.7
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues in the three month period ended December 29, 2007 increased by $2.7 million compared to
revenues in the three month period ended December 30, 2006. Revenues from customers other than
Nortel Networks increased by $8.4 million, or 20%, in the three months ended December 29, 2007, as
compared to the corresponding period in the prior year, largely on the strength of increased sales
of 980nm laser pumps, tunable laser products, high power lasers, industrial filters and increased
product revenues in our New Focus division, which designs, manufactures, markets and sells photonic
solutions, and comprises our research and industrial segment. Revenues from Nortel Networks
decreased by $5.7 million in the three months ended December 29, 2007 compared to the three months
ended December 30, 2006, primarily as a result of the expiration of the third addendum to the
supply agreement with Nortel Networks at the end of the three months ended December 30, 2006.
Revenues in the six month period ended December 29, 2007 increased by $0.5 million compared to
revenues in the six months ended December 30, 2006. Revenues from customers other than Nortel
Networks increased by $12.6 million, or 15%, in the six months ended December 29, 2007, as compared
to the corresponding period in the prior year, largely on the strength of increased sales of 980nm
laser pumps, tunable products, high power lasers, industrial filters and increased product sales
volumes in our New Focus division. Revenues from Nortel Networks decreased by $12.0 million in the
six months ended December 29, 2007 compared to the six months ended December 30, 2006, primarily as
a result of the expiration of the third addendum to a supply agreement with Nortel Networks during
the three months ended December 30, 2006.
After decreasing to $3.1 million in the three months ended March 31, 2007, revenues from Nortel
Networks increased to $7.6 million in the three months ended June 30, 2007 and $8.3 million in the
three months ended September 29, 2007 and $8.8 million in the three months ended December 29, 2007.
The Company expects Nortel Networks to continue to be a significant customer during the remainder
of the 2008 calendar year.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
$ Millions
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
Cost of revenues
|
|
$
|
45.5
|
|
|
$
|
48.1
|
|
|
|
(5
|
%)
|
|
$
|
87.5
|
|
|
$
|
95.1
|
|
|
|
(8
|
%)
|
Our cost of revenues consists of the costs associated with manufacturing our products, and
includes the costs to purchase raw materials, manufacturing-related labor costs and related
overhead, including stock-based compensation expense. Cost of revenue also
includes costs associated with under-utilized production facilities and resources. 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 in research and development expense.
14
Our cost of revenues for the three and six month periods ended December 29, 2007 decreased
$2.6 million and $7.6 million, or 5% and 8%, respectively, from the same periods ended December 30,
2006. These decreases were primarily due to reductions in our manufacturing overhead costs as a
result of our restructuring and cost reduction plans, including the closure of the manufacturing
operations of our Paignton, U.K. facility subsequent to the transfer of assembly and test and
related activities to our Shenzhen, China facility and the consolidation of our Caswell U.K.
fabrication operations. Our cost of revenues for the three and six month periods ended December 29,
2007 included $0.7 and $1.3 million of stock-based compensation charges, respectively, compared to
$0.6 million and $1.2 million in the three and six month periods ended December 30, 2006,
respectively.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
$ Millions
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
Gross margin
|
|
$
|
13.4
|
|
|
$
|
8.2
|
|
|
|
63
|
%
|
|
$
|
25.8
|
|
|
$
|
17.7
|
|
|
|
45
|
%
|
|
Gross margin rate
|
|
|
23
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
23
|
%
|
|
|
16
|
%
|
|
|
|
|
Gross margin is calculated as net revenues less cost of revenues. The gross margin rate is gross
margin reflected as a percentage of revenues.
Our gross margin rate increased to 23% in each of the three and six month periods ended December
29, 2007, compared to 15% and 16% in the three and six month periods ended December 30, 2006,
respectively. The increases in gross margin rate during the three and six months ended December 29,
2007 as compared to the same periods in the prior year were primarily due to higher revenues
combined with a lower manufacturing costs base as a result of our restructuring and cost reduction
plans, including the closure of the manufacturing operations of our Paignton, U.K. facility
subsequent to the transfer of assembly and test and related activities to our Shenzhen, China
facility and the consolidation of our Caswell, U.K. fabrication operations.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
$ Millions
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
Research and development expenses
|
|
$
|
8.2
|
|
|
$
|
11.5
|
|
|
|
(28
|
%)
|
|
$
|
16.9
|
|
|
$
|
23.0
|
|
|
|
(27
|
%)
|
|
As a percentage of net revenues
|
|
|
14
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
15
|
%
|
|
|
20
|
%
|
|
|
|
|
Research and development expenses consist primarily of salaries and related costs of employees
engaged in research and design activities, including stock-based compensation charges related to
those employees, costs of design tools and computer hardware, costs related to prototyping, and
facilities costs for certain research and development focused sites.
Research and development expenses decreased to $8.2 million and $16.9 million in the three and six
month periods ended December 29, 2007, respectively, from $11.5 million and $23.0 million in the
three and six month periods ended December 30, 2006, respectively. The decreases were primarily due
to staff reductions and a decrease in related costs as a result of our restructurings and cost
reduction plans. Research and development expenses included stock-based compensation charges of
$0.6 million and $1.1 million in the three and six month periods ended December 29, 2007,
respectively, compared to $0.4 million and $0.9 million in the three and six month periods ended
December 30, 2006, respectively.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
$ Millions
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
Selling, general and
administrative expenses
|
|
$
|
13.0
|
|
|
$
|
12.1
|
|
|
|
8
|
%
|
|
$
|
24.4
|
|
|
$
|
24.9
|
|
|
|
(2
|
%)
|
|
As a percentage of net revenues
|
|
|
22
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
22
|
%
|
|
|
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 systems costs.
Selling, general and administrative expenses for the three months ended December 29, 2007 were
$13.0 million, a $0.9 million increase from $12.1 million in the three month period ended December
30, 2006. The three months ended December 29, 2007 included $0.9 million in legal expenses related
to a lawsuit we filed against a real estate developer in the United
Kingdom arising out of our
purchase and subsequent 2005 sale of a parcel of land in the United Kingdom. Otherwise decreases in
professional fees, including audit and accounting services, were offset by an increase in
stock-based compensation related to stock
15
awards with performance based vesting. Selling, general
and administrative expenses for the six months ended December 29, 2007 decreased $0.5 million from
the six months ended December 30, 2006. The six months ended December 29, 2007 included $0.9
million in legal expenses related to a lawsuit we filed against a real estate developer in the
United Kingdom arising out of our purchase and subsequent 2005 sale of a parcel of land in the
United Kingdom. Otherwise decrease during these six month periods was primarily the result of a
decrease in professional fees, including audit and accounting fees, and information systems cost
savings in connection with our cost reduction plans, offset partially by higher stock-based
compensation expenses related to the issuance of awards with performance based vesting during the
period. Stock-based compensation expenses increased to $1.3 million and $2.0 million in the three
and six month periods ended December 29, 2007, respectively, from $0.9 million and $1.8 million in
the three and six month periods ended December 30, 2006, respectively, primarily due to expenses
recorded in association with performance based vesting awards in the three months and six months
ended December 29, 2007.
Amortization of Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
$ Millions
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
Amortization of intangible assets
|
|
$
|
1.4
|
|
|
$
|
2.5
|
|
|
|
(44
|
%)
|
|
$
|
3.4
|
|
|
$
|
4.8
|
|
|
|
(29
|
%)
|
|
As a percentage of net revenues
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
|
|
In previous years, we acquired six optical components companies and businesses and one photonics
and microwave company. Our last such acquisition was in March 2006. Each of these business
combinations added to the balance of our purchased intangible assets, and the related amortization
of these intangible assets was recorded as an expense in each of the three and six month periods
ended December 29, 2007 and December 30, 2006. Subsequent to the three month period ended December
30, 2006, the purchased intangible assets from certain of these business acquisitions became fully
amortized, which reduced our expense for amortization of purchased intangible assets in the three
and six month periods ended December 29, 2007 to $1.4 million and $3.4 million, respectively, as
compared to $2.5 million and $4.8 million during the three and six month periods ended December 30,
2006, respectively.
Restructuring and Severance Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Millions
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
Lease cancellation and commitments
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.6
|
|
|
$
|
0.8
|
|
Termination payments to employees and related costs
|
|
|
0.4
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses
|
|
$
|
0.6
|
|
|
$
|
1.3
|
|
|
$
|
1.8
|
|
|
$
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 31, 2007, we adopted an overhead cost reduction plan which included workforce
reductions, facility and site consolidation of our Caswell, U.K. semiconductor operations within
existing U.K. facilities and the transfer of certain research and development activities to our
Shenzhen, China facility. We began implementing the overhead cost reduction plan in the quarter
ended March 31, 2007. As of December 29, 2007, we incurred expenses of $7.3 million with respect to
this cost reduction plan, of which $6.5 million had been paid as of December 29, 2007, the
substantial portion being personnel severance and retention related expenses. This plan is now
substantially complete. As a result of the completion of this plan, we have saved approximately $8
million per fiscal quarter in expenses when compared to the quarter ended December 30, 2006. Any
remaining expenses, which we expect to be less than $0.2 million, are expected to be incurred and
paid by the end of our fiscal year ending June 28, 2008. In the three and six month periods ended
December 29, 2007, a substantial portion of our restructuring and severance charges for termination
payments to employees and related costs were associated with this overhead cost reduction plan and
related costs associated with consolidation of certain administrative functions at our San Jose
facility.
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
our chip-on-carrier assembly from Paignton to Shenzhen. The transfer of these operations was
completed in the quarter ended March 31, 2007. In May 2006, 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,
and these plans were also substantially completed in the quarter ended June 30, 2007. In total, as
of December 29, 2007, we have spent $32.8 million on these restructuring programs. In the three and
six month periods ended December 30, 2006, the substantial portion of our restructuring and
severance charges for termination payments to employees and related costs were associated with
these programs.
16
In connection with these restructuring plans, earlier restructuring plans, and the assumption of
restructuring accruals upon the March 2004 acquisition of New Focus, we continue to make scheduled
payments drawing down the related lease cancellations and commitments. In the three month and six
month periods ended December 29, 2007, and the three month and six month periods ended December 30,
2006, we recorded $0.2 million, $0.5 million, $0.2 million and $0.8 million, respectively, in
expenses for revised estimates related to these cancellations and commitments.
Legal Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
$ Millions
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
Legal settlements
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.5
|
|
In the six months ended December 30, 2006, 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).
This settlement had been reached in the fiscal year ended July 1, 2006, and net charges of
$5.0 million were recorded in our statement of operations in that period.
Impairment of Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
$ Millions
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
Impairment of long-lived assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.9
|
|
During the six month period ended December 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.
Other Income/(Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
%
|
|
$ Millions
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
Other Income/(expense), net
|
|
$
|
3.0
|
|
|
$
|
(1.9
|
)
|
|
|
(260
|
%)
|
|
$
|
2.7
|
|
|
$
|
(3.4
|
)
|
|
|
(179
|
%)
|
Other income/(expense), net primarily consists of interest expense, interest income 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 realized gains or
losses on forward contracts designated as hedges. The increases in other income/(expense), net, in
the three months ended December 29, 2007 compared to the three months ended December 30, 2006, and
in the six months ended December 29, 2007 compared to the six months ended December 30, 2006, are
primarily related to non-cash losses on the re-measurement of short term balances between our
international subsidiaries primarily generated by changes in currency exchange rates between the
United States dollar and the United Kingdom pound sterling.
Income Tax Provision/(Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
Change
|
|
$ Millions
|
|
2007
|
|
|
2006
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
%
|
|
Income tax provision/(benefit)
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
We have incurred substantial losses to date and expect to incur additional losses in the future,
and accordingly our income tax provision is negligible in each period presented. Based upon the
weight of available evidence, which includes our historical operating performance and the recorded
cumulative net losses in all prior periods, we provided a full valuation allowance against our net
deferred tax assets at December 29, 2007 and at December 30, 2006.
17
Liquidity, Capital Resources and Contractual Obligations
Liquidity and Capital Resource
Operating activities
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
$ Millions
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net loss
|
|
$
|
(16.1
|
)
|
|
$
|
(44.2
|
)
|
Non-cash accounting items:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9.6
|
|
|
|
12.3
|
|
Stock-based compensation
|
|
|
4.4
|
|
|
|
3.9
|
|
Impairment of long-lived assets
|
|
|
|
|
|
|
1.9
|
|
Gain on sale of property and equipment
|
|
|
(1.7
|
)
|
|
|
(0.8
|
)
|
Amortization of deferred gain on sale leaseback
|
|
|
(0.7
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
Total non-cash accounting charges
|
|
|
11.6
|
|
|
|
16.7
|
|
Changes in operating assets and liabilities, net
|
|
|
(4.4
|
)
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(8.9
|
)
|
|
$
|
(31.0
|
)
|
|
|
|
|
|
|
|
Net cash used in operating activities for the six month period ended December 29, 2007 was
$8.9 million, primarily resulting from our net loss of $16.1 million, offset by non-cash accounting
charges of $11.6 million, primarily consisting of $9.6 million of expense related to depreciation
and amortization of certain assets, $4.4 million of expense related to stock based compensation and
a $1.7 million gain on sale of property, equipment. A net change in our operating assets and
liabilities of $4.4 million due to increases in accounts receivable and inventories, both
associated with our increasing revenues, as well as increases in accrued expenses and other
liabilities, partially offset by decreases in accounts payable, prepaid expenses and other current
assets, also contributed to the use of cash.
Net cash used in operating activities for the six month period ended December 30, 2006 was
$31.0 million, primarily resulting from the net loss of $44.2 million, offset by non-cash
accounting charges of $16.7 million, primarily consisting of $3.9 million of expense related to
stock based compensation, $1.9 million of expense related to impairment of long-lived assets and
$12.3 million of expense related to depreciation and amortization of certain assets. The remaining
$3.5 million was due to the net change in our operating assets and liabilities, which arose
primarily from cash generated from reductions in accounts receivable, inventories at our Paignton,
UK site as operations have moved to Shenzhen, China, and in prepaid and other current assets,
partially offset by decreases in accounts payable and accrued expenses and other liabilities,
including the payment of professional fees and accrued restructuring costs.
Investing activities
Net cash provided by investing activities in the six month period ended December 29, 2007 was
$0.6 million, primarily consisting of $4.5 million from the release of restricted cash which had
been security on an unoccupied leased facility and $1.8 million in net proceeds from the sale of
property, equipment and other long-lived assets, offset by $5.7 million used in capital
expenditures.
Investing activities generated cash of $7.6 million in the six month period ended December 30,
2006, primarily consisting of $9.4 million in net proceeds from sale of land held for re-sale and
$2.9 million in net proceeds from sale of property, equipment and other long-lived assets, offset
by $4.2 million of cash used in capital expenditures and $0.6 million of cash transferred to
restricted cash. During the quarter ended December 30, 2006, Bookham Technology plc, our
wholly-owned subsidiary, sold our Paignton U.K. manufacturing 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 in effect on
the date of the sale), 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.
Financing activities
Net cash provided in financing activities in the six month period ended December 29, 2007 was
$37.1 million, consisting primarily of $40.9 million in proceeds, net of expenses and commissions,
from an underwritten public offering of 16 million shares of our common stock at a price to the
public of $2.75 a share, offset by the repayment of $3.8 million drawn under our senior secured
$25 million credit facility.
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 certain accredited investors. Our
net proceeds from this private placement, including the second closing, were a total of
$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.
18
Sources of Cash
In the past five years, we have funded our operations from several sources, including public and
private offerings of equity, issuance of debt and convertible debentures, sales of assets, our
senior secured $25 million credit facility and net cash obtained in connection with acquisitions.
On November 13, 2007, we completed a public offering of 16,000,000 shares of common stock that
generated $40.9 million of cash, net of commissions and expenses. As of December 29, 2007, we held
$64.7 million in cash and cash equivalents (including restricted cash of $1.7 million). Based on
our cash balances, and amounts expected to be available under our senior secured $25 million credit
facility, under which advances are available based on a percentage of accounts receivable at the
time the advance is requested, we believe we have sufficient financial resources in order to
operate as a going concern through at least the quarter ending December 27, 2008. To further
strengthen our financial position, we may raise additional funds by any one or a combination of the
following: issuing equity, debt or convertible debt or selling certain non-core businesses. In the
event we choose to raise additional finds, there can be no guarantee of our ability to raise those
additional funds on terms acceptable to us, or at all.
Credit Facility
On August 2, 2006, we, with Bookham Technology plc, New Focus and Bookham (US) Inc., each a
wholly-owned subsidiary, which we collectively refer to as the Borrowers, entered into a credit
agreement, or 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 a percentage of qualified accounts receivable, as defined in the Credit
Agreement, at the time the advance is requested.
The obligations of the Borrowers under the Credit Agreement are guaranteed by us, Onetta, 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 , by the assets of the Obligors pursuant to a security agreement, or the Security
Agreement, including a pledge of the capital stock holdings of the Obligors in some of their direct
subsidiaries. Any new direct subsidiary of the Obligors is required to execute a security agreement
in substantially the same form and join in 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 reborrowed any time until
maturity, which is August 2, 2009. A termination of the commitment line 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 customary events of default,
including payment defaults, defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, a cross-default related to indebtedness in an
aggregate amount of $1 million or more, bankruptcy and insolvency related defaults, defaults
relating to such matters as ERISA and 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 minimum liquidity defined as $30 million of qualified cash and excess
availability, each as also defined in the Credit Agreement), as well as restrictions on liens,
capital expenditures, investments, indebtedness, fundamental changes to the Borrowers business,
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 December 29, 2007, we had no outstanding borrowings and there were $4.9 million in outstanding
letters of credits with vendors and landlords secured under this Credit Agreement 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, we
are obligated to pay the administrative agent a letter of credit fee at a rate equal to 2.75% per
annum.
Future Cash Requirements
As of December 29, 2007, we held $64.7 million in cash and cash equivalents (including restricted
cash of $1.7 million). Based on our cash balances, and amounts expected to be available under the
Credit Agreement, which are based on a percentage of qualified accounts receivable at the time
the advance is requested, we believe we have sufficient financial resources in order to operate as
a going concern through at least the quarter ended December 27, 2008. To further strengthen our
financial position, in the event of unforeseen circumstances, or if needed to fund growth in future
financial periods, we may raise additional funds by any one or a combination of the following:
issuing equity, debt or convertible debt or selling certain non core businesses. In the event we
choose to raise additional finds, there can be no guarantee of our ability to raise those
additional funds on terms acceptable to us, or at all.
From time to time, we have engaged in discussions with third parties concerning potential
acquisitions of product lines, technologies and businesses. We continue to consider potential
acquisition candidates. Any of these transactions could involve the issuance of a
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significant number of new equity securities, debt, and/or cash consideration. We may also be
required to raise additional funds to complete any such acquisition, through either the issuance of
equity securities or borrowings. If we raise additional funds or acquire businesses or technologies
through the issuance of equity securities, our existing stockholders may experience significant
dilution.
Risk ManagementForeign Currency Risk
We are exposed to fluctuations in foreign currency exchange rates. As our business has grown and
become multinational in scope, we have become increasingly subject to fluctuations based upon
changes in the exchange rates between the currencies in which we collect revenues and pay expenses.
Despite our change in domicile from the United Kingdom to the United States, and our movement of
certain functions, including assembly and test operations, from the United Kingdom to China, in the
future, we expect that a majority of our revenues will continue to be denominated in U.S. dollars,
while a significant 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 and the Swiss franc, in which we pay
expenses in connection with operating our facilities in Shenzhen, China, and Zurich, Switzerland,
respectively. To the extent the exchange rate between the U.S. dollar and the Chinese Yuan were to
fluctuate more significantly than experienced to date, our exposure would increase. 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 December 29, 2007, we held
11 foreign currency forward exchange contracts with a nominal value of $7.8 million, which included
put and call options which expire, or expired, at various dates from January 2008 to
September 2008. During the six month period ended December 29, 2007, we recorded a net gain of
$0.2 million in our statement of operations in connection with foreign exchange contracts that
expired during that period. As of December 29, 2007, we recorded an unrealized loss of $0.4 million
to other comprehensive income in connection with marking these contracts to fair value. On January
3, 2008, we entered into 12 additional foreign currency forward exchange contracts with a nominal
value of $12.0 million, which included put and call options which expire at various dates from
January 2008 to December 2008.
Contractual Obligations
During the quarter ended December 29, 2007, there have been no material changes to the contractual
obligations disclosed as of June 30, 2007 in our Annual Report on Form 10-K filed with the SEC on
August 31, 2007.
Off-Balance Sheet Arrangements
In connection with the sale by New Focus, Inc. of its passive component line to Finisar, Inc.,
prior to our acquisition of New Focus, New Focus agreed to indemnify Finisar for claims related to
the intellectual property sold to Finisar. This indemnification 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 prior to our acquisition of New Focus, New Focus indemnified Intel against
losses for certain intellectual property claims. This indemnification obligation expires in
May 2008 and has a maximum liability of $7.0 million. We do not expect to payout any amounts in
respect of these obligations, therefore no accrual has been made.
We indemnify our directors and certain employees as permitted by law, and have existing
indemnification agreements with our directors and we have already or expect to enter into new
indemnification agreements with our directors and officers. We have not recorded a liability
associated with these indemnification arrangements as we historically have not incurred any costs
associated with such obligations and do not expect to in the future. Costs associated with such
obligations may be mitigated, in whole or in part, by insurance coverage that we maintain.
We also have indemnification clauses in various contracts that we enter into in the normal
course of business, such as guarantees or letter of credit issued by our commercial banks in favor
of several of our suppliers or indemnification clauses in favor of customers in respect of
liabilities they may incur as a result of purchasing our products should such products infringe the
intellectual property rights of a third party. We have not historically paid out any amounts
related to these obligations and do not expect to in the future; therefore, no accrual has been
made for these obligations.
Other than as set forth above, we are not currently party to any material off-balance sheet
arrangements.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We finance our operations through a mixture of the issuance of equity securities, operating leases,
working capital and by drawing on a three year $25 million senior secured revolving credit facility
under a credit agreement we entered into on August 3, 2006. Our only exposure to interest rate
fluctuations is on our cash deposits and for amounts borrowed under the credit agreement. During
the quarter ended December 29, 2007, we paid off $4.3 million of borrowings outstanding under the
credit agreement and there are no borrowings drawn under the credit agreement as of December 29,
2007. 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. We believe our
interest rate risk is immaterial.
20
Foreign currency
We are exposed to fluctuations in foreign currency exchange rates. As our business has grown and
become multinational in scope, we have become increasingly subject to fluctuations based upon
changes in the exchange rates between the currencies in which we collect revenues and pay expenses.
Despite our change in domicile from the United Kingdom to the United States, and our movement of
certain functions, including assembly and test operations, from the United Kingdom to China, in the
future we expect that a majority of our revenues will continue to be denominated in U.S. dollars,
while a significant 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 and the Swiss franc in which we pay
expenses in connection with operating our facilities in Shenzhen, China, and Zurich, Switzerland,
respectively. To the extent the exchange rate between the U.S. dollar and the Chinese Yuan were to
fluctuate more significantly than experienced to date, our exposure would increase. 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 December 29, 2007, we held
11 foreign currency forward exchange contracts with a nominal value of $7.8 million, which included
put and call options which expire, or expired, at various dates from January 2008 to
September 2008. During the six month period ended December 29, 2007, we recorded an unrealized loss
of $0.2 million to other comprehensive income in connection with marking these contracts to fair
value. On January 3, 2008, we entered into 12 additional foreign currency forward exchange
contracts with a nominal value of $12.0 million, which included put and call options which expire,
at various dates from January 2008 to December 2008. It is estimated that a 10% fluctuation in the
dollar between December 29, 2007 and the maturity dates of these put and call options would lead to
a profit of $1.8 million (U.S. dollar weakening), or loss of $2.0 million (U.S. dollar
strengthening) on our outstanding foreign currency forward exchange contracts, should they be held
to maturity.
Item 4
. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of December 29, 2007. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by the company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the companys management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures, as of December
29, 2007, our Chief Executive Office and Chief Financial Officer concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d -
15(f) under the Exchange Act) occurred during the quarter ended December 29, 2007 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
21
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 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.
The plaintiffs and most of the issuer defendants and their insurers entered into a
stipulation of settlement for the claims against the issuer defendants, including Bookham
Technology plc. This stipulation of settlement was subject to, among other things, certification of
the underlying class of plaintiffs. Under the stipulation of settlement, the plaintiffs would
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, following an appeal from the underwriter defendants 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, the Second Circuit denied plaintiffs petition for
rehearing, but clarified that the plaintiffs may seek to certify a more limited class in the
District Court. In light of the overturned class certification on June 25, 2007, the District Court
signed an Order terminating the settlement. 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.
On November 12, 2007, Xian Raysung Photonics Inc. filed a civil suit against Bookham Inc.,
and our wholly-owned subsidiary, Bookham Technology (Shenzhen) Co., Ltd., in the Xian Intermediate
Peoples Court in Shanxi Province of the Peoples Republic of China. The complaint filed by Xian
Raysung Photonics Inc. alleges that Bookham Inc. and Bookham Technology (Shenzhen) Co., Ltd.
breached an agreement between the parties pursuant to which Xian Raysung Photonics Inc. had
supplied certain sample components and was to supply certain components to Bookham Inc. and Bookham
Technology (Shenzhen) Co., Ltd. Xian Raysung Photonics Inc. has requested the court award damages
of 12,353,728 Chinese Yuan (approximately $1.72 million based on an exchange rate of $1.00 to
7.1845 Chinese Yuan as in effect on February 1, 2008) and require that Bookham, Inc. and Bookham Technology
(Shenzhen) Co., Ltd. pay its legal fees in connection with the suit. [Bookham, Inc. and Bookham
Technology (Shenzhen) Co., Ltd. believes they have meritorious defenses to the claims made by Xian
Raysung Photonics Inc. and therefore believes that such claims
22
will not have a material effect on its 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
actually occurs, our business, financial condition or results of operations would likely suffer. In
that case, the trading price of our common stock could fall.
Risks Related to Our Business
We have a history of large operating losses and we may not be able to achieve profitability in the future.
We have never been profitable. We have incurred losses and negative cash flows from
operations since our inception. As of December 29, 2007, we had an accumulated deficit of
$1,052 million.
Our net loss for the six month period ended December 29, 2007 was $16.1 million. Our
net loss for the year ended June 30, 2007 was $82.2 million. For the year ended July 1, 2006, our
net loss 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. We may not be able to achieve profitability in any future
period and if we are unable to do so, we may need additional financing to execute on our current or
future business strategies, which may not be available on commercially acceptable terms or at all.
We may not be able to maintain positive gross margins.
Even though we generated positive gross margins in each of the past twelve 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. Additionally, we must continue to reduce our costs and
improve our product mix to offset price erosion on certain product categories.
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 wavelength
gold box devices and the increased integration of components on subsystems. Our ability to
anticipate and respond to these and other changes in technology, industry standards, customer
requirements and product offerings and to develop and introduce new and enhanced products will be
significant factors in our ability to succeed. We expect that new technologies will continue to
emerge as competition in the telecommunications industry increases and the need for higher and more
cost efficient bandwidth expands. The introduction of new products embodying new technologies or
the emergence of new industry standards could render our existing products or products in
development uncompetitive from a pricing standpoint, obsolete or unmarketable.
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 effect on our
results of operations.
Even though the market for optical components has been gradually recovering from the
industry-wide slump experienced at the beginning of the decade, particularly in the metro market
segment, there continues to be excess capacity, intense price competition among optical component
manufacturers and continued consolidation in 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.
We depend on a limited number of customers for a significant percentage of our revenues.
Historically, we have generated most of our revenues from a limited number of
customers. For example, in the six months ended December 29, 2007 and the fiscal year ended
June 30, 2007, our three largest customers accounted for 34% and 41% of our revenues, respectively.
Revenues from any of our major customers may decline or fluctuate significantly in the future. We
may not be able to offset any decline in revenues from our existing major customers with revenues
from new customers or other existing customers.
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Historically, Nortel Networks has been our largest customer. Sales to Nortel
Networks accounted for 15%, 20% and 48% of our revenues for the six month period ended December 29,
2007 and the years ended June 30, 2007 and July 1, 2006, respectively. Through December 2006, 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 as a result of which Nortel Networks is no longer obligated to buy any of our
products. Revenues from Nortel Networks decreased from $14.5 million in the quarter ended
December 30, 2006 to $3.1 million in the quarter ended March 31, 2007. Even though revenues from
Nortel Networks increased to $7.6 million in the quarter ended June 30, 2007 and $8.3 million in
the quarter ended December 29, 2007, as with other major customers, revenues from Nortel may
decline or fluctuate significantly in the future. Our inability to replace these revenues will have
an adverse impact on our business and results of operations.
We and our customers depend upon a limited number of major telecommunications carriers.
Our dependence on a limited number of customers is due to the fact that the optical
telecommunications systems industry is dominated by a small number of large companies. These
customers in turn 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.
We typically do not enter into long-term contracts with our customers and our customers may
decrease, cancel or delay their buying levels at any time with little or no advance notice to us.
Our customers typically purchase our products pursuant to individual purchase
orders. While our customers generally provide us with their expected forecasts for our products
several months in advance, in most cases they are not contractually committed to buy any quantity
of products beyond those in purchase orders previously submitted to us. Our customers may decrease,
cancel or delay purchase orders already in place. If any of our major customers decrease, stop or
delay purchasing our products for any reason, our business and results of operations would be
harmed. Cancellation or delays of such orders may cause us to fail to achieve our short- and
long-term financial and operating goals and result in excess and obsolete inventory.
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 transfer of our assembly
and test operations from Paignton, U.K. to Shenzhen, China, a significant portion 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 effect 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 some of our exposure to
such currency fluctuations, and we may be required to convert currencies to meet our obligations.
Under certain circumstances, these transactions could 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 of operating 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 iterative research and development related
activities from the U.K. 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; and
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retain employees at our Shenzhen facility.
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There can be no assurance we will be able to do 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
24
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. Employee turnover in China is high due to the intensely
competitive and fluid market for skilled labor.
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 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,
which we may not be able to do successfully.
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 imported materials that are used in the manufacturing process and subsequently exported from
China as finished products. However, Chinese trade regulations are in a state of flux, and we may
become subject to other forms of taxation and duties in China or may be required to pay export fees
in the future. In the event that we become subject to new forms of taxation or export fees in
China, our business and results of operations could be materially adversely affected. We may also
be required to expend greater amounts than we currently anticipate in connection with increasing
production at 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, industrial, research, semiconductor capital equipment, military and
biotechnology markets. Our current and anticipated future dependence on a small number of customers
increases the revenue impact of each such customers decision to delay or defer purchases from us.
Our expense levels in the future will be based, in large part, on our expectations regarding future
revenue sources and, as a result, operating results for any quarterly period in which material
orders fail to occur, or are delayed or deferred could vary significantly.
Because of these and other factors, quarter-to-quarter comparisons of our results of
operations may not be 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 six 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 optical 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 our chip-on-carrier
assembly from Paignton to Shenzhen. The transfer of these operations was completed in the quarter
ended March 31, 2007. In May 2006, 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. This was substantially
completed in the quarter ended June 30, 2007. We have spent an aggregate of $32.8 million on these
restructuring programs.
On January 31, 2007, we adopted an overhead cost reduction plan which included
workforce reductions, facility and site consolidation of our Caswell, U.K. semiconductor operations
within our existing U.K. facilities and the transfer of certain research and development activities
to our Shenzhen facility. As of December 29, 2007, we had incurred expenses of $7.3 million with
respect to this cost reduction plan, the substantial portion being personnel severance and
retention related expenses. This plan is now substantially complete. As a result of the
completion of this plan, we have saved approximately $8 million per fiscal quarter in expenses when
compared to the quarter ended December 30, 2006. Any remaining expenses, which we expect to be
less than $0.2 million, are expected to be incurred and paid by the end of our fiscal year ending
June 30, 2008.
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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.
Our results of operations may suffer if we do not effectively manage our inventory, and we may
incur inventory-related charges.
We need to manage our inventory of component parts and finished goods effectively to meet
changing customer requirements. Accurately forecasting customers product needs is difficult. 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. 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 unsaleable or obsolete inventory, which would adversely affect
our results of operations. We have from time to time incurred significant inventory-related
charges. For example, 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.
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 was entitled to receivables
of £73.8 million (approximately$135.8 million, based on an exchange rate of £1.00 to $1.8403, the
noon buying rate on September 2, 2005 for cable transfers in foreign currencies as certified by the
Federal Reserve Bank of New York) from Deutsche Bank in connection with certain aircraft subleases
and these payments have been applied 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 the completion of these transactions, Bookham
Technology plc has had 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 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 modification to
existing products often take many quarters to develop because of their complexity and because
customer specifications sometimes change during the development cycle. We often incur substantial
costs associated with the research and development 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 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.
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Delays, disruptions or quality control problems in manufacturing could result in delays in product
shipments to customers and could adversely affect our business.
We may experience delays, disruptions or quality control problems in our manufacturing
operations or the manufacturing operations of our subcontractors. As a result, we could incur
additional costs that would adversely affect 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 results in higher manufacturing yields, whereas lower volume production
generally results in lower yields. In addition, lower yields may result, and have in the past
resulted, from commercial shipments of products prior to full manufacturing qualification to the
applicable specifications. Changes in manufacturing processes required as a result of changes in
product specifications, changing customer needs and the introduction of new product lines have
historically caused, and may in the future cause, significantly reduced manufacturing yields,
resulting in low or negative margins on those products. Moreover, an increase in the rejection rate
of products during the quality control process, before, during or after manufacture, results in
lower yields and margins. Finally, manufacturing yields and margins can also be lower if we receive
or inadvertently use defective or contaminated materials from our suppliers.
We depend on a limited number of suppliers who could disrupt our business if they stopped,
decreased or delayed shipments.
We depend on a limited 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
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 technology appropriate for patent
protection. Our practice is to require employees and consultants to execute non-disclosure and
proprietary rights agreements upon commencement of employment or consulting arrangements. These
agreements acknowledge our exclusive ownership of all intellectual property developed by the
individuals during their work for us and require that all proprietary information disclosed will
remain confidential. Although such agreements may be binding, they may not be enforceable in full
or in part in all jurisdictions and any breach of a confidentiality obligation could have a 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 now that we have transferred all of our assembly and test operations and
chip-on-carrier operations from our facilities in the U.K. to 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 or require us to obtain a license to use the technology from third parties, or
we may be prohibited from selling certain products in the future.
Companies
in the industry in which we operate frequently receive claims of patent infringement
or infringement of other intellectual property rights. We have, from
time to time,
received such claims, including from competitors and from companies
that have sustantially more resources than us. Third parties may in the
future assert claims against us concerning our existing products or with respect to future products
under development. 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 and where
appropriate have entered into license agreements with those third parties with respect to that
intellectual property. We may not in all cases be able to resolve
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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 or prohibit 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 and modules is highly competitive and such competition
could result in our existing customers moving their orders to competitors. We are aware of a number
of companies that have developed or are developing optical component products, including tunable
lasers, pluggables and thin film filter products, among others, that compete directly with our
current and proposed product offerings. Certain of our competitors may be able to more quickly and
effectively:
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respond to new technologies or technical standards;
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react to changing customer requirements and expectations;
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devote needed resources to the development, production, promotion and sale of products; and
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deliver competitive products at lower prices.
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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 six months ended December 29, 2007 and the years ended June 30, 2007, July 1, 2006 and
July 2, 2005, 25%, 23%, 21%, and 28% of our revenues, respectively, were derived in the United
States and 75%, 77%, 79%, and 72% of our revenues, respectively, were derived outside the United
States. We are subject to additional risks related to operating in foreign countries, including:
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currency fluctuations, which could result in increased operating expenses and reduced revenues;
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greater difficulty in accounts receivable collection and longer collection periods;
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difficulty in enforcing or adequately protecting our intellectual property;
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foreign taxes;
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political, legal and economic instability in foreign markets; and
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foreign regulations.
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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. During periods of growth or decline,
management may not be able to 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, defects may occur in our products. The occurrence of any
defects in our products could give rise to liability for damages caused by such defects, including
consequential damages. Such defects could, moreover, impair 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. We cannot assure
investors that this insurance could adequately cover our costs arising from defects in our products
or otherwise.
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.
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.
We may not be able to raise capital when desired on favorable terms, or at all, or without dilution
to our stockholders.
The rapidly changing industry in which we operate, the length of time between developing and
introducing a product to market and frequent changing customer specifications for products, among
other things, makes our prospects difficult to evaluate. It is possible that we may not generate
sufficient cash flow from operations or otherwise have the capital resources to meet our future
capital needs. If this occurs, we may need additional financing to execute on our current or future
business strategies.
In the past, we have sold shares of our common stock in public offerings, private placements
or otherwise in order to fund our operations. On November 13, 2007, we completed a public offering
of 16,000,000 shares of common stock that generated $40.9
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million of cash, net of commissions and
expenses. On March 22, 2007, pursuant to a private placement, 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.
If we raise funds through the issuance of equity or convertible debt securities, our
stockholders may be significantly diluted, and these newly-issued securities may have rights,
preferences or privileges senior to those of securities held by existing stockholders. We cannot
assure you that additional financing will be available on terms favorable to us, or at all. If
adequate funds are not available or are not available on acceptable terms, if and when needed, our
ability to fund our operations, develop or enhance our products, or otherwise respond to
competitive pressures could be significantly limited.
Risks Related to Regulatory Compliance and Litigation
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. In our
prior fiscal years ended July 1, 2006 and July 2, 2005, we reported certain material weaknesses, in
fiscal 2006 relating to inconsistent treatment of translation/transaction gains and loses in
respect to certain intercompany loan balances, and in fiscal 2005 relating to: i) shortage of, and
turnover in, qualified financial reporting personnel to ensure complete application of U.S.
generally accepted accounting principles, ii) insufficient management review of analyses and
reconciliations, iii) inaccurate updating of accounting inputs for estimates of complex non-routine
transactions, and iv) accounting for foreign currency exchange transactions. Although we have since
concluded as to the satisfactory remediation of these material weaknesses, 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 we are subject to environmental and
import/export laws and regulations that 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 our New Focus division, 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 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. 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.
In addition, the sale and manufacture of certain of our products require on-going compliance
with governmental security and import/export regulations. Our New Focus division has, in the past,
been notified of potential violations of certain export regulations which on one occasion resulted
in the payment of a fine to the U.S. federal government. We may, in the future, be subject to
investigation which may result in fines for violations of security and import/export regulations.
Furthermore, any disruptions of our product shipments in the future, including disruptions as a
result of efforts to comply with governmental regulations, could adversely affect our revenues,
gross margins and results of operations.
Litigation regarding Bookham Technology plcs and New Focus initial public offering and follow-on
offering and any other litigation in which we become involved, including as a result of
acquisitions on the arrangements we have with suppliers and customers, 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.,
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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 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 subject to their
execution of tolling agreements. 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 entered into a
stipulation of settlement for the claims against the issuer defendants, including us. This
stipulation of settlement was subject to, among other things, certification of the underlying class
of plaintiffs. Under the stipulation of settlement, the plaintiffs would 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, following an appeal from the underwriter defendants 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, the Second Circuit denied plaintiffs petition for
rehearing, but clarified that the plaintiffs may seek to certify a more limited class in the
District Court. In light of the overturned class certification on June 25, 2007, the District Court
signed an Order terminating the settlement. 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.
On November 12, 2007, Xian Raysung Photonics Inc. filed a civil suit against Bookham
Inc., and our wholly-owned subsidiary, Bookham Technology (Shenzhen) Co., Ltd., in the Xian
Intermediate Peoples Court in Shanxi Province of the Peoples Republic of China. The complaint
filed by Xian Raysung Photonics Inc. alleges that Bookham Inc. and Bookham Technology (Shenzhen)
Co., Ltd. breached an agreement between the parties pursuant to which Xian Raysung Photonics Inc.
had supplied certain sample components and was to supply certain components to Bookham Inc. and
Bookham Technology (Shenzhen) Co., Ltd. Xian Raysung Photonics Inc. has requested the court award
damages of 12,353,728 Chinese Yuan (approximately $1.72 million based on an exchange rate of $1.00
to 7.1845 Chinese Yuan as in effect on February 1, 2008) and require that Bookham, Inc. and Bookham
Technology (Shenzhen) Co., Ltd. pay its legal fees in connection with the suit. Bookham, Inc. and
Bookham Technology (Shenzhen) Co., Ltd. believes they have meritorious defenses to the claims made
by Xian Raysung Photonics Inc. and therefore believes that such claims will not have a material
effect on its financial position, results of operations or cash flows.
Litigation is subject to inherent uncertainties, and an adverse result in these or other
matters that may arise from time to time could have a material adverse effect on our business,
results of operations and financial condition. 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.
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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 staggered 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.
Risks Related to Our Common Stock
A variety of factors could cause the trading price of our common stock to be volatile or decline.
The trading price of our common stock has been, and is likely to continue to be, highly
volatile. Many factors could cause the market price of our common stock to rise and fall. In
addition to the matters discussed in other risk factors included herein, some of the reasons for
the fluctuations in our stock price are:
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fluctuations in our results of operations;
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changes in our business, operations or prospects;
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hiring or departure of key personnel;
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new contractual relationships with key suppliers or customers by us or our competitors;
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proposed acquisitions by us or our competitors;
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financial results that fail to meet public market analysts expectations and changes in
stock market analysts recommendations regarding us, other optical technology companies or
the telecommunication industry in general;
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future sales of common stock, or securities convertible into or exercisable for common stock;
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adverse judgments or settlements obligating us to pay damages;
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acts of war, terrorism, or natural disasters;
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industry, domestic and international market and economic conditions;
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low trading volume in our stock;
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developments relating to patents or property rights; and
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government regulatory changes.
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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, 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.
In connection with the public offering of 16 million shares of our common stock completed on
November 13, 2007, all of our executive officers and directors entered into lock-up agreements with
the underwriters for such offering. As a result of these lock-up agreements, approximately
1.16 million shares are subject to a contractual restriction on resale through February 10, 2008,
subject to
32
extension in certain circumstances. The market price for shares of our common stock may
decline if stockholders subject to the lock-up agreements sell a substantial number of shares when
the restrictions on resale lapse, or if the underwriters waive the lock-up agreements and allow the
stockholders to sell some or all of their shares.
Substantially all of the shares of common stock held by our other stockholders are freely
tradable or tradable under Rule 144.
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 to buy our common stock in the public
and private markets. These sales may also cause the market price of our common stock to decline
significantly and hinder our ability to sell equity securities in the future at a time and price
that we deem appropriate to meet our capital needs.
We may incur significant costs from class action litigation due to our expected stock volatility.
Our stock price may fluctuate for many reasons, including as a result of public
announcements regarding the progress of our product development efforts, the addition or departure
of key personnel, variations in our quarterly operating results and changes in market valuations of
companies in our industry. Recently, when the market price of a stock has been volatile, as our
stock price may be, holders of that stock have occasionally brought securities class action litigation against
the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type
against us, even if the lawsuit were without merit, we could incur substantial costs defending the
lawsuit. The lawsuit could also divert the time and attention of our management. In addition, if
the suit were resolved in a manner adverse to us, the damages we could be required to pay may be
substantial and would have an adverse impact on our ability to operate our business.
Because we do not intend to pay dividends, stockholders will benefit from an investment in our
common stock only if it appreciates in value.
We have never declared or paid any dividends on our common stock. We anticipate that
we will retain any future earnings to support operations and to finance the development of our
business and do not expect to pay cash dividends in the foreseeable future. As a result, the
success of an investment in our common stock will depend upon any future appreciation in its value.
There is no guarantee that our common stock will appreciate in value or even maintain the price at
which stockholders have purchased their shares.
We can issue shares of preferred stock that may adversely affect your rights as a stockholder of
our common stock.
Our certificate of incorporation authorizes us to issue up to 5,000,000 shares of
preferred stock with designations, rights and preferences determined from time-to-time by our board
of directors. Accordingly, our board of directors is empowered, without stockholder approval, to
issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to
those of holders of our common stock. For example, an issuance of shares of preferred stock could:
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adversely affect the voting power of the holders of our common stock;
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make it more difficult for a third party to gain control of us;
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discourage bids for our common stock at a premium;
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limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or
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otherwise adversely affect the market price of our common stock.
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We may in the future issue additional shares of authorized preferred stock at any time.
Item 4.
Submission of Matters to a Vote of Security Holders
.
On January 25, 2008, we held a special meeting of stockholders. At the special meeting of
stockholders, stockholders approved our Amended and Restated 2004 Stock Incentive Plan, which,
among other things, increased the aggregate number of shares of common stock reserved for issuance
under such plan from 9,000,000 shares to 19,000,000 shares and added certain limitations with
respect to awards we may grant under such plan. At the special meeting, 47,854,020 shares of
common stock voted in favor our Amended and Restated Incentive Plan, 10,644,690 shares of common
stock voted against our Amended and Restated 2004 Stock Incentive Plan, and 280,897 shares of
common stock abstained. There were no broker non-votes.
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
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February 6, 2008
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C
hief Financial Officer (Principal
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Financial and Accounting Officer)
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34
EXHIBIT INDEX
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Exhibit
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Number
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Description of Exhibit
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10.1
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Amended and Restated 2004 Stock
Incentive Plan.
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10.2
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Form of Indeminification Agreement
by and between the Registrant and its Directors and Executive Officer.
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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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