NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PREPARATION

Basis of Presentation

Oclaro, Inc., a Delaware corporation, is sometimes referred to in this Quarterly Report on Form 10-Q as “Oclaro,” “we,” “us” or “our.”

On July 23, 2012, we completed a merger by and among Opnext, Inc. (Opnext), Tahoe Acquisition Sub, Inc., a newly formed wholly-owned subsidiary of Oclaro (Merger Sub), and Oclaro, pursuant to which we acquired Opnext through a merger of Merger Sub with and into Opnext. The acquisition is more fully discussed in Note 5, Business Combinations and Asset Dispositions .

The accompanying unaudited condensed consolidated financial statements of Oclaro as of December 29, 2012 and for the three and six months ended December 29, 2012 and December 31, 2011 have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission (SEC) Regulation S-X, and include the accounts of Oclaro and all of our subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our consolidated financial position and results of operations have been included. The condensed consolidated results of operations for the three and six months ended December 29, 2012 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 29, 2013. The condensed consolidated balance sheet as of December 29, 2012 includes the assets and liabilities assumed in the Opnext acquisition. The condensed consolidated statements of operations and comprehensive loss for the three and six months ended December 29, 2012, and the condensed consolidated statement of cash flows for the six months ended December 29, 2012, include the results of operations of the combined entities from July 23, 2012, the date of the acquisition.

The condensed consolidated balance sheet as of June 30, 2012 has been derived from our audited financial statements as of such date, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2012 (2012 Form 10-K). The condensed consolidated balance sheet as of June 30, 2012, the statements of operations and comprehensive loss for the three and six months ended December 31, 2011, and the statement of cash flows for the six months ended December 31, 2011 do not reflect any assets or liabilities assumed in the acquisition or any results of operations from Opnext.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported periods. These judgments can be subjective and complex, and consequently, actual results could differ materially from those estimates and assumptions. Descriptions of the key estimates and assumptions are included in our 2012 Form 10-K.

Fiscal Years

We operate on a 52/53 week year ending on the Saturday closest to June 30. Our fiscal year ending June 29, 2013 will be a 52 week year, with the quarter ended December 29, 2012 being a 13 week quarterly period. Our fiscal year ended June 30, 2012 was a 52 week year, with the quarter ended December 31, 2011 being a 13 week quarterly period.

Reclassifications

For presentation purposes, we have reclassified certain prior period amounts to conform to the current period financial statement presentation. These reclassifications did not affect our consolidated revenues, net loss, cash flows, cash and cash equivalents or stockholders’ equity as previously reported.

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NOTE 2. RECENT ACCOUNTING STANDARDS

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which requires us to disclose gross information and net information about instruments and transactions eligible for offset in the statement of financial position. ASU No. 2011-11 will be effective for our fiscal year beginning on June 30, 2013. The adoption of this update will require a change in the format of our current presentation.

The following table provides details regarding our inventories at the dates indicated:

The following table provides details regarding our property and equipment, net at the dates indicated:

Property and equipment includes assets under capital leases of $24.6 million at December 29, 2012, which were assumed in connection with the Opnext acquisition. Amortization associated with assets under capital leases is recorded in depreciation expense.

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The following table presents details regarding our accrued expenses and other liabilities at the dates indicated:

The following table summarizes the activity related to our accrued restructuring charges for the six months ended December 29, 2012:

In connection with the acquisition of Opnext, we initiated a restructuring plan to integrate the businesses in the first quarter of fiscal year 2013. In connection with the integration, we recorded $0.8 million and $9.1 million in restructuring charges during the three and six months ended December 29, 2012, respectively. The restructuring charges for the three months ended December 29, 2012, included $0.8 million related to workforce reductions. The restructuring charges for the six months ended December 29, 2012, included $7.8 million related to workforce reductions, $0.9 million related to the impairment of certain technology that is now considered redundant following the acquisition and $0.4 million related to the write-off of net book value inventory that supported this technology. During the three and six months ended December 29, 2012, we made scheduled payments of $1.8 million and $7.8 million, respectively, to settle a portion of these restructuring liabilities. As of December 29, 2012, we had $0.6 million in accrued restructuring liabilities related to this restructuring plan.

During fiscal year 2012, we initiated a restructuring plan in connection with the transfer of our Shenzhen, China manufacturing operations to Venture Corporation Limited (Venture). This transition is scheduled to occur in a phased and gradual transfer of products over three years. In connection with this transition, we recorded restructuring charges of $1.4 million and $2.9 million during the three and six months ended December 29, 2012, respectively, for employee separation charges. During the three and six months ended December 29, 2012, we made scheduled payments of $0.8 million and $1.9 million, respectively, to settle a portion of these restructuring liabilities. As of December 29, 2012, we had $2.8 million in accrued restructuring liabilities related to this restructuring plan. We expect to incur between $5.5 million and $9.5 million in additional restructuring costs in connection with the transition of our Shenzhen manufacturing operations to Venture over the next two years.

The current portion of accrued restructuring liabilities is included in the caption accrued expenses and other liabilities and the non-current portion is included in the caption other non-current liabilities in the condensed consolidated balance sheet.

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The following table presents the components of accumulated other comprehensive income at the dates indicated:

NOTE 4. FAIR VALUE

We define fair value as the estimated price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. We apply the following fair value hierarchy, which ranks the quality and reliability of the information used to determine fair values:

Our cash equivalents and marketable securities are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most marketable securities and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

We have a defined benefit pension plan in Switzerland whose assets are classified within Level 1 of the fair value hierarchy for plan assets of cash, equity investments and fixed income investments, and Level 3 of the fair value hierarchy for plan assets of real estate and alternative investments. These pension plan assets are not reflected in the accompanying condensed consolidated balance sheets, and are thus not included in the following table.

The contingent obligation related to the make-whole premium on our convertible notes was valued using a Monte Carlo simulation model, which estimates the value based on the probability and timing of conversion. We have classified the contingent obligation within Level 3 of the fair value hierarchy.

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The following table provides details regarding the changes in assets and liabilities classified within Level 3 from June 30, 2012 to December 29, 2012:

NOTE 5. BUSINESS COMBINATIONS AND ASSET DISPOSITIONS

Sale of Thin Film Filter Business and Interleaver Product Line

On November 19, 2012, we entered into an asset purchase agreement with II-VI Incorporated, Photop Technologies, Inc. and Photop Koncent, Inc. (FuZhou), both wholly owned subsidiaries of II-VI Incorporated, pursuant to which we sold substantially all of the assets of our thin film filter business and our interleaver product line. The transactions closed on December 3, 2012.

The total purchase price under the asset purchase agreement is $27.0 million in cash. As of December 29, 2012, we have received $26.0 million in cash proceeds, while the remaining $1.0 million is being held in escrow until December 31, 2013 to satisfy any indemnification claims related to these transactions. Under the asset purchase agreement, we made certain customary representations and warranties regarding our thin film filter business and interleaver product line, and we are subject to customary indemnification obligations related to pre-closing liabilities and breaches of representations, warranties and covenants. Also pursuant to the Purchase Agreement, we have agreed not to compete in the thin film filter or interleaver business for a period of five years, subject to certain limitations and exceptions.

In connection with these transactions, we transferred $0.7 million of property, plant and equipment, $0.7 million of inventory and $0.2 million of other net assets. We also incurred approximately $0.4 million in legal fees, commissions and other administrative costs related to the transactions. As of December 29, 2012, the transfer of assets under the asset purchase agreement was complete and we recognized a gain of $25.0 million within restructuring, acquisition and related costs in the condensed consolidated statements of operations.

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Acquisition of Opnext

On March 26, 2012, we entered into an Agreement and Plan of Merger and Reorganization, by and among Opnext, Tahoe Acquisition Sub, Inc., a newly formed wholly-owned subsidiary of Oclaro (Merger Sub) and Oclaro, pursuant to which we acquired Opnext through a merger of Merger Sub with and into Opnext. On July 23, 2012 we consummated the acquisition following approval by the stockholders of both companies.

Our primary reasons for the acquisition of Opnext were to create an industry leader in telecom optical components and to strengthen the combined position of the companies in datacom optical components. The acquisition is also consistent with our strategy of extending optical communications technology into industrial and consumer markets, and is expected to create the opportunity for significant cost savings in the combined company.

As a result of the acquisition, we converted each issued and outstanding share of Opnext common stock into the right to receive 0.42 of a share of our common stock, par value $0.01 per share (and cash in lieu of fractional shares). In addition, each Opnext stock option that was outstanding and unexercised immediately prior to the acquisition was converted into an option to purchase our common stock (adjusted to give effect to the exchange ratio); and each Opnext stock appreciation right that was outstanding and that remained unsettled immediately prior to the acquisition was converted into either a stock appreciation right with respect to our common stock (adjusted to give effect to the exchange ratio) or a stock appreciation right subject to cash settlement and remained subject to the same terms and conditions of the Opnext equity plan and the applicable stock appreciation right agreement as in effect immediately prior to the acquisition.

In connection with the acquisition: (i) 91,467,739 shares of Opnext common stock were converted into the right to receive 38,416,355 shares of our common stock; (ii) outstanding options to purchase 10,119,340 shares of Opnext common stock were converted into options to purchase 4,250,011 shares of our common stock; and (iii) stock appreciation rights (SARs) with respect to 412,123 shares of Opnext common stock were converted into SARs with respect to 172,970 shares of our common stock.

Immediately following the effective time of the merger, Oclaro stockholders immediately prior to the merger owned approximately 57.3 percent and Opnext’s stockholders owned approximately 42.7 percent of the combined company. The combination is intended to qualify as a tax-free reorganization for federal income tax purposes. We accounted for this acquisition under the purchase method of accounting. The estimated fair value of assets acquired and liabilities assumed and the results of operations of Opnext from the closing date of the acquisition, July 23, 2012, are included in our condensed consolidated financial statements at December 29, 2012 and for the three and six months then ended.

For accounting purposes, the fair value of the consideration paid to Opnext stockholders in the acquisition was $89.8 million; which includes the issuance of $88.7 million in common stock, based on a price of $2.31 per share of our common stock, which was the closing market price of our common stock on the day the acquisition was consummated; and $1.1 million for the assumption of vested stock options and SARs to purchase our common stock.

The total consideration given to former stockholders of Opnext has been allocated to the assets acquired and liabilities assumed based on preliminary estimates of their estimated fair values as of the date of the acquisition. Because of the short time frame since the close of the acquisition on July 23, 2012, we have recorded the tangible and intangible assets acquired and liabilities assumed based upon their preliminary fair values as of July 23, 2012. The fair values were based upon management estimates, and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). We expect to continue to obtain information to assist us in determining the fair values of the assets acquired and liabilities assumed at the acquisition date during our third quarter of fiscal 2013.

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Our preliminary purchase price allocation is as follows:

The preliminary fair value of raw materials inventories were based on historical cost on a first-in first-out basis, reduced to reflect amounts related to inventory we believe will prove to be unsalable. Products may be unsalable because they are technically obsolete due to substitute products, specification changes or excess inventory relative to customer forecasts. Work in process, finished goods and spare parts were preliminarily valued using the comparative sales method, which estimates the expected sales price of the subject inventory, reduced for all costs expected to be incurred in its completion (for work in process), disposition and a profit on those efforts. Work in process, finished goods and spare parts were also reduced to reflect amounts related to inventory we believe will prove to be unsalable.

The preliminary fair value of property and equipment was determined using management estimates based on currently available information and a high-level review of similar historical transactions completed by us during the previous three fiscal years.

The preliminary fair value of intangible assets was based on internal assessments using the “income approach,” which requires an estimate or forecast of all the expected future cash flows through the application of the multi-period excess earnings method, relief-from-royalty method or other acceptable methods. We have initially identified the following significant intangible assets: $13.7 million of developed technology with an estimated weighted average useful life of 6 years, $1.8 million of contract backlog with an estimated weighted average useful life of 1 year, $7.3 million of customer relationships with an estimated weighted average useful life of 6 years, $4.8 million of trademarks and other with an estimated weighted average useful life of 4 years, and $0.4 million of in-process research and development. These preliminary estimates of fair value and weighted-average useful life will likely be different from our final purchase price allocation, and the difference could have a material impact on the accompanying condensed consolidated financial statements.

Any excess of the fair value of assets acquired and liabilities assumed over the aggregate consideration given for such acquisition results in a gain on bargain purchase. In the first quarter of fiscal year 2013, we recorded a gain on bargain purchase of $39.5 million in connection with the acquisition of Opnext. Our preliminary estimate of gain on bargain purchase is subject to change during the measurement period as we finalize our purchase price allocation based on finalization of the fair value estimates of assets acquired and liabilities assumed.

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The bargain purchase gain of $39.5 million results from the difference between the fair value of consideration given and our preliminary estimate of the fair value of assets acquired and liabilities assumed. The consideration given for Opnext consisted of a fixed number of Oclaro shares for each Opnext Share (0.42 for one), which was agreed upon on March 26, 2012. On that date, the closing price of Oclaro’s common stock was $4.66. At the consummation of the merger on July 23, 2012, the closing price of Oclaro’s common stock was $2.31. This share price, multiplied by the fixed number of Opnext shares outstanding at the merger, and including the fair value of vested stock awards assumed by Oclaro, resulted in the fair value of consideration given being $89.8 million, less than the preliminary estimate of the fair market value of the net assets acquired and liabilities assumed of $129.3 million.

We also recorded $2.6 million in acquisition-related costs during the three and six month months ended December 29, 2012, which are included in restructuring, acquisition and related costs in the condensed consolidated statement of operations. The acquisition-related costs include legal fees, banker fees, consultation fees, travel expenses and other miscellaneous direct and incremental administrative expenses associated with the acquisition.

Upon the close of the acquisition, the combined company implemented significant workforce restructuring actions. Among other things, we combined our global sales, finance, legal and human resources operations. We also realigned our global operations and business units under a single management structure. Our newly combined global organizations provide services for both the pre-acquisition Oclaro and former Opnext products. We have also reduced redundant product offerings by eliminating selected products from each predecessor company and transitioned existing customers for such products to the other company’s current offering. In addition, we have merged our research and development efforts along product families, so many of our new product introductions going forward will benefit from both Oclaro and Opnext technology. For these reasons, we believe it would be impracticable to allocate revenues going forward to one predecessor entity or the other and to separately disclose revenues and earnings of Opnext since the acquisition date.

The following unaudited pro forma consolidated results of operations have been prepared as if the merger with Opnext had occurred as of July 3, 2011, the first day of our fiscal year 2012:

We made certain adjustments to the combined results of operations in arriving at these unaudited pro forma financial results; namely we eliminated revenues and cost of revenues related to product sales between the companies; eliminated depreciation of property and equipment based on historical acquisition cost and reflected depreciation based on the preliminary estimated fair values and useful lives of property and equipment acquired; reversed amortization of intangible assets based on the historical amortization related to Opnext’s existing intangible assets and reflected amortization of identified intangible assets based on the preliminary estimated fair values and useful lives of identified intangible assets recorded as a result of the acquisition; and eliminated acquisition-related transaction costs and our preliminary estimate of the bargain purchase gain, which were directly attributable to the merger but which are not expected to have a continuing impact on the combined entity’s results. This unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

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Asset Sale

In December 2011, we entered into an asset sale agreement to sell certain assets related to a legacy product, including inventory, equipment and intangibles, in exchange for $3.9 million in initial consideration plus potential earnout consideration, based on the purchaser’s revenues from the legacy product over a 15 month period following the closing date. During the second quarter of fiscal year 2012, we received $1.5 million in cash proceeds related to this initial consideration, with the remaining $2.4 million being received during the third and fourth quarters of fiscal year 2012.

In the second fiscal quarter of 2012, we recorded a deferred gain of $1.3 million related to the sale of these assets and classified this amount in accrued expenses and other liabilities in our condensed consolidated balance sheet. In the third fiscal quarter of 2012, we completed the asset transfer and recognized a gain of $1.9 million within restructuring, acquisition and related costs in the condensed consolidated statements of operations. Earnout consideration, if any, will be recognized in the period it is reported to us as due, provided we believe cash collections are reasonably assured.

Acquisition of Mintera

In July 2010, we acquired Mintera Corporation (Mintera). This acquisition is more fully discussed in Note 3, Business Combinations , to our consolidated financial statements included in our 2012 Annual Report on Form 10-K. Under the terms of this acquisition, we agreed to pay certain revenue-based consideration, whereby former security holders of Mintera were entitled to receive earnouts up to $20.0 million, determined based on revenue from Mintera products following the acquisition. In the first quarter of fiscal year 2013, we settled remaining earnout obligations of $8.6 million in cash. As of December 29, 2012, we had no remaining earnout obligations to the former security holders of Mintera.

NOTE 6. INTANGIBLE ASSETS

In connection with our acquisition of Opnext on July 23, 2012, we recorded $28.0 million in intangible assets as our preliminary estimate of the fair value of acquired intangible assets. The intangible assets acquired from Opnext consist of $13.7 million of developed technology with an estimated weighted average useful life of 6 years, $1.8 million of contract backlog with an estimated weighted average useful life of 1 year, $7.3 million of customer relationships with an estimated weighted average useful life of 6 years, $4.8 million of trademarks and other with an estimated weighted average useful life of 4 years, and $0.4 million of in-process research and development. These preliminary estimates of fair value and weighted-average useful lives will likely be different from our final purchase price allocation.

The following table summarizes the activity related to our intangible assets for the six months ended December 29, 2012:

During the first quarter of fiscal year 2013, we determined that a portion of the technology we acquired in connection with our acquisition of Mintera in July 2010 is now considered redundant, following the acquisition of Opnext and its product lines. We recorded $0.9 million for the impairment loss related to these intangibles in restructuring, acquisition and related costs in our condensed consolidated statements of operations for the six months ended December 29, 2012.

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NOTE 7. CREDIT LINE AND NOTES

Wells Fargo Credit Line

On August 2, 2006, Oclaro, Inc., as the “Parent”, along with Oclaro Technology Limited, Oclaro Photonics, Inc. and Oclaro Technology, Inc., each a wholly-owned subsidiary, entered into a credit agreement, or the “Original Credit Agreement”, with Wells Fargo Capital Finance, Inc. (Wells Fargo) and certain other lenders.

On November 2, 2012, Oclaro Technology Limited as “Borrower,” and the Parent entered into a Second Amended and Restated Credit Agreement with Wells Fargo and the other lenders regarding the senior secured revolving credit facility, increasing the facility size to $50 million and extending the term thereof to November 2, 2017.

Under the Credit Agreement, advances are available based on up to 85 percent of “eligible accounts receivable,” as defined in the Credit Agreement. The Borrower has the option to increase the size of the revolving credit facility to up to $100 million by adding lenders willing to provide such increase. The obligations of the Borrower under the Credit Agreement are guaranteed by the Parent and all significant subsidiaries of the Parent and the Borrower (collectively, the “Guarantors”), and are secured, pursuant to two security agreements by substantially all of the assets of the Borrower and the Guarantors, including a pledge of the capital stock holdings of the Borrower and certain Guarantors in their direct subsidiaries. Borrowings made under the Credit Agreement bear interest at a rate based on either the London Interbank Offered Rate plus 2.50 percentage points or the bank’s prime rate plus 1.25 percentage points. Commencing March 31, 2013, the interest rate margins may decrease or increase by 0.25 percentage points based on the average quarterly availability under the revolving credit facility. In the absence of an event of default, any amounts outstanding under the Credit Agreement may be repaid and re-borrowed at any time until maturity, which is November 2, 2017.

The obligations of the Borrower 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 $2.0 million or more, bankruptcy and insolvency related defaults, defaults relating to such matters as the Employee Retirement Income Security Act and certain judgments in excess of $2.0 million and a change of control default. The Credit Agreement contains negative covenants applicable to the Parent, the Borrower and their subsidiaries, including a financial covenant that, on a consolidated basis, requires the Parent to maintain a minimum fixed charge coverage ratio of no less than 1.10 to 1.00, if the Parent and its subsidiaries have not maintained qualified cash of at least $15 million and adjusted excess availability, as such terms are defined in the Credit Agreement. The Credit Agreement also contains restrictions on liens, certain investments, indebtedness, fundamental changes to the Borrower’s business, certain dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business and transactions with affiliates.

In connection with the Credit Agreement, the Company paid an arrangement fee of $150,000, a closing fee of $275,000 and agreed to pay a monthly servicing fee of $4,000 and an unused line fee equal to 0.375 percentage points per annum, payable monthly on the unused amount of revolving credit commitments. To the extent there are letters of credit outstanding under the Credit Agreement, the Borrower is obligated to pay the administrative agent a letter of credit fee at a rate equal to 3.3 percentage points per annum. Commencing March 31, 2013, the letter of credit fee may decrease or increase by 0.25 percentage points based on the average quarterly availability under the revolving credit facility.

At December 29, 2012, there was $40.8 million outstanding under the Credit Agreement at an average interest rate of 4.5 percent per annum. At June 30, 2012, there was $25.5 million outstanding under the Credit Agreement at an average interest rate of 4.75 percent per annum. At December 29, 2012 and June 30, 2012, there were $30,000 and $0.1 million, respectively, in outstanding standby letters of credit secured under the Credit Agreement. These letters of credit expire at various intervals through April 2014.

On January 23, 2013, Silicon Valley Bank (SVB) and Wells Fargo (Agent) entered into a Joinder Agreement (the Joinder Agreement) pursuant to the Second Amended and Restated Credit Agreement. Pursuant to the Joinder Agreement, SVB agreed to become an additional Lender under the Second Amended and Restated Credit Agreement, and the Lenders agreed to increase the revolving credit facility under the Second Amended and Restated Credit Agreement from $50 million to $80 million. In connection with the Joinder Agreement, Parent paid SVB a lender fee of $150,000. Refer to Note 18, Subsequent Event for additional information regarding the Joinder Agreement.

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7.50 % Exchangeable Senior Secured Second Lien Notes (Convertible Notes)

On December 14, 2012, we and our indirect, wholly owned subsidiary, Oclaro Luxembourg S.A., closed the private placement of $25.0 million aggregate principal amount 7.50% Exchangeable Senior Secured Second Lien Notes due 2018 (Convertible Notes). The sale of the Convertible Notes resulted in net proceeds of approximately $22.8 million. The private placement was completed pursuant to a purchase agreement, dated December 14, 2012 entered into by us, certain of our domestic and foreign subsidiaries (the Guarantors) and Morgan Stanley & Co. LLC.

The Convertible Notes are governed by an Indenture, entered into by us and the Guarantors with Wells Fargo Bank, National Association, as trustee and second lien collateral agent (the Trustee). The Indenture contains affirmative and negative covenants that, among other things, limit the ability of us and the Guarantors to incur, assume or guarantee additional indebtedness; make restricted payments including, without limitation, paying dividends, repurchasing capital stock and redeeming debt that is junior in right of payment to the Convertible Notes; create liens; sell or otherwise dispose of assets, including capital stock of subsidiaries; and enter into mergers and consolidations. The Indenture also contains customary events of default. Upon the occurrence of certain events of default, the Trustee or the holders of the Convertible Notes may declare all outstanding Convertible Notes to be due and payable immediately. The Convertible Notes are unconditionally guaranteed, jointly and severally, on a senior secured basis by us and all of the Guarantors.

On or after December 15, 2013, in the event that the last reported sale price of our common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending within five trading days immediately prior to the date the we receive a notice of exchange exceeds the exchange price in effect on each such trading day, we will, in addition to delivering shares upon exchange by the holder of Convertible Notes, together with cash in lieu of fractional shares, make a “make-whole premium” payment in cash equal to the sum of the present value of the remaining scheduled payments of interest on the Convertible Notes to be exchanged through the maturity date computed using a discount rate equal to 0.50%. Any holder that exchanges its Convertible Notes in connection with a fundamental change, as defined in the Indenture, will not receive the “make-whole premium” but will instead receive the additional shares set forth in the Indenture. Any holder that exchanges its Convertible Notes after such holder’s Convertible Notes have been called for redemption by us will, in addition to receiving shares of common stock deliverable upon such exchange and cash in lieu of fractional shares, receive a payment (the “redemption exchange make-whole payment”) in cash equal to the sum of the remaining scheduled payments of interest that would have been made on the Convertible Notes to be exchanged had such Convertible Notes remained outstanding from the applicable exchange date to the maturity date. If the redemption exchange make-whole payment is payable upon exchange of a holder’s Convertible Notes, then such holder will not receive the “make-whole premium” payment described above.

Prior to December 19, 2015, we may not redeem the Convertible Notes other than in connection with certain changes in tax law of a relevant taxable jurisdiction that results in additional amounts (as defined herein) becoming payable with respect to deliveries or payments on the Convertible Notes.

On or after December 19, 2015, we may redeem for cash all or part of the Convertible Notes if the last reported sale price per share of our common stock has been at least 150 percent of the exchange price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending within five trading days prior to the date on which we provide notice of redemption. The redemption price will equal (i) 100 percent of the principal amount of the Convertible Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date plus (iii) the sum of the remaining scheduled payments of interest that would have been made on the Convertible Notes to be redeemed had such Convertible Notes remained outstanding from the redemption date to the maturity date (excluding interest accrued to, but excluding, the redemption date that is otherwise paid pursuant to the immediately preceding clause (ii)).

Upon the occurrence of a fundamental change, subject to certain conditions, each holder of the Convertible Notes will have the option to require that we purchase all or a portion of such holder’s Convertible Notes in cash at a purchase price equal to 100 percent of the principal amount of the Convertible Notes to be purchased plus any accrued and unpaid interest, including additional interest, if any.

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In connection with the private placement of the Convertible Notes, on December 14, 2012, we and the Guarantors entered into certain security agreements with the Trustee in order to secure their obligations under the Indenture. Pursuant to the security agreements, the Convertible Notes and related guarantees are secured by second-priority liens on all the tangible and intangible assets of ours and the Guarantors.

We maintain banking relationships in the ordinary course of business with the Trustee and its affiliates. An affiliate of the Trustee, Wells Fargo Capital Finance, Inc., is the lender under our senior secured revolving credit facility and is the first lien collateral agent under an intercreditor agreement entered into with the Trustee in connection with the issuance of the Convertible Notes.

In connection with the issuance of the Convertible Notes, our contingent obligation to make a make-whole premium payment in the event of an early conversion by the holders of the Convertible Notes is considered an embedded derivative. As of December 14, 2012, the date of the debt issuance, and as of December 29, 2012, the fair value of these contingent obligations is estimated at $0.1 million, and recorded within other non-current liabilities in the condensed consolidated balance sheet. The estimated fair value of the make-whole premium was determined by using a Monte Carlo simulation model to determine the probability and timing of a conversion.

We incurred approximately $1.3 million in debt discount and $0.9 million in issuance costs. The debt discount is recorded in convertible notes payable and the issuance costs are recorded within other non-current assets.

The Convertible Notes will mature on June 15, 2018. Interest on the Convertible Notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2013. During the three and six months ended December 29, 2012, we recorded $0.1 million in interest expense related to these Convertible Notes.

The following table sets forth balance sheet information related to the Convertible Notes at December 29, 2012:

Sumitomo Note

In connection with the acquisition of Opnext, we assumed a 1.5 billion Japanese yen note payable to The Sumitomo Trust Bank (Sumitomo). The note is due monthly unless renewed by Sumitomo. As of December 29, 2012, the outstanding loan balance was $17.1 million, based on the exchange rate on December 29, 2012. Interest is paid monthly at the Tokyo Interbank Offered Rate plus a premium, which for our first two quarters of fiscal year 2013 was 1.7 percent per annum. Interest expense for the three and six months ended December 29, 2012 was $0.1 million and $0.1 million, respectively.

As of December 29, 2012, we have $17.1 million in restricted cash in our condensed consolidated balance sheet securing our note payable to Sumitomo.

NOTE 8. FLOOD-RELATED EXPENSE

In October 2011, certain areas in Thailand suffered major flooding as a result of monsoons. This flooding had a material impact on our business and results of operations. Our primary contract manufacturer, Fabrinet, suspended operations at two factories located in Chokchai, Thailand and Pinehurst, Thailand. The Chokchai factory suffered extensive flood damage and became inaccessible due to high water levels inside and surrounding the manufacturing facility. As a result of this flooding, we experienced a significant decline in product sales due to our inability or limited ability to manufacture certain products and we incurred significant damage to our inventory and property and equipment located at the Chokchai facility.

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During the three and six months ended December 29, 2012, we recorded flood-related charges of $0.6 million and $0.9 million, respectively, related to professional fees and related expenses incurred in connection with our recovery efforts.

During the three and six months ended December 31, 2011, we recorded impairment charges of $4.2 million related to the write-off of the net book value of damaged inventory and $3.0 million related to the write-off of the net book value of property and equipment based on preliminary estimates of the damage caused by the flooding. These impairment charges are recorded within the operating expense caption flood-related expense in our condensed consolidated statement of operations for the three and six months ended December 31, 2011. Flood-related expense for the three and six months ended December 31, 2011 also includes $1.8 million in personnel-related costs, professional fees and related expenses incurred in connection with our recovery efforts.

While we maintain both property and business interruption insurance coverage, there can be no assurance as to the amount or timing of future insurance recoveries. Insurance recoveries related to impairment losses previously recorded and other recoverable expenses will be recognized to the extent of the related loss or expense in the period that recoveries become probable and realizable. Insurance recoveries under business interruption coverage and insurance recovery gains in excess of amounts previously written-off related to impaired inventory and equipment or in excess of other recoverable expenses previously recognized will be recognized when they become realizable and all contingencies have been resolved. The evaluation of insurance recoveries requires estimates and judgments about future results which affect reported amounts and certain disclosures. Actual results could differ from those estimates. Insurance recoveries we receive in future periods will be recorded net of flood-related expense in the condensed consolidated statement of operations. As of December 29, 2012, we have not recorded any estimated amounts relating to potential future insurance recoveries in the condensed consolidated statement of operations.

The following table presents the components of flood-related expense for the dates indicated: