OCLARO, INC. (Form: 10-Q, Received: 05/08/2014 17:02:03)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-30684

OCLARO, INC.

(Exact name of registrant as specified in its charter)



Delaware		20-1303994
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2560 Junction Avenue, San Jose, California 95134

(Address of principal executive offices, zip code)

(408) 383-1400

(Registrant’s 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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):



Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No ¨

107,598,988 shares of common stock outstanding as of May 5, 2014

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OCLARO, INC.

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of March 29, 2014 and June 29, 2013	3

	Condensed Consolidated Statements of Operations for the three and nine months ended March 29, 2014 and March 30, 2013	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended March 29, 2014 and March 30, 2013	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended March 29, 2014 and March 30, 2013	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	41

Item 6.	Exhibits	59

Signatures		60

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

OCLARO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	March 29, 2014			June 29, 2013
	(Thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	117,441		$	84,635
Restricted cash	4,678			2,719
Short-term investments	160			200
Accounts receivable, net of allowances for doubtful accounts and sales returns of $3,008 and $612 as of March 29, 2014 and $2,993 and $3,206 as of June 29, 2013, respectively, and including $3,516 and $2,975 due from related parties at March 29, 2014 and June 29, 2013, respectively	75,505			100,774
Inventories	81,661			86,029
Prepaid expenses and other current assets	58,869			33,498
Assets of discontinued operations held for sale	—			55,333
Total current assets	338,314			363,188
Property and equipment, net	53,311			72,028
Other intangible assets, net	8,886			10,233
Other non-current assets	3,222			4,445
Total assets	$	403,733		$	449,894
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, including $2,212 and $2,246 due to related parties at March 29, 2014 and June 29, 2013, respectively	$	89,203		$	94,157
Accrued expenses and other liabilities	47,240			52,010
Capital lease obligations, current	5,649			8,281
Term loan payable	—			24,647
Credit line payable	—			39,964
Liabilities of discontinued operations held for sale	—			17,470
Total current liabilities	142,092			236,529
Deferred gain on sale-leasebacks	10,699			10,477
Convertible notes payable	—			22,990
Capital lease obligations, non-current	5,295			9,914
Other non-current liabilities	15,806			15,852
Total liabilities	173,892			295,762
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock: 1,000 shares authorized; none issued and outstanding
Common stock: $0.01 par value per share; 175,000 shares authorized and 106,874 shares issued and outstanding at March 29, 2014; 175,000 shares authorized and 92,766 shares issued and outstanding at June 29, 2013	1,068			928
Additional paid-in capital	1,457,131			1,429,155
Accumulated other comprehensive income	45,113			39,368
Accumulated deficit	(1,273,471		)	(1,315,319		)
Total stockholders’ equity	229,841			154,132
Total liabilities and stockholders’ equity	$	403,733		$	449,894

The accompanying notes form an integral part of these condensed consolidated financial statements

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OCLARO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended						Nine Months Ended
	March 29, 2014			March 30, 2013			March 29, 2014			March 30, 2013
	(Thousands, except per share amounts)
Revenues, including $ 1,809 and $6,510 from related parties for the three and nine months ended March 29, 2014, respectively, and $1,252 and $8,592 from related parties for the three and nine months ended March 30, 2013, respectively	$	95,398		$	101,539		$	294,960		$	309,245
Cost of revenues	84,298			95,939			255,729			286,377
Gross profit	11,100			5,600			39,231			22,868
Operating expenses:
Research and development	14,624			19,231			49,135			60,458
Selling, general and administrative	17,437			19,078			56,944			60,428
Amortization of other intangible assets	418			1,219			1,259			3,823
Restructuring, acquisition and related (income) expense, net	3,068			2,782			12,666			(9,881		)
Flood-related (income) expense, net	(1,657		)	(11,548		)	(1,797		)	(10,643		)
Impairment of other intangibles	—			—			—			864
(Gain) loss on sale of property and equipment	(326		)	74			331			287
Total operating expenses	33,564			30,836			118,538			105,336
Operating loss	(22,464		)	(25,236		)	(79,307		)	(82,468		)
Other income (expense):
Interest income (expense), net	(29		)	(1,103		)	(9,114		)	(2,230		)
Gain (loss) on foreign currency transactions, net	625			(6,788		)	(446		)	(10,782		)
Other income (expense), net	(56		)	(3,760		)	493			(3,760		)
Gain on bargain purchase	—			—			—			24,866
Total other income (expense)	540			(11,651		)	(9,067		)	8,094
Loss from continuing operations before income taxes	(21,924		)	(36,887		)	(88,374		)	(74,374		)
Income tax provision	745			148			2,471			2,300
Loss from continuing operations	(22,669		)	(37,035		)	(90,845		)	(76,674		)
Income (loss) from discontinued operations, net of tax	(252		)	(2,971		)	132,693			1,305
Net income (loss)	$	(22,921	)	$	(40,006	)	$	41,848		$	(75,369	)
Basic and diluted net income (loss) per share:
Loss per share from continuing operations	$	(0.22	)	$	(0.41	)	$	(0.94	)	$	(0.89	)
Income (loss) per share from discontinued operations	—			(0.03		)	1.37			0.02
Basic and diluted net income (loss) per share	$	(0.22	)	$	(0.44	)	$	0.43		$	(0.87	)
Shares used in computing net income (loss) per share:
Basic	105,487			90,263			96,552			86,770
Diluted	105,487			90,263			96,552			86,770

The accompanying notes form an integral part of these condensed consolidated financial statements.

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OCLARO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended						Nine Months Ended
	March 29, 2014			March 30, 2013			March 29, 2014			March 30, 2013
	(Thousands)
Net income (loss)	$	(22,921	)	$	(40,006	)	$	41,848		$	(75,369	)
Other comprehensive income (loss):
Unrealized loss on hedging transactions	—			—			—			(7		)
Unrealized gain (loss) on marketable securities	—			(8		)	(39		)	4
Currency translation adjustments	(23		)	4,294			(64		)	9,110
Pension adjustment, net of tax benefits	15			156			5,848			345
Total comprehensive income (loss)	$	(22,929	)	$	(35,564	)	$	47,593		$	(65,917	)

The accompanying notes form an integral part of these condensed consolidated financial statements.

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OCLARO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended
	March 29, 2014			March 30, 2013
	(Thousands)
Cash flows from operating activities:
Net income (loss)	$	41,848		$	(75,369	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Amortization of deferred gain on sale-leasebacks	(1,594		)	(1,547		)
Amortization and write-off of issuance costs in connection with term loan	4,293			—
Gain on sale of Zurich Business	(63,214		)	—
Gain on sale of Amplifier Business	(69,069		)	—
Gain on sale of assets	(660		)	(24,846		)
Depreciation and amortization	21,567			32,439
Impairment of other intangibles	—			864
Flood-related non-cash losses	2,011			—
Gain on bargain purchase	—			(24,866		)
Stock-based compensation expense	5,015			5,440
Other non-cash adjustments	1,376			3,787
Changes in operating assets and liabilities:
Accounts receivable, net	32,051			28,240
Inventories	4,129			1,201
Prepaid expenses and other current assets	(20,843		)	(9,915		)
Other non-current assets	1,284			(98		)
Accounts payable	(8,338		)	(18,883		)
Accrued expenses and other liabilities	(15,242		)	(5,228		)
Net cash used in operating activities	(65,386		)	(88,781		)
Cash flows from investing activities:
Purchases of property and equipment	(6,074		)	(13,210		)
Proceeds from sale of Amplifier Business	84,600			—
Proceeds from sale of Zurich Business	93,545			—
Proceeds from sale of assets	2,120			26,000
Transfer from restricted cash	(1,938		)	3,691
Cash acquired from business combinations	—			36,123
Net cash provided by investing activities	172,253			52,604
Cash flows from financing activities:
Proceeds from issuance of common stock, net	(59		)	1,712
Proceeds from borrowings under credit line	—			15,256
Proceeds from the sale of convertible notes, net	—			22,768
Payments on capital lease obligations	(6,056		)	(5,505		)
Repayments on borrowings under credit line and term loan	(64,964		)	(1,147		)
Cash paid under earnout obligations	—			(8,628		)
Net cash provided by (used in) financing activities	(71,079		)	24,456
Effect of exchange rate on cash and cash equivalents	(2,982		)	9,575
Net increase (decrease) in cash and cash equivalents	32,806			(2,146		)
Cash and cash equivalents at beginning of period	84,635			61,760
Cash and cash equivalents at end of period	$	117,441		$	59,614
Supplemental disclosures of non-cash transactions:
Issuance of common stock in connection with exercise of convertible notes	$	23,050		$	—
Issuance of common stock, stock options and stock appreciation rights related to the acquisition of Opnext	—			89,842
Capital lease obligations incurred for purchases of property and equipment	—			(658		)

The accompanying notes form an integral part of these condensed consolidated financial statements.

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OCLARO, INC.

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 November 1, 2013, we sold our optical amplifier and micro-optics business (the “Amplifier Business”) to II-VI Incorporated (II-VI). The sale is more fully discussed in Note 5, Business Combinations and Dispositions .

On September 12, 2013, we sold our Oclaro Switzerland GmbH subsidiary and associated laser diodes and pump business (the “Zurich Business”) to II-VI. The sale is more fully discussed in Note 5, Business Combinations and Dispositions .

These sales are reported as discontinued operations, which require retrospective restatement of prior periods to classify the assets, liabilities and results of operations as discontinued operations. We have classified the assets and liabilities to be sold as “assets of discontinued operations held for sale” and “liabilities of discontinued operations held for sale” within current assets and current liabilities, respectively, on the condensed consolidated balance sheet as of June 29, 2013 . The notes to our condensed consolidated financial statements relate to our continuing operations only, unless otherwise indicated.

On July 23, 2012, we completed a merger with Opnext, Inc. ("Opnext"). The acquisition is more fully discussed in Note 5, Business Combinations and Dispositions . The condensed consolidated balance sheets as of March 29, 2014 and June 29, 2013 , include the assets and liabilities assumed in the Opnext acquisition. The condensed consolidated statements of operations, comprehensive loss and cash flows for the nine months ended March 30, 2013 include the results of operations of the combined entities from July 23, 2012, the date of the acquisition.

The accompanying unaudited condensed consolidated financial statements of Oclaro as of March 29, 2014 and for the three and nine months ended March 29, 2014 and March 30, 2013 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 nine months ended March 29, 2014 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 28, 2014 .

The condensed consolidated balance sheet as of June 29, 2013 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 29, 2013 (" 2013 Form 10-K").

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported periods. These judgments can be subjective and complex, and consequently, actual results could differ materially from those estimates and assumptions. Descriptions of some of the key estimates and assumptions are included in our 2013 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 28, 2014 will be a 52 week year, with the quarter ended March 29, 2014 being a 13 week quarterly period. Our fiscal year ended June 29, 2013 was a 52 week year, with the quarter ended March 30, 2013 being a 13 week quarterly period.

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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.

Out of Period Adjustment

In the second quarter of fiscal 2014, we recorded an out-of-period adjustment of approximately $2.0 million in flood-related (income) expense in the accompanying condensed consolidated statements of operations. The adjustment, which decreased flood-related (income) expense and decreased property and equipment, net, was made to account for the impairment of leased assets assumed pursuant to the Opnext merger that had been damaged in the 2011 Thailand flood (see Note 10, Flood-Related (Income) Expense, Net). We determined that this adjustment did not have a material impact to our current or prior period consolidated financial statements.

NOTE 2. RECENT ACCOUNTING STANDARDS

In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-5, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This guidance amends a parent company’s accounting for the cumulative translation adjustment recorded in accumulated other comprehensive income associated with a foreign entity. The amendment requires a parent to release into net income the cumulative translation adjustment related to its investment in a foreign entity when it either sells a part or all of its investment, or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. We elected to early adopt this guidance during our first quarter of fiscal year 2014. Accordingly, we treated our sale of our Zurich Business in the first quarter of fiscal year 2014 in accordance with this guidance and recorded $3.1 million in income from discontinued operations related to the cumulative translation adjustment from deconsolidating our Swiss subsidiary during the nine months ended March 29, 2014 within the condensed consolidated statement of operations. This guidance will continue to impact our financial position and results of operations prospectively in the instance of an event or transaction described above.

In July 2013, the FASB issued amended guidance that resolves the diversity in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This new accounting guidance requires the netting of unrecognized tax benefits ("UTBs") against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. Under the new standard, UTBs will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. The new standard requires prospective adoption but allows retrospective adoption for all periods presented. We have adopted this guidance during our second quarter of fiscal year 2014. The adoption of the guidance did not have a significant impact on our financial position, results of operations or cash flows.

In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This update requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity's financial results or a business activity classified as held for sale should be reported as discontinued operations. The standard also expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2014. We do not expect these changes to have a material impact on our condensed consolidated financial statements.

NOTE 3. BALANCE SHEET DETAILS

The following table provides details regarding our cash and cash equivalents at the dates indicated:



	March 29, 2014		June 29, 2013
	(Thousands)
Cash and cash equivalents:
Cash-in-bank	$	116,221	$	82,634
Money market funds	1,220		2,001
	$	117,441	$	84,635

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As of March 29, 2014 , we had restricted cash of $4.7 million , consisting of collateral for the performance of our obligations under certain lease facility agreements and $2.4 million (equivalent to RMB 15 million ) of cash held in Oclaro Shenzhen’s bank account in China that was frozen by the Xi'an Court in connection with our litigation with Xi’an Raysung Photonics Inc. (see Note 9, Commitments and Contingencies , for additional details regarding this litigation.)

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



	March 29, 2014		June 29, 2013
	(Thousands)
Inventories:
Raw materials	$	28,576	$	32,678
Work-in-process	22,668		26,760
Finished goods	30,417		26,591
	$	81,661	$	86,029

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



	March 29, 2014			June 29, 2013
	(Thousands)
Property and equipment, net:
Buildings and improvements	$	13,030		$	10,271
Plant and machinery	48,449			72,144
Fixtures, fittings and equipment	8,991			4,295
Computer equipment	14,296			13,940
	84,766			100,650
Less: Accumulated depreciation	(31,455		)	(28,622		)
	$	53,311		$	72,028

Property and equipment includes assets under capital leases of $10.9 million at March 29, 2014 and $18.2 million at June 29, 2013 , respectively. Amortization associated with assets under capital leases is recorded in depreciation expense.

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



	March 29, 2014		June 29, 2013
	(Thousands)
Accrued expenses and other liabilities:
Trade payables	$	11,738	$	10,391
Compensation and benefits related accruals	10,401		13,117
Warranty accrual	5,137		4,670
Accrued restructuring charges, current	1,556		5,363
Other accruals	18,408		18,469
	$	47,240	$	52,010

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The following table summarizes the activity related to our accrued restructuring charges for the nine months ended March 29, 2014 :



	Lease Cancellations, Commitments and Other Charges			Termination Payments to Employees and Related Costs			Total Accrued Restructuring Charges
	(Thousands)
Balance at June 29, 2013	$	230		$	7,036		$	7,266
Charged to restructuring costs	375			11,555			11,930
Paid or written-off	(605		)	(13,981		)	(14,586		)
Balance at March 29, 2014	$	—		$	4,610		$	4,610
Current portion	—			1,556			1,556
Non-current portion	—			3,054			3,054

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.

During the first quarter of fiscal year 2014, we initiated a restructuring plan to simplify our operating footprint, reduce our cost structure and focus our research and development investment in the optical communications market where we can leverage our core competencies. During the three months ended March 29, 2014 , we recorded restructuring charges of $2.2 million related to workforce reductions and paid $4.2 million to settle a portion of these restructuring liabilities. During the nine months ended March 29, 2014 , we recorded restructuring charges of $8.0 million and paid $7.3 million to settle a portion of these restructuring liabilities. The restructuring charges for the nine months ended March 29, 2014 , included $7.7 million related to workforce reductions and $0.3 million related to revised estimates related to lease cancellations and commitments. As of March 29, 2014 , we had $0.7 million in accrued restructuring liabilities related to this restructuring plan. We expect to incur an additional $8.0 million to $12.0 million in restructuring charges over the course of the next year in connection with the ongoing activities related to this restructuring plan.

As of June 29, 2013 , we also had $1.9 million in accrued restructuring liabilities relating to the separation agreement with our former Chief Executive Officer. During the nine months ended March 29, 2014 , we paid $1.2 million to settle a portion of this liability. At March 29, 2014, we have $0.7 million in accrued restructuring liabilities, which we expect to settle during the next quarter.

During the first quarter of fiscal year 2013, we initiated a restructuring plan to integrate our acquisition of Opnext. In connection with this restructuring plan, we recorded $1.1 million in restructuring charges during the nine months ended March 29, 2014 , respectively. The restructuring charges recorded in fiscal year 2014 included $0.9 million in external consulting charges and professional fees associated with reorganizing the infrastructure and $0.1 million in revised estimates related to lease cancellations and commitments. During the nine months ended March 29, 2014 , we made scheduled payments of $2.2 million , respectively, to settle these restructuring liabilities. During the three and nine months ended March 30, 2013 , we recorded $0.5 million and $9.6 million in restructuring charges, respectively. The restructuring charges for the three months ended March 30, 2013 , included $0.3 million related to workforce reductions and $0.2 million related to revised estimates for lease cancellations and commitments. The restructuring charges for the nine months ended March 30, 2013 , included $8.1 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 nine months ended March 30, 2013, we made scheduled payments of $0.4 million and $8.2 million , respectively. As of March 29, 2014 , we had no further accrued restructuring liabilities related to this restructuring plan.

During fiscal year 2012, we initiated a restructuring plan in connection with the transfer of a portion of our Shenzhen, China manufacturing operations to Venture Corporation Limited (Venture). In connection with this transition, during the three and nine months ended March 29, 2014 , we recorded restructuring charges related to employee separation charges of $0.9 million and $2.7 million , respectively. During the three and nine months ended March 29, 2014 , we made scheduled payments of $1.5 million and $3.8 million , respectively, to settle a portion of these restructuring liabilities. During the three and nine months ended March 30, 2013 , we recorded restructuring charges related to employee separation charges of $1.1 million and $4.0 million , respectively. During the three and nine months ended March 30, 2013 , we made scheduled payments of $0.2 million and $2.1 million , respectively, to settle a portion of these restructuring liabilities. As of March 29, 2014 , we had $3.2 million in accrued restructuring liabilities related to this restructuring plan. We expect to incur between $2.0 million and $3.0 million in

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additional restructuring costs in connection with the transition of our Shenzhen manufacturing operations to Venture over the next year.

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



	March 29, 2014			June 29, 2013
	(Thousands)
Accumulated other comprehensive income:
Currency translation adjustments	$	45,655		$	45,719
Unrealized loss on marketable securities	(144		)	(105		)
Switzerland and Japan defined benefit plans	(398		)	(6,246		)
	$	45,113		$	39,368

In connection with the sale of the Zurich Business in the first quarter of fiscal year 2014, II-VI assumed the pension plan covering employees of the Swiss subsidiary.

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:


Level 1-	Quoted prices in active markets for identical assets or liabilities.


Level 2-	Inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices of identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets), or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3-	Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

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

The contingent obligation related to the make-whole premium on our convertible notes was valued using a valuation model which estimated the value based on the probability and timing of conversion. The contingent obligation was previously classified within Level 3 of the fair value hierarchy. During the second quarter of fiscal year 2014, the holders of the Convertible Notes exercised their rights to exchange the Convertible Notes for common stock, and settled the make-whole premium.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are shown in the table below by their corresponding balance sheet caption and consisted of the following types of instruments at March 29, 2014 :



	Fair Value Measurement at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Thousands)
Assets:
Cash and cash equivalents: (1)
Money market funds	$	1,220	$	—	$	—	$	1,220
Short-term investments:
Marketable securities	160		—		—		160
Total assets measured at fair value	$	1,380	$	—	$	—	$	1,380


(1)	Excludes $116.2 million in cash held in our bank accounts at March 29, 2014 .

The following table provides details regarding the changes in assets and liabilities classified within Level 3 from June 29, 2013 to March 29, 2014 :



	Other non-current
	liabilities
	(Thousands)
Balance at June 29, 2013	$	99
Current year adjustments to the contingent obligation for make-whole premium	600
Settlement of make-whole premium upon conversion of the Convertible Notes	(699		)
Balance at March 29, 2014	$	—

During the second quarter of fiscal year 2014, the holders of the Convertible Notes exercised their rights to exchange the Convertible Notes for our common stock. The conversion of the Notes is more fully discussed in Note 7, Credit Line and Notes .

NOTE 5. BUSINESS COMBINATIONS AND DISPOSITIONS

Sale of Amplifier Business

On October 10, 2013, Oclaro Technology Limited entered into an Asset Purchase Agreement with II-VI, whereby Oclaro Technology Limited agreed to sell to II-VI and certain of its affiliates its Amplifier Business for $88.6 million in cash. The transaction closed on November 1, 2013.

Consideration, valued at $88.6 million consists of $79.6 million in cash, which was received on November 1, 2013, $4.0 million subject to hold-back by II-VI until December 31, 2014 to address any post-closing claims and $5.0 million related to the exclusive option, which was received on September 12, 2013 and was credited against the purchase price upon closing of the sale.

We entered into certain transition service and manufacturing service agreements to allow the Amplifier Business to continue operations during the ownership transition. Both parties provided customary and reciprocal representations, warranties and covenants in the Asset Purchase Agreement.

We classified the sale of our Amplifier Business as a discontinued operation as of September 12, 2013, the date management committed to sell the business. In connection with this transaction, we transferred $16.2 million in net assets to II-VI. We also incurred approximately $2.9 million in legal fees, commissions and other administrative costs related to this transaction. We

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recognized a gain of $69.1 million on the sale of the Amplifier Business, which is recorded within discontinued operations in the condensed consolidated statements of operations for the nine months ended March 29, 2014 . As of March 29, 2014 , we had a $4.0 million receivable in prepaid expenses and other current assets from II-VI related to the hold-back for potential post-closing adjustments or claims.

The assets of the discontinued operation are presented as current assets under the caption assets of discontinued operations held for sale in the accompanying condensed consolidated balance sheets at March 29, 2014 and June 29, 2013 , and consist of the following:



	March 29, 2014		June 29, 2013
	(Thousands)
Assets of Discontinued Operations Held for Sale
Inventories	—		8,308
Prepaid expenses and other current assets	—		303
Property and equipment, net	—		6,555
	$	—	$	15,166

The following table presents the statements of operations for the discontinued operations of the Amplifier Business:



	Three Months Ended						Nine Months Ended
	March 29, 2014			March 30, 2013			March 29, 2014		March 30, 2013
	(Thousands)
Revenues	$	—		$	19,593		$	35,185	$	73,330
Cost of revenues	—			15,479			26,243		57,014
Gross profit	—			4,114			8,942		16,316
Operating expenses	—			5,377			5,576		14,123
Other income (expense), net	(636		)	—			69,069		—
Income (loss) from discontinued operations before income taxes	(636		)	(1,263		)	72,435		2,193
Income tax provision	—			—			—		—
Income (loss) from discontinued operations	$	(636	)	$	(1,263	)	$	72,435	$	2,193

Sale of Zurich Business

On September 12, 2013, we completed a share and asset purchase agreement with II-VI, pursuant to which we sold our Oclaro Switzerland GmbH subsidiary and associated laser diodes and pump business to II-VI. We received proceeds of $90.6 million in cash on September 12, 2013, and $2.9 million in cash during the third quarter of fiscal year 2014 which related to a final settlement of the post-closing working capital adjustment. We will also receive an additional $6.0 million subject to hold-back by II-VI until December 31, 2014 to address any post-closing adjustments or claims. In addition, we retained approximately $14.7 million in accounts receivable related to the Zurich Business and approximately $9.6 million of supplier and employee related payables related to the Zurich Business which were not included in the Zurich subsidiary.

As part of the agreement, II-VI purchased our Swiss subsidiary, which includes its GaAs fabrication facility, and also the corresponding high power laser diodes, VCSEL and 980 nm pump laser product lines, including intellectual property, inventory, equipment and a related research and development facility in Tucson, all of which are associated with the business.

We will continue the back-end manufacturing of the 980 nm pump and some high power laser diode products at our Shenzhen, China manufacturing facility and supply them to II-VI under a manufacturing services agreement. In addition, various supply and transition service agreements have been established between the companies to ensure a smooth transition.

We have classified the sale of our Zurich Business as a discontinued operation. In connection with this transaction, in the first quarter of fiscal year 2014, we transferred $32.5 million in net assets to II-VI and incurred approximately $4.9 million in legal fees, commissions and other administrative costs. We initially recognized a gain of $62.8 million on the sale of the Zurich Business. In the third quarter of fiscal year 2014, we recorded an additional gain of $0.4 million primarily related to the final settlement of the post-closing working capital adjustment. During the three and nine months ended March 29, 2014, we

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recorded $0.4 million and $63.2 million , respectively, within discontinued operations in the condensed consolidated statements of operations related to the sale of the Zurich Business. During the first quarter of fiscal year 2014, we also recorded $3.1 million in income from discontinued operations within the condensed consolidated statement of operations related to the cumulative translation adjustment from deconsolidating our Swiss subsidiary. As of March 29, 2014 , we recorded a $6.0 million receivable in prepaid expenses and other current assets from II-VI related to the hold-back for potential post-closing adjustments or claims.

The assets and liabilities of the discontinued operation are presented as current assets and current liabilities, separately under the captions assets of discontinued operations held for sale and liabilities of discontinued operations held for sale in the accompanying condensed consolidated balance sheets at March 29, 2014 and June 29, 2013 , and consist of the following:



	March 29, 2014		June 29, 2013
	(Thousands)
Assets of Discontinued Operations Held for Sale
Accounts receivable, net	—		79
Inventories	—		23,762
Prepaid expenses and other current assets	—		1,294
Property and equipment, net	—		12,749
Deferred tax asset, non-current	—		2,283
	$	—	$	40,167



	March 29, 2014		June 29, 2013
	(Thousands)
Liabilities of Discontinued Operations Held for Sale
Accounts payable	—		2,315
Accrued expenses and other liabilities	—		6,788
Other non-current liabilities	—		8,367
	$	—	$	17,470

The following table presents the statements of operations for the discontinued operations of the Zurich Business:



	Three Months Ended					Nine Months Ended
	March 29, 2014		March 30, 2013			March 29, 2014		March 30, 2013
	(Thousands)					(Thousands)
Revenues	$	—	$	20,510		$	13,896	$	67,345
Cost of revenues	—		17,057			11,593		55,015
Gross profit	—		3,453			2,303		12,330
Operating expenses	—		4,358			3,416		12,727
Other income (expense), net	884		(565		)	62,034		202
Income (loss) from discontinued operations before income taxes	884		(1,470		)	60,921		(195		)
Income tax provision	500		238			663		693
Income (loss) from discontinued operations	$	384	$	(1,708	)	$	60,258	$	(888	)

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 was $27.0 million in cash. We received $26.0 million in cash

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proceeds during the second quarter of fiscal year 2013 and the remaining $1.0 million during the third quarter of fiscal year 2014.

In connection with this transaction, during the second quarter of fiscal year 2013, we recognized a gain of $25.0 million within restructuring, acquisition and related costs in the condensed consolidated statements of operations.

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.

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 initially recorded a gain on bargain purchase of $39.5 million in connection with the acquisition of Opnext, which was subsequently adjusted to $24.9 million , upon completing our purchase price allocation and finalizing our fair value estimates of assets acquired and liabilities assumed in the fourth quarter of fiscal year 2013.

Acquisition of Mintera

In July 2010, we acquired Mintera Corporation (“Mintera”). 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 the remaining earnout obligations of $8.6 million in cash.

NOTE 6. OTHER INTANGIBLE ASSETS

In connection with our sale of the Zurich Business, we transferred certain of our other intangible assets to II-VI. As of September 12, 2013, the date of the sale, and as of June 29, 2013, these other intangible assets had no carrying value. For the three and nine months ended March 30, 2013 , we recorded $0.1 million and $0.2 million , respectively, in amortization related to these intangible assets, which has been reclassified to discontinued operations in the condensed consolidated statements of operations.

In connection with our acquisition of Opnext on July 23, 2012 , we recorded $16.4 million in other intangible assets as our estimate of the fair value of acquired intangible assets. 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 was redundant, following the acquisition of Opnext and its product lines. We recorded $0.9 million for the impairment loss related to these intangibles in our condensed consolidated statements of operations for the nine months ended March 30, 2013 .

The following table summarizes the activity related to our other intangible assets for the nine months ended March 29, 2014 :



	Core and Current Technology			Development and Supply Agreements		Customer Relationships			Patent Portfolio		Other Intangibles		Amortization			Total
	(Thousands)
Balance at June 29, 2013	$	8,333		$	4,556	$	5,198		$	915	$	3,338	$	(12,107	)	$	10,233
Amortization	—			—		—			—		—		(1,259		)	(1,259		)
Translations and adjustments	(92		)	81		(77		)	—		—		—			(88		)
Balance at March 29, 2014	$	8,241		$	4,637	$	5,121		$	915	$	3,338	$	(13,366	)	$	8,886

We expect the amortization of intangible assets to be $1.7 million for fiscal years 2014 through 2018, and $0.9 million for fiscal year 2019, based on the current level of our other intangible assets as of March 29, 2014.

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NOTE 7. CREDIT LINE AND NOTES

Silicon Valley Bank Credit Facility

On March 28, 2014, Oclaro, Inc. and its subsidiary, Oclaro Technology Limited (the “Borrower”), entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which the Bank provided the Borrower with a three -year revolving credit facility of up to $40.0 million . Under the Loan Agreement, advances are available based on up to 80 percent of “eligible accounts” as defined in the Loan Agreement. The Loan Agreement has a $10.0 million sub-facility for letters of credit, foreign exchange contracts and cash management services.

The obligations of the Borrower under the Loan Agreement are guaranteed by us and certain subsidiaries of ours (collectively, the “Guarantors”) pursuant to an Unconditional Guaranty in favor of the Bank (the “Guaranty”), and are secured by substantially all of the assets of the Borrower and the Guarantors, including a pledge of the capital stock holdings of the Borrower and the Guarantors in their direct subsidiaries.

Borrowings made under the Loan Agreement bear interest at a rate based on either the London Interbank Offered Rate plus 2.25 percent or Wall Street Journal’s prime rate plus 1.00 percent . If the sum of (a) the Borrower’s unrestricted cash and cash equivalents that are subject to the Bank’s liens less (b) the amount outstanding to the Bank under the Loan Agreement (such sum being “Net Cash”) is less than $15.0 million , then the interest rates are increased by 0.75 percent until Net Cash exceeds $15.0 million for a calendar month. If interest paid under the Loan Agreement is less than $45,000 in any fiscal quarter, the Borrower is required to pay the Bank an additional amount equal to the difference between $45,000 and the actual interest paid during such fiscal quarter. The minimum interest payment is in lieu of a stand-by charge.

The obligations of the Borrower under the Loan Agreement may be accelerated, and the Guarantors may become obligated under the Guaranty, upon the occurrence of an event of default under the Loan Agreement. The Loan Agreement includes customary events of default. Upon the occurrence and during the continuance of an event of default, obligations shall bear interest at a rate per annum which is 2.0 percentage points above the rate that is otherwise applicable thereto, unless the Bank elects otherwise, in its sole discretion.

The Loan Agreement contains covenants applicable to us, the Borrower and our subsidiaries, including a financial covenant that, on a consolidated basis, requires us to maintain a minimum fixed charge coverage ratio of no less than 1.10 to 1.00 , if the Borrower has not maintained Net Cash of at least $15.0 million , and other customary covenants.

If the Loan Agreement terminates prior to its maturity date, the Borrower will pay a termination fee equal to 1.00 percent of the total credit facility if such termination occurs in the first year after closing, 0.75 percent of the total credit facility if such termination occurs in the second year after closing and 0.50 percent of the total credit facility if such termination occurs in the third year after closing. The maturity date of the Loan Agreement is March 28 2017. At March 29, 2014 , there were no amounts outstanding under the Loan Agreement.

Credit Line and Term Loan

On August 2, 2006, Oclaro, Inc. ("Parent"), along with Oclaro Technology Limited (“Borrower”), Oclaro Photonics, Inc. and Oclaro Technology, Inc., each a wholly-owned subsidiary, entered into a Credit Agreement with Wells Fargo Capital Finance, Inc. (“Wells Fargo”) and certain other lenders (the “Credit Agreement”). From time to time, we amended and restated the Credit Agreement, which is more fully discussed in Note 7, Credit Line and Notes , to our consolidated financial statements included in our 2013 Form 10-K, before terminating the agreement on March 14, 2014.

On May 6, 2013, Wells Fargo and Silicon Valley Bank (collectively, the “Lenders”), Parent, Borrower, Wells Fargo (“Agent”) and PECM Strategic Funding LP and Providence TMT Debt Opportunity Fund II LP (the “Term Lenders”) entered into Amendment Number Two to the Credit Agreement and the associated guaranties and security agreements (the “Amendment”), which amended the Credit Agreement in pertinent part by adding a $25.0 million term loan (the “Term Loan”) to be provided by the Term Lenders; reducing the revolving credit facility from $80.0 million to $50.0 million (to be further reduced on a dollar-for-dollar basis by an amount equal to the net proceeds of certain asset sale transactions that the Parent may undertake in the future); adding an affirmative covenant that Borrower shall have consummated one or more asset sales by July 15, 2013 with a minimum threshold of net proceeds; and providing for payments and proceeds of asset sales to be applied to repay the credit facility and the Term Loan. In connection with the Term Loan, we also issued certain warrants. The Lenders exercised these warrants in May 2014, which is more fully discussed in Note 17. Subsequent Events .

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On August 21, 2013, Parent, Borrower, Agent, and the Lenders entered into Waiver and Amendment Number Three to the Credit Agreement, which amended the Credit Agreement in pertinent part by extending the date by which the Borrower shall have consummated one or more asset sales with a minimum threshold of net proceeds to September 2, 2013. The Borrower paid the lenders an amendment fee of $650,000 . On September 12, 2013, we completed the sale of the Zurich Business and applied the net proceeds to repay the entire credit facility and Term Loan. The event of default resulting from not completing the transaction by September 2, 2013, was waived on September 26, 2013.

Prior to terminating the Credit Agreement on March 14, 2014, we repaid all amounts owed to the Lenders under the Credit Agreement, other than immaterial amounts attributable to obligations under the Credit Agreement in respect to letters of credit.

At June 29, 2013 , we had $40.0 million outstanding under the credit facility and $25.0 million outstanding related to the Term Loan. During the first quarter of fiscal year 2014, we repaid all amounts owed under the Credit Agreement and Term Loan, and recorded the remaining unamortized debt discount and issuance costs of $4.3 million related to the Term Loan in discontinued operations within the condensed consolidated statement of operations for the nine months ended March 29, 2014 .

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 percent 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.

Under the terms of the Convertible Notes, 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 that we receive a notice of exchange exceeded the exchange price in effect on each such trading day, we were obliged, in addition to delivering shares upon exchange by the holder of Convertible Notes, together with cash in lieu of fractional shares, to 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 percent . The initial exchange price was $1.846 per share of common stock. Any holder that exchanged its Convertible Notes after such holder’s Convertible Notes had been called for redemption by us would, 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 would not receive the “make-whole premium” payment described above.

We considered the contingent obligation of having to make a make-whole payment in the event of an early conversion by the holders of the Convertible Notes as an embedded derivative. We estimated the fair value of the make-whole payment by using a valuation model to predict the probability and timing of a conversion. At June 29, 2013, the fair value of this contingent obligation was estimated at $0.1 million . On December 19, 2013, the holders exercised their rights to exchange the Convertible Notes for our common stock. The exchange rate for the exchanges was 541.7118 shares of common stock per $1,000 in principal amount of Convertible Notes. We issued 13,542,791 shares of common stock in connection with the exchange, with cash payable in lieu of fractional shares. In addition, pursuant to the terms of the indenture governing the Convertible Notes, we made a redemption exchange make-whole payment of $8.3 million , which we recorded in interest (income) expense, net, in the condensed consolidated statements of operations for the nine months ended March 29, 2014 .

In connection with the private placement of the Convertible Notes, we incurred approximately $1.3 million in debt discount and $0.9 million in issuance costs. Upon exchange of the Convertible Notes during the second quarter of fiscal year 2014, we recorded the remaining unamortized debt discount and issuance costs of $1.8 million in additional paid-in capital within the condensed consolidated balance sheet.

NOTE 8. POST-RETIREMENT BENEFITS

Switzerland Defined Benefit Plan

During the first quarter of fiscal year 2014, we sold our Zurich Business, and as part of the sale transferred our pension plan covering employees of our Swiss subsidiary (the “Swiss Plan”) to II-VI. At the end of our first quarter of fiscal year 2014, we had no remaining obligations under the Swiss Plan.

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Net periodic pension costs associated with our Swiss Plan are recorded in discontinued operations and included the following:



	Three Months Ended					Nine Months Ended
	March 29, 2014		March 30, 2013			March 29, 2014			March 30, 2013
	(Thousands)
Service cost	$	—	$	816		$	703		$	2,455
Interest cost	—		185			169			556
Expected return on plan assets	—		(308		)	(279		)	(928		)
Net amortization	—		93			76			282
Net periodic pension costs	$	—	$	786		$	669		$	2,365

Prior to transferring our pension plan to II-VI, we contributed $0.5 million to our Swiss Plan. During the three and nine months ended March 30, 2013 , we contributed $0.5 million and $1.7 million , respectively, to our Swiss Plan.

Japan Defined Contribution and Benefit Plan

In connection with our acquisition of Opnext, we assumed a defined contribution plan and a defined benefit plan that provides retirement benefits to our employees in Japan.

Under the defined contribution plan, contributions are provided based on grade level and totaled $0.2 million and $0.6 million for the three and nine months ended March 29, 2014 , respectively, and $0.2 million and $0.7 million for the three months ended March 30, 2013 and for the period from July 23, 2012, the acquisition date, to March 30, 2013 , respectively. Employees can elect to receive the benefit as additional salary or contribute the benefit to the plan on a tax-deferred basis.

Under the defined benefit plan in Japan (the “Japan Plan”), we calculate benefits based on an employee’s individual grade level and years of service. Employees are entitled to a lump sum benefit upon retirement or upon certain instances of termination. As of March 29, 2014 , there were no plan assets. Net periodic pension costs for the Japan Plan included the following:



	Three Months Ended				Nine Months Ended
	March 29, 2014		March 30, 2013		March 29, 2014		March 30, 2013
	(Thousands)
Service cost	$	239	$	251	$	720	$	827
Interest cost	23		32		70		105
Net amortization	17		17		48		58
Net periodic pension costs	$	279	$	300	$	838	$	990

In connection with the Japan Plan, we have $0.2 million in accrued expenses and other liabilities and $8.0 million in other non-current liabilities in our condensed consolidated balance sheet as of March 29, 2014 , to account for the projected benefit obligations.

We made benefit payments under the Japan plan of $0.3 million and $0.4 million during the three and nine months ended March 29, 2014 , respectively, and $0.1 million during the nine months ended March 30, 2013 .

NOTE 9. COMMITMENTS AND CONTINGENCIES

Loss Contingencies

We are involved in various lawsuits, claims, and proceedings that arise in the ordinary course of business. We record a loss provision when we believe it is both probable that a liability has been incurred and the amount can be reasonably estimated.

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Guarantees

We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors and executive officers. We have not recorded a liability associated with these indemnification arrangements, as we historically have not incurred any material costs associated with such indemnification obligations. Costs associated with such indemnification obligations may be mitigated by insurance coverage that we maintain, however, such insurance may not cover any, or may cover only a portion of, the amounts we may be required to pay. In addition, we may not be able to maintain such insurance coverage in the future.

We also have indemnification clauses in various contracts that we enter into in the normal course of business, such as indemnifications in favor of customers in respect of liabilities they may incur as a result of purchasing our products should such products infringe the intellectual property rights of a third party. We have not historically paid out any material amounts related to these indemnifications; therefore, no accrual has been made for these indemnifications.

Warranty Accrual

We generally provide a warranty for our products for twelve months to thirty-six months from the date of sale, although warranties for certain of our products may be longer. We accrue for the estimated costs to provide warranty services at the time revenue is recognized. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty costs would increase, resulting in a decrease in gross profit.

The following table summarizes movements in the warranty accrual for the periods indicated:



	Three Months Ended						Nine Months Ended
	March 29, 2014			March 30, 2013			March 29, 2014			March 30, 2013
	(Thousands)
Warranty provision—beginning of period	$	5,487		$	5,920		$	4,670		$	2,599
Warranties assumed in acquisitions	—			—			—			4,867
Warranties issued	466			774			1,967			2,815
Warranties utilized or expired	(849		)	(1,157		)	(2,863		)	(4,621		)
Currency translation and other adjustments	33			(290		)	1,363			(413		)
Warranty provision—end of period	$	5,137		$	5,247		$	5,137		$	5,247

Capital Leases

In connection with our acquisition of Opnext, we assumed certain capital leases with Hitachi Capital Corporation for certain equipment. The following table shows the future minimum lease payments due under non-cancelable capital leases with Hitachi Capital Corporation:



	Capital Leases
	(Thousands)
Fiscal Year Ending:
2014 (remaining)	$	1,548
2015	5,487
2016	2,951
2017	1,326
2018	49
Thereafter	118
Total minimum lease payments	11,479
Less amount representing interest	(535		)
Present value of capitalized payments	10,944
Less: current portion	(5,649		)
Long-term portion	$	5,295

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Litigation

In the ordinary course of business, we are involved in various legal proceedings, and we anticipate that additional actions will be brought against us in the future. The most significant of these proceedings are described below. The following supplements and amends the discussion set forth in our Annual Report on Form 10-K for the year ended June 29, 2013 . These legal proceedings, as well as other matters, involve various aspects of our business and a variety of claims in various jurisdictions. Complex legal proceedings frequently extend for several years, and some of the matters pending against us are at very early stages of the legal process. As a result, some pending matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to determine whether the proceeding is material to us or to estimate a range of possible loss, if any. Unless otherwise disclosed, we are unable to estimate the possible loss or range of loss for the legal proceedings described below. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these items currently pending could have a material adverse effect on our results of operations, financial position or cash flows.

On October 23, 2013, Xi’an Raysung Photonics Inc., or Raysung, filed a civil suit against our wholly-owned subsidiary, Oclaro Technology (Shenzhen) Co., Ltd. (formerly known as Bookham Technology (Shenzhen) Co., Ltd.), or Oclaro Shenzhen, in the Xi’an Intermediate People’s Court in Shaanxi Province of the People’s Republic of China, or the Xi’an Court. The complaint filed by Raysung alleges that Oclaro Shenzhen terminated its purchase order pursuant to which Raysung had supplied certain products and was to supply certain products to Oclaro Shenzhen.

Raysung has requested the court award damages of approximately $0.8 million (equivalent to RMB 4,796,531 ), and requested that Oclaro Shenzhen take the finished products that are now stored in Raysung’s warehouse (the value of the finished product is approximately, $2.2 million , (equivalent to RMB 13,505,162 ) and requested that Oclaro Shenzhen pay its court fees in connection with this suit.

The Xi’an Court delivered an Asset Preservation Order which was served on Oclaro Shenzhen and the local Customs office. According to the Asset Preservation Order, Oclaro Shenzhen was ordered to maintain approximately $2.4 million (equivalent to RMB 15,000,000 ) or assets equivalent to the said amount during the litigation process, and the Customs office was ordered to restrict Oclaro Shenzhen's equipment from being exported before the Asset Preservation Order is lifted. On November 11, 2013, Oclaro Shenzhen entered into a settlement agreement. Under the terms of this settlement agreement, Oclaro Shenzhen agreed to pay $500,000 in payment of invoices for certain materials to Raysung and to work with Raysung to requalify it as a vendor for certain Oclaro Shenzhen manufacturing requirements, in consideration of which Raysung agreed to submit the settlement agreement to the Xi’an Court so it could issue a civil mediation agreement, apply for a discharge of the Asset Preservation Order and waive the right to bring any legal actions against Oclaro Shenzhen relating to these matters. Oclaro Shenzhen performed its obligations under the settlement agreement, however, on January 15, 2014, Raysung applied to the Xi’an Court to terminate the settlement agreement and add Oclaro, Inc. as a co-defendant in the original civil suit.

On March 26, 2014, the Xi’an Court froze approximately $2.4 million (equivalent to RMB 15 million ) of cash held in Oclaro Shenzhen’s bank account in China. The next scheduled hearing before the Xi’an Court is on June 11, 2014. Oclaro, Inc. and Oclaro Shenzhen believe that they have meritorious defenses to the claims made by Raysung and intend to defend this litigation vigorously.

On May 19, 2011, Curtis and Charlotte Westley filed a purported class action complaint in the United States District Court for the Northern District of California, against us and certain of our officers and directors. The Court subsequently appointed the Connecticut Laborers’ Pension Fund (“Pension Fund”) as lead plaintiff for the putative class. On April 26, 2012, the Pension Fund filed a second amended complaint, captioned as Westley v. Oclaro, Inc., No. 11 Civ. 2448 EMC, allegedly on behalf of persons who purchased our common stock between May 6 and October 28, 2010, alleging that we and certain of our officers and directors issued materially false and misleading statements during this time period regarding our current business and financial condition, including projections for demand for our products, as well as our revenues, earnings, and gross margins, for the first quarter of fiscal year 2011 as well as the full fiscal year. The complaint alleges violations of section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, as well as section 20(a) of the Securities Exchange Act. The complaint seeks damages and costs of an unspecified amount. On September 21, 2012, the Court dismissed the second amended complaint with leave to amend. After the Pension Fund moved for reconsideration, on January 10, 2013, the Court allowed plaintiffs to take discovery regarding statements made in May and June 2010. On March 1, 2013 the Pension Fund filed a third amended complaint, attempting to cure pleading deficiencies with regard to statements allegedly made in July and August 2010. On April 1, 2013, defendants moved to dismiss the third amended complaint with respect to the statements made in July and August 2010. On May 30, 2013, the Court granted Defendants’ motion to dismiss the complaint’s claims based on statements made in July and August 2010. Discovery has commenced, and no trial has been scheduled in this action.

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On June 10, 2011, a purported shareholder, Stanley Moskal, filed a purported derivative action in the Superior Court for the State of California, County of Santa Clara, against us, as nominal defendant, and certain of our current and former officers and directors, as defendants. The case is styled Moskal v. Couder, No. 1:11 CV 202880 (Santa Clara County Super. Ct., filed June 10, 2011). Four other purported shareholders, Matteo Guindani, Jermaine Coney, Jefferson Braman and Toby Aguilar, separately filed substantially similar lawsuits in the United States District Court for the Northern District of California on June 27, June 28, July 7 and July 26, 2011, respectively. By Order dated September 14, 2011, the Guindani, Coney, and Braman actions were consolidated under In re Oclaro, Inc. Derivative Litigation, Lead Case No. 11 Civ. 3176 EMC. On October 5, 2011, the Aguilar action was voluntarily dismissed. Each remaining purported derivative complaint alleges that Oclaro has been, or will be, damaged by the actions alleged in the Westley complaint, and the litigation of the Westley action, and any damages or settlement paid in the Westley action. Each purported derivative complaint alleges counts for breaches of fiduciary duty, waste, and unjust enrichment. Each purported derivative complaint seeks damages and costs of an unspecified amount, as well as injunctive relief. By Order dated March 6, 2012, the parties in the Moskal action agreed that defendants shall not be required to respond to the original complaint. By Order dated February 27, 2013, the parties in the Moskal action agreed that plaintiff would serve an amended complaint no later than 30 days after the Court in the Westley action rules on defendants’ motion to dismiss the third amended complaint in the Westley action and the stay of discovery would remain in effect until further order of the Court or agreement by the parties, provided, however, that they obtain discovery produced in the Westley Action. By Order dated March 12, 2013, the parties to In re Oclaro, Inc. Derivative Litigation agreed to stay all proceedings until such time as (a) the defendants file an answer to any complaint in the Westley action; or (b) the Westley action is dismissed in its entirety with prejudice, provided, however, that they obtain discovery produced in the Westley Action. No trial has been scheduled in any of these actions.

On September 3, 2013, the parties agreed to settle the Westley, Moskal, and In re Oclaro Derivative matters for a total of $3.95 million , plus certain corporate governance changes. The money will be paid entirely by our directors and officers liability insurance carriers. Any fees awarded to the plaintiffs in these actions, or their respective counsel, will be included in this amount. By Order dated May 5, 2014, the Court in each of the Westley, Moskal, and In re Oclaro Derivative matters preliminarily approved the settlement. The settlement is subject to final court approval.

On May 27, 2011, Opnext Japan filed a complaint against Furukawa in the Tokyo District Court alleging that certain laser diode modules sold by Furukawa infringe Opnext Japan’s Japanese patent No. 3,887,174. Opnext Japan was seeking an injunction as well as damages in the amount of 100.0 million Japanese yen.

On August 5, 2011, Opnext Japan filed a complaint against Furukawa in the Tokyo District Court alleging that certain integratable tunable laser assemblies sold by Furukawa infringe Opnext Japan’s Japanese patent No. 4,124,845. Opnext Japan was seeking an injunction as well as damages in the amount of 200.0 million Japanese yen.

On March 25, 2014, the outstanding patent litigation between Opnext Japan and Furukawa was settled by court recorded settlement before the Tokyo District Court on terms agreed to by both parties. In addition, Oclaro, Inc. and Furukawa entered into a separate out of court settlement agreement dated March 30, 2014.

NOTE 10. FLOOD-RELATED (INCOME) EXPENSE, NET

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.

During the three months ended March 29, 2014 , we recorded $1.7 million in flood-related income in our condensed consolidated statement of operations, primarily relating to insurance settlement proceeds received in the third quarter of fiscal year 2014. During the nine months ended March 29, 2014 , we recorded $1.8 million in flood-related income in our condensed consolidated statement of operations, primarily consisting of $3.7 million in insurance settlement proceeds received in the second and third quarters of fiscal year 2014, partially offset by an out-of-period adjustment of $2.0 million related to the impairment of leased assets assumed pursuant to the Opnext merger that had been damaged by the flooding. During the three and nine months ended March 30, 2013 , we recorded net flood-related income of $11.5 million and $10.6 million , respectively, related to payments received from our insurers, offset in part by professional fees and related expenses incurred in connection with our recovery efforts.

As of March 29, 2014 , we have not recorded any estimated amounts relating to potential future insurance recoveries in the condensed consolidated statement of operations.

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NOTE 11. EMPLOYEE STOCK PLANS

Stock Incentive Plans

In connection with our acquisition of Opnext, we assumed Opnext’s Third Amended and Restated 2001 Long-Term Stock Incentive Plan and the shares reserved for issuance thereunder. After giving effect to the exchange ratio, the unused and converted share reserve thereunder consisted of 6.3 million shares of common stock as of the acquisition date. Subject to compliance with applicable NASDAQ rules, we can only make grants to legacy Opnext employees and employees hired after the close of the merger unless stockholder approval was obtained to permit awards to all our employees. On July 23, 2013, our board of directors approved the Fourth Amended and Restated 2001 Long-Term Stock Incentive Plan (the "Plan") and on January 14, 2014, our shareholders ratified this plan, establishing it as our primary equity incentive plan. The Plan (i) revises the eligibility section to allow us to make grants to all our employees, non-employee directors and consultants, (ii) allows us to grant incentive stock options and awards which may be able to qualify as qualified performance-based compensation under Section 162(m) of the Internal Revenue Code, (iii) extends the term of the Plan to ten years from the effective date of the Plan (the Plan expires in July 2023), and (iv) conforms the share counting provisions of the Plan to provide that full value awards count as 1.25 shares for purposes of the Plan.

We also maintain the Amended and Restated 2004 Stock Incentive Plan (“2004 Plan”). Under the 2004 Plan, there are a total of 7.8 million shares of common stock authorized for issuance, with full value awards being counted as 1.25 shares of common stock for purposes of the share limit. The 2004 Plan expires in October 2020 .

As of March 29, 2014 , there were 5.0 million shares of our common stock available for grant under both plans.

We generally grant stock options that vest over a four year service period, and restricted stock awards and units that vest over a one year to four year service period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives as set by our board of directors or the compensation committee of our board of directors.

In July 2011, our board of directors approved the grant of 0.2 million performance stock units (“PSUs”) to certain executive officers with an aggregate estimated grant date fair value of $0.9 million . These PSUs vest, up to 150 percent of the target PSUs, upon the achievement of certain revenue growth targets through June 30, 2013, relative to certain comparable companies. In October 2013, the board of directors determined that achievement of the performance conditions was reached at the 100 percent target level. Approximately 0.1 million of the grants outstanding, or 50 percent , vested on October 22, 2013, with the remaining 50 percent scheduled to vest upon a two -year service condition through August 2015. As of March 29, 2014 , there were less than 0.1 million PSUs outstanding, after adjustments for forfeitures due to terminations, related to this grant, with an aggregate estimated grant date fair value of $0.1 million .

In July 2012, our board of directors approved a grant of 0.6 million PSUs to certain executive officers, subject to shareholder approval of an amendment to our Plan. Prior to shareholder approval, approximately 0.4 million of the PSUs were forfeited as a result of certain executive officer departures. On January 14, 2014, shareholder approval was obtained at our annual general meeting of stockholders. In the third quarter of fiscal year 2014, the grant of 0.2 million PSUs became effective, with an aggregate estimated grant date fair value of $0.6 million . These PSUs vest upon the achievement of certain adjusted earnings before interest, taxes, depreciation and amortization targets through June 30, 2014. Vesting is also contingent upon service conditions being met through August 2016. If the performance conditions are not achieved, then the corresponding PSUs will be forfeited in the first quarter of fiscal year 2015.

In February 2014, our board of directors granted our chief executive officer 0.8 million restricted stock units ("RSUs") in satisfaction of the terms set forth in his employment agreement dated September 11, 2013. The RSUs vested in full on the date of grant, but as of March 29, 2014, they have not been settled. The RSUs have an aggregate grant date fair value of $2.0 million , which was recorded in the third quarter of fiscal year 2014.

In March 2014, our board of directors approved a grant of 0.2 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $0.5 million . These PSUs vest upon the achievement of non-GAAP operating income break-even for calendar year 2015. Vesting is also contingent upon service conditions being met through February 2018. If the performance condition is not achieved, then the corresponding PSUs will be forfeited in the third quarter of fiscal year 2016.

The following table summarizes the combined activity under all of our equity incentive plans for the nine months ended March 29, 2014 :

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	Shares Available For Grant		Stock Options / SARs Outstanding		Weighted- Average Exercise Price		Restricted Stock Awards / Units Outstanding		Weighted- Average Grant Date Fair Value
	(Thousands)		(Thousands)				(Thousands)
Balance at June 29, 2013	7,578		6,475		$	9.36	2,850		$	3.17
Granted	(4,790	)	195		2.41		3,700		2.49
Exercised or released	—		(148	)	1.00		(1,422	)	2.70
Cancelled or forfeited	2,250		(1,619	)	12.08		(631	)	2.78
Balance at March 29, 2014	5,038		4,903		8.49		4,497		2.63

Supplemental disclosure information about our stock options and SARs outstanding as of March 29, 2014 is as follows:



	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
	(Thousands)			(Years)	(Thousands)
Options and SARs exercisable	4,378	$	9.15	4.1	$	176
Options and SARs outstanding	4,903	8.49		4.6	366

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the closing price of our common stock of $3.03 on March 28, 2014, which would have been received by the option holders had all option holders exercised their options as of that date. There were approximately 0.2 million shares of common stock subject to in-the-money options which were exercisable as of March 29, 2014 . We settle employee stock option exercises with newly issued shares of common stock.

NOTE 12. STOCK-BASED COMPENSATION

We recognize stock-based compensation expense in our condensed consolidated statement of operations related to all share-based awards, including grants of stock options, based on the grant date fair value of such share-based awards. Estimating the grant date fair value of such share-based awards requires us to make judgments in the determination of inputs into the Black-Scholes stock option pricing model which we use to arrive at an estimate of the grant date fair value for such awards. The assumptions used in this model to value stock option grants were as follows:



	Three Months Ended			Nine Months Ended
	March 29, 2014		March 30, 2013	March 29, 2014		March 30, 2013
Stock options:
Expected life	5.3 years		—	5.3 years		5.1 years
Risk-free interest rate	1.6	%	—	1.5	%	0.7	%
Volatility	84.8	%	—	83.9	%	82.9	%
Dividend yield	—		—	—		—

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The amounts included in cost of revenues and operating expenses for stock-based compensation were as follows:



	Three Months Ended					Nine Months Ended
	March 29, 2014			March 30, 2013		March 29, 2014			March 30, 2013
	(Thousands)
Stock-based compensation by category of expense:
Cost of revenues	$	244		$	488	$	746		$	1,217
Research and development	249			380		701			1,168
Selling, general and administrative	2,492			715		3,347			2,380
	$	2,985		$	1,583	$	4,794		$	4,765
Stock-based compensation by type of award:
Stock options	$	210		$	574	$	803		$	1,948
Restricted stock awards	2,810			828		4,034			2,364
Purchase rights under ESPP	—			118		—			531
Inventory adjustment to cost of revenues	(35		)	63		(43		)	(78		)
	$	2,985		$	1,583	$	4,794		$	4,765

As of March 29, 2014 and June 29, 2013 , we had capitalized approximately $0.3 million and $0.4 million , respectively, of stock-based compensation as inventory.

As of March 29, 2014, we determined that the achievement of the performance conditions associated with the PSUs issued in July 2012 are improbable. We have not recorded any compensation cost associated with these PSUs. If the performance conditions are not met or not expected to be met, no compensation cost will be recognized on the underlying PSUs, and any previously recognized compensation expense related to those PSUs would be reversed.

Included in stock-based compensation for the three and nine months ended March 29, 2014 is approximately $2.0 million in compensation cost related to the grant of 0.8 million RSUs to our chief executive officer on February 10, 2014, which vested in full on the grant date.

NOTE 13. INCOME TAXES

The income tax provision of $0.7 million and $2.5 million for the three and nine months ended March 29, 2014 , respectively, related primarily to our foreign operations, and includes a payment of approximately $1.0 million related to the completion of our tax audit in China.

The income tax provision of $0.1 million and $2.3 million for the three and nine months ended March 30, 2013 , respectively, related primarily to our foreign operations.

The total amount of our unrecognized tax benefits as of March 29, 2014 and June 29, 2013 was approximately $7.8 million and $8.0 million , respectively. As of March 29, 2014 , we had $3.0 million in unrecognized tax benefits that, if recognized, would affect our effective tax rate. While it is often difficult to predict the final outcome of any particular uncertain tax position, it is reasonably possible that unrecognized tax benefits could decrease by approximately $0.1 million in the next twelve months.

NOTE 14. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed using only the weighted-average number of shares of common stock outstanding for the applicable period, while diluted net income per share is computed assuming conversion of all potentially dilutive securities, such as stock options, unvested restricted stock awards, warrants and convertible notes during such period.

For the three and nine months ended March 29, 2014 , we excluded 10.6 million and 13.5 million , respectively, of outstanding stock options, stock appreciation rights, warrants, shares issuable in connection with convertible notes, and unvested restricted stock awards from the calculation of diluted net income per share because their effect would have been anti-dilutive.

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For the three and nine months ended March 30, 2013 , we excluded 24.2 million and 15.7 million of outstanding stock options, stock appreciation rights, warrants, shares issuable in connection with convertible notes, and unvested restricted stock awards, respectively, from the calculation of diluted net loss per share because their effect would have been anti-dilutive.

NOTE 15. GEOGRAPHIC INFORMATION, PRODUCT GROUPS AND CUSTOMER CONCENTRATION INFORMATION

Geographic Information

The following table shows revenues by geographic area based on the delivery locations of our products:



	Three Months Ended				Nine Months Ended
	March 29, 2014		March 30, 2013		March 29, 2014		March 30, 2013
	(Thousands)
China	$	26,609	$	31,320	$	75,065	$	90,972
Germany	21,511		14,946		56,525		43,014
Malaysia	11,230		11,406		34,658		34,565
Japan	7,822		12,583		29,263		39,519
Mexico	5,073		6,400		26,338		15,099
United States	7,097		6,812		23,028		27,993
Italy	3,625		3,840		15,125		15,733
Thailand	2,798		3,925		8,182		10,715
Rest of world	9,633		10,307		26,776		31,635
	$	95,398	$	101,539	$	294,960	$	309,245

Product Groups

The following table sets forth revenues by product group:



	Three Months Ended				Nine Months Ended
	March 29, 2014		March 30, 2013		March 29, 2014		March 30, 2013
	(Thousands)
40 Gb/s and 100 Gb/s transmission	$	44,145	$	39,556	$	128,703	$	111,027
10 Gb/s and lower transmission	43,676		55,723		144,078		179,089
Industrial and consumer	7,577		6,260		22,179		19,129
	$	95,398	$	101,539	$	294,960	$	309,245

Significant Customers and Concentration of Credit Risk

For the three months ended March 29, 2014 , Coriant GmbH ("Coriant") accounted for 21 percent , Cisco Systems, Inc. (“Cisco”) accounted for 12 percent and Huawei Technologies Co., Ltd. (“Huawei”) accounted for 11 percent of our revenues. For the nine months ended March 29, 2014 , Coriant accounted for 18 percent , Cisco accounted for 13 percent and Huawei accounted for 10 percent of our revenues.

For the three months ended March 30, 2013 , Coriant accounted for 14 percent , Cisco accounted for 13 percent , Fiberhome Technologies Group (“Fiberhome”) accounted for 12 percent and Huawei accounted for 12 percent of our revenues. For the nine months ended March 30, 2013 , Cisco accounted for 13 percent , Coriant accounted for 13 percent , Fiberhome accounted for 11 percent and Huawei accounted for 10 percent of our revenues.

As of March 29, 2014 , Coriant accounted for 26 percent of our accounts receivable. As of June 29, 2013 , Huawei accounted for 15 percent of our accounts receivable.

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NOTE 16. RELATED PARTY TRANSACTIONS

As a result of our acquisition of Opnext on July 23, 2012, Hitachi, Ltd. (Hitachi) holds approximately 11 percent of our outstanding common stock as of March 29, 2014 based on Hitachi’s most recent Schedule 13G filed with the Securities and Exchange Commission on February 12, 2014.

We continue to enter into transactions with Hitachi in the normal course of business. Sales to Hitachi were $1.8 million and $6.5 million for the three and nine months ended March 29, 2014 , respectively, and $1.3 million and $8.6 million for the three and nine months ended March 30, 2013 , respectively. Purchases from Hitachi were $2.9 million and $9.5 million for the three and nine months ended March 29, 2014 , respectively, and $5.1 million and $16.3 million for the three and nine months ended March 30, 2013 , respectively. At March 29, 2014 , we had $3.5 million accounts receivable due from Hitachi and $2.2 million accounts payable due to Hitachi. At June 29, 2013 we had $3.0 million accounts receivable due from Hitachi and $2.2 million accounts payable due to Hitachi. We also have certain capital equipment leases with Hitachi Capital Corporation as described in Note 9, Commitments and Contingencies .

We are now party to a research and development agreement and intellectual property license agreements with Hitachi.

NOTE 17. SUBSEQUENT EVENTS

On May 2, 2014, PECM Strategic Funding L.P. and Providence TMT Debt Opportunity Fund L.P., holders of warrants (the “Warrants”) to purchase shares of our common stock, par value $0.01 per share (the “Common Stock”), have exercised the Warrants in full. We will deliver 978,457 shares of Common Stock in connection with the cashless exercise of the Warrants, and will not receive any proceeds from the exercise.

As previously announced, the offer and sale of the Warrants, which were issued on May 6, 2013, was not registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act as such transaction did not involve a public offering of securities.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, about our future expectations, plans or prospects and our business. You can identify these statements by the fact that they do not relate strictly to historical or current events, and contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “will,” “plan,” “believe,” “should,” “outlook,” “could,” “target,” “model,” “may” and other words of similar meaning in connection with discussion of future operating or financial performance. We have based our forward looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. There are a number of important factors that could cause our actual results or events to differ materially from those indicated by such forward-looking statements, including (i) the effect of receiving a “going concern” statement in our auditors report on our 2013 consolidated financial statements, (ii) our ability to effectively restructure our operations and business following the sale of our Zurich Business and the Amplifier Business in accordance with our business plan, (iii) our dependence on a limited number of customers for a significant percentage of our revenues, (iv) our ability to maintain strong relationships with certain customers, (v) our ability to effectively and efficiently transition to an outsourced back-end assembly and test model, (vi) the potential inability to realize the expected benefits of asset dispositions, (vii) the sale of businesses which may or may not arise in connection with executing our restructuring plans, (viii) the impact of continued uncertainty in world financial markets and any resulting reduction in demand for our products, (ix) our ability to meet or exceed our gross margin expectations, ,(x) the effects of fluctuating product mix on our results, (xi) our ability to timely develop and commercialize new products, (xii) our ability to reduce costs and operating expenses, (xiii) our ability to respond to evolving technologies and customer requirements and demands, (xiv) our ability to effectively compete with companies that have greater name recognition, broader customer relationships and substantially greater financial, technical and marketing resources than we do, (xv) our ability to timely capitalize on any increase in market demand, (xvi) increased costs related to downsizing and compliance with regulatory and legal requirements in connection with such downsizing, (xvii) competition and pricing pressure, (xviii) the risks associated with our international oper ations, (xix) the outcome of tax audits or similar proceedings, (xx) the outcome of pending litigation against us, (xxi) o ur ability to maintain or increase our cash reserves and obtain debt or equity-based financing on terms acceptable to us or at all, (xxii) our ability to serve as a supplier to the buyers of our Zurich Business and the Amplifier Business during the transition of manufacturing activities and meet our related transition agreement obligations, and (xxiii) other factors described in other documents we periodically file with the SEC. We cannot guarantee any future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements. Several of the important factors that may cause our actual results to differ materially from the expectations we describe in forward-looking statements are identified in the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in this Quarterly Report on Form 10-Q and the documents incorporated herein by reference.

As used herein, “Oclaro,” “we,” “our,” and similar terms include Oclaro, Inc. and its subsidiaries, unless the context indicates otherwise.

OVERVIEW

We are one of the largest providers of optical components, modules and subsystems for the optical communications market. We are a global leader dedicated to photonics innovation, with research and development (R&D) and chip fabrication facilities in the U.K., Italy and Japan. We have in-house and contract manufacturing sites in the U.S., China, Malaysia and Thailand, with design, sales and service organizations in most of the major regions around the world.

Our customers include ADVA Optical Networking; Alcatel-Lucent; Ciena; Cisco; Coriant; Ericsson; Fujitsu; Huawei; Juniper Networks and ZTE.

RECENT DEVELOPMENTS

On March 28, 2014, we entered into a loan and security agreement (the "Loan Agreement") with Silicon Valley Bank (the “Bank”) pursuant to which the Bank provided us with a three -year revolving credit facility of up to $40.0 million . Under the Loan Agreement, advances are available based on up to 80 percent of “eligible accounts” as defined in the Loan Agreement. The Loan Agreement has a $10.0 million sub-facility for letters of credit, foreign exchange contracts and cash management services.

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On March 14, 2014, we terminated our credit facility with Wells Fargo Capital Finance and certain other lenders.

On July 23, 2013, our board of directors approved the Fourth Amended and Restated 2001 Long-Term Stock Incentive Plan (the “Plan”) and on January 14, 2014, our shareholders ratified the Plan, establishing it as our primary equity incentive plan. The Plan (i) revises the eligibility section to allow us to make grants to all our employees, non-employee directors and consultants, (ii) allows us to grant incentive stock options and awards which may be able to qualify as qualified performance-based compensation under Section 162(m) of the Internal Revenue Code, (iii) extends the term of the Plan to ten years from the effective date of the Plan, and (iv) conforms the share counting provisions of the Plan to provide that full value awards count as 1.25 shares for purposes of the Plan.

RESULTS OF OPERATIONS

On September 12, 2013 we announced the sale of our Zurich Business to II-VI, along with an exclusive option to purchase our Amplifier Business. On October 10, 2013, we entered into an Asset Purchase Agreement with II-VI for the sale of our Amplifier Business, which subsequently closed on November 1, 2013. We have classified the financial results of the Zurich and Amplifier Businesses as discontinued operations for all periods presented. The following presentations relate to continuing operations only, unless otherwise indicated.

On July 23, 2012, we completed a merger with Opnext, Inc. (“Opnext”). The acquisition is more fully discussed in Note 5, Business Combinations and Dispositions to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The condensed consolidated statements of operations for the nine months ended March 30, 2013 include the results of operations of the combined entities from July 23, 2012, the date of the acquisition.

The following tables set forth our condensed consolidated results of operations for the periods indicated, along with amounts expressed as a percentage of revenues, and comparative information regarding the absolute and percentage changes in these amounts:

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	Three Months Ended													Increase
	March 29, 2014					March 30, 2013					Change			(Decrease)
	(Thousands)			%		(Thousands)			%		(Thousands)			%
Revenues	$	95,398		100.0		$	101,539		100.0		$	(6,141	)	(6.0	)
Cost of revenues	84,298			88.4		95,939			94.5		(11,641		)	(12.1	)
Gross profit	11,100			11.6		5,600			5.5		5,500			98.2
Operating expenses:
Research and development	14,624			15.3		19,231			18.9		(4,607		)	(24.0	)
Selling, general and administrative	17,437			18.3		19,078			18.8		(1,641		)	(8.6	)
Amortization of other intangible assets	418			0.4		1,219			1.2		(801		)	(65.7	)
Restructuring, acquisition and related (income) expense, net	3,068			3.2		2,782			2.8		286			10.3
Flood-related (income) expense, net	(1,657		)	(1.7	)	(11,548		)	(11.4	)	9,891			(85.7	)
(Gain) loss on sale of property and equipment	(326		)	(0.3	)	74			0.1		(400		)	n/m		⁽¹⁾
Total operating expenses	33,564			35.2		30,836			30.4		2,728			8.8
Operating loss	(22,464		)	(23.6	)	(25,236		)	(24.9	)	2,772			(11.0	)
Other income (expense):
Interest income (expense), net	(29		)	—		(1,103		)	(1.1	)	1,074			(97.4	)
Gain (loss) on foreign currency transactions, net	625			0.7		(6,788		)	(6.7	)	7,413			n/m		⁽¹⁾
Other income (expense), net	(56		)	(0.1	)	(3,760		)	(3.7	)	3,704			(98.5	)
Total other income (expense)	540			0.6		(11,651		)	(11.5	)	12,191			n/m		⁽¹⁾
Loss from continuing operations before income taxes	(21,924		)	(23.0	)	(36,887		)	(36.4	)	14,963			(40.6	)
Income tax provision	745			0.8		148			0.1		597			403.4
Loss from continuing operations	(22,669		)	(23.8	)	(37,035		)	(36.5	)	14,366			(38.8	)
Loss from discontinued operations, net of tax	(252		)	(0.2	)	(2,971		)	(2.9	)	2,719			(91.5	)
Net loss	$	(22,921	)	(24.0	)	$	(40,006	)	(39.4	)	$	17,085		(38.8	)


(1)	Not meaningful.

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	Nine Months Ended													Increase
	March 29, 2014					March 30, 2013					Change			(Decrease)
	(Thousands)			%		(Thousands)			%		(Thousands)			%
Revenues	$	294,960		100.0		$	309,245		100.0		$	(14,285	)	(4.6	)
Cost of revenues	255,729			86.7		286,377			92.6		(30,648		)	(10.7	)
Gross profit	39,231			13.3		22,868			7.4		16,363			71.6
Operating expenses:
Research and development	49,135			16.7		60,458			19.6		(11,323		)	(18.7	)
Selling, general and administrative	56,944			19.3		60,428			19.5		(3,484		)	(5.8	)
Amortization of other intangible assets	1,259			0.4		3,823			1.2		(2,564		)	(67.1	)
Restructuring, acquisition and related (income) expense, net	12,666			4.3		(9,881		)	(3.2	)	22,547			n/m		⁽¹⁾
Flood-related (income) expense, net	(1,797		)	(0.6	)	(10,643		)	(3.4	)	8,846			(83.1	)
Impairment of other intangibles	—			—		864			0.3		(864		)	(100.0	)
Loss on sale of property and equipment	331			0.1		287			0.1		44			15.3
Total operating expenses	118,538			40.2		105,336			34.1		13,202			12.5
Operating loss	(79,307		)	(26.9	)	(82,468		)	(26.7	)	3,161			(3.8	)
Other income (expense):
Interest income (expense), net	(9,114		)	(3.1	)	(2,230		)	(0.7	)	(6,884		)	308.7
Gain (loss) on foreign currency transactions, net	(446		)	(0.2	)	(10,782		)	(3.5	)	10,336			(95.9	)
Other income (expense), net	493			0.2		(3,760		)	(1.2	)	4,253			n/m		⁽¹⁾
Gain on bargain purchase	—			—		24,866			8.0		(24,866		)	(100.0	)
Total other income (expense)	(9,067		)	(3.1	)	8,094			2.6		(17,161		)	n/m		⁽¹⁾
Loss from continuing operations before income taxes	(88,374		)	(30.0	)	(74,374		)	(24.1	)	(14,000		)	18.8
Income tax provision	2,471			0.8		2,300			0.7		171			7.4
Loss from continuing operations	(90,845		)	(30.8	)	(76,674		)	(24.8	)	(14,171		)	18.5
Income from discontinued operations, net of tax	132,693			45.0		1,305			0.4		131,388			10,068.0
Net income (loss)	$	41,848		14.2		$	(75,369	)	(24.4	)	$	117,217		n/m		⁽¹⁾


(1)	Not meaningful.

Revenues

Revenues for the three months ended March 29, 2014 decreased by $6.1 million , or 6 percent , compared to the three months ended March 30, 2013 . Compared to the three months ended March 30, 2013 , revenues from sales of our 40 Gb/s and 100 Gb/s transmission modules increased by $4.6 million , or 12 percent ; revenues from sales of our 10 Gb/s transmission modules decreased by $12.0 million , or 22 percent ; and revenues from sales of our industrial and consumer products increased by $1.3 million , or 21 percent .

For the three months ended March 29, 2014 , Coriant GmbH (“Coriant”) accounted for 21 percent , Cisco Systems, Inc. (“Cisco”) accounted for 12 percent and Huawei Technologies Co., Ltd. (“Huawei”) accounted for 11 percent of our revenues. For the three months ended March 30, 2013 , Coriant accounted for 14 percent , Cisco accounted for 13 percent , Fiberhome Technologies Group (“Fiberhome”) accounted for 12 percent and Huawei accounted for 12 percent of our revenues.

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Revenues for the nine months ended March 29, 2014 decreased by $14.3 million , or 5 percent , compared to the nine months ended March 30, 2013 . Compared to the nine months ended March 30, 2013 , revenues from sales of our 40 Gb/s and 100 Gb/s transmission modules increased by $17.7 million , or 16 percent ; revenues from sales of our 10 Gb/s transmission modules decreased by $35.0 million , or 20 percent ; and revenues from sales of our industrial and consumer products increased by $3.1 million , or 16 percent .

For the nine months ended March 29, 2014 , Coriant accounted for 18 percent , Cisco accounted for 13 percent and Huawei accounted for 10 percent of our revenues. For the nine months ended March 30, 2013 , Cisco accounted for 13 percent , Coriant accounted for 13 percent, Fiberhome accounted for 11 percent and Huawei accounted for 10 percent of our revenues.

Gross Profit

Gross profit is calculated as revenues less cost of revenues. Gross margin rate is gross profit reflected as a percentage of revenues.

Our cost of revenues consists of the costs associated with manufacturing our products, and includes the purchase of raw materials, labor costs and related overhead, including stock-based compensation charges and the costs charged by our contract manufacturers for the products they manufacture for us. Charges for excess and obsolete inventory are also included in cost of revenues. Costs and expenses related to our manufacturing resources incurred in connection with the development of new products are included in research and development expenses.

Our gross margin rate increased to 12 percent for the three months ended March 29, 2014 , compared to 6 percent for the three months ended March 30, 2013 . The 6 percentage point improvement in gross margin rate primarily related to an increase in revenues from our 100 Gb/s products, improvements to our manufacturing cost structure, and less provisions for excess or obsolete inventory.

Our gross margin rate increased to 13 percent for the nine months ended March 29, 2014 , compared to 7 percent for the nine months ended March 30, 2013 . The 6 percentage point improvement in gross margin rate primarily related to an increase in revenues from our 100 Gb/s products, improvements to our manufacturing cost structure, and lower intangible asset amortization, partially offset by a less favorable mix of our 40 Gb/s products.

Research and Development Expenses

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 $14.6 million for the three months ended March 29, 2014 from $19.2 million for the three months ended March 30, 2013 . The decline was primarily related to a decrease of $2.9 million as a result of aligning and reducing combined research and development resources of Oclaro and Opnext in association with the merger, a decrease of $1.1 million related to our decision to no longer develop the WSS product line, and a decrease of $0.6 million related to the impact of the depreciation of the Japanese Yen.

Research and development expenses decreased to $49.1 million for the nine months ended March 29, 2014 from $60.5 million for the nine months ended March 30, 2013 . The decline was primarily related to a decrease of $6.1 million as a result of aligning and reducing combined research and development resources of Oclaro and Opnext in association with the merger, a decrease of $2.3 million related to our decision to no longer develop the WSS product line, and a decrease of $1.7 million related to the impact of the depreciation of the Japanese Yen.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of personnel-related expenses, including stock-based compensation charges related to employees engaged in sales, general and administrative functions, legal and professional fees, facilities expenses, insurance expenses and certain information technology costs.

Selling, general and administrative expenses decreased to $17.4 million for the three months ended March 29, 2014 , from $19.1 million for the three months ended March 30, 2013 . The decline was primarily related to a decrease of $2.5 million as a result of aligning and reducing combined selling, general and administrative resources of Oclaro and Opnext in association with the merger, and $0.9 million in other costs savings and headcount reductions, partially offset by $2.0 million in stock compensation

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costs related to the grant of 0.8 million RSUs to our chief executive officer on February 10, 2014, which vested in full on the grant date.

Selling, general and administrative expenses decreased to $56.9 million for the nine months ended March 29, 2014 , from $60.4 million for the nine months ended March 30, 2013 . The decline was primarily related to a decrease of $8.2 million as a result of aligning and reducing combined selling, general and administrative resources of Oclaro and Opnext in association with the merger, partially offset by an increase in legal costs of $1.2 million , an increase in audit fees of $0.9 million , and $2.0 million in stock compensation costs related to the grant of 0.8 million RSUs to our chief executive officer on February 10, 2014, which vested in full on the grant date, and an increase of $0.9 million related to other selling, general and administrative expenses.

Amortization of Other Intangible Assets

Amortization of other intangible assets decreased to $0.4 million for the three months ended March 29, 2014 from $1.2 million for the three months ended March 30, 2013 , and decreased to $1.3 million for the nine months ended March 29, 2014 from $3.8 million for the nine months ended March 30, 2013 . The decrease in our amortization is a result of recording $14.2 millio n in impairment losses during the fourth quarter of fiscal year 2013, including $6.4 million related to intangibles acquired in connection with our acquisition of Mintera, $2.6 million related to intangibles acquired in connection with our acquisition of Opnext, and $5.2 million related to intangibles acquired in connection with other earlier acquisitions. As a result of these impairments, we expect the amortization of intangible assets to decrease from $5.3 million in fiscal year 2013 to $1.7 million for fiscal years 2014 through 2018 based on the current level of our other intangible assets.

Restructuring, Acquisition and Related Costs

During the first quarter of fiscal year 2013, we initiated a restructuring plan to integrate our acquisition of Opnext. In connection with this restructuring plan, we recorded $1.1 million in restructuring charges during the nine months ended March 29, 2014 , respectively. The restructuring charges recorded in fiscal year 2014 included $0.9 million in external consulting charges and professional fees associated with reorganizing the infrastructure and $0.1 million in revised estimates related to lease cancellations and commitments. During the nine months ended March 29, 2014 , we made scheduled payments of $2.2 million , respectively, to settle these restructuring liabilities. During the three and nine months ended March 30, 2013 , we recorded $0.5 million and $9.6 million in restructuring charges, respectively. The restructuring charges for the three months ended March 30, 2013 , included $0.3 million related to workforce reductions and $0.2 million related to revised estimates for lease cancellations and commitments. The restructuring charges for the nine months ended March 30, 2013 , included $8.1 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 nine months ended March 30, 2013, we made scheduled payments of $0.4 million and $8.2 million, respectively. As of March 29, 2014 , we had no further accrued restructuring liabilities related to this restructuring plan.

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ended March 30, 2013 , we recorded restructuring charges related to employee separation charges of $1.1 million and $4.0 million , respectively. During the three and nine months ended March 30, 2013 , we made scheduled payments of $0.2 million and $2.1 million , respectively, to settle a portion of these restructuring liabilities. As of March 29, 2014 , we had $3.2 million in accrued restructuring liabilities related to this restructuring plan. We expect to incur between $2.0 million and $3.0 million in additional restructuring costs in connection with the transition of our Shenzhen manufacturing operations to Venture over the next year.

Flood-related (Income) Expense, Net

In October 2011, certain areas in Thailand suffered major flooding as a result of monsoons. This flooding had a material and adverse 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.

Impairment of Other Intangible Assets

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 was 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 our condensed consolidated statement of operations for the nine months ended March 30, 2013 .

Other Income (Expense)

Other income (expense) increased to $0.5 million in income for the three months ended March 29, 2014 from $11.7 million in expense for the three months ended March 30, 2013 . This increase in other income (expense) was primarily related to recording a $0.6 million foreign currency transaction gain during the three months ended March 29, 2014 , as compared to recording a $6.8 million foreign currency transaction loss during the three months ended March 30, 2013 . The $6.8 million foreign currency transaction loss during the three months ended March 30, 2013 was predominantly a result of revaluing intercompany receivables denominated in Japanese yen. The increase in other income (expense) also related to a $3.6 million impairment charge related to the revaluation of an investment during the three months ended March 30, 2013 , and recording $1.1 million in lower interest expense during the current quarter as compared to the three months ended March 30, 2013 as a result of the conversion of the 7.50% Exchangeable Senior Secured Second Lien Notes due 2018 ("Convertible Notes") into common stock in the second quarter of fiscal year 2014 and the repayment of the credit facility and Term Loan in the first quarter of fiscal year 2014.

Other income (expense) decreased to $9.1 million in expense for the nine months ended March 29, 2014 from $8.1 million in income for the nine months ended March 30, 2013 . This decrease was primarily due to a $24.9 million gain on bargain purchase in connection with our acquisition of Opnext in the first quarter of fiscal year 2013, and a $6.9 million increase in interest expense primarily related to the make-whole payment from the conversion of the Convertible Notes into common stock in the second quarter of fiscal year 2014, partially offset by a $3.6 million impairment charge related to the revaluation of an investment during the nine months ended March 30, 2013 , and by smaller losses of $10.3 million on foreign currency transactions during the nine months ended March 29, 2014 , as compared to the nine months ended March 30, 2013 . The $10.8 million foreign currency transaction loss during the nine months ended March 30, 2013 was predominantly a result of revaluing intercompany receivables denominated in Japanese yen.

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Income Tax Provision

For the three and nine months ended March 29, 2014 , our income tax provision of $0.7 million and $2.5 million , respectively, related primarily to our foreign operations, and includes a payment of approximately $1.0 million related to the completion of our tax audit in China.

For the three and nine months ended March 30, 2013 , our income tax provisions of $0.1 million and $2.3 million , respectively, related primarily to our foreign operations.

Income from Discontinued Operations, Net of Tax

During the three and nine months ended March 29, 2014 , we recorded a loss of $0.6 million and a gain of $69.1 million , respectively, related to the sale of the Amplifier Business. During the three and nine months ended March 29, 2014 , we recorded a gain on the sale of the Zurich Business of $0.4 million and $63.2 million , respectively.

During the three and nine months ended March 29, 2014 , we recorded income from discontinued operations of the Zurich and Amplifier Businesses of $0.3 million and $132.7 million , respectively. For the three and nine months ended March 30, 2013 , we recorded a loss from discontinued operations of the Zurich and Amplifier Businesses of $3.0 million and a gain from discontinued operations of the Zurich and Amplifier Businesses of $1.3 million , respectively.

The following table sets forth the results of the discontinued operations of our Zurich and Amplifier Businesses and the year-over-year increases (decreases) in our results:



	Three Months Ended									Nine Months Ended
	March 29, 2014			March 30, 2013			Change			March 29, 2014		March 30, 2013		Change
	(Thousands)									(Thousands)
Revenues	$	—		$	40,103		$	(40,103	)	$	49,081	$	140,675	$	(91,594	)
Cost of revenues	—			32,536			(32,536		)	37,836		112,029		(74,193		)
Gross profit	—			7,567			(7,567		)	11,245		28,646		(17,401		)
Operating expenses	—			9,735			(9,735		)	8,992		26,850		(17,858		)
Other income (expense), net	248			(565		)	813			131,103		202		130,901
Income (loss) from discontinued operations before income taxes	248			(2,733		)	2,981			133,356		1,998		131,358
Income tax provision	500			238			262			663		693		(30		)
Income (loss) from discontinued operations	$	(252	)	$	(2,971	)	$	2,719		$	132,693	$	1,305	$	131,388

RECENT ACCOUNTING STANDARDS

See Note 2, Recent Accounting Standards , to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information regarding the effect of new accounting pronouncements on our condensed consolidated financial statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses and other financial information. Actual results may differ significantly from those based on our estimates and judgments or could be materially different if we used different assumptions, estimates or conditions. In addition, our financial condition and results of operations could vary due to a change in the application of a particular accounting policy.

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We identified our critical accounting policies in our Annual Report on Form 10-K for the year ended June 29, 2013 (2013 Form 10-K) related to revenue recognition and sales returns, inventory valuation, business combinations, impairment of goodwill and other intangible assets, accounting for stock-based compensation and income taxes. It is important that the discussion of our operating results be read in conjunction with the critical accounting policies discussed in our 2013 Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

The condensed consolidated statement of cash flows and the discussion below on cash flows from operating, investing and financing activities have not been adjusted for the effects of the discontinued operations.

Cash Flows from Operating Activities

Net cash used in operating activities for the nine months ended March 29, 2014 was $65.4 million , primarily resulting from non-cash adjustments of $100.3 million and a $7.0 million decrease in cash due to changes in operating assets and liabilities, partially offset by net income of $41.8 million . The $100.3 million decrease in cash resulting from non-cash adjustments primarily consisted of a $69.1 million gain on the sale of the Amplifier Business, a $63.2 million gain on the sale of the Zurich Business, $1.6 million from the amortization of deferred gain from sales-leaseback transactions, partially offset by $21.6 million in depreciation and amortization, $5.0 million of expense related to stock-based compensation, $4.3 million related to the amortization and write-off of the issuance costs of the term loan and $2.0 million related to non-cash flood-related impairments. The $7.0 million decrease in cash due to changes in operating assets and liabilities was comprised of a $20.8 million increase in prepaid expenses and other current assets, a $15.2 million decrease in accrued expenses and other liabilities, a $8.3 million decrease in accounts payable, partially offset by a $32.1 million decrease in accounts receivable, a $4.1 million decrease in inventories and a $1.3 million decrease in other non-current assets.

Net cash used by operating activities for the nine months ended March 30, 2013 was $88.8 million , primarily resulting from a net loss of $75.4 million , non-cash adjustments of $8.7 million and a $4.7 million decrease in cash due to changes in operating assets and liabilities. The $4.7 million decrease in cash due to changes in operating assets and liabilities was comprised of a $18.9 million decrease in accounts payable, a $9.9 million increase in prepaid expenses and other current assets, a $5.2 million decrease in accrued expenses and other liabilities, partially offset by a $28.2 million decrease in accounts receivable and a $1.2 million decrease in inventories. The $8.7 million decrease in cash resulting from non-cash adjustments primarily consisted of a decrease of $24.9 million for the bargain purchase gain related to the acquisition of Opnext, a decrease of $24.8 million related to the gain on the sale of the thin film filter business and interleaver product line and $1.5 million from the amortization of deferred gain from sales-leaseback transactions, partially offset by $32.4 million in depreciation and amortization, $5.4 million of expense related to stock-based compensation, $3.6 million related to an impairment charge on an investment and $0.9 million related to the impairment of certain intangibles.

Cash Flows from Investing Activities

Net cash provided by investing activities for the nine months ended March 29, 2014 was $172.3 million , primarily consisting of $93.5 million proceeds from the sale of Zurich Business, $84.6 million from the sale of the Amplifier Business, $2.1 million from the sale of certain assets and a $1.9 million reduction in restricted cash, which were partially offset by $6.1 million used in capital expenditures.

Net cash provided by investing activities for the nine months ended March 30, 2013 was $52.6 million , primarily consisting of $36.1 million cash acquired in the acquisition of Opnext, $26.0 million in proceeds from the sale of the thin film filter business and interleaver product line, and $3.7 million reduction in restricted cash, partially offset by $13.2 million used in capital expenditures.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended March 29, 2014 was $71.1 million , primarily consisting of $65.0 million in repayments on a term loan and our revolving credit facility, and $6.1 million in payments on capital lease obligations.

Net cash provided by financing activities for the nine months ended March 30, 2013 was $24.5 million , primarily consisting of $22.8 million in proceeds from the sale of convertible notes, $15.3 million in borrowings under our revolving credit facility and $1.7 million received from the issuance of common stock through stock option exercises and our employee stock purchase plan, partially offset by $8.6 million in payments in connection with the remaining earnout obligations related to our acquisition

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of Mintera, $5.5 million in payments on capital lease obligations and $1.1 million repayments on a note payable and revolving credit facility.

Credit Line and Notes

On March 14, 2014, we terminated our senior secured revolving credit facility with Wells Fargo Capital Finance, Inc. and other lenders (the "Credit Agreement"). As of March 29, 2014 , there were no amounts outstanding under the Credit Agreement, other than immaterial amounts attributable to obligations under the Credit Agreement in respect to letters of credit.

As of June 29, 2013 , there was $40.0 million outstanding under the Credit Agreement and $25.0 million owed in connection with the Term Loan. As of June 29, 2013 , the net carrying value of the liability component of our Convertible Notes was $22.8 million and the estimated fair value of the contingent obligation for the make-whole payment was valued at $0.1 million. During the first quarter of fiscal year 2014, we used part of the proceeds from the sale of the Zurich Business to fully repay our outstanding balance under the Credit Agreement and the Term Loan. During the second quarter of fiscal year 2014, the holders of the Convertible Notes exercised their rights to exchange the Convertible Notes for our common stock, plus a make-whole payment.

See Note 7, Credit Line and Notes for additional information regarding the Loan Agreement, Credit Agreement, Term Loan and Convertible Notes. At March 29, 2014 and June 29, 2013, there was immaterial amounts in outstanding standby letters of credit secured under the Credit Agreement. These letters of credit expire in June 2015.

Future Cash Requirements

On September 12, 2013, we completed the sale of our Zurich Business under which we expect to receive $6.0 million in additional proceeds which are subject to hold-back by II-VI until December 31, 2014 to address any post-closing adjustments or claims. On November 1, 2013, we completed the sale of our Amplifier Business under which we expect to receive $4.0 million in additional proceeds which are subject to hold-back by II-VI until December 31, 2014 to address any post-closing claim.

We currently expect that we will expend approximately an additional $12.0 million to $17.0 million in cash during the next twelve months to reduce our accounts payable. With our current cash and cash equivalent balances, we believe that we have sufficient funds to support our operations through the next 12 months, including costs associated with the implementation of our restructuring activities.

In the event we need additional liquidity beyond our current expectations, such as to fund future growth or strengthen our balance sheet or to fund the cost of restructuring activities, we may find it necessary to lower our operating income break-even level and undertake additional cost cutting measures. We will continue to explore other sources of additional liquidity. These additional sources of liquidity could include one, or a combination, of the following: (i) issuing equity securities, (ii) incurring indebtedness secured by our assets, (iii) issuing debt and/or convertible debt securities, or (iv) selling product lines, other assets and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.

We have incurred significant operating losses and generated negative cash flows for fiscal year 2013, the first three quarters of fiscal year 2014 and anticipate that our net loss for the remaining fiscal year 2014 could be substantial. The continued operation of our business is dependent upon our achieving cash flows expected to be generated from the execution of our current operating plan, including anticipated restructuring plans.

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For additional information on the risks we face related to future cash requirements, see Item 1A. Risk Factors under “— 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 and maintain sufficient levels of liquidity.”

As of March 29, 2014 , $94.4 million of the $117.4 million of our cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we could be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not include repatriation of these funds.

Off-Balance Sheet Arrangements

We also have indemnification clauses in various contracts that we enter into in the normal course of business, such as indemnification in favor of customers in respect of liabilities they may incur as a result of purchasing our products should such products infringe the intellectual property rights of a third party. We have not historically paid out any material amounts related to these indemnifications; therefore, no accrual has been made for these indemnifications.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For quantitative and qualitative disclosures about market risk affecting us, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended June 29, 2013 , which is incorporated herein by reference. Our exposure to market risk has not changed materially since June 29, 2013 .

INTEREST RATES

We finance our operations through a mixture of issuances of equity securities, finance leases, working capital and by drawing on our Credit Agreement. We have exposure to interest rate fluctuations on our cash deposits and for amounts borrowed under our Credit Agreement and through our capital leases. At March 29, 2014 , we had $10.9 million under capital leases. An increase in our average interest rate by 1.0 percent would increase our annual interest expense by $0.1 million .

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 day’s notice and invested in overnight money market accounts. We believe our current interest rate risk is immaterial.

FOREIGN CURRENCY

As our business is multinational in scope, we are subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenues and pay expenses. 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 and Japanese yen. Our expenses denominated in the Swiss franc have decreased significantly as a result of our sale of the Zurich Business in the first quarter of fiscal year 2014. Fluctuations in the exchange rate between the U.S. dollar, the U.K. pound sterling, and the Japanese yen and, to a lesser extent, other currencies in which we collect revenues and pay expenses, could affect our operating results. This includes the Chinese yuan, the Korean won and the Euro in which we pay expenses in connection with operating our facilities in Shenzhen and Shanghai, China; Daejeon, South Korea and San Donato, Italy. To the extent the exchange rate between the U.S. dollar and these currencies were to fluctuate more significantly than experienced to date, our exposure would increase.

As of March 29, 2014 , our U.K. subsidiary had $10.7 million , net, in U.S. dollar denominated operating intercompany payables, $46.7 million in U.S. dollar denominated accounts receivable and payable, net, related to sales to external customers and purchases from suppliers, and $68.8 million in U.S. dollar denominated cash accounts. It is estimated that a 10 percent fluctuation in the U.S. dollar relative to the U.K. pound sterling would lead to a profit of $10.5 million (U.S. dollar strengthening), or loss of $10.5 million (U.S. dollar weakening) on the translation of these receivables and other cash balances, which would be recorded as gain (loss) on foreign currency transactions, net, in our condensed consolidated statement of operations.

As of March 29, 2014 , our Japan subsidiary had $45.6 million , net, in U.S. dollar denominated operating intercompany payables, $13.3 million in U.S. dollar denominated accounts payable, net of accounts receivable, related to sales to external customers and purchases from suppliers, and $5.7 million in U.S. dollar denominated cash and restricted cash accounts. It is estimated that a 10 percent fluctuation in the U.S. dollar relative to the Japanese yen would lead to a profit of $5.3 million (U.S. dollar weakening), or loss of $5.3 million (U.S. dollar strengthening) on the translation of these balances, which would be recorded as gain (loss) on foreign currency transactions, net, in our condensed consolidated statement of operations.

BANK LIQUIDITY RISK

As of March 29, 2014 , we have approximately $117.4 million in operating accounts that are held with domestic and international financial institutions. These cash balances could be lost or become inaccessible if the underlying financial institutions fail or if they are unable to meet the liquidity requirements of their depositors and they are not supported by the the national government of the country in which such financial institution is located . Notwithstanding, we have not incurred any losses and have had full access to our operating accounts to date. We believe any failures of domestic and international financial institutions could impact our ability to fund our operations in the short term.

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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 March 29, 2014 . The term “disclosure controls and procedures,” as defined in Rules13a-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 SEC’s 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 company’s 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 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 March 29, 2014 , our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were not effective at the reasonable assurance level.

As disclosed in our Annual Report on Form 10-K for the year ended June 29, 2013 , we identified a material weakness in our internal control over financial reporting such that our disclosure controls and procedures related to accounting for the purchase of the Opnext acquisition were not effective. Over the past several quarters, we implemented enhancements to our internal controls over financial reporting, including hiring finance personnel and adding oversight for the accounting of acquisitions and dispositions. Our remediation efforts, including the testing of these controls, will continue throughout our fiscal year 2014. We expect that the material weakness will be remediated during fiscal year 2014 once these controls have been operational for a sufficient period of time to allow management to conclude that these controls are operating effectively.

Notwithstanding the ineffectiveness of our disclosure controls and procedures as of March 29, 2014 and the material weakness in our internal control over financial reporting that existed as of that date as described above, management believes that (i) this Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the periods covered by this Report and (ii) the condensed consolidated financial statements, and other financial information, included in this Report fairly present in all material respects in accordance with U.S. GAAP our financial condition, results of operations and cash flows as of, and for, the dates and periods presented.

Except as noted in the preceding paragraph, there was no change in our internal control over financial reporting during the three months ended March 29, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Overview

In the ordinary course of business, we are involved in various legal proceedings, and we anticipate that additional actions will be brought against us in the future. The most significant of these proceedings are described below. The following supplements and amends the discussion set forth in our Annual Report on Form 10-K for the year ended June 29, 2013. These legal proceedings, as well as other matters, involve various aspects of our business and a variety of claims in various jurisdictions. Complex legal proceedings frequently extend for several years, and a number of the matters pending against us are at very early stages of the legal process. As a result, some pending matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to determine whether the proceeding is material to us or to estimate a range of possible loss, if any. Unless otherwise disclosed, we are unable to estimate the possible loss or range of loss for the legal proceedings described below. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these items currently pending could have a material adverse effect on our results of operations, financial position or cash flows.

Specific Matters

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filed by Raysung alleges that Oclaro Shenzhen terminated its purchase order pursuant to which Raysung had supplied certain products and was to supply certain products to Oclaro Shenzhen.

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dismissed in its entirety with prejudice, provided, however, that they obtain discovery produced in the Westley Action. No trial has been scheduled in any of these actions.

ITEM 1A. RISK FACTORS

Investing in our securities involves a high degree of risk. The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity and stock price materially and adversely. You should carefully consider the risks and uncertainties described below in addition to the other information included or incorporated by reference in this Quarterly Report on Form 10-Q. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall and you could lose all or part of your investment.

We have recently announced significant changes at Oclaro relating to our operations, strategic plan and management team. The operation of our business could be adversely affected by the transition of key personnel as we rebuild our executive leadership team and make additional organizational changes.

Beginning in June 2013, we have announced a series of events, transactions and restructuring plans, which have had a significant impact on our business. Among other things, we sold our Zurich and Amplifier Businesses and announced a restructuring plan to focus our business on our core competencies. While we believe these events, transactions and plans will have a positive impact on our financial condition and results of operations, these changes will result in at least a significant near-term reduction in our revenues, could lead to a disruption in our operations and employee morale, could lead to unplanned attrition of employees, and adversely affect our ability to attract highly skilled employees. In addition, many of our senior management are relatively new. Since June 2013, we have appointed a new Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, and have hired a new head of Worldwide Sales, a new General Counsel, a new Principal Accounting Officer and a new President of our Integrated Photonics Division. We have also decreased the size of our Board of Directors from nine to seven. It is important to our success that our Chief Executive Officer continues building an effective management team and global organization. It may take some time for each of the new members of our management team to become fully integrated into our business. Our failure to manage these transitions, or to find and retain experienced management personnel, could adversely affect our ability to compete effectively and could adversely affect our operating results. If we experience these or other adverse consequences, fail to manage these transitions, do not find and retain experienced management personnel, or are otherwise unable to realize the expected benefits of our restructuring plan, our business, results of operations and financial condition would be materially and adversely affected and we may not be able to continue as a going concern over the long term.

We depend on a limited number of customers for a significant percentage of our revenues and the loss of a major customer could have a materially adverse impact on our financial condition.

Historically, we have generated most of our revenues from a limited number of customers. Our dependence on a limited number of customers is due to the fact that the optical telecommunications systems industry is dominated by a small number of large companies. These companies in turn depend primarily on a limited number of major telecommunications carrier customers to purchase their products that incorporate our optical components. For example, during the fiscal years ended

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June 29, 2013, June 30, 2012 and July 2, 2011, our three largest customers accounted for 31 percent, 29 percent and 36 percent of our revenues, respectively, including our discontinued operations. Because we rely on a limited number of customers for significant percentages of our revenues, a decrease in demand for our products from any of our major customers for any reason (including due to market conditions, catastrophic events or otherwise) could have a materially adverse impact on our financial conditions and results of operations. For example, during the second half of fiscal 2012, our revenues were adversely impacted by a significant change in demand expectations from a particular major customer. Further, the industry in which our customers operate is subject to a trend of consolidation. To the extent this trend continues, we may become dependent on even fewer customers to maintain and grow our revenues.

Sales of older legacy products continue to represent a significant percentage of our total revenues and, if we do not increase the percentage of sales associated with new products, our revenues may not grow in the future.

The markets for our products are characterized by changing technology and continuing process development. The future of our business will depend in large part upon the continuing relevance of our technological capabilities, and our ability to introduce new products that address our customers’ requirements for more cost-effective bandwidth solutions. Our inability to successfully launch or sustain new or next generation programs or product features that anticipate future market trends could materially adversely affect our financial results. We may also encounter competition from new or revised technologies that render our products less profitable or obsolete in our chosen markets, and our operating results may suffer. Furthermore, we cannot assure you that we will introduce new or next generation products in a timely manner, that these products will gain market acceptance, or that new product revenues will increase at a rate sufficient to replace declining legacy product revenues, and failure to do so could materially affect our operating results.

We have a history of large operating losses. We may not be able to achieve profitability in the future and as a result we may not be able to maintain sufficient levels of liquidity.

We have historically incurred losses and negative cash flows from operations since our inception. As of March 29, 2014 , we had an accumulated deficit of $1,273.5 million . We incurred a loss from continuing operations of $90.8 million and negative cash flows from operations of $65.4 million during the nine months ended March 29, 2014 , and we incurred net losses for the years ended June 29, 2013, June 30, 2012 and July 2, 2011 of $122.7 million, $66.5 million and $46.4 million, respectively.

As of March 29, 2014 , we held $122.3 million in cash and short-term investments, comprised of $117.4 million in cash and cash equivalents, $4.7 million in restricted cash and $0.2 million of short-term investments; and we had working capital, including cash, of $196.2 million . At March 29, 2014 , we had debt of $10.9 million , consisting of capital leases. During fiscal year 2013 and 2014, we executed a number of financing transactions in order to generate funds to help sustain our operations: we sold our interleaver and thin film filter business, we expanded our line of credit, we executed a convertible debt transaction and in the third quarter of fiscal year 2013, we began to evaluate and execute sales of product lines in order to generate additional capital. On May 6, 2013, we secured a short term loan from Providence Equity of $25.0 million (with net proceeds to us of $20.5 million after discounts and expenses) as a bridge to the conclusion of certain asset sales. In order to obtain the short term loan, we amended our Credit Agreement to add Providence as a term lender. In connection with this amendment, we agreed to complete certain asset sales and use the proceeds to repay amounts we have borrowed under the Credit Agreement by July 15, 2013. On August 21, 2013, we amended our Credit Agreement to extend the time frame within which we must complete such asset sales to make such repayments to September 2, 2013. The corresponding sale of our Zurich Business to II-VI was closed on September 12, 2013. We received proceeds of $90.6 million in cash on September 12, 2013 and an additional $2.9 million subject to a potential post-closing working capital adjustment, which was calculated based on the level of working capital in the Oclaro Switzerland GmbH subsidiary at the September 12, 2013 close versus a target based on working capital at June 29, 2013. We will also receive $6.0 million subject to hold-back by II-VI until December 31, 2014 to address any post-closing adjustments or claims. We also received $5.0 million for a 30 day option to sell our Amplifier Business for $88.0 million inclusive of the option amount. On November 1, 2013, we sold our Amplifier Business to II-VI and certain of its affiliates for $88.6 million in cash, consisting of $79.6 million in cash, subject to inventory valuation adjustments after closing, and $4.0 million, subject to hold-back by II-VI until December 31, 2014 to address any post-closing claims. In accordance with the option agreement we entered into with II-VI, the $5.0 million paid by II-VI was credited against the $88.6 million purchase price for the Amplifier Business.

Following the sale of the Zurich Business, we repaid all amounts outstanding under the Credit Agreement as required. The event of default resulting from not completing the sale of the Zurich Business on September 2, 2013 was waived on September 26, 2013. This waiver eliminated the requirement for the Agent and Lenders to make any advances, issue any letters of credit or provide any other extension of credit until the Agent and Lenders agree otherwise and prevents us from exercising any right or action set forth in the applicable loan documents that is conditioned on the absence of any event of default. If the Agent and Lenders do not agree to make amounts under the Credit Agreement available to us within 30 days of the waiver (or

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such later time as the Agent agrees), then the Agent and Lenders will have the option to immediately terminate the Credit Agreement. On March 14, 2014, we terminated the Credit Agreement. On March 28, 2014, we entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which the Bank provided us with a three -year revolving credit facility of up to $40.0 million . Under the Loan Agreement, advances are available based on up to 80 percent of “eligible accounts” as defined in the Loan Agreement.

The optical communications industry is subject to significant operational fluctuations. In order to remain competitive we incur substantial costs associated with research and development, qualification, production capacity and sales and marketing activities in connection with products that may be purchased, if at all, long after we have incurred such costs. In addition, the rapidly changing industry in which we operate, the length of time between developing and introducing a product to market, frequent changing customer specifications for products, customer cancellations of products and general down cycles in the industry, among other things, make our prospects difficult to evaluate. We are not generating positive cash flow from operations, and it is possible that we may not (i) generate sufficient positive cash flow from operations; (ii) raise funds through the issuance of equity, equity-linked or convertible debt securities; (iii) be able to draw advances under our Loan Agreement in the future or repay any such amounts; (iv) conclude additional strategic dispositions or similar transactions; or (v) otherwise have sufficient capital resources to meet our future capital or liquidity needs. We believe it is prudent to undertake additional restructuring activities to reduce our cost base and lower our operating income break-even level, which activities will also be financed from our existing financial resources. There are no guarantees we will be able to generate additional financial resources beyond our existing balances.

Our success will depend on our ability to anticipate and respond to evolving technologies and customer requirements.

The market for telecommunications equipment is characterized by substantial capital investment, rapid and unpredictable changes in customer demand and diverse and evolving technologies. For example, the market for optical components is currently characterized by a trend toward the adoption of pluggable components and tunable transmitters that do not require the customized interconnections of traditional fixed wavelength “gold box” devices and the increased integration of components on subsystems. Our ability to anticipate and respond to these and other changes in technology, industry standards, customer requirements and product offerings and to develop and introduce new and enhanced products will be significant factors in our ability to succeed. We expect that new technologies will continue to emerge as competition in the telecommunications industry increases and the need for higher and more cost efficient bandwidth expands. The introduction of new products embodying new technologies or the emergence of new industry standards could render our existing products or products in development uncompetitive from a pricing standpoint, obsolete or unmarketable, which would negatively affect our financial condition and results of operations.

We may not be able to maintain or improve gross margin levels.

We may not be able to maintain or improve our gross margins, due to slow introductions of new products, failure to effectively cost reduce existing products, the potential for future macroeconomic or market volatility reducing sales volumes, changes in customer demand (including a change in product mix between different areas of our business) and pricing pressure from increased competition or other factors. We are attempting to reduce our product costs and improve our product mix to offset price competition and erosion expected in most product categories, but there is no assurance that we will be successful. Our gross margins can also be adversely impacted for reasons including, but not limited to, fixed manufacturing costs that would not be expected to decrease in proportion to any decrease in revenues; unfavorable production yields or variances; increases in costs of input parts and materials; the timing of movements in our inventory balances; warranty costs and related returns; changes in foreign currency exchange rates; possible exposure to inventory valuation reserves; the sale of the Zurich and Amplifier Businesses, including procuring certain parts that were previously internally sourced; and failure to realize benefits of the transfer of certain manufacturing functions to Venture Corporation Limited (Venture). Any failure to maintain, or improve, our gross margins will adversely affect our financial results, including our goal to achieve sustainable cash flow positive operations.

The majority of our long-term customer contracts do not commit customers to specified buying levels, and our customers may decrease, cancel or delay their buying levels at any time with little or no advance notice to us.

The majority of our customers typically purchase our products pursuant to individual purchase orders or contracts that do not contain purchase commitments. Some customers provide us with their expected forecasts for our products several months in advance, but many of these customers may decrease, cancel or delay purchase orders already in place, and the impact of any such actions may be intensified given our dependence on a small number of large customers. If any of our major customers decrease, stop or delay purchasing our products for any reason, our business and results of operations would be harmed. Cancellation or delays of such orders may cause us to fail to achieve our short-term and long-term financial and operating goals

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and result in excess and obsolete inventory. For example, in fiscal year 2011, we did experience certain deferrals and cancellations of orders which adversely impacted our quarterly financial results. In addition, during the second half of fiscal year 2012, our revenues were adversely impacted by a significant change in demand expectations from a major customer.

Our products are complex and may take longer to develop than anticipated and we may not recognize revenues from new products until after long field testing and customer acceptance periods.

Many of our new products must be tailored to customer specifications. As a result, we are developing new products and using new technologies in those products. For example, while we currently manufacture and sell discrete “gold box” technology, we expect that many of our sales of “gold box” technology will soon be replaced by pluggable modules. New products or modifications to existing products often take many quarters or even years to develop because of their complexity and because customer specifications sometimes change during the development cycle. We often incur substantial costs associated with the research and development, design, sales and marketing activities in connection with products that may be purchased long after we have incurred such costs. In addition, due to the rapid technological changes in our market, a customer may cancel or modify a design project before we begin large-scale manufacture of the product and receive revenues from the customer. It is unlikely that we would be able to recover the expenses for cancelled or unutilized design projects. It is difficult to predict with any certainty, particularly in the present economic climate, the frequency with which customers will cancel or modify their projects, or the effect that any cancellation or modification would have on our results of operations. In some cases, the adoption of our new product offerings can also become a function of the pace of adoption of new technologies or new data rates at the telecom network level.

The markets in which we operate are highly competitive, which could result in lost sales and lower revenues.

The market for optical components and modules is highly competitive and this competition could result in our existing customers moving their orders to our competitors. We are aware of a number of companies that have developed or are developing optical component products, including tunable lasers, pluggables, 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:


•	develop or respond to new technologies or technical standards;


•	react to changing customer requirements and expectations;


•	devote needed resources to the development, production, promotion and sale of products; and


•	deliver competitive products at lower prices.

Some of our current competitors, as well as some of our potential competitors, have longer operating histories, greater name recognition, broader customer relationships and industry alliances and substantially greater financial, technical and marketing resources than we do. In addition, market leaders in industries such as semiconductor and data communications, who may also have significantly more resources than we do, may in the future enter our market with competing products. Our competitors and new Chinese companies are establishing manufacturing operations in China to take advantage of comparatively low manufacturing costs. All of these risks may be increased if the market were to further consolidate through mergers or other business combinations between competitors.

We may not be able to compete successfully with our competitors and aggressive competition in the market may result in lower prices for our products and/or decreased gross margins. Any such development could have a material adverse effect on our business, financial condition and results of operations.

If our customers do not qualify our manufacturing lines or the manufacturing lines of our subcontractors for volume shipments, our operating results could suffer.

Most of our customers do not purchase products, other than limited numbers of evaluation units, prior to qualification of the manufacturing line for volume production. Our existing manufacturing lines, as well as each new manufacturing line, must pass through varying levels of qualification with our customers. Our manufacturing lines have passed our qualification standards, as well as our technical standards. However, our customers also require that our manufacturing lines pass their specific qualification standards and that we, and any subcontractors that we may use, be registered under international quality standards. In addition, we have in the past, and may in the future, encounter quality control issues as a result of relocating our manufacturing lines or introducing new products to fill production. We may be unable to obtain customer qualification of our manufacturing lines or we may experience delays in obtaining customer qualification of our manufacturing lines. Such delays or failure to obtain qualifications would harm our operating results and customer relationships. To the extent we introduce new

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contract manufacturing partners and move any production lines from existing internal or external facilities the new production lines will likely need to be re-qualified with customers. Exposures to these risks could increase materially during the transition of certain of our Shenzhen product lines to Venture in Malaysia.

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, introduction of new product lines and changes in contract manufacturers have historically caused, and may in the future cause, significantly reduced manufacturing yields, resulting in low or negative margins on those products. Moreover, an increase in the rejection rate of products during the quality control process, before, during or after manufacture, results in lower yields and margins. Finally, manufacturing yields and margins can also be lower if we receive or inadvertently use defective or contaminated materials from our suppliers. Any reduction in our manufacturing yields will adversely affect our gross margins and could have a material impact on our operating results.

We will incur significant additional restructuring charges that will adversely affect our results of operations.

We expect to incur significant restructuring expenses for incremental actions going forward, including restructuring actions we announced in the first half of fiscal year 2014 to reduce our complexity and to simplify our operating footprint subsequent to the sale of the Zurich and Amplifier Businesses.

We have previously enacted a series of restructuring plans and cost reduction plans designed to reduce our manufacturing overhead and our operating expenses that have resulted in significant restructuring charges. Such charges have adversely affected, and will continue to adversely affect, our results of operations for the periods in which such charges have been, or will be, incurred. Additionally, actual costs have in the past, and may in the future, exceed the amounts estimated and provided for in our financial statements. Significant additional charges could materially and adversely affect our results of operations in the periods that they are incurred and recognized. In addition, any restructuring activities will require significant cash commitments and will adversely affect our cash balances.

For instance, during fiscal year 2012 and 2013, we incurred $6.0 million and $5.1 million in restructuring charges, respectively, in connection with the transition of certain portions of our Shenzhen, China assembly and test operations to Venture, and expect to incur an additional $2.0 million and $3.0 million in restructuring charges over the remaining transition period. During the year ended June 29, 2013, we incurred $12.1 million in restructuring charges in connection with the acquisition and integration of Opnext, and expect to incur additional restructuring charges related to this plan over the next few quarters.

There is risk in executing the transition of certain portions of our Shenzhen assembly and test operations, and in executing to the corresponding long term supply agreement, with Venture, and we may not realize the anticipated benefits from either.

In March 2012, we entered into a definitive agreement with Venture to transfer our Shenzhen final assembly and test operations to Venture’s Malaysia facility in a phased and gradual transfer of products over a period of three years. In conjunction with this agreement, we entered into a five-year supply agreement with Venture to manufacture and supply us with certain products that were previously manufactured at our Shenzhen facility. There can be no assurance that the transition of portions of our Shenzhen assembly and test operations and the corresponding long term supply agreement with Venture will result in the benefits that we expect, or that revenues will not be adversely impacted during the transition period.

In addition, there is significant risk in our ability to execute stages of this transfer without negative impacts on production output, delivery to customer requests, quality and customer service in general. Revenues could be adversely impacted if production output falls short of expectations during the transfer or if customer service is perceived to be inadequate.

On March 28, 2012, shortly after announcing this agreement, certain of our employees in Shenzhen initiated a work stoppage up to and including April 4, 2012. Although we negotiated a resolution to this work stoppage, there can be no assurance that work stoppages will not arise in the future having a material adverse impact on our production output and/or the levels and gross margins of the corresponding product revenues supported by the production output, and/or increasing the net costs of executing the transfer to Venture or of continuing the remaining operations in Shenzhen. Any such work stoppage may

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adversely impact our revenues and our ability to deliver products to our customers. In addition, our recent sale of the Zurich and Amplifier Businesses, and our commitment to provide manufacturing services for the buyer using our Shenzhen facility and personnel, could potentially have an impact on corresponding employee relations in Shenzhen and impact our ability to deliver products to our customers.

Delays, disruptions or quality control problems in manufacturing could result in delays in product shipments to customers and could adversely affect our business.

We may experience delays, disruptions or quality control problems in our manufacturing operations or the manufacturing operations of our subcontractors. As a result, we could incur additional costs that would adversely affect our gross margins, and our product shipments to our customers could be delayed beyond the shipment schedules requested by our customers, which would negatively affect our revenues, competitive position and reputation. Furthermore, even if we are able to deliver products to our customers on a timely basis, we may be unable to recognize revenues at the time of delivery based on our revenue recognition policies. Exposures to these risks could increase during the transition of portions of our Shenzhen product lines to Venture Malaysia over what is anticipated to be a two to three year period, and with regards to any product line manufacturing transitions associated with our integration of Opnext.

Our results of operations may suffer if we do not effectively manage our inventory, and we may continue to 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 or deemed excess while in inventory due to rapidly changing customer specifications or a decrease in customer demand. We also have exposure to contractual liabilities to our contract manufacturers for inventories purchased by them on our behalf, based on our forecasted requirements, which may become excess or obsolete. Our inventory balances also represent an investment of cash. To the extent our inventory turns are slower than we anticipate based on historical practice, our cash conversion cycle extends and more of our cash remains invested in working capital. If we are not able to manage our inventory effectively, we may need to write down the value of some of our existing inventory or write off non-saleable or obsolete inventory. We have from time to time incurred significant inventory-related charges. Any such charges we incur in future periods could materially and adversely affect our results of operations. As part of the transition of portions of our Shenzhen manufacturing facility to Venture, we may need to invest in additional inventories during the corresponding transition period, and in the future may be exposed to contractual liabilities to Venture for inventories purchased by them on our behalf.

As a result of our global operations, our business is subject to currency fluctuations that have adversely affected our results of operations in recent quarters and may continue to do so in the future.

Our financial results have been and will continue to be materially impacted by foreign currency fluctuations. At certain times in our history, declines in the value of the U.S. dollar versus the U.K. pound sterling have had a major negative effect on our margins and our cash flow. A significant portion of our expenses are denominated in U.K. pounds sterling and Japanese yen and substantially all of our revenues are denominated in U.S. dollars.

Fluctuations in the exchange rate between these currencies and, to a lesser extent, other currencies in which we collect revenues and/or pay expenses could have a material effect on our future operating results. For example during fiscal year 2013, the Swiss franc appreciated approximately 1 percent relative to the U.S. dollar, the U.K. pound sterling depreciated approximately 2 percent relative to the U.S. dollar, and the Japanese yen depreciated approximately 20 percent relative to the U.S. dollar, impacting our manufacturing overhead and operating expenses. If the U.S. dollar stays the same or depreciates relative to the U.K. pound sterling and/or Japanese yen in the future, our future operating results may be materially impacted. Additional exposure could also result should the exchange rate between the U.S. dollar and the Chinese yuan, the South Korean won, or the Euro vary more significantly than they have to date.

We periodically engage in currency hedging transactions in an effort to cover some of our exposure to U.S. dollar to U.K. pound sterling currency fluctuations, and we may be required to convert currencies to meet our obligations. We expect, in the future, to enter into similar hedging transactions in an effort to cover some of our exposure to U.S. dollar to Japanese yen currency fluctuations. These transactions may not operate to fully hedge our exposure to currency fluctuations, and under certain circumstances, these transactions could have an adverse effect on our financial condition.

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We relocated our operations formerly located in Totsuka, Japan. Our business may experience disruption due to this relocation.

We relocated our manufacturing and research and development facilities, as well as our administrative offices from Totsuka, Japan to a facility we leased from Yokogawa Electric Corporation in Sagamihara-shi, Kanagawa Prefecture, Japan. Although we have completed this transition, there can be no assurance that the relocation of these operations will not adversely impact our production capacity or manufacturing yields or divert management’s attention from the day-to-day operation of our business, any of which could adversely affect our business, results of operations and cash flows.

We may undertake divestitures of portions of our business, such as the divestiture of our Zurich Business and our Amplifier Business, that require us to continue providing substantial post-divestiture transition services and support, which may cause us to incur unanticipated costs and liabilities and adversely affect our financial condition and results of operations.

From time to time we consider divestitures of product lines or portions of our assets in order to streamline our business, focus on our core operations and raise cash. For example, on September 12, 2013, we sold our Zurich Business to II-VI and on November 1, 2013, we sold our Amplifier Business to II-VI (See Note 5, Business Combinations and Dispositions , elsewhere in this Quarterly Report on Form 10-Q for further details). In connection with these divestitures, we entered into transition service, manufacturing service and supply agreements with II-VI to facilitate the ownership transition, collectively referred to as “transition agreements.” Pursuant to these transition agreements, we continue to manufacture certain products for II-IV, we host certain IT infrastructure for II-IV and we perform certain administrative functions for II-VI. From time to time, substantial amounts of executive resources have been diverted from our core ongoing business to manage these transitions. For each of these divestitures, a material portion of the purchase price was held back by II-VI to address post-closing claims, including claims related to our performance of the transition agreements. Although we received a portion of the holdback from the sale of the Zurich Business during the third fiscal quarter, significant amounts of the Zurich Business hold back and the Amplifier Business holdback could be affected by our ability to properly discharge our transition agreement obligations. In order to perform under these transition agreements, on an interim basis, we have been required to retain certain employees and contractors, continue operating certain facilities, dedicate certain manufacturing capacity and maintain certain supplier agreements that have added additional costs and delayed our ability to fully restructure our operations to efficiently focus on our core ongoing business. If we fail to perform under these transition agreements, or if we do not successfully execute the restructuring of our operations after our transition agreement obligations have been fulfilled, our financial condition and results of operations could be harmed.

We recently exchanged convertible debt for common stock which diluted our shareholder base and in the future we may need to access the capital markets to raise additional equity.

We may need additional liquidity beyond our current expectations, such as to fund future growth or strengthen our balance sheet or to fund the cost of restructuring activities, and will continue to explore other sources of additional liquidity. These additional sources of liquidity could include one, or a combination, of the following: (i) issuing equity securities, (ii) incurring indebtedness secured by our assets, (iii) issuing debt and/or convertible debt securities, or (iv) selling product lines, other assets and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.

If we raise funds through the issuance of equity, equity-linked or convertible debt securities, our stockholders may be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of securities held by existing stockholders. If we raise funds through the issuance of debt instruments, such as we did in 2013 when we issued convertible debt, the agreements governing such debt instruments may contain covenant restrictions that limit our ability to, among other things: (i) incur additional debt, assume obligations in connection with letters of credit, or issue guarantees; (ii) create liens; (iii) make certain investments or acquisitions; (iv) enter into transactions with our affiliates; (v) sell certain assets; (vi) redeem capital stock or make other restricted payments; (vii) declare or pay dividends or make other distributions to stockholders; and (viii) merge or consolidate with any entity. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, develop or enhance our products, or otherwise respond to competitive pressures and operate effectively could be significantly limited.

We may undertake mergers or acquisitions, such as our acquisition of Opnext, Inc. (Opnext), that do not prove successful, which would materially and adversely affect our business, prospects, financial condition and results of operations.

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From time to time we consider mergers or acquisitions, collectively referred to as “acquisitions,” of other businesses, assets or companies that would complement our current product offerings, enhance our intellectual property rights or offer other competitive opportunities. For example, on March 26, 2012, we entered into an Agreement and Plan of Merger and Reorganization with Opnext, which was completed on July 23, 2012. However, in the future, we may not be able to identify suitable acquisition candidates at prices we consider appropriate. In addition, we are in an industry that is actively consolidating and, as a result, there is no guarantee that we will successfully and satisfactorily bid against third parties, including competitors, when we identify a critical target we want to acquire.

We cannot readily predict the timing or size of our future acquisitions, or the success of our recent or future acquisitions. Failure to successfully implement our acquisition plans could have a material adverse effect on our business, prospects, financial condition and results of operations. Even successful acquisitions could have the effect of reducing our cash balances, diluting the ownership interests of existing stockholders or increasing our indebtedness. For example, in our acquisition of Opnext we issued approximately 38.4 million newly issued shares of our common stock to the former stockholders of Opnext.

In addition, during the first quarter of fiscal year 2012, we issued 0.9 million shares of our common stock related to the settlement of our Xtellus escrow liability. In October 2011, we paid $0.5 million in cash and issued 0.8 million shares of our common stock to pay earnout obligations related to our acquisition of Mintera. In the fourth quarter of fiscal year 2012, we paid $2.2 million to settle a portion of our Mintera earnout obligations, and settled the remaining $8.6 million obligation in cash in the first quarter of fiscal year 2013.

Our acquisition of Opnext and other acquisitions involve a number of other potential risks to our business, including the following, any of which could harm our business:


•	failure to realize the potential financial or strategic benefits of the acquisition;


•	increased costs associated with merged or acquired operations;


•	increased indebtedness obligations;


•	economic dilution to gross and operating profit (loss) and earnings (loss) per share;


•	failure to successfully further develop the combined, acquired or remaining technology, which could, among other things, result in the impairment of amounts recorded as goodwill or other intangible assets;


•	unanticipated costs and liabilities and unforeseen accounting charges;


•	difficulty in integrating product offerings;


•	difficulty in coordinating and rationalizing research and development activities to enhance introduction of new products and technologies with reduced cost;


•	difficulty in coordinating and integrating the manufacturing activities of our acquired businesses, including with respect to third-party manufacturers, including coordination, integration or transfers of any manufacturing activities associated with our acquisition of Opnext;


•	delays and difficulties in delivery of products and services;


•	failure to effectively integrate or separate management information systems, personnel, research and development, marketing, sales and support operations;


•	difficulty in maintaining internal control procedures and disclosure controls that comply with the requirements of the Sarbanes-Oxley Act of 2002, or poor integration of a target’s procedures and controls;


•	difficulty in preserving important relationships of our acquired businesses and resolving potential conflicts between business cultures;


•	uncertainty on the part of our existing customers, or the customers of an acquired company, about our ability to operate effectively after a transaction, and the potential loss of such customers;


•	loss of key employees;


•	difficulty in coordinating the international activities of our acquired businesses, including Opnext, which has substantial operations in Japan as well as the United States, and which uses contract manufacturing suppliers in Southeast Asia;


•	the effect of tax laws and other legal and regulatory regimes due to increasing complexities of our global operating structure;


•	greater exposure to the impact of foreign currency changes on our business;


•	the effect of employment law or regulations or other limitations in foreign jurisdictions that could have an impact on timing, amounts or costs of achieving expected synergies; and


•	substantial demands on our management as a result of these transactions that may limit their time to attend to other operational, financial, business and strategic issues.

Our integration with acquired businesses has been and will continue to be a complex, time-consuming and expensive process. We cannot assure you that we will be able to successfully integrate these businesses in a timely manner, or at all, or that any of the anticipated benefits from our acquisition of Opnext or previous acquisitions will be realized. There are inherent challenges

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in integrating the operations of geographically diverse companies. We may have difficulty, and may incur unanticipated expenses related to, integrating management and personnel from our acquisition of Opnext and previously acquired entities with our management and personnel. Our failure to achieve the strategic objectives of our acquisition of Opnext or previous acquisitions could have a material adverse effect on our revenues, expenses and our other operating results and cash resources, and could result in us not achieving the anticipated potential benefits of these transactions. In addition, we cannot assure you that the growth rate of the combined company will equal the historical growth rate experienced by any of the companies that we have acquired including Opnext. Comparable risks would accompany any divestiture of businesses or assets we might undertake.

In addition, even if we successfully integrate the operations of Opnext and other companies that we acquire in the future, we cannot predict with certainty which strategic, financial or operating synergies or other benefits, if any, will actually be achieved from our acquisition, the timing of any such benefits, or whether those benefits which have been achieved will be sustainable on a long-term basis. Our failure to successfully integrate the operations of Opnext would likely have a material and adverse impact on our business, prospects, financial condition and results of operations.

Despite our existing debt levels, we may have to incur substantially more debt in the future, which may subject us to restrictive covenants that could limit our ability to operate our business.

In the future, we may incur additional indebtedness through arrangements such as credit agreements or term loans that may impose restrictions and covenants that limit our ability to respond appropriately to market conditions, make capital investments or take advantage of business opportunities. In addition, any debt arrangements we may enter into would likely require us to make regular interest payments, which would adversely affect our results of operations.

We have a complex multinational tax structure, and changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

We have a complex multinational tax structure with multiple types of intercompany transactions, and our allocation of profits and losses among us and our subsidiaries through our intercompany transfer pricing agreements is subject to review by the Internal Revenue Service and other tax authorities. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are also subject to periodic examination of our income tax returns and related transfer pricing documentation by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these examinations will not have an adverse effect on our operating results and financial condition.

Our intellectual property rights may not be adequately protected.

Our future success will depend, in large part, upon our intellectual property rights, including patents, copyrights, design rights, trade secrets, trademarks and know-how. We maintain an active program of identifying technology appropriate for patent protection. Our practice is to require employees and consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements. These agreements acknowledge our exclusive ownership of all intellectual property developed by the individuals during their work for us and require that all proprietary information disclosed will remain confidential. Although such agreements may be binding, they may not be enforceable in full or in part in all jurisdictions and any breach of a confidentiality obligation could have a negative effect on our business and our remedy for such breach may be limited.

Our intellectual property portfolio is an important corporate asset. The steps we have taken and may take in the future to protect our intellectual property may not adequately prevent misappropriation or ensure that others will not develop competitive technologies or products. We cannot assure you that our competitors will not successfully challenge the validity of our patents or design products that avoid infringement of our proprietary rights with respect to our technology. There can be no assurance that other companies are not investigating or developing other similar technologies, that any patents will be issued from any application pending or filed by us, or that, if patents are issued, that the claims allowed will be sufficiently broad to deter or prohibit others from marketing similar products. In addition, we cannot assure you that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights under those patents will provide a competitive advantage to us or that our products and technology will be adequately covered by our patents and other intellectual property. Further, the laws of certain regions in which our products are or may be developed, manufactured or sold, including Asia-Pacific, Southeast Asia and Latin America, may not be enforceable to protect our products and intellectual property rights to the same extent as the

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laws of the United States, the U.K. and continental European countries. This is especially relevant since we have transferred our assembly and test operations and chip-on-carrier operations, including certain engineering-related functions, to Shenzhen, China, and have recently signed an agreement to transition portions of these assembly and test operations to Venture in Malaysia.

Opnext has historically relied on Hitachi, one of our major shareholders, for assistance with the research and development efforts related to Opnext’s product portfolio. Any failure of Hitachi to continue to provide these services could have a material adverse effect on our business. Opnext’s product expertise is based on the research ability developed within their Hitachi heritage and through joint research and development in lasers and optical technologies. A key factor to Opnext’s business success and strategy is fundamental laser research. Opnext relied on access to Hitachi’s research laboratories pursuant to a research and development agreement with Hitachi, which includes access to Hitachi’s research facilities and engineers, to conduct research and development activities that are important to the establishment of new technologies and products vital to their current and future business. Should access to Hitachi’s research laboratories become unavailable or available at less attractive terms in the future, this may impede development of new technologies and products, and our financial condition and operating results could be materially adversely affected.

Our revenues and operating results are likely to fluctuate significantly as a result of factors that are outside our control.

Our revenues and operating results are likely to fluctuate significantly in the future as a result of factors that are outside our control. The timing of order placement, size of orders and satisfaction of contractual customer acceptance criteria, changes in the pricing of our products due to competitive pressures as well as order or shipment delays or deferrals, with respect to our products, may cause material fluctuations in revenues. Our lengthy sales cycle, which may extend to more than one year, may cause our revenues and operating results to vary from period to period and it may be difficult to predict the timing and amount of any variation. Delays or deferrals in purchasing decisions by our customers may increase as we develop new or enhanced products for new markets, including data communications, industrial, research, consumer and biotechnology markets. Purchase decisions by our customers are also impacted by the capital expenditure plans of the global telecom carriers, which tend to be the primary customers of our customers. Our current and anticipated future dependence on a small number of customers increases the revenue impact of each such customer’s decision to delay or defer purchases from us, or decision not to purchase products from us. For example, during the second half of fiscal 2012, our revenues were adversely impacted by a significant change in demand expectations from a particular major customer. 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 our business is capital intensive, significant fluctuations in our revenues, without a corresponding decrease in expenses, can have a significant adverse impact on our operating results.

We have significant manufacturing and research and development operations in China, which exposes us to risks inherent in doing business in China.

A significant portion of our assembly and test operations, chip-on-carrier operations and manufacturing and supply chain management operations are concentrated in our facility in Shenzhen, China. In addition, we have substantial research and development related activities in Shenzhen, China. To be successful in China we will need to:


•	qualify our manufacturing lines and the products we produce in Shenzhen, as required by our customers;


•	attract and retain qualified personnel to operate our Shenzhen facility, even during the transition period to Venture; and


•	attract and retain research and development employees at our Shenzhen facility.

We cannot assure you that we will be able to do any of these.

Employee turnover in China is high due to the intensely competitive and fluid market for skilled labor. To operate our Shenzhen facility under these conditions, we need to continue to hire direct manufacturing personnel, administrative personnel and technical personnel; obtain and retain required legal authorization to hire such personnel; and incur the time and expense to hire and train such personnel. On March 28, 2012, shortly after announcing our agreement with Venture to transition certain manufacturing operations, certain of our employees in Shenzhen initiated a work stoppage. The work stoppage impacted our Shenzhen manufacturing capabilities temporarily up to and including April 4, 2012. Revenues for the three months ended March 31, 2012 were adversely impacted by approximately $4.0 million due to the work stoppage.

Inflation rates in China are higher than in most jurisdictions in which we operate. We believe that salary inflation rates for the skilled personnel we hire and seek to retain in Shenzhen are likely to be higher than overall inflation rates.

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Operations in China are subject to greater political, legal and economic risks than our operations in other countries. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, employee benefits and other matters. In addition, we may not obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits.

We intend to continue to export the products manufactured at our Shenzhen facility. Under current regulations, upon application and approval by the relevant governmental authorities, we will not be subject to certain Chinese taxes and will be exempt from certain duties on imported materials that are used in the manufacturing process and subsequently exported from China as finished products. However, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation and duties in China or may be required to pay export fees in the future. In the event that we become subject to new forms of taxation or export fees in China, our business and results of operations could be materially adversely affected. We may also be required to expend greater amounts than we currently anticipate in connection with increasing production at our Shenzhen facility. Any one of the factors cited above, or a combination of them, could result in unanticipated costs or interruptions in production, which could materially and adversely affect our business.

Our products may infringe the intellectual property rights of others, which could result in expensive litigation or require us to obtain a license to use the technology from third parties, or we may be prohibited from selling certain products in the future.

Companies in the industry in which we operate frequently are sued or receive informal claims of patent infringement or infringement of other intellectual property rights. We have, from time to time, received such claims, including from competitors and from companies that have substantially more resources than us.

Third parties may in the future assert claims against us concerning our existing products or with respect to future products under development, or with respect to products that we may acquire through acquisitions. We have entered into and may in the future enter into indemnification obligations in favor of some customers that could be triggered upon an allegation or finding that we are infringing other parties’ proprietary rights. If we do infringe a third party’s rights, we may need to negotiate with holders of those rights in order to obtain a license to those rights or otherwise settle any infringement claim. We have from time to time received notices from third parties alleging infringement of their intellectual property and where appropriate have entered into license agreements with those third parties with respect to that intellectual property. Any license agreements that we wish to enter into the future with respect to intellectual property rights may not be available to us on commercially reasonable terms, or at all. We may not in all cases be able to resolve allegations of infringement through licensing arrangements, settlement, alternative designs or otherwise. We may take legal action to determine the validity and scope of the third-party rights or to defend against any allegations of infringement. Holders of intellectual property rights could become more aggressive in alleging infringement of their intellectual property rights and we may be the subject of such claims asserted by a third party. In the course of pursuing any of these means or defending against any lawsuits filed against us, we could incur significant costs and diversion of our resources and our management’s attention. Due to the competitive nature of our industry, it is unlikely that we could increase our prices to cover such costs. In addition, such claims could result in significant penalties or injunctions that could prevent us from selling some of our products in certain markets or result in settlements or judgments that require payment of significant royalties or damages.

We depend on a limited number of suppliers and key contract manufacturers who could disrupt our business if they stopped, decreased, delayed or were unable to meet our demand for shipments of their products or manufacturing of our products.

We depend on a limited number of suppliers of raw materials and equipment used to manufacture our products. We currently also depend on a limited number of contract manufacturers, principally Fabrinet in Thailand, to manufacture certain of our products. We will also increasingly depend on Venture as we transfer portions of our Shenzhen assembly and test operations in a phased and gradual transfer of products to Venture. Some of these suppliers are sole sources. We typically have not entered into long-term agreements with our suppliers other than Fabrinet and Venture, therefore, these suppliers generally may stop supplying us materials and equipment at any time. Our reliance on a sole supplier or limited number of suppliers could result in delivery problems, reduced control over product pricing and quality, and an inability to identify and qualify another supplier in a timely manner. Some of our suppliers that may be small or undercapitalized may experience financial difficulties that could prevent them from supplying us materials and equipment. In addition, our suppliers, including our sole source suppliers, may experience manufacturing delays or shut downs due to circumstances beyond their control such as earthquakes, floods, fires, political unrest or other natural disasters.

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Fabrinet’s manufacturing operations are located in Thailand. In October 2011, due to flooding in Thailand, Fabrinet suspended operations at both of their factories that supply us with finished goods. Thailand has also been subject to political unrest in the recent past, including the temporary interruption of service at one of its international airports, and may again experience such political unrest in the future. If Fabrinet is unable to supply us with materials or equipment, or if they are unable to ship our materials or equipment out of Thailand due to future flooding or political unrest, this could materially adversely affect our ability to fulfill customer orders and our results of operations.

Any supply deficiencies relating to the quality or quantities of materials or equipment we use to manufacture our products could materially and adversely affect our ability to fulfill customer orders and our results of operations. Lead times for the purchase of certain materials and equipment from suppliers have increased and in some cases have limited our ability to rapidly respond to increased demand, and may continue to do so in the future. To the extent we introduce additional contract manufacturing partners, introduce new products with new partners and/or move existing internal or external production lines to new partners, we could experience supply disruptions during the transition process. In addition, due to our customers’ requirements relating to the qualification of our suppliers and contract manufacturing facilities and operations, we cannot quickly enter into alternative supplier relationships, which prevents us from being able to respond immediately to adverse events affecting our suppliers.

Our business and results of operations may continue to be negatively impacted by general economic, financial market conditions and market conditions in the industries in which we operate, and such conditions may increase the other risks that affect our business.

Over the past few years, the world’s financial markets have experienced significant turmoil, resulting in reductions in available credit, increased costs of credit, extreme volatility in security prices, potential changes to existing credit terms, and rating downgrades of investments. In light of these economic conditions, many of our customers reduced their spending plans, leading them to draw down their existing inventory and reduce orders for our products. It is possible that economic conditions could result in further setbacks, and that these customers, or others, could as a result significantly reduce their capital expenditures, draw down their inventories, reduce production levels of existing products, defer introduction of new products or place orders and accept delivery for products for which they do not pay us due to their economic difficulties or other reasons. These conditions have contributed materially and adversely affected the market conditions in the industries in which we operate, and have had a material adverse impact on our revenues. In addition, the financial downturn affected the financial strength of certain of our customers, including their ability to obtain credit to finance purchases of our products, and could adversely affect additional customers in the future. Our suppliers may also be adversely affected by economic conditions that may impact their ability to provide important components used in our manufacturing processes on a timely basis, or at all. To a large degree, orders from our customers are dependent on demand from telecom carriers around the world. Telecom carrier capital expenditure plans and execution can also be adversely impacted, both in terms of total spend and in determination of areas of investment within network infrastructures, by global and regional macroeconomic conditions.

These conditions could also result in reduced capital resources because of the potential lack of credit availability, higher costs of credit and the stretching of payables by creditors seeking to preserve their own cash resources. We are unable to predict the likely duration, severity and potential continuation of any disruption in financial markets and adverse economic conditions in the U.S. and other countries, but the longer the duration the greater the risks we face in operating our business.

Fluctuations in our operating results could adversely affect the market price of our common stock.

Our revenues and other operating results are likely to fluctuate significantly in the future. The timing of order placement, size of orders and satisfaction of contractual customer acceptance criteria, changes in the pricing of our products due to competitive pressures as well as order or shipment delays or deferrals, with respect to our products, acquisitions and asset sales may cause material fluctuations in revenues. Our lengthy sales cycle, which may extend to more than one year, may cause our revenues and operating results to vary from period to period and it may be difficult to predict the timing and amount of any variation. Delays or deferrals in purchasing decisions by our customers may increase as we develop new or enhanced products for new markets, including data communications, industrial, research, consumer and biotechnology markets. Our current and anticipated future dependence on a small number of customers increases the revenue impact of each such customer’s decision to delay or defer purchases from us, or decision not to purchase products from us. Our expense levels in the future will be based, in large part, on our expectations regarding future revenue sources and, as a result, operating results for any quarterly period in which material orders fail to occur, or are delayed or deferred, could vary significantly.

Because of these and other factors, quarter-to-quarter comparisons of our results of operations may not be indicative of our future performance. In future periods, our results of operations may differ, in some cases materially, from the estimates of

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public market analysts and investors. Such a discrepancy, or our failure to meet published financial projections, could cause the market price of our common stock to decline.

Sales of our products could decline if customer and/or supplier relationships are disrupted by our recent divestiture activities.

Our customers may not continue their historical buying patterns. Customers may defer purchasing decisions as they evaluate our financial strength, the likelihood of successful divestiture of our products and our future product strategy, or consider purchasing products of our competitors.

Customers may also seek to modify or terminate existing agreements, or prospective customers may delay entering into new agreements or purchasing our products or may decide not to purchase any products from us.

Competitive positions in the market, including relative to suppliers who are also competitors, could change as a result of an acquisition or divestiture, and this could impact supplier relationships, including the terms under which we do business with such suppliers.

We sold the Zurich and Amplifier Businesses and may pursue other strategic dispositions or a further reduction in the number of our locations which could be difficult to implement, disrupt our business or further change our business profile significantly.

The sale of the Zurich and Amplifier Businesses, and any future strategic disposition of assets or businesses or reduction in the number of our locations involve numerous risks, including: (i) potential disruption of our ongoing business and distraction of management; (ii) difficulty segregating assets or businesses to be disposed of or consolidated; (iii) exposure to unknown, contingent or other liabilities, including litigation arising in connection with the disposition; (iv) changing our business profile in ways that could have unintended negative consequences; (v) the failure to achieve anticipated benefits, (vi) accounting charges that may affect our financial condition and results of operations; (vii) significant fluctuations in our revenues and operating results; (viii) our ability to support manufacturing services and transition services and the risk to the rest of our business resulting from resources focusing on those services; and (ix) with respect to the sale of the Zurich Business, (A) our ability to support the buyer’s transition from Shenzhen; and (B) the ability of the buyer to supply us with 980 nm pumps. We expect the completion of these asset sales to cause a decrease in our total revenues during 2014 compared to 2013, which will adversely impact our operating results for this period. Additional asset sales that we may consider in the future could cause us to face similar risks, which could weaken our financial condition and adversely impact our operating results.

If we fail to attract and retain key personnel, our business could suffer.

Our future success depends, in part, on our ability to attract and retain key personnel. Competition for highly skilled technical personnel is extremely intense and we continue to face difficulty identifying and hiring qualified engineers in many areas of our business. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Our future success also depends on the continued contributions of our executive management team and other key management and technical personnel, each of whom would be difficult to replace. The loss of services of these or other executive officers or key personnel or the inability to continue to attract qualified personnel could have a material adverse effect on our business.

If we fail to obtain the right to use the intellectual property rights of others necessary to operate our business, our business and results of operations will be materially and adversely affected.

Certain companies in the telecommunications and optical components markets in which we sell our products have experienced frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including academic institutions and our competitors. Optical component suppliers may seek to gain a competitive advantage or other third parties, inside or outside our market, may seek an economic return on their intellectual property portfolios by making infringement claims against us. We currently in-license certain intellectual property of third parties, and in the future, we may need to obtain license rights to patents or other intellectual property held by others to the extent necessary for our business. Unless we are able to obtain such licenses on commercially reasonable terms, patents or other intellectual property held by others could be used to inhibit or prohibit our production and sale of existing products and our development of new products for our markets. Licenses granting us the right to use third-party technology may not be available on commercially reasonable terms, or at all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have a significant adverse impact on our operating results. In addition, in the event we are granted such a license, it is likely such license would be non-exclusive and other parties, including

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competitors, may be able to utilize such technology. Our larger competitors may be able to obtain licenses or cross-license their technology on better terms than we can, which could put us at a competitive disadvantage. In addition, our larger competitors may be able to buy such technology and preclude us from licensing or using such technology.

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 fiscal years ended June 29, 2013, June 30, 2012 and July 2, 2011, 13 percent, 18 percent and 17 percent of our revenues, respectively, were derived from sales to customers located in the United States and 87 percent, 82 percent and 83 percent of our revenues, respectively, were derived from sales to customers located outside the United States, including our discontinued operations. We are subject to additional risks related to operating in foreign countries, including:


•	currency fluctuations, which could result in increased operating expenses and reduced revenues;


•	greater difficulty in accounts receivable collection and longer collection periods;


•	difficulty in enforcing or adequately protecting our intellectual property;


•	ability to hire qualified candidates;


•	foreign taxes;


•	political, legal and economic instability in foreign markets;


•	foreign regulations;


•	changes in, or impositions of, legislative or regulatory requirements;


•	trade restrictions, including restrictions imposed by the United States government on trading with parties in foreign countries;


•	transportation delays;


•	epidemics and illnesses;


•	terrorism and threats of terrorism;


•	work stoppages and infrastructure problems due to adverse weather conditions or natural disasters;


•	work stoppages related to employee dissatisfaction;


•	changes in import/export regulations, tariffs, and freight rates; and


•	the effective protections of, and the ability to enforce, contractual arrangements.

Any of these risks, or any other risks related to our foreign operations, could materially adversely affect our business, financial condition and results of operations.

A lack of effective internal control over our financial reporting could result in an inability to report our financial results accurately, which could lead to a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

In connection with establishing the fair values of certain assets and liabilities associated with our acquisition of Opnext, we identified a material weakness over controls related to our recording of the purchase under Accounting Standards Codification Topic 805, Business Combinations . In the fourth quarter of fiscal year 2013, we made adjustments to the fair value of certain items, including property and equipment, capital leases and intangible assets. As a result of these adjustments, management concluded that we did not maintain effective internal control over financial reporting as of June 29, 2013, because the potential impact of these adjustments could have been material to our financial position and results of operations. Our remediation efforts, including the testing of these controls, will continue throughout our fiscal year 2014. In addition, in April 2012, in connection with the restatement of our previously issued consolidated financial statements as of and for the quarters ended March 31, 2012 and October 1, 2011, our management re-evaluated the effectiveness of our disclosure controls and procedures. As a result of that re-evaluation, our management determined that a material weakness existed in our internal controls over financial reporting such that our disclosure controls and procedures related to accounting for income taxes were not effective as of March 31, 2012 and October 1, 2011. During the three months ended March 31, 2012, we implemented enhancements to our internal controls over financial reporting, including adding additional monitoring controls over the preparation and filing of foreign income tax returns. Our remediation efforts, including the testing of these controls continued throughout our fiscal year 2012. The material weakness related to the preparation and filing of foreign income taxes was considered remediated in the fourth quarter of fiscal year 2012, once these controls were shown to be operational for a sufficient period of time to allow management to conclude that these controls were operating effectively.

We cannot assure you that similar material weaknesses will not recur. If additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.

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Effective internal controls over financial reporting are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed. Our failure to implement and maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business, financial condition, operating results and our stock price, and we could be subject to stockholder litigation as a result. Even if we are able to implement and maintain effective internal control over financial reporting, the costs of doing business may increase and our management may be required to dedicate greater time and resources to that effort. In addition, we have in the past, and may in the future, acquire companies that have either experienced material weaknesses in their internal controls over financial reporting or have had no previous reporting obligations under Sarbanes-Oxley. Failure to integrate acquired businesses into our internal controls over financial reporting could cause those controls to fail.

We have been named as a party to derivative action lawsuits, and we may be named in additional litigation, all of which will require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

When the market price of a stock experiences a sharp decline, as our stock price recently has, holders of that stock have often brought securities class action litigation against the company that issued the stock. Several securities class action lawsuits have been filed against us and certain of our current and former officers and directors. Other class action lawsuits have been initiated against Opnext, us and certain of our respective current and former officers and directors as purported derivative actions. The securities class action complaints allege violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the Securities and Exchange Commission. Each purported derivative complaint alleges, among other things, counts for breaches of fiduciary duty, waste, and unjust enrichment. For a description of these lawsuits, see Part II, Item 1 – Legal Proceedings of this Quarterly Report on Form 10-Q. Although settlements recently have been preliminarily approved with respect to these lawsuits, the settlements may not be finally approved by the court. If this were to occur, the lawsuits would likely continue to divert the time and attention of our management and cause us to incur significant expense in defending against the litigation. In addition, if these suits are resolved in a manner adverse to us, the damages we could be required to pay may be substantial and could have an adverse impact on our results of operations and our ability to operate our business.

We may face product liability claims.

Despite quality assurance measures, defects may occur in our products. The occurrence of any defects in our products could give rise to liability for damages caused by such defects, including consequential damages. Such defects could, moreover, impair market acceptance of our products. Both could have a material adverse effect on our business and financial condition. In addition, we may assume product warranty liabilities related to companies we acquire, which could have a material adverse effect on our business and financial condition. In order to mitigate the risk of liability for damages, we carry product liability insurance with a $25.0 million aggregate annual limit and errors and omissions insurance with a $5.0 million annual limit. We cannot assure you that this insurance would adequately cover our costs arising from any defects in our products or otherwise.

At times, the market price of our common stock has fluctuated significantly.

The market price of our common stock has been, and is likely to continue to be, highly volatile. For example, between July 1, 2012 and June 29, 2013, the market price of our common stock ranged from a low of $0.99 per share to a high of $3.19 per share. 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 in our public filings, some of the events that could impact our stock price are:


•	fluctuations in our results of operations, including our gross margins;


•	changes in our business, operations or prospects;


•	hiring or departure of key personnel;


•	new contractual relationships with key suppliers or customers by us or our competitors;


•	proposed acquisitions and dispositions by us or our competitors;


•	financial results or projections that fail to meet public market analysts’ expectations and changes in stock market analysts’ recommendations regarding us, other optical technology companies or the telecommunication industry in general;


•	future sales of common stock, or securities convertible into, exchangeable or exercisable for common stock;

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•	adverse judgments or settlements obligating us to pay damages;


•	future issuances of common stock in connection with acquisitions or other transactions;


•	acts of war, terrorism, or natural disasters;


•	industry, domestic and international market and economic conditions, including the global macroeconomic downturn over the last three years and related sovereign debt issues in certain parts of the world;


•	low trading volume in our stock;


•	developments relating to patents or property rights; and


•	government regulatory changes.

In connection with our acquisition of Xtellus, during the first quarter of fiscal year 2012 we issued 0.9 million shares of our common stock to settle our escrow liability. In connection with our acquisition of Mintera, during the second quarter of fiscal year 2012, we issued 0.8 million shares of our common stock to pay portions of the 12 month earnout obligations. In connection with our acquisition of Opnext, during the first quarter of fiscal year 2013, we issued 38.4 million shares of our common stock. In addition, during the second quarter of fiscal year 2014, we issued 13.5 million shares of our common stock in connection with the exercise of the Convertible Notes. In May 2013, we also issued 1.8 million warrants to purchase our common stock at an exercise price of $1.50 per share in connection with the Term Loan we received in May 2013 (See Note 7, Credit Line and Notes elsewhere in this Quarterly Report on Form 10-Q for further details). On May 2, 2014, these warrants were exercised, resulting in the issuance of 978,457 shares of our common stock. The issuance of these shares and their subsequent sale will dilute our existing stockholders and could potentially have a negative impact on our stock price.

Our shares of common stock have experienced substantial price and volume fluctuations, in many cases without any direct relationship to our operating performance. An outgrowth of this market volatility is the significant vulnerability of our stock price to any actual or perceived fluctuation in the strength of the markets we serve, regardless of the actual consequence of such fluctuations. As a result, the market price for our stock is highly volatile. These broad market and industry factors have caused the market price of our common stock to fluctuate, and may in the future cause the market price of our common stock to fluctuate, regardless of our actual operating performance.

We are not restricted from issuing additional shares of our common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, shares of our common stock. Issuances of shares of our common stock or convertible securities, including outstanding options and warrants, will dilute the ownership interest of our stockholders.

Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it appreciates in value.

We have never declared or paid any dividends on our common stock. We anticipate that we will retain any future earnings to support operations and to finance the development of our business and do not expect to pay cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act, or the FCPA. Our failure to comply with these laws could result in penalties which could harm our reputation and have a material adverse effect on our business, results of operations and financial condition.

We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. Although we have implemented policies and procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject, there is no assurance that such policies or procedures will work effectively all of the time or protect us against liability under the FCPA or other laws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. We have manufacturing operations in China and other jurisdictions, many of which pose elevated risks of anti-corruption violations, and we export our products for sale internationally. This puts us in frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. If we are not in compliance with the FCPA and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or foreign authorities could harm our reputation and have an adverse impact on our business, financial condition and results of operations.

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Litigation may substantially increase our costs and harm our business.

We are a party to numerous lawsuits and will continue to incur legal fees and other costs related thereto, including potentially expenses for the reimbursement of legal fees of officers and directors under indemnification obligations. The expense of continuing to defend such litigation may be significant. In addition, there can be no assurance that we will be successful in any defense. Further, the amount of time that will be required to resolve these lawsuits is unpredictable and these actions may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time could have a material adverse effect on our business, results of operations and financial condition.

For a description of our current material litigation, see Part II, Item 1 – Legal Proceedings of this Quarterly Report on Form 10-Q.

In addition, from time to time, we have been a party to certain intellectual property infringement litigation as more fully described above under “Risks Related to Our Business — Our products may infringe the intellectual property rights of others, which could result in expensive litigation or require us to obtain a license to use the technology from third parties, or we may be prohibited from selling certain products in the future .”

The inability to obtain government licenses and approvals for desired international trading activities or technology transfers may prevent the profitable operation of our business.

Many of our present and future business activities are subject to licensing by the United States government under the Export Administration Act, the Export Administration Regulations and other laws, regulations and requirements governing international trade and technology transfer. We presently manufacture products in China and Thailand that require such licenses. The profitable operations of our business may require the continuity of these licenses and may require further licenses and approvals for future products in these and other countries. However, there is no certainty to the continuity of these licenses, nor that further desired licenses and approvals may be obtained.

Prior to our acquisition of Opnext, Opnext licensed its intellectual property to Hitachi and its wholly owned subsidiaries without restriction. In addition, Hitachi is free to license certain of Hitachi’s intellectual property that Opnext used in its business to any third party, including competitors, which could harm our business and operating results.

Opnext was initially created as a stand-alone entity by acquiring certain assets of Hitachi through various transactions. In connection with these transactions, Opnext acquired a number of patents and know-how from Hitachi, but also granted Hitachi and its wholly owned subsidiaries a perpetual right to continue to use those patents and know-how, as well as other patents and know-how that Opnext developed during a period which ended in July 2011 (or October 2012 in certain cases). This license back to Hitachi is broad and permits Hitachi to use this intellectual property for any products or services anywhere in the world, including licensing this intellectual property to our competitors.

Additionally, while significant intellectual property owned by Hitachi was assigned to Opnext when Opnext was formed, Hitachi retained and only licensed to Opnext the intellectual property rights to underlying technologies used in both Opnext products and the products of Hitachi. Under the agreement, Hitachi remains free to license these intellectual property rights to the underlying technologies to any party, including competitors. The intellectual property that has been retained by Hitachi and that can be licensed in this manner does not relate solely or primarily to one or more of Opnext’s products, or groups of products; rather, the intellectual property that is licensed to Opnext by Hitachi is generally used broadly across Opnext’s entire product portfolio. Competition by third parties using the underlying technologies retained by Hitachi could harm the Opnext business, financial condition and results of operations.

We may record additional impairment charges that will adversely impact our results of operations.

As of March 29, 2014 , we had $8.9 million in other intangible assets and $53.3 million of property and equipment, net on our condensed consolidated balance sheet. If we make changes in our business strategy or if market or other conditions adversely affect our business operations, we may be forced to record an impairment charge related to these assets, which would adversely impact our results of operations. If impairment has occurred, we will be required to record an impairment charge for the difference between the carrying value of the other intangible assets and the implied fair value of the other intangible assets in the period in which such determination is made. The testing of other intangible assets for impairment requires us to make significant estimates about the future performance and cash flows of our business, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry, or market conditions, changes in underlying business operations, future reporting unit operating performance, changes in competition, or changes in

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technologies. Any changes in key assumptions, or actual performance compared with those assumptions, about our business and its future prospects or other assumptions could affect the fair value of one or more reporting units, and result in an impairment charge.

During the fourth quarter of fiscal year 2013 we completed our annual analysis for potential impairment of our goodwill, which included examining the impact of current general economic conditions on our future prospects and the current level of our market capitalization. Based on this analysis, we determined that the goodwill related to our Mintera reporting unit was fully impaired. This resulted in a $10.9 million impairment charge in our statement of operations for fiscal year 2013. In addition, during the first quarter of fiscal year 2013, we recorded $0.9 million in impairment charges related to the impairment of certain technology that is now considered redundant following the acquisition of Opnext. In the fourth quarter of fiscal year 2013, we recorded an additional $13.7 million impairment charge related to the impairment of intangible assets related to certain technologies and we recorded impairment charges of $1.7 million related to other long-lived assets.

Uncertainties associated with the sale of the Zurich and Amplifier Businesses may cause us to lose employees, customers and business partners.

Our current and prospective employees, customers and business partners may be uncertain about their future roles and relationships with us following the completion of the sale of the Zurich and Amplifier Businesses. This uncertainty may adversely affect our ability to attract and retain key management and employees, customers and business partners.

Our business and operating results may be adversely affected by natural disasters or other catastrophic events beyond our control.

Our business and operating results are vulnerable to natural disasters, such as earthquakes, fires, tsunami, volcanic activity and floods, as well as other events beyond our control such as power loss, telecommunications failures and uncertainties arising out of terrorist attacks in the United States and armed conflicts overseas. For example, in the latter three quarters of fiscal year 2012, our results of operations were materially and adversely impacted by the flooding in Thailand. Additionally, our corporate headquarters and a portion of our research and development and manufacturing operations are located in Silicon Valley, California, and select manufacturing facilities are located in Japan. These regions in particular have been vulnerable to natural disasters, such as earthquakes and tsunamis. The occurrence of any of these events could pose physical risks to our property and personnel, which may adversely affect our ability to produce and deliver products to our customers. Although we presently maintain insurance against certain of these events, we cannot be certain that our insurance will be adequate to cover any damage sustained by us or by our customers.

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 handle hazardous materials as part of our manufacturing activities. Consequently, our operations are subject to environmental laws and regulations governing, among other things, the use and handling of hazardous substances and waste disposal. We may incur costs to comply with current or future environmental laws. As with other companies engaged in manufacturing activities that involve hazardous materials, a risk of environmental liability is inherent in our manufacturing activities, as is the risk that our facilities will be shut down in the event of a release of hazardous waste, or that we would be subject to extensive monetary liabilities. The costs associated with environmental compliance or remediation efforts or other environmental liabilities could adversely affect our business. Under applicable European Union regulations, we, along with other electronics component manufacturers, are prohibited from using lead and certain other hazardous materials in our products. We could lose business or face product returns if we fail to maintain these requirements properly.

In addition, the sale and manufacture of certain of our products require on-going compliance with governmental security and import/export regulations. We may, in the future, be subject to investigation which may result in fines for violations of security and import/export regulations. Furthermore, any disruptions of our product shipments in the future, including disruptions as a result of efforts to comply with governmental regulations, could adversely affect our revenues, gross margins and results of operations.

The new disclosure requirements related to the “conflict minerals” provision of the Dodd-Frank Act may limit our supply and increase our costs for certain metals used in our products and could affect our reputation with customers or shareholders.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the Securities and Exchange Commission (SEC) adopted a new rule requiring public companies to disclose the use of specified minerals, known

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as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The new rule, which went into effect for calendar year 2013 and requires a disclosure report to be filed with the SEC by May 31, 2014, will require companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo (DRC) or an adjoining country. The new rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacturing of our products. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to the due diligence process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. As our supply chain is complex and we use contract manufacturers for some of our products, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. If we cannot determine that our products exclude conflict minerals sourced from the DRC or adjoining countries, some of our customers may discontinue, or materially reduce, purchases of our products, which could negatively affect our results of operations.

We can issue shares of preferred stock that may adversely affect your rights as a stockholder of our common stock.

Our certificate of incorporation authorizes us to issue up to 1.0 million 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:


•	adversely affect the voting power of the holders of our common stock;


•	make it more difficult for a third-party to gain control of us;


•	discourage bids for our common stock at a premium;


•	limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or


•	otherwise adversely affect the market price of our common stock.

We may in the future issue shares of authorized preferred stock at any time.

Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover, even if such a transaction would be beneficial to our stockholders.

Some provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These include provisions:


•	authorizing the board of directors to issue preferred stock;


•	prohibiting cumulative voting in the election of directors;


•	limiting the persons who may call special meetings of stockholders;


•	prohibiting stockholder actions by written consent;


•	creating a classified board of directors pursuant to which our directors are elected for staggered three-year terms;


•	permitting the board of directors to increase the size of the board and to fill vacancies;


•	requiring a super-majority vote of our stockholders to amend our bylaws and certain provisions of our certificate of incorporation; and


•	establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

We are subject to the provisions of Section 203 of the Delaware General Corporation Law which limit the right of a corporation to engage in a business combination with a holder of 15 percent or more of the corporation’s outstanding voting securities, or certain affiliated persons. We do not currently have a stockholder rights plan in place.

Although we believe that these charter and bylaw provisions, and provisions of Delaware law, provide an opportunity for the board to assure that our stockholders realize full value for their investment, they could have the effect of delaying or preventing a change of control, even under circumstances that some stockholders may consider beneficial.

ITEM 6. EXHIBITS

The exhibits filed as part of this Quarterly Report on Form 10-Q, or incorporated by reference, are listed on the Exhibit Index immediately preceding such exhibits, which Exhibit Index is incorporated herein by reference.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorize



	OCLARO, INC. (Registrant)

Date: May 8, 2014	By:	/s/ G REG D OUGHERTY
		Greg Dougherty Chief Executive Officer (Principal Executive Officer)

Date: May 8, 2014	By:	/s/ P ETE M ANGAN
		Pete Mangan Chief Financial Officer (Principal Financial Officer)

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EXHIBIT INDEX



Exhibit Number		Description of Exhibit
2.1		Agreement and Plan of Merger dated March 26, 2012, among Oclaro, Inc., Tahoe Acquisition Sub, Inc. and Opnext, Inc. (previously filed as Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on March 26, 2012 and incorporated herein by reference.)
2.2		Agreement of Merger among: Oclaro, Inc., a Delaware corporation; Nikko Acquisition Corp., a Delaware corporation; Mintera Corporation, a Delaware corporation; and Shareholder Representative Services LLC, as the Stockholders’ Agent. Dated as of July 20, 2010 (previously filed as Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on July 26, 2010 and incorporated herein by reference.)
2.3		Agreement of Merger among: Oclaro, Inc., a Delaware corporation; Rio Acquisition corp., a Delaware corporation; Xtellus Inc., a Delaware corporation; and Alta Berkeley LLP, as the Stockholders’ Agent. Dated as of December 16, 2009 (previously filed as Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on December 22, 2009 and incorporated herein by reference.)
3.1		Amended and Restated Bylaws of Oclaro, Inc., including Amendments No. 1 and No. 2 thereto (formerly Bookham, Inc.) (previously filed as Exhibit 3.1 to Registrant’s Registration Statement on Form S-8 dated May 5, 2009 and incorporated herein by reference.)
3.2		Amendment No. 3 to Amended and Restated By-Laws of Oclaro, Inc. (previously filed as Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on July 28, 2011 and incorporated herein by reference.)
3.3		Restated Certificate of Incorporation of Oclaro, Inc. (previously filed as Exhibit 3.2 to Registrant’s Annual Report on Form 10-K filed on September 1, 2010 and incorporated herein by reference.)
3.4		Certificate of Amendment to Restated Certificate of Incorporation of Oclaro, Inc. (previously filed as Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on July 27, 2012 and incorporated herein by reference.)
4.1		Indenture, dated December 14, 2012, entered into by Oclaro, Inc., Oclaro Luxembourg S.A., certain of Oclaro, Inc.’s domestic and foreign subsidiaries and Wells Fargo Bank, National Association (previously filed as Exhibit 4.1 to Registrant’s Quarterly Report on Form 10-Q/A filed on February 15, 2013 and incorporated herein by reference.)
4.2		Form of Warrant Certificate dated May 6, 2013 (previously filed as Exhibit 4.2 to Registrant’s Annual Report on 10-K filed on September 27, 2013 and incorporated herein by reference.)
10.1(2)		Oclaro, Inc. Fourth Amended and Restated 2001 Long-Term Stock Incentive Plan (previously filed as Annex A to our Proxy Statement for our 2013 Annual Meeting of Stockholders on November 26, 2013 and incorporated herein by reference.)
10.2(1)(3)		Loan and Security Agreement, dated March 28, 2014, by and among Oclaro, Inc., Oclaro Technology Ltd. and Silicon Valley Bank
10.3(1)		Unconditional Guaranty, dated March 28, 2014, by and among Oclaro, Inc., Oclaro Technology Ltd. and Silicon Valley Bank
10.4(1)(2)		Offer Letter of Richard Craig, President, Integrated Photonics Division, dated April 21, 2014
31.1(1)		Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2(1)		Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1(1)		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2(1)		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document


(1)	Filed herewith.


(2)	Management contract or compensatory plan or arrangement.


(3)	Portions of this exhibit have been omitted pursuant to a request for confidential treatment submitted to the Securities and Exchange Commission.

CONFIDENTIAL TREATMENT REQUESTED

CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of March 28, 2014 (the “ Effective Date ”) between (i) SILICON VALLEY BANK , a California corporation with a loan production office located at 2400 Hanover Street, Palo Alto, CA 94304 (“ Bank ”), (ii) OCLARO, INC. , a Delaware corporation (“ Parent ”) and (iii) OCLARO TECHNOLOGY LIMITED , a company incorporated under the laws of England and Wales, with company number 02298887 and its registered address at Caswell Towcester, Northamptonshire NN12 8EQ, UK (“ Borrower ”), provides the terms on which Bank shall lend to Borrower and Borrower shall repay Bank. The parties agree as follows:

1 ACCOUNTING AND OTHER TERMS

Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein.

2 LOAN AND TERMS OF PAYMENT

2.1 Promise to Pay . Borrower hereby unconditionally promises to pay Bank the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon as and when due in accordance with this Agreement.

2.1.1 Revolving Advances .

(a) Availability . Subject to the terms and conditions of this Agreement and to the deduction of Reserves, commencing the first Business Day following the Effective Date, Bank shall make Advances not exceeding the Availability Amount. Amounts borrowed under the Revolving Line may be repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to the applicable terms and conditions precedent herein.

(b) Termination; Repayment . The Revolving Line terminates on the Revolving Line Maturity Date, when the principal amount of all Advances, the unpaid interest thereon, and all other Obligations relating to the Revolving Line shall be immediately due and payable.

2.1.2 Letters of Credit Sublimit .

(a) As part of the Revolving Line, Bank shall issue or have issued Letters of Credit denominated in Dollars or a Foreign Currency for Borrower’s account. The aggregate Dollar Equivalent amount utilized for the issuance of Letters of Credit shall at all times reduce the amount

otherwise available for Advances under the Revolving Line. The aggregate Dollar Equivalent of the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not exceed Ten Million Dollars ($10,000,000), minus (i) the sum of all amounts used for Cash Management Services, and minus (ii) the FX Reserves.

(b) If, on the Revolving Line Maturity Date (or the effective date of any termination of this Agreement), there are any outstanding Letters of Credit, then on such date Borrower shall provide to Bank cash collateral in an amount equal to at least 105% (at least 110% for Letters of Credit denominated in a currency other than Dollars) of the aggregate Dollar Equivalent of the face amount of all such Letters of Credit plus all interest, fees, and costs due or estimated by Bank to become due in connection therewith, to secure all of the Obligations relating to such Letters of Credit. All Letters of Credit shall be in form and substance acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank’s standard Application and Letter of Credit Agreement (the “ Letter of Credit Application ”). Borrower agrees to execute any further documentation in connection with the Letters of Credit as Bank may reasonably request. Borrower further agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guarantied by Bank and opened for Borrower’s account or by Bank’s interpretations of any Letter of Credit issued by Bank for Borrower’s account, and Borrower understands and agrees that Bank shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower’s instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto.

(c) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional, and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, such Letters of Credit, and the Letter of Credit Application. If a demand for payment is made under any Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the Dollar Equivalent of the amount thereof (plus fees and charges in connection therewith such as wire, cable, SWIFT or similar charges).

(d) Borrower may request that Bank issue a Letter of Credit payable in a Foreign Currency.

(e) To guard against fluctuations in currency exchange rates, upon the issuance of any Letter of Credit payable in a Foreign Currency, Bank shall create a reserve (the “ Letter of Credit Reserve ”) under the Revolving Line in an amount equal to ten percent (10%) of the face amount of such Letter of Credit. The amount of the Letter of Credit Reserve may be adjusted by Bank from time to time to account for fluctuations in the exchange rate. The availability of funds under the Revolving Line shall be reduced by the amount of such Letter of Credit Reserve for as long as such Letter of Credit remains outstanding.

2.1.3 Foreign Exchange Sublimit . As part of the Revolving Line, Borrower may enter into foreign exchange contracts with Bank under which Borrower commits to purchase from or sell to Bank a specific amount of Foreign Currency (each, a “ FX Contract ”) on a specified date (the “ Settlement Date ”). FX Contracts shall have a Settlement Date of at least one (1) FX Business Day after the contract date and shall be subject to a reserve of ten percent (10.0%) of each outstanding FX Contract (the “ FX Reserve ”). The aggregate amount of FX Contracts at any one time may not

exceed ten (10) times the lesser of (A)Ten Million Dollars ($10,000,000), minus (i) the sum of all amounts used for Cash Management Services, and minus (ii) the aggregate Dollar Equivalent of the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) or (B) the lesser of the Revolving Line or the Borrowing Base, minus (i) the sum of all amounts used for Cash Management Services, and minus (ii) the aggregate Dollar Equivalent of the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve). Any amounts needed to fully reimburse Bank for any amounts not paid by Borrower in connection with FX Contracts will be treated as Advances under the Revolving Line and will accrue interest at the interest rate applicable to Advances.

2.1.4 Cash Management Services Sublimit . Borrower may use the Revolving Line in an aggregate amount not to exceed the lesser of (A) Ten Million Dollars ($10,000,000), minus (i) the aggregate Dollar Equivalent of the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), and minus (ii) the FX Reserves, or (B) the lesser of the Revolving Line or the Borrowing Base, minus (i) the sum of all outstanding principal amounts of any Advances, minus (ii) the aggregate Dollar Equivalent of the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), and minus (iii) the FX Reserves, for Bank’s cash management services, which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in Bank’s various cash management services agreements (collectively, the “ Cash Management Services ”). Any amounts Bank pays on behalf of Borrower for any Cash Management Services will be treated as Advances under the Revolving Line and will accrue interest at the interest rate applicable to Advances.

2.2 Overadvances . If, at any time, the outstanding principal amount of any Advances exceeds the lesser of either the Revolving Line or the Borrowing Base, Borrower shall immediately pay to Bank in cash the amount of such excess (such excess, the “ Overadvance ”). Without limiting Borrower’s obligation to repay Bank any Overadvance, Borrower agrees, at the option of Bank, to pay Bank interest on the outstanding amount of any Overadvance, on demand, at the Default Rate.

2.3 Payment of Interest on the Credit Extensions .

(a) Interest Rate . Subject to Section 2.3(c) and (e):

(i) Advances . The principal amount outstanding under the Revolving Line shall be maintained as either LIBOR Advances or as Prime Rate Advances, and shall accrue interest as follows:

(A) subject to Sections 3.6 and 3.7, each Advance maintained as a LIBOR Advance shall bear interest for each Interest Period with respect thereto at a rate per annum equal to the LIBOR Rate determined on the first day of such Interest Period plus (ii) the Applicable Margin in effect on the first day of such Interest Period; and

(B) each Advance maintained as a Prime Rate Advance shall bear interest at a rate per annum equal to the Prime Rate plus (ii) the Applicable Margin.

(b) Interest Rate Determination . The foregoing applicable interest rates for Credit Extensions consisting of Advances will be adjusted on the first (1 ^st ) day of each Interest Period and fixed for the duration of each such Interest Period.

(c) Default Rate . Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate per annum which is two percentage points (2.00%) above the rate that is otherwise applicable thereto (the “ Default Rate ”), unless Bank elects otherwise, in its sole discretion. Fees and expenses which are required to be paid by Borrower pursuant to the Loan Documents (including, without limitation, Bank Expenses) but are not paid when due shall bear interest until paid at a rate equal to the highest rate applicable to the Obligations. Payment or acceptance of the increased interest rate provided in this Section 2.3(c) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Bank.

(d) Minimum Interest . In the event the aggregate amount of interest earned by Bank in any fiscal quarter (such period, the “ Minimum Interest Period ,” which period shall begin on the Effective Date and continue with each fiscal quarter thereafter until the earlier of the Revolving Line Maturity Date or the date this Agreement is terminated), is less than Forty Five Thousand Dollars ($45,000) (exclusive of any collateral monitoring fees, unused line fees, or any other fees and charges hereunder) (“ Minimum Interest ”), Borrower shall pay to Bank, upon demand by Bank, an amount equal to the (i) Minimum Interest minus (ii) the aggregate amount of all interest earned by Bank (exclusive of any collateral monitoring fees, unused line fees, or any other fees and charges hereunder) in such Minimum Interest Period. The amount of Minimum Interest charged shall be prorated for any partial Minimum Interest Period. Borrower shall not be entitled to any credit, rebate, or repayment of any Minimum Interest pursuant to this Section 2.3(d) notwithstanding any termination of this Agreement or the suspension or termination of Bank’s obligation to make loans and advances hereunder. Bank may deduct amounts owing by Borrower under this Section 2.3(d) pursuant to the terms of Section 2.5(c). Bank shall provide Borrower written notice of deductions made from the Designated Deposit Account pursuant to the terms of this Section 2.3(d).

(e) Adjustment to Interest Rate . Changes to the interest rate of any Credit Extension based on changes to the Prime Rate shall be effective on the effective date of any change to the Prime Rate and to the extent of any such change.

(f) Payment; Interest Computation . Unless otherwise indicated, interest is payable on each Interest Payment Date. Interest accruing on LIBOR Advances and Prime Rate Advances shall be computed on the basis of a 360-day year for the actual number of days elapsed. In computing interest, (i) all payments received after 12:00 noon Pacific time on any day shall be deemed received at the opening of business on the next Business Day, and (ii) the date of the making of any Credit Extension shall be included and the date of payment shall be excluded; provided , however , that if any Credit Extension is repaid on the same day on which it is made, such day shall be included in computing interest on such Credit Extension .

2.4 Fees . Borrower shall pay to Bank:

(a) Bank Expenses . All Bank Expenses (including reasonable attorneys’ fees and expenses for documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due (or, if no stated due date, upon demand by Bank); and

(b) Termination Fee . Upon termination of this Agreement for any reason prior to the Revolving Line Maturity Date, in addition to the payment of any other amounts then-owing, a termination fee in an amount equal to (i) one percent (1.00%) of the Revolving Line (i.e. Four Hundred Thousand Dollars ($400,000)) if such termination occurs on or prior to the first anniversary of the Effective Date, (ii) three-quarters of one percent (0.75%) of the Revolving Line (i.e. Three Hundred Thousand Dollars ($300,000)) if such termination occurs after the first anniversary of the Effective Date but on or prior to the second anniversary of the Effective Date; and (iii) one-half of one percent (0.50%) of the Revolving Line (i.e. Two Hundred Thousand Dollars ($200,000)) if such termination occurs after the second anniversary of the Effective Date but on or prior to the third anniversary of the Effective Date; provided that no termination fee shall be charged if the credit facility hereunder is replaced with a new facility from Bank.

(c) Fees Fully Earned . Unless otherwise provided in this Agreement or in a separate writing by Bank, Borrower shall not be entitled to any credit, rebate, or repayment of any fees earned by Bank pursuant to this Agreement notwithstanding any termination of this Agreement or the suspension or termination of Bank’s obligation to make loans and advances hereunder. Bank may deduct amounts owing by Borrower under the clauses of this Section 2.4 pursuant to the terms of Section 2.5(c). Bank shall provide Borrower written notice of deductions made from the Designated Deposit Account pursuant to the terms of the clauses of this Section 2.4.

2.5 Payments; Application of Payments; Debit of Accounts .

(a) All payments to be made by Borrower under any Loan Document shall be made in immediately available funds in Dollars, without setoff or counterclaim, before 12:00 noon Pacific time on the date when due. Payments of principal and/or interest received after 12:00 noon Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment shall be due the next Business Day, and additional fees or interest, as applicable, shall continue to accrue until paid.

(b) Bank has the exclusive right to determine the order and manner in which all payments with respect to the Obligations may be applied. Borrower shall have no right to specify the order or the accounts to which Bank shall allocate or apply any payments required to be made by Borrower to Bank or otherwise received by Bank under this Agreement when any such allocation or application is not specified elsewhere in this Agreement.

(c) Bank may debit any of Borrower’s deposit accounts, including the Designated Deposit Account, for principal and interest payments or any other amounts Borrower owes Bank when due. These debits shall not constitute a set-off.

2.6 Withholding. Payments received by Bank from Borrower under this Agreement will be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Authority (including any interest, additions to tax or penalties applicable thereto), other than Excluded Taxes. Specifically, however, if at any time any Governmental Authority, applicable law, regulation or international agreement requires Borrower to make any withholding or deduction from any such payment or other sum payable hereunder to Bank, Borrower hereby covenants and agrees that the amount due from Borrower with respect to such payment or other

sum payable hereunder will be increased to the extent necessary to ensure that, after the making of such required withholding or deduction, Bank receives a net sum equal to the sum which it would have received had no withholding or deduction been required, and Borrower shall pay the full amount withheld or deducted to the relevant Governmental Authority. Borrower will, upon request, furnish Bank with proof reasonably satisfactory to Bank indicating that Borrower has made such withholding payment; provided , however , that Borrower need not make any withholding payment if the amount or validity of such withholding payment is contested in good faith by appropriate and timely proceedings and as to which payment in full is bonded or reserved against by Borrower. The agreements and obligations of Borrower contained in this Section 2.6 shall survive the termination of this Agreement. Bank or any other recipient of payments or reimbursements hereunder that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which Borrower is resident for tax purposes, or any treaty to which such jurisdiction is a party, with respect to payments hereunder shall deliver to Borrower at the time or times prescribed by applicable law or reasonably requested by Borrower such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, Bank or such other recipient, if requested by Borrower, shall deliver such other documentation prescribed by applicable law or reasonably requested by Borrower as will enable Borrower to determine whether or not Bank or such other recipient is subject to backup withholding or information reporting requirements. The agreements and obligations of Borrower contained in this Section 2.6 shall survive the termination of this Agreement.

3 CONDITIONS OF LOANS

3.1 Conditions Precedent to Initial Credit Extension . Bank’s obligation to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, such documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate, including, without limitation:

(f) copies of duly executed signatures to the Loan Documents;

(g) copies of duly executed signatures to the Control Agreements;

(h) copies of duly executed signatures to any notice to third party bank and acknowledgements required under the terms of the UK Collateral Documents;

(i) such forms and fees as are required to register the security interests created in the UK Collateral Documents over Intellectual Property at the UKPO/EPO;

(j) undated, signed, blank stock transfer forms and original share certificates in respect of the entire issued share capital of each of Borrower and Bookham Nominees Limited.

(k) [reserved].

(l) a certificate of a director of each of Borrower and Bookham Nominees Limited with respect to its certificate of incorporation, certificate of incorporation on change of name (if any) memorandum and articles of association, board minutes and shareholder resolutions

(authorizing the execution and delivery of this Agreement, the Debenture, and the other Loan Documents to which it is a party and disapplying the power of the directors to refuse to register a transfer of shares), register of charges and specimen signatures;

(m) a certificate of a member of Oclaro Innovations LLP with respect to its certificate of incorporation, certificate of incorporation on change of name (if any) partnership agreement, minutes of a meeting of its members authorizing the execution and delivery of this Agreement, the Debenture, and the other Loan Documents to which it is a party, register of charges, and specimen signatures;

(n) the Operating Documents and long-form good standing certificates of each Guarantor other than the UK Guarantors certified by the Secretary of State (or equivalent agency) of Borrower’s jurisdiction of organization or formation and each jurisdiction in which Borrower is qualified to conduct business, each as of a date no earlier than thirty (30) days prior to the Effective Date;

(o) copies of duly executed signatures to the completed Borrowing Resolutions for Borrower;

(p) copies of duly executed signature to a payoff letter from Wells Fargo Capital Finance, Inc. (the “ Prior Lender ”), together with all documents and agreements executed in connection therewith, shall have been terminated and all amounts thereunder shall have been paid in full;

(q) evidence that (i) the Liens securing Indebtedness owed by Parent and Subsidiaries to Prior Lender and any other third party will be terminated and (ii) the documents and/or filings evidencing the perfection of such Liens, including without limitation any financing statements and/or control agreements, have or will, concurrently with the initial Credit Extension, be terminated;

(r) certified copies, dated as of a recent date, of financing statement searches, and UK Companies House register searches as Bank may request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be terminated or released;

(s) the Perfection Certificate of Parent and Subsidiaries, together with copies of the duly executed signatures thereto;

(t) [reserved];

(u) a bailee’s waiver in favor of Bank for each location where Borrower maintains property with a third party, by each such third party, together with copies of the duly executed signatures thereto;

(v) a legal opinion of English counsel (authority/enforceability) to the Bank, dated as of the Effective Date together with copies of the duly executed signature thereto;

(w) a legal opinion of counsel to the Loan Parties, dated as of the Effective Date together with copies of the duly executed signature thereto;

(x) copies of the duly executed signatures to each Guaranty and each Guarantor Security Agreement, together with copies of the duly executed signatures to the completed Borrowing Resolutions for each Guarantor;

(y) evidence satisfactory to Bank that the insurance policies and endorsements required by Section 6.7 hereof are in full force and effect, together with appropriate evidence showing lender loss payable and/or additional insured clauses or endorsements in favor of Bank;

(z) evidence satisfactory to Bank that all senior unsecured convertible notes issued by Parent have been converted into equity or have otherwise been retired; and

(aa) payment of the Bank Expenses then due as specified in Section 2.4 hereof.

3.2 Conditions Precedent to all Credit Extensions . Bank’s obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following conditions precedent:

(g) timely receipt of an executed Transaction Report;

(h) the representations and warranties in this Agreement and the Debenture shall be true, accurate, and complete in all material respects on the date of the Transaction Report and on the Funding Date of each Credit Extension; provided , however , that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided , further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Default or Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrower’s representation and warranty on that date that the representations and warranties in this Agreement and the Debenture remain true, accurate, and complete in all material respects; provided , however , that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided , further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and

(i) Bank determines to its satisfaction that there has not been any material impairment in the general affairs, management, results of operation, financial condition or the prospect of repayment of the Obligations, or any material adverse deviation by Borrower from the most recent business plan of Borrower presented to and accepted by Bank.

3.3 Covenant to Deliver . Borrower agrees to deliver to Bank each item required to be delivered to Bank under this Agreement as a condition precedent to any Credit Extension. Borrower expressly agrees that a Credit Extension made prior to the receipt by Bank of any such item shall not constitute a waiver by Bank of Borrower’s obligation to deliver such item, and the making of any Credit Extension in the absence of a required item shall be in Bank’s sole discretion.

3.4 Procedures for Borrowing; Advances . Subject to the prior satisfaction of all other applicable conditions to the making of an Advance set forth in this Agreement, an Advance shall be made upon Borrower’s irrevocable written notice delivered to Bank by electronic mail in the form of a Notice of Borrowing executed by an Authorized Signer or without instructions if any Advances is necessary to meet Obligations which have become due. Such Notice of Borrowing must be received by Bank prior to 12:00 noon Pacific time, (i) at least three (3) Business Days prior to the requested Funding Date, in the case of any LIBOR Advance, and (ii) on the requested Funding Date, in the case of a Prime Rate Advance, specifying: (1) the amount of the Advance; (2) the Currency in which such Advance shall be denominated; (3) the requested Funding Date; (4) whether the Credit Extension is to be comprised of LIBOR Advances or Prime Rate Advances; and (5) the duration of the Interest Period applicable to any such LIBOR Advances included in such notice; provided that if the Notice of Borrowing shall fail to specify the duration of the Interest Period for any Credit Extension comprised of LIBOR Advances, such Interest Period shall be one (1) month. In addition to such Notice of Borrowing, Borrower must promptly deliver to Bank by electronic mail a completed Transaction Report executed by an Authorized Signer together with such other reports and information, including without limitation, sales journals, cash receipts journals, accounts receivable aging reports, as Bank may request in its sole discretion.

3.5 Conversion and Continuation Elections .

(a) So long as (i) Borrower shall not have sent any notice of termination of this Agreement; and (ii) Borrower shall have complied with such customary procedures as Bank has established from time to time for Borrower’s requests for LIBOR Advances, Borrower may, upon irrevocable written notice to Bank:


(1)	elect to convert on any Business Day, Prime Rate Advances into LIBOR Advances;


(2)	elect to continue on any Interest Payment Date any LIBOR Advances maturing on such Interest Payment Date; or


(3)	elect to convert on any Interest Payment Date any LIBOR Advances maturing on such Interest Payment Date into Prime Rate Advances.

(b) Borrower shall deliver a Notice of Conversion/Continuation by electronic mail to be received by Bank prior to 12:00 noon Pacific time (i) at least three (3) Business Days in advance of the Conversion Date or Continuation Date, if any Credit Extensions are to be converted into or continued as LIBOR Advances; and (ii) on the Conversion Date, if any Credit Extensions are to be converted into Prime Rate Advances, in each case specifying the:


(1)	proposed Conversion Date or Continuation Date;


(2)	aggregate amount of the Credit Extensions to be converted or continued;


(3)	nature of the proposed conversion or continuation; and


(4)	if the resulting Credit Extension is to be a LIBOR Advance, the duration of the requested Interest Period.

(c) If upon the expiration of any Interest Period applicable to any LIBOR Advances, Borrower shall have timely failed to select a new Interest Period to be applicable to such LIBOR Advances or request to convert a LIBOR Advance into a Prime Rate Advance, Borrower shall be deemed to have elected for any such Credit Extensions, to convert such LIBOR Advances into Prime Rate Advances.

(d) Any LIBOR Advances shall, at Bank’s option, convert into Prime Rate Advances in the event that an Event of Default exists.

3.1 Special Provisions Governing LIBOR Advances . Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to LIBOR Advances as to the matters covered:

(a) Determination of Applicable Interest Rate . As soon as practicable on each Interest Rate Determination Date, Bank shall determine (which determination shall, absent manifest error in calculation, be final, conclusive and binding upon all parties) the interest rate that shall apply to the LIBOR Advances for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Borrower.

(b) Inability to Determine Applicable Interest Rate . In the event that Bank shall have reasonably determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any LIBOR Advances, that by reason of circumstances affecting the London interbank market adequate and fair means do not exist for ascertaining the interest rate applicable to such LIBOR Advance on the basis provided for in the definition of LIBOR, or that LIBOR does not accurately reflect the cost to Bank of lending LIBOR Advances, then Bank shall on such date give notice (by facsimile or by telephone confirmed in writing) to Borrower of such determination, whereupon (i) no Credit Extensions may be made as, or converted to, LIBOR Advances until such time as Bank notifies Borrower that the circumstances giving rise to such notice no longer exist, and (ii) any Notice of Conversion/Continuation given by Borrower with respect to LIBOR Advances in respect of which such determination was made shall be deemed to be rescinded by Borrower. Bank shall endeavor to promptly notify Borrower if the circumstances described in this Section 3.6(b) are no longer applicable, but the failure of Bank to so notify Borrower shall not be deemed a breach of this Agreement by Bank or Borrower.

(c) Compensation for Breakage or Non-Commencement of Interest Periods . If (i) for any reason, other than a default by Bank or any failure of Bank to fund LIBOR Advances due to impracticability or illegality under Sections 3.7(c) and 3.7(d) of this Agreement, a borrowing or a conversion to or continuation of any LIBOR Advances does not occur on a date specified in a Notice of Conversion/Continuation, as the case may be, or (ii) any complete or partial principal payment or reduction of a LIBOR Advance, or any conversion of any LIBOR Advance, occurs on a date prior to the last day of an Interest Period applicable to that LIBOR Advance, including due to voluntary or mandatory prepayment or acceleration, then, in each case, Borrower shall compensate

Bank, upon written request by Bank, for all losses and expenses incurred by Bank in an amount equal to the excess, if any, of:

(A) the amount of interest that would have accrued on the amount (1) not borrowed, converted or continued as provided in clause (i) above, or (2) paid, reduced or converted as provided in clause (ii) above, for the period from (y) the date of such failure to borrow, convert or continue as provided in clause (i) above, or the date of such payment, reduction or conversion as provided in clause (ii) above, as the case may be, to (z) in the case of a failure to borrow, convert or continue as provided in clause (i) above, the last day of the Interest Period that would have commenced on the date of such borrowing, conversion or continuing but for such failure, and in the case of a payment, reduction or conversion prior to the last day of an Interest Period applicable to a LIBOR Advance as provided in clause (ii) above, the last day of such Interest Period, in each case at the applicable rate of interest or other return for such LIBOR Advance(s) provided for herein (excluding, however, the Applicable Margin included therein, if any), over

(B) the interest which would have accrued to Bank on the applicable amount provided in clause (A) above through the purchase of a LIBOR deposit bearing interest at the rate obtained pursuant to the definition of LIBOR Rate on the date of such failure to borrow, convert or continue as provided in clause (i) above, or the date of such payment, reduction or conversion as provided in clause (ii) above, as the case may be, for a period equal to the remaining period of such applicable Interest Period provided in clause (A) above.

Bank’s request shall set forth the manner and method of computing such compensation and such determination as to such compensation shall be conclusive absent manifest error. Borrower agrees to pay Bank, upon demand by Bank (or Bank may, at its option, debit the Designated Deposit Account or any other account Borrower maintains with Bank) any amounts required to compensate Bank for any loss (including loss of anticipated profits), cost, or expense incurred by Bank, as a result of the conversion of LIBOR Advances to Prime Rate Advances.

(d) Assumptions Concerning Funding of LIBOR Advances . Calculation of all amounts payable to Bank under this Section 3.6 and under Section 3.7 shall be made as though Bank had actually funded each relevant LIBOR Advance through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to the definition of LIBOR Rate in an amount equal to the amount of such LIBOR Advance and having a maturity comparable to the relevant Interest Period; provided , however , that Bank may fund each of its LIBOR Advances in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this Section 3.6 and under Section 3.7. Notwithstanding anything to the contrary contained herein, Bank shall not be required to purchase Dollar deposits in the London interbank market or other applicable LIBOR market to fund any LIBOR Advances, but the provisions hereof shall be deemed to apply as if Bank had purchased such deposits to fund the LIBOR Advances.

(e) LIBOR Advances After Default . After the occurrence and during the continuance of an Event of Default, at Bank’s option, (i) Borrower may not elect to have any Credit Extension be continued as, or converted to, a LIBOR Advance after the expiration of any Interest Period then in effect for such Credit Extension and (ii) subject to the provisions of Section 3.6(c), any Notice of Conversion/Continuation given by Borrower with respect to a requested conversion/continuation that has not yet occurred shall, at Bank’s option, be deemed to be rescinded by Borrower and be deemed a request to convert or continue Credit Extensions referred to therein as Prime Rate Advances.

3.2 Additional Requirements/Provisions Regarding LIBOR Advances.

(a) Borrower shall pay Bank, upon demand by Bank, from time to time such amounts as Bank may determine to be necessary to compensate it for any costs incurred by Bank that Bank reasonably determines are attributable to its making or maintaining of any amount receivable by Bank hereunder in respect of any LIBOR Advances relating thereto (such increases in costs and reductions in amounts receivable being herein called “ Additional Costs ”), in each case resulting from any Regulatory Change which:

(i) changes the basis of taxation of any amounts payable to Bank under this Agreement in respect of any LIBOR Advances (other than Excluded Taxes);

(ii) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with, or other liabilities of Bank (including any LIBOR Advances or any deposits referred to in the definition of LIBOR); or

(iii) imposes any other condition affecting this Agreement (or any of such extensions of credit or liabilities).

Bank will notify Borrower of any event occurring after the Effective Date which will entitle Bank to compensation pursuant to this Section 3.7(a) as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Bank will furnish Borrower with a statement setting forth the basis and amount of each request by Bank for compensation under this Section 3.7(a). Determinations and allocations by Bank for purposes of this Section 3.7(a) of the effect of any Regulatory Change on its costs of maintaining its obligations to make LIBOR Advances, of making or maintaining LIBOR Advances, or on amounts receivable by it in respect of LIBOR Advances, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive absent manifest error.

(b) If Bank shall determine that the adoption or implementation after the Effective Date of any applicable law, rule, regulation, or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its applicable lending office) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank, or comparable agency, has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank (a “ Bank Parent ”) as a consequence of its obligations hereunder to a level below that which Bank (or Bank’s Parent) could have achieved but

for such adoption, change, or compliance (taking into consideration policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within five (5) days after demand by Bank, Borrower shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction. A statement of Bank claiming compensation under this Section 3.7(b) and setting forth the additional amount or amounts to be paid to it hereunder with the calculation thereof in reasonable detail shall be conclusive absent manifest error.

Notwithstanding anything to the contrary in this Section 3.7, Borrower shall not be required to compensate Bank pursuant to Section 3.7(a) or (b) for any amounts incurred more than six (6) months prior to the date that Bank notifies Borrower of Bank’s intention to claim compensation therefor; provided that if the circumstances giving rise to such claim have a retroactive effect, then such six-month period shall be extended to include the period of such retroactive effect. The obligations of the Borrower arising pursuant to Section 3.7(a) and (b) shall survive the Revolving Line Maturity Date, as applicable, the termination of this Agreement and the repayment of all Obligations.

(d) If it shall become unlawful for Bank to continue to fund or maintain any LIBOR Advances, or to perform its obligations hereunder, upon demand by Bank, Borrower shall prepay the LIBOR Advances in full with accrued interest thereon and all other amounts payable by Borrower hereunder (including, without limitation, any amount payable in connection with such prepayment pursuant to Section 3.6(c)(ii)). Notwithstanding the foregoing, to the extent a determination by Bank as described above relates to a LIBOR Advance then being requested by Borrower pursuant to a Notice of Conversion/Continuation, Borrower shall have the option, subject to the provisions of Section 3.6(c)(ii), to (i) rescind such Notice of Conversion/Continuation by giving notice (by facsimile or by telephone confirmed in writing), to Bank of such rescission on the date on which Bank gives notice of its determination as described above, or (ii) modify such Notice of Conversion/Continuation to obtain a Prime Rate Advance or to have outstanding Credit Extensions converted into or continued as Prime Rate Advances by giving notice (by facsimile or by telephone confirmed in writing) to Bank of such modification on the date on which Bank gives notice of its determination as described above. Bank shall endeavor to promptly notify Borrower if the circumstances described in this Section 3.7(d) are no longer applicable, but the failure of Bank to so notify Borrower shall not be deemed a breach of this Agreement by Bank or Borrower.

3.3 Limitations on LIBOR Tranches . Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions and continuations of LIBOR Advances and all selections of Interest Periods shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the LIBOR Advances comprising each LIBOR tranche shall be equal to One Million Dollars ($1,000,000) or a whole multiple of One Hundred Thousand Dollars ($100,000) in excess thereof, and (b) no more than seven (7) LIBOR tranches shall be outstanding at any one time.

4 CREATION OF SECURITY INTEREST

4.1 Grant of Security Interest . Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to

Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof.

If this Agreement is terminated, Bank’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. Upon payment in full in cash of the Obligations and at such time as Bank’s obligation to make Credit Extensions has terminated, Bank shall, at Borrower’s sole cost and expense, release its Liens in the Collateral granted herein and in the Debenture and all rights therein shall revert to Borrower.

Without limiting the foregoing, all Obligations shall also be secured by (a) the Debenture and any and all other security agreements, mortgages or other collateral granted to Bank by Borrower as security for the Obligations, now or in the future, and (b) any and all properties, rights and assets of Borrower granted by Borrower to Bank now, or in the future, in which Borrower obtains an interest, or the power to transfer rights in.

4.2 Priority of Security Interest . Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral (subject only to Permitted Liens that are permitted pursuant to the terms of this Agreement to have superior priority to Bank’s Lien under this Agreement). If Borrower shall acquire a commercial tort claim in excess of Seventy Five Thousand Dollars ($75,000), Borrower shall promptly notify Bank in a writing signed by Borrower of the general details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Bank.

4.3 Authorization to File Financing Statements . Borrower hereby authorizes Bank to file financing statements, without notice to Borrower, with all appropriate jurisdictions to perfect or protect Bank’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of Bank under the Code. Such financing statements may indicate the Collateral as “all assets of the Debtor” or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in Bank’s discretion.

5 REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows:

5.1 Due Organization, Authorization; Power and Authority . Borrower is a private limited company, duly incorporated and validly existing under the laws of England and Wales and has the power to carry on its business as it is now being conducted and to own its property and other assets. In connection with this Agreement, Borrower has delivered to Bank a completed certificate signed by Borrower, entitled “Perfection Certificate”. Borrower represents and warrants to Bank that (a) Borrower’s exact legal name is that indicated on the Perfection Certificate and on the signature page hereof; (b) Borrower is an organization of the type and is organized in the jurisdiction set forth in the Perfection Certificate; (c) the Perfection Certificate accurately sets forth Borrower’s organizational identification number or accurately states that Borrower has none; (d) the Perfection Certificate accurately sets forth Borrower’s place of business, or, if more than one, its chief executive office as well as Borrower’s mailing address (if different than its chief executive office); (e) except

as disclosed in the Perfection Certificate, Borrower (and each of its predecessors) has not, in the past five (5) years, changed its jurisdiction of formation, organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificate pertaining to Borrower and each of its Subsidiaries is accurate and complete (except for changes thereto that are permitted hereunder and it being understood and agreed that Borrower may from time to time update certain information in the Perfection Certificate after the Effective Date to the extent permitted by one or more specific provisions in this Agreement). If Borrower is not now a Registered Organization but later becomes one, Borrower shall promptly notify Bank of such occurrence and provide Bank with Borrower’s organizational identification number.

The execution, delivery and performance by Borrower of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of Borrower’s organizational documents, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which Borrower or any of its Subsidiaries or any of their property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such Governmental Approvals which have already been obtained and are in full force and effect), or (v) conflict with, contravene, constitute a default or breach under, or result in or permit the termination or acceleration of, any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound in which the default could reasonably be expected to have a material adverse effect on the business of Parent and its Subsidiaries, taken as a whole.

5.2 Collateral . Borrower has good title to, rights in, and the power to transfer each item of the Collateral upon which it purports to grant a Lien hereunder and pursuant to the Debenture, free and clear of any and all Liens except Permitted Liens. Borrower has no Collateral Accounts at or with any bank or financial institution other than Bank or Bank’s Affiliates except for the Collateral Accounts described in the Perfection Certificate delivered to Bank in connection herewith and which Borrower has taken such actions as are necessary to give Bank a perfected security interest therein, pursuant to the term of Section 6.8(b) and as provided in the Debenture. The Accounts are bona fide, existing obligations of the Account Debtors.

The Collateral is not in the possession of any third party bailee (such as a warehouse) except as otherwise provided in the Perfection Certificate or as permitted pursuant to Section 7.2. None of the components of the Collateral shall be maintained at locations other than as provided in the Perfection Certificate or as permitted pursuant to Section 7.2.

All Inventory is in all material respects of good and marketable quality, free from material defects.

Borrower is the sole owner of the Intellectual Property which it owns or purports to own except for (a) non-exclusive licenses granted to its customers in the ordinary course of business, (b) over-the-counter software that is commercially available to the public, and (c) material Intellectual Property licensed to Borrower and noted on the Perfection Certificate. Each Patent which it owns or purports to own and which is material to Borrower’s business is valid and

enforceable, and no part of the Intellectual Property which Borrower owns or purports to own and which is material to Borrower’s business has been judged invalid or unenforceable, in whole or in part. To the best of Borrower’s knowledge, no claim has been made that any part of the Intellectual Property violates the rights of any third party except to the extent such claim would not reasonably be expected to have a material adverse effect on the business of Parent and its Subsidiaries, taken as a whole.

Except as noted on the Perfection Certificate, Borrower is not a party to, nor is it bound by, any Restricted License.

5.3 Accounts Receivable .

(a) For each Account with respect to which Advances are requested, on the date each Advance is requested and made, such Account shall be an Eligible Account.

(b) All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Eligible Accounts are and shall be true and correct and all such invoices, instruments and other documents, and all of Borrower's Books are genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Eligible Account shall comply in all material respects with all applicable laws and governmental rules and regulations. Borrower has no knowledge of any actual or imminent Insolvency Proceeding of any Account Debtor whose accounts are Eligible Accounts in any Transaction Report. To the best of Borrower’s knowledge, all signatures and endorsements on all documents, instruments, and agreements relating to all Eligible Accounts are genuine, and all such documents, instruments and agreements are legally enforceable in accordance with their terms.

5.4 Litigation . There are no actions or proceedings pending or, to the knowledge of any Responsible Officer, threatened in writing by or against Borrower or any of its Subsidiaries involving more than, individually or in the aggregate, One Million Dollars ($1,000,000) that have not otherwise been previously disclosed to Bank.

5.5 Financial Statements; Financial Condition . All consolidated financial statements for Borrower and any of its Subsidiaries delivered to Bank fairly present in all material respects Borrower’s consolidated financial condition and Borrower’s consolidated results of operations. There has not been any material deterioration in Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Bank.

5.6 Solvency . The fair salable value of Borrower’s consolidated assets (including goodwill minus disposition costs) exceeds the fair value of Borrower’s liabilities; Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature and Borrower is not unable to pay its debts (including trade debts) within the meaning of the UK Insolvency Act 1986 and has not stopped paying its debts as they fall due and the value of its assets is not less than the value of its liabilities (taking into account its contingent and prospective liabilities).

5.7 Regulatory Compliance . Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940, as amended.

Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors). Borrower (a) has complied in all material respects with all Requirements of Law, and (b) has not violated any Requirements of Law the violation of which could reasonably be expected to have a material adverse effect on its business. None of Borrower’s or any of its Subsidiaries’ properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each of its Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Government Authorities that are necessary to continue their respective businesses as currently conducted.

5.8 Subsidiaries; Investments . Borrower does not own any stock, partnership, or other ownership interest or other equity securities except for Permitted Investments.

5.9 Tax Returns and Payments; Pension Contributions . Borrower has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower except to the extent such taxes are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor.

To the extent Borrower defers payment of any contested taxes, Borrower shall (i) notify Bank in writing of the commencement of, and any material development in, the proceedings, and (ii) post bonds or take any other steps required to prevent the governmental authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien.” Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not withdrawn from participation in, and has not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

5.10 Use of Proceeds . Borrower shall use the proceeds of Advances under the Revolving Line solely as working capital and to fund its general business requirements and not for personal, family, household or agricultural purposes.

5.11 Full Disclosure . No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to Bank, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or

periods covered by such projections and forecasts may differ from the projected or forecasted results).

5.12 Definition of “Knowledge . ” For purposes of the Loan Documents, whenever a representation or warranty is made to Borrower’s knowledge or awareness, to the “best of” Borrower’s knowledge, or with a similar qualification, knowledge or awareness means the actual knowledge, after reasonable investigation, of any Responsible Officer.

5.13 Inactive Subsidiaries . Each of the Inactive Subsidiaries is inactive and does not conduct any business operations, except as may be related to the dissolution of such Inactive Subsidiary or the consolidation or merger of such Inactive Subsidiary with one or more Loan Parties as permitted under the terms of this Agreement.

6 AFFIRMATIVE COVENANTS

Borrower and/or Parent shall do all of the following:

6.1 Government Compliance .

(a) Maintain its and all its Subsidiaries’ legal existence and good standing in their respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on Borrower’s business or operations. Borrower shall comply, and have each Subsidiary comply, in all material respects, with all laws, ordinances and regulations to which it is subject.

(b) Obtain all of the Governmental Approvals necessary for the performance by Borrower of its obligations under the Loan Documents to which it is a party and the grant of a security interest to Bank in all of its property. Borrower shall promptly provide copies of any such obtained Governmental Approvals to Bank.

6.2 Financial Statements, Reports, Certificates . Provide Bank with the following:

(e) a Transaction Report (and any schedules and sales and collection journals related thereto) (i) with each request for an Advance, (ii) no later than Friday of each week when a Streamline Period is not in effect, and (iii) within ten (10) days after the end of each month when a Streamline Period is in effect;

(f) no later than Friday of each week when a Streamline Period is not in effect, and within ten (10) days after the end of each month when a Streamline Period is in effect , (A) accounts receivable agings, aged by invoice date, (B) accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, and (C) reconciliations of accounts receivable agings (aged by invoice date), transaction reports, Deferred Revenue report, and general ledger;

(g) as soon as available, but no later than thirty (30) days after the last day of each month, a company prepared consolidated and consolidating balance sheet and income statement covering Parent’s and each of its Subsidiary’s operations for such month certified by a Responsible Officer and in a form acceptable to Bank (the “ Monthly Financial Statements ”) ;

(h) (i) w ithin thirty (30) days after the last day of each month and together with the Monthly Financial Statements, (ii) within forty-five (45) days after the last day of each quarter and together with the Quarterly Financial Statements, and (iii) within ninety (90) day after the last day of each fiscal year and together with the Annual Financial Statements, a duly completed Compliance Certificate signed by a Responsible Officer , certifying that as of the end of such month, Borrower was in full compliance with all of the terms and conditions of this Agreement, and, if applicable, setting forth calculations showing compliance with the financial covenants set forth in this Agreement, and such other information as Bank may reasonably request, including, without limitation, a statement that at the end of such month there were no held checks;

(i) as soon as available, and in any event within forty-five (45) days after the end of each fiscal quarter of Borrower, company prepared consolidated and consolidating balance sheet and income statement covering Parent’s and each of its Subsidiary’s operations for such quarter certified by a Responsible Officer and in a form acceptable to Bank (the “ Quarterly Financial Statements ”) ;

(j) within forty-five (45) days prior to the end of each fiscal year of Parent, (A) annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Parent, and (B) annual financial projections for the following fiscal year (on a quarterly basis) as approved by Parent’s board of directors, together with any related business forecasts used in the preparation of such annual financial projections ;

(k) as soon as available, and in any event within ninety (90) days following the end of Parent’s fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Bank (the “ Annual Financial Statements ”) ;

(l) within five (5) days of filing, copies of all periodic and other reports, proxy statements and other materials filed by Parent with the SEC, any Governmental Authority succeeding to any or all of the functions of the SEC or with any national securities exchange, or distributed to its shareholders, as the case may be. Documents required to be delivered pursuant to the terms hereof (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which Parent posts such documents, or provides a link thereto, on Parent’s website on the Internet at Parent’s website address; provided , however , Borrower shall promptly notify Bank in writing (which may be by electronic mail) of the posting of any such documents;

(m) no later than Friday of each week when a Streamline Period is not in effect, and within ten (10) days after the end of each month when a Streamline Period is in effect, a cash reconciliation report, in form and substance acceptable to Bank, in its reasonable discretion, and in any event including all cash balances at all financial institutions for Parent and its Subsidiaries;

(n) within five (5) days of delivery, copies of all statements, reports and notices made available to Borrower’s security holders or to any holders of Subordinated Debt;

(o) prompt report of any legal actions pending or threatened in writing against Parent or any of its Subsidiaries that could result in damages or costs to Parent or any of its Subsidiaries of, individually or in the aggregate, One Million Dollars ($1,000,000) or more; and

(p) other financial information reasonably requested by Bank .

6.3 Accounts Receivable .

(a) Schedules and Documents Relating to Accounts . Borrower shall deliver to Bank transaction reports and schedules of collections, as provided in Section 6.2, on Bank’s standard forms; provided , however , that Borrower’s failure to execute and deliver the same shall not affect or limit Bank’s Lien and other rights in all of Borrower’s Accounts, nor shall Bank’s failure to advance or lend against a specific Account affect or limit Bank’s Lien and other rights therein. If requested by Bank, Borrower shall furnish Bank with copies (or, at Bank’s request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts. In addition, Borrower shall deliver to Bank, on its request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all necessary indorsements, and copies of all credit memos.

(b) Disputes . Borrower shall promptly notify Bank of all disputes or claims relating to Accounts. Borrower may forgive (completely or partially), compromise, or settle any Account for less than payment in full, or agree to do any of the foregoing so long as (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, in arm’s-length transactions, and reports the same to Bank in the regular reports provided to Bank; (ii) no Default or Event of Default has occurred and is continuing; and (iii) after taking into account all such discounts, settlements and forgiveness, the total outstanding Advances will not exceed the lesser of the Revolving Line or the Borrowing Base.

(c) Collection of Accounts . Borrower shall have the right to collect all Accounts, unless and until a Default or an Event of Default has occurred and is continuing and Bank instructs Borrower otherwise. Bank shall require that Borrower direct Account Debtors to deliver or transmit all proceeds of Accounts into a lockbox account, or such other “blocked account” as specified by Bank (any such account, a “ Cash Collateral Account ”), pursuant to a blocked account agreement in form and substance reasonably satisfactory to as Bank; provided that with respect to Account Debtors existing on the Effective Date, at least fifty (50%) of such Account Debtors shall transition such payments to such Cash Collateral Account within ninety (90) days after the Effective Date, with all such Account Debtors existing on the Effective Date to transition all payments to the Cash Collateral Account on or before the date that is one hundred eighty (180) days after the Effective Date (for the avoidance of doubt, all new Account Debtors of Borrower after the Effective Date shall direct all payments to the Cash Collateral Account). Whether or not an Event of Default has occurred and is continuing, Borrower shall immediately deliver all payments on and proceeds of Accounts to a Cash Collateral Account to be applied to immediately reduce the Obligations; provided , that (i) in respect of any Cash Collateral Account located outside the UK, during a Streamline Period, such payments and proceeds shall not be applied to immediately reduce the

Obligations and shall instead be transferred to an account of Borrower maintained at Bank and (ii) in respect of any Cash Collateral Account located within the UK, during a Streamline Period, Borrower may request in writing and Bank may accede in writing that such payments and proceeds not be applied to immediately reduce the Obligations and instead be transferred to an account of Borrower maintained at Bank.

(d) Returns . Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower, Borrower shall promptly (i) determine the reason for such return, (ii) issue a credit memorandum to the Account Debtor in the appropriate amount, and (iii) provide a copy of such credit memorandum to Bank, upon request from Bank. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, Borrower shall hold the returned Inventory in trust for Bank, and immediately notify Bank of the return of the Inventory.

(e) Verification . Bank may, from time to time, after consultation with and notice to Borrower, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts, either in the name of Borrower or Bank or such other name as Bank may choose, and notify any Account Debtor of Bank’s security interest in such Account.

(f) No Liability . Bank shall not be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall Bank be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to an Account. Nothing herein shall, however, relieve Bank from liability for its own gross negligence or willful misconduct.

6.4 Remittance of Proceeds . Except as otherwise provided in Section 6.3(c), deliver, in kind, all proceeds arising from the disposition of any Collateral to Bank in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations (a) prior to an Event of Default, pursuant to the terms of Section 2.5(b) hereof, and (b) after the occurrence and during the continuance of an Event of Default, pursuant to the terms of Section 9.4 hereof ; provided that , if no Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to Bank the proceeds of Permitted Transfers consisting of the sale of worn out or obsolete Equipment disposed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of Two hundred Fifty Thousand Dollars ($250,000) or less (for all such transactions in any fiscal year). Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Bank. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

6.5 Taxes; Pensions . Timely file, and require each of its Subsidiaries to timely file, all required tax returns and reports and timely pay, and require each of its Subsidiaries to timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Parent and each of its Subsidiaries, except for deferred payment of any taxes contested pursuant to the

terms of Section 5.9 hereof, and shall deliver to Bank, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms.

6.6 Access to Collateral; Books and Records . At reasonable times, on one (1) Business Day’s notice (provided no notice is required if an Event of Default has occurred and is continuing), Bank, or its agents, shall have the right to inspect the Collateral and the right to audit and copy Borrower’s Books. The foregoing inspections and audits shall be conducted at Borrower’s expense and no more often than once every twelve (12) months (once every six (6) months when a Streamline Period is not in effect, or, in each case, more frequently at Bank’s expense, as determined by Bank), unless an Event of Default has occurred and is continuing in which case such inspections and audits shall occur as often as Bank shall determine is necessary . The charge therefor shall be $850 per person per day (or such higher amount as shall represent Bank’s then-current standard charge for the same), plus reasonable out-of-pocket expenses. In the event Borrower and Bank schedule an audit more than ten (10) days in advance, and Borrower cancels or seeks to or reschedules the audit with less than ten (10) days written notice to Bank, then (without limiting any of Bank’s rights or remedies) Borrower shall pay Bank a fee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensate Bank for the anticipated costs and expenses of the cancellation or rescheduling.

6.7 Insurance .

(a) Keep its business and the Collateral insured for risks and in amounts standard for companies in Borrower’s industry and location and as Bank may reasonably request. Insurance policies shall be in a form, with financially sound and reputable insurance companies that are not Affiliates of Borrower, and in amounts that are reasonably satisfactory to Bank. All property policies shall have a lender’s loss payable endorsement showing Bank as an additional loss payee. All liability policies shall show, or have endorsements showing, Bank as an additional insured. Bank shall be named as lender loss payee and/or additional insured with respect to any such insurance providing coverage in respect of any Collateral.

(b) Ensure that proceeds payable under any property policy are, at Bank’s option, payable to Bank on account of the Obligations.

(c) At Bank’s request, Borrower shall deliver certified copies of insurance policies and evidence of all premium payments. Each provider of any such insurance required under this Section 6.7 shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to Bank, that it will give Bank twenty (20) days prior written notice before any such policy or policies shall be materially altered or canceled. If Borrower fails to obtain insurance as required under this Section 6.7 or to pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make all or part of such payment or obtain such insurance policies required in this Section 6.7, and take any action under the policies Bank deems prudent.

6.1 Operating Accounts .

(a) Parent shall maintain its primary and all of its Subsidiaries’ primary operating and other deposit accounts and securities accounts maintained in the United States with Bank and

Bank’s Affiliates which accounts shall, within ninety (90) days after the Effective Date, represent at least seventy-five percent (75%) of the dollar value of Parent’s and such Subsidiaries accounts at all financial institutions in the United States. In addition, at least seventy-five percent (75%) of the dollar value of Parent’s and its Subsidiaries’ accounts at all financial institutions worldwide shall be maintained in accounts of Loan Parties. Notwithstanding the foregoing, (i) Parent shall be permitted to maintain its existing account with U.S. Bank, N.A., so long as the average daily balance therein does not exceed One Hundred Thousand Dollars ($100,000) at any time; and (ii) Oclaro North America shall be permitted to maintain its existing account with Bank of America, N.A., so long as the average daily balance therein does not exceed One Hundred Thousand Dollars ($100,000) at any time (the foregoing accounts described in clause (i) and clause (ii) are collectively referred to as the “ Existing Accounts ”).

(b) Provide Bank five (5) days prior-written notice before establishing any Collateral Account at or with any bank or financial institution other than Bank or Bank’s Affiliates. For each Collateral Account that Borrower at any time maintains (including, without limitation, Collateral Accounts maintained at Barclay’s Bank, but specifically excluding the Existing Accounts), the Borrower shall serve a notice as specified in the Debenture and/or cause the applicable bank or financial institution (other than Bank) at or with which any Collateral Account is maintained to execute and deliver an acknowledgement or Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Bank’s Lien in such Collateral Account in accordance with the terms hereunder and pursuant to the Debenture which Control Agreement may not be terminated without the prior written consent of Bank. The provisions of the previous sentence shall not apply to deposit accounts that are used exclusively for payroll, payroll taxes, and other employee wage and benefit payments to or for the benefit of Borrower’s employees and identified to Bank by Borrower as such.

6.2 Financial Covenants . Maintain at all times, subject to periodic reporting as of the last day of each fiscal quarter, unless otherwise noted, on a consolidated basis with respect to Parent and its Subsidiaries:

(q) Fixed Charge Coverage Ratio . A Fixed Charge Coverage Ratio, as at the last day of each fiscal quarter in which a Streamline Period has not been in effect at any time during such fiscal quarter, measured on a trailing twelve-month basis, equal to or greater than 1.10:1.00.

6.3 Protection and Registration of Intellectual Property Rights .

(g) (i) Protect, defend and maintain the validity and enforceability of its Intellectual Property material to Borrower’s business; (ii) promptly advise Bank in writing of material infringements or any other event that could reasonably be expected to materially and adversely affect the value of its Intellectual Property; and (iii) not allow any Intellectual Property material to Borrower’s business to be abandoned, forfeited or dedicated to the public without Bank’s written consent.

(h) To the extent not already disclosed in writing to Bank, if Borrower (i) obtains any Patent, registered Trademark, registered Copyright, registered mask work, or any pending application for any of the foregoing, whether as owner, licensee or otherwise, or (ii) applies for any Patent or the registration of any Trademark, then Borrower shall (x) with respect to any Copyright,

immediately, and (y) with respect to any Patent or Trademark, simultaneously when providing Monthly Financial Statements, provide written notice thereof to Bank and in each case shall execute such intellectual property security agreements and other documents and take such other actions as Bank may request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Bank in such property. If Borrower decides to register any Copyrights or mask works in the United States Copyright Office, Borrower shall: (x) provide Bank with at least fifteen (15) days prior written notice of Borrower’s intent to register such Copyrights or mask works together with a copy of the application it intends to file with the United States Copyright Office (excluding exhibits thereto); (y) execute an intellectual property security agreement and such other documents and take such other actions as Bank may request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Bank in the Copyrights or mask works intended to be registered with the United States Copyright Office; and (z) record such intellectual property security agreement with the United States Copyright Office contemporaneously with filing the Copyright or mask work application(s) with the United States Copyright Office. If requested by Bank, Borrower shall promptly provide to Bank copies of all applications that it files for Patents or for the registration of Trademarks, Copyrights or mask works.

(i) Provide written notice to Bank within ten (10) days of entering or becoming bound by any Restricted License (other than over-the-counter software that is commercially available to the public). Borrower shall take such steps as Bank reasonably requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (i) any Restricted License to be deemed “Collateral” and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such Restricted License, whether now existing or entered into in the future, and (ii) Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Bank’s rights and remedies under this Agreement and the other Loan Documents.

6.4 Litigation Cooperation . From the date hereof and continuing through the termination of this Agreement, m ake available to Bank, without expense to Bank, Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that Bank may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Bank with respect to any Collateral or relating to Borrower.

6.5 Formation or Acquisition of Subsidiaries . Notwithstanding and without limiting the negative covenants contained in Sections 7.3 and 7.7 hereof, at the time that Borrower or any Guarantor forms any direct or indirect Subsidiary or acquires any direct or indirect Subsidiary after the Effective Date, Borrower and such Guarantor shall (a) cause such new Subsidiary to provide to Bank a joinder to the Loan Agreement to cause such Subsidiary to become a co-borrower hereunder or Guarantor, together with such appropriate financing statements and/or Control Agreements, all in form and substance satisfactory to Bank (including being sufficient to grant Bank a first priority Lien (subject to Permitted Liens) in and to the assets of such newly formed or acquired Subsidiary), (b) provide to Bank appropriate certificates and powers and financing statements, pledging all of the direct or beneficial ownership interest in such new Subsidiary, in form and substance satisfactory to Bank, and (c) provide to Bank all other documentation in form and substance satisfactory to Bank, including one or more opinions of counsel satisfactory to Bank, which in its opinion is appropriate with respect to the execution and delivery of the applicable documentation referred to

above. Any document, agreement, or instrument executed or issued pursuant to this Section 6.12 shall be a Loan Document. In addition, in the event that any Immaterial Subsidiary at any time maintains net assets in excess of Seven Hundred Fifty Thousand Dollars ($750,000) (other than temporary amounts in excess thereof caused by cash advances for the funding of such Immaterial Subsidiary’s payroll obligations), at Bank’s discretion, Borrower shall cause such Immaterial Subsidiary to comply with this Section 6.12.

6.6 Further Assurances . Execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s Lien in the Collateral or to effect the purposes of this Agreement. Deliver to Bank, within five (5) days after the same are sent or received, copies of all correspondence, reports, documents and other filings with any Governmental Authority regarding compliance with or maintenance of Governmental Approvals or Requirements of Law or that could reasonably be expected to have a material effect on any of the Governmental Approvals or otherwise on the operations of Borrower or any of its Subsidiaries.

6.7 Post - closing Matters .

(a) On or before the date that is ten (10) days after the Effective Date, original executed signature pages to the Loan Documents and the other documents described in Section 3.1 hereof;

(b) On or before the date that is ten (10) Business Days after the Effective Date (or such later date as Bank shall determine, in its sole discretion), Certificates of Foreign Qualification for each Loan Party (other than the jurisdiction of incorporation/organization for such Loan Party) in which such Loan Party is qualified to conduct business as a foreign entity; and

(c) On or before the date that is twenty (20) days after the Effective Date (or such later date as Bank shall determine, in its sole discretion), Borrower shall use commercially reasonable efforts to cause to be delivered to Bank a landlord’s consent in favor of Bank for 2560 Junction Avenue, San Jose, California 95134, by the respective landlord thereof, together with copies of the duly executed signatures thereto.

7 NEGATIVE COVENANTS

Borrower and/or Parent shall not do any of the following without Bank’s prior written consent:

7.1 Dispositions . Convey, sell, lease, transfer, assign, or otherwise dispose of (collectively, “ Transfer ”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Permitted Transfers.

7.2 Changes in Business, Management, Control, or Business Locations . (a) Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Parent and such Subsidiary, as applicable, or reasonably related thereto; (b) liquidate or dissolve; or (c) (i) fail to provide notice to Bank of any Key Person departing from or ceasing to be employed by Parent and/or Borrower within five (5) days after such Key Person’s departure from Parent and/or Borrower, as applicable; or (ii) permit or suffer any Change in Control of Parent .

Borrower and/or Parent shall not, without at least thirty (30) days prior written notice to Bank: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain less than Two Hundred Fifty Thousand Dollars ($250,000) in Borrower’s assets or property) or deliver any portion of the Collateral valued, individually or in the aggregate, in excess of Two Hundred Fifty Thousand Dollars ($250,000) to a bailee at a location other than to a bailee and at a location already disclosed in the Perfection Certificate, (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, or (5) change any organizational number (if any) assigned by its jurisdiction of organization. If Borrower and/or Parent intends to deliver any portion of the Collateral valued, individually or in the aggregate, in excess of Two Hundred Fifty Thousand Dollars ($250,000) to a bailee, and Bank and such bailee are not already parties to a bailee agreement governing both the Collateral and the location to which Borrower and/or Parent intends to deliver the Collateral, then Borrower and/or Parent, as applicable, will first receive the written consent of Bank, and such bailee shall execute and deliver a bailee agreement in form and substance reasonably satisfactory to Bank.

7.3 Mergers or Acquisitions . Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or, other than in connection with a Permitted Acquisition, acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person (including, without limitation, by the formation of any Subsidiary). A Subsidiary may merge or consolidate into another Subsidiary or into Borrower. Any Subsidiary that is not a Loan Party, including, without limitation, any Inactive Subsidiary and/or and Immaterial Subsidiary, may be dissolved or otherwise disposed of, so long as the assets/proceeds from such dissolution or disposition are transferred to a Loan Party.

7.4 Indebtedness . Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.

7.5 Encumbrance . Create, incur, allow, or suffer any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, permit any Collateral not to be subject to the first priority security interest granted herein, pursuant to the Debenture, or enter into any agreement, document, instrument or other arrangement (except with or in favor of Bank) with any Person which directly or indirectly prohibits or has the effect of prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any of Borrower’s or any Subsidiary’s Intellectual Property, except as is otherwise permitted in Section 7.1 hereof and the definition of “Permitted Liens” herein .

7.6 Maintenance of Collateral Accounts . Maintain any Collateral Account except pursuant to the terms of Section 6.8(b) hereof.

7.7 Distributions; Investments . (a) Pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock ; provided that (i) any Loan Party may convert any of its convertible securities into other securities pursuant to the terms of such convertible securities or otherwise in exchange thereof, (ii) any Loan Party may pay dividends solely in common stock; and (iii) any Subsidiary (whether or not such Subsidiary is a Loan Party) may pay dividends to any Loan Party; or (b) directly or indirectly make any Investment (including, without limitation,

by the formation of any Subsidiary) other than Permitted Investments, or permit any of its Subsidiaries to do so.

7.8 Transactions with Affiliates . Other than Permitted Intercompany Advances or other transactions permitted hereunder, directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower, except for transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.

7.9 Subordinated Debt . (a) Make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof, provide for earlier or greater principal, interest, or other payments thereon, or adversely affect the subordination thereof to Obligations owed to Bank.

7.10 Compliance . Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940, as amended, or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower’s business, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

7.11 Bookham International. Bookham International shall not (i) conduct, transact or otherwise engage in, or commit to conduct, transact or otherwise engage in, any business or operations other than those incidental to its ownership of the Stock of Oclaro Tech (Shenzhen) Co. Ltd., a company organized and existing under the laws of China (“ Oclaro China ”), (ii) incur, create, assume or suffer to exist any Indebtedness or other liabilities or financial obligations, except (x) nonconsensual obligations imposed by operation of law, and (y) obligations with respect to its Stock, or (iii) own, lease, manage or otherwise operate any properties or assets other than the ownership of shares of Stock of Oclaro China.

8 EVENTS OF DEFAULT

Any one of the following shall constitute an event of default (an “ Event of Default ”) under this Agreement:

8.1 Payment Default . Borrower fails to (a) make any payment of principal or interest on any Credit Extension when due, or (b) pay any other Obligations within three (3) Business Days

after such Obligations are due and payable (which three (3) Business Day cure period shall not apply to payments due on the Revolving Line Maturity Date). During the cure period, the failure to make or pay any payment specified under clause (b) hereunder is not an Event of Default (but no Credit Extension will be made during the cure period) ;

8.2 Covenant Default .

(a) Borrower and/or Parent fails or neglects to perform any obligation in Sections 6.2, 6.5, 6.7, 6.8, 6.9, 6.10(c), 6.12, 6.13 or violates any covenant in Section 7; or

(b) Borrower and/or Parent fails or neglects to perform, keep, or observe any other term, provision, condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to any default (other than those specified in this Section 8) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within ten (10) days after the occurrence thereof; provided , however , that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower and/or Parent, as applicable be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower and/or Parent shall have an additional period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (but no Credit Extensions shall be made during such cure period). Cure periods provided under this section shall not apply, among other things, to financial covenants or any other covenants set forth in clause (a) above;

8.3 Material Adverse Change . A Material Adverse Change occurs;

8.4 Attachment; Levy; Restraint on Business .

(a) (i) The service of process seeking to attach, by trustee or similar process, any funds of Borrower or of any entity under the control of Parent (including a Subsidiary), or (ii) a notice of lien or levy is filed against any of Parent’s or Borrower’s assets by any Governmental Authority, and the same under subclauses (i) and (ii) hereof are not, within twenty (20) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise); provided , however , no Credit Extensions shall be made during any twenty (20) day cure period; or

(b) (i) any material portion of Borrower’s and/or Parent’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver, or (ii) any court order enjoins, restrains, or prevents Borrower and/or Parent from conducting all or any material part of its business;

8.5 Insolvency . (a) Borrower or any Guarantor is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (b) Borrower or any Guarantor begins an Insolvency Proceeding; (c) an Insolvency Proceeding is begun against Borrower or any Guarantor and is not dismissed or stayed within forty-five (45) days (but no Credit Extensions shall be made while any of the conditions described in clause (a) exist and/or until any Insolvency Proceeding is dismissed); or (d) with respect to each of Borrower and UK Guarantors it is, or is deemed for the purposes of any law to be, unable to pay its debts as they fall due or otherwise insolvent without having to make any proof to the satisfaction of the court under section 123(2) of the Insolvency Act 1986.

8.6 Other Agreements . There is, under any agreement to which Borrower or any Guarantor is a party with a third party or parties, (a) any default resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount individually or in the aggregate in excess of Two Million Dollars ($2,000,000); or (b) any breach or default by Borrower or any Guarantor, the result of which could have a material adverse effect on the business of Parent and its Subsidiaries, taken as a whole;

8.7 Judgments; Penalties . One or more fines, penalties or final judgments, orders or decrees for the payment of money in an amount, individually or in the aggregate, of at least Two Million Dollars ($2,000,000) (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall be rendered against Borrower or any Guarantor by any Governmental Authority, and the same are not, within ten (10) days after the entry, assessment or issuance thereof, discharged, satisfied, or paid, or after execution thereof, stayed or bonded pending appeal, or such judgments are not discharged prior to the expiration of any such stay (provided that no Credit Extensions will be made prior to the satisfaction, payment, discharge, stay, or bonding of such fine, penalty, judgment, order or decree);

8.8 Misrepresentations . Borrower or any Person acting for Borrower makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect when made;

8.9 Subordinated Debt . Any document, instrument, or agreement evidencing any Subordinated Debt shall for any reason be revoked or invalidated or otherwise cease to be in full force and effect, any Person shall be in breach thereof or contest in any manner the validity or enforceability thereof or deny that it has any further liability or obligation thereunder, or the Obligations shall for any reason be subordinated or shall not have the priority contemplated by this Agreement or any Subordination; or

8.10 Guaranty . (a) Any guaranty of any Obligations terminates or ceases for any reason to be in full force and effect; (b) any Guarantor does not perform any obligation or covenant under any guaranty of the Obligations; (c) any circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8 occurs with respect to any Guarantor, (d) the liquidation, winding up, or termination of existence of any Guarantor; or (e) a material impairment in the perfection or priority of Bank’s Lien in the collateral provided by Guarantor or in the value of such collateral.

9 BANK’S RIGHTS AND REMEDIES

9.1 Rights and Remedies . Upon the occurrence and during the continuance of an Event of Default, Bank may, without notice or demand, do any or all of the following:

(d) declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank);

(e) stop advancing money or extending credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Bank;

(f) demand that Borrower (i) deposit cash with Bank in an amount equal to at least 105% (110% for Letters of Credit denominated in a Foreign Currency), of the Dollar Equivalent of the aggregate face amount of all Letters of Credit remaining undrawn (plus all interest, fees, and costs due or to become due in connection therewith (as estimated by Bank in its good faith business judgment)), to secure all of the Obligations relating to such Letters of Credit, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all letter of credit fees scheduled to be paid or payable over the remaining term of any Letters of Credit;

(g) terminate any foreign exchange forward contracts;

(h) verify the amount of, demand payment of and performance under, and collect any Accounts and General Intangibles, settle or adjust disputes and claims directly with Account Debtors for amounts on terms and in any order that Bank considers advisable, and notify any Person owing Borrower money of Bank’s security interest in such funds;

(i) make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral. Borrower shall assemble the Collateral if Bank requests and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank’s rights or remedies;

(j) apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower;

(k) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower’s labels, Patents, Copyrights, mask works, rights of use of any name, trade secrets, trade names, Trademarks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section, Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit;

(l) place a “hold” on any account maintained with Bank and/or deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control Agreement or similar agreements providing control of any Collateral;

(m) demand and receive possession of Borrower’s Books; and

(n) exercise all rights and remedies available to Bank under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).

9.2 Power of Attorney . Each of Parent and Borrower hereby irrevocably appoints Bank as its lawful attorney-in-fact, exercisable upon the occurrence and during the continuance of an Event of Default, to: (a) endorse Borrower’s name on any checks or other forms of payment or security; (b) sign Borrower’s name on any invoice or bill of lading for any Account or drafts against Account Debtors; (c) settle and adjust disputes and claims about the Accounts directly with Account Debtors, for amounts and on terms Bank determines reasonable; (d) make, settle, and adjust all claims under Borrower’s insurance policies; (e) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; and (f) transfer the Collateral into the name of Bank or a third party as the Code permits. Each of Parent and Borrower hereby appoints Bank as its lawful attorney-in-fact to sign Parent’s and/or Borrower’s name, as applicable, on any documents necessary to perfect or continue the perfection of Bank’s security interest in the Collateral regardless of whether an Event of Default has occurred until all Obligations have been satisfied in full and Bank is under no further obligation to make Credit Extensions hereunder. Bank’s foregoing appointment as Parent’s and Borrower’s attorney in fact, and all of Bank’s rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank’s obligation to provide Credit Extensions terminates.

9.3 Protective Payments . If Borrower fails to obtain the insurance called for by Section 6.7 or fails to pay any premium thereon or fails to pay any other amount which Borrower is obligated to pay under this Agreement or any other Loan Document or which may be required to preserve the Collateral, Bank may obtain such insurance or make such payment, and all amounts so paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then highest rate applicable to the Obligations, and secured by the Collateral. Bank will make reasonable efforts to provide Borrower with notice of Bank obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No payments by Bank are deemed an agreement to make similar payments in the future or Bank’s waiver of any Event of Default.

9.4 Application of Payments and Proceeds . If an Event of Default has occurred and is continuing, Bank shall have the right to apply in any order any funds in its possession, whether from Borrower account balances, payments, proceeds realized as the result of any collection of Accounts or other disposition of the Collateral, or otherwise, to the Obligations. Bank shall pay any surplus to Borrower by credit to the Designated Deposit Account or to other Persons legally entitled thereto; Borrower shall remain liable to Bank for any deficiency. If Bank, directly or indirectly, enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Bank shall have the option, exercisable at any time, of either reducing the Obligations by the principal amount of the purchase price or deferring the reduction of the Obligations until the actual receipt by Bank of cash therefor.

9.5 Bank’s Liability for Collateral . So long as Bank complies with reasonable banking practices regarding the safekeeping of the Collateral in the possession or under the control of Bank, Bank shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or

damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss, damage or destruction of the Collateral.

9.6 No Waiver; Remedies Cumulative . Bank’s failure, at any time or times, to require strict performance by Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of Bank thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by the party granting the waiver and then is only effective for the specific instance and purpose for which it is given. Bank’s rights and remedies under this Agreement and the other Loan Documents are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election and shall not preclude Bank from exercising any other remedy under this Agreement or other remedy available at law or in equity, and Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay in exercising any remedy is not a waiver, election, or acquiescence.

9.7 Demand Waiver . Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable.

10 NOTICES

All notices, consents, requests, approvals, demands, or other communication by any party to this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage prepaid; (b) upon transmission, when sent by electronic mail or facsimile transmission; (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address, facsimile number, or email address indicated below. Bank or Borrower may change its mailing or electronic mail address or facsimile number by giving the other party written notice thereof in accordance with the terms of this Section 10.

If to Borrower:    Oclaro Technology Limited
    2560 Junction Avenue
    San Jose, CA 95134
    Attn: Pete Mangan - fax (408) 435-5025 email     pete.mangan@oclaro.com
    David Teichmann - fax (408) 904-4913 email     david.teichmann@oclaro.com

If to Bank:    Silicon Valley Bank
    2400 Hanover Street
    Palo Alto, CA 94304
    Attn: Ryan Edwards
     Email: redwards@svb.com

with a copy to:        Riemer & Braunstein LLP
                Three Center Plaza
                Boston, MA 02108
                Attn: Charles W. Stavros, Esquire
                Fax: (617) 880-3456
                Email: cstavros@riemerlaw.com

11 CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE

California law governs the Loan Documents without regard to principles of conflicts of law. Parent, Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California; provided , however , that nothing in this Agreement shall be deemed to operate to preclude Bank from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Bank. Parent and Borrower each expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and Parent and Borrower each hereby waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Parent and Borrower each hereby waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to Borrower at the address set forth in, or subsequently provided by Borrower in accordance with, Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of Borrower’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid.

TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, PARENT, BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY

CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL .

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with California Code of Civil Procedure § 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure Sections 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the Santa Clara County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and orders applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to California Code of Civil Procedure Section 644(a). Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

This Section 11 shall survive the termination of this Agreement.

12 GENERAL PROVISIONS

12.1 Termination Prior to Revolving Line Maturity Date; Survival . All covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations have been satisfied. So long as Borrower has satisfied the Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement), the Revolving Line may

be terminated prior to the Revolving Line Maturity Date by Borrower, effective three (3) Business Days after written notice of termination is given to Bank and upon payment of the termination fee described in Section 2.4(b) and any outstanding Minimum Interest. Those obligations that are expressly specified in this Agreement as surviving this Agreement’s termination shall continue to survive notwithstanding the termination of the Revolving Line.

12.2 Successors and Assigns . This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights or obligations under it without Bank’s prior written consent (which may be granted or withheld in Bank’s discretion). Bank has the right, without the consent of or notice to Borrower, to sell, transfer, assign, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights, and benefits under this Agreement and the other Loan Documents.

12.3 Indemnification . Borrower agrees to indemnify, defend and hold Bank and its directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Bank (each, an “ Indemnified Person ”) harmless against: (i) all obligations, demands, claims, and liabilities (collectively, “ Claims ”) claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (ii) all losses or expenses (including Bank Expenses) in any way suffered, incurred, or paid by such Indemnified Person as a result of, following from, consequential to, or arising from transactions between Bank and Borrower (including reasonable attorneys’ fees and expenses), except for Claims and/or losses directly caused by such Indemnified Person’s gross negligence or willful misconduct.

This Section 12.3 shall survive until all statutes of limitation with respect to the Claims, losses, and expenses for which indemnity is given shall have run.

12.4 Time of Essence . Time is of the essence for the performance of all Obligations in this Agreement.

12.5 Severability of Provisions . Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

12.6 Correction of Loan Documents . Bank may correct patent errors and fill in any blanks in the Loan Documents consistent with the agreement of the parties.

12.7 Amendments in Writing; Waiver; Integration . No purported amendment or modification of any Loan Document, or waiver, discharge or termination of any obligation under any Loan Document, shall be enforceable or admissible unless, and only to the extent, expressly set forth in a writing signed by the party against which enforcement or admission is sought. Without limiting the generality of the foregoing, no oral promise or statement, nor any action, inaction, delay, failure to require performance or course of conduct shall operate as, or evidence, an amendment, supplement or waiver or have any other effect on any Loan Document. Any waiver granted shall be limited to the specific circumstance expressly described in it, and shall not apply to any subsequent or other circumstance, whether similar or dissimilar, or give rise to, or evidence, any obligation or commitment to grant any further waiver. The Loan Documents represent the entire agreement about

this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of the Loan Documents merge into the Loan Documents.

12.8 Counterparts and Execution . This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Agreement. It is intended that this Agreement shall take effect as a deed in respect of Borrower notwithstanding the method of execution of this Agreement by the other parties hereto.

12.9 Confidentiality . In handling any confidential information, Bank shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made: (a) to Bank’s Subsidiaries or Affiliates (such Subsidiaries and Affiliates, together with Bank, collectively, “ Bank Entities ”); (b) to prospective transferees or purchasers of any interest in the Credit Extensions ( provided , however , Bank shall use commercially reasonable efforts to obtain any prospective transferee’s or purchaser’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order; (d) to Bank’s regulators or as otherwise required in connection with Bank’s examination or audit; (e) as Bank considers appropriate in exercising remedies under the Loan Documents; and (f) to third-party service providers of Bank so long as such service providers have executed a confidentiality agreement with Bank with terms no less restrictive than those contained herein. Confidential information does not include information that is either: (i) in the public domain or in Bank’s possession when disclosed to Bank, or becomes part of the public domain (other than as a result of its disclosure by Bank in violation of this Agreement) after disclosure to Bank; or (ii) disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information.

Bank Entities may use confidential information for the development of databases, reporting purposes, and market analysis so long as such confidential information is aggregated and anonymized prior to distribution unless otherwise expressly permitted by Borrower. The provisions of the immediately preceding sentence shall survive the termination of this Agreement.

12.10 Set Off . Following the occurrence and during the continuance of an Event of Default, Bank may set off any matured obligation due from Borrower under the Loan Documents against any matured obligation owed by Bank to Borrower, regardless of the place of payment, banking branch or currency of either obligation. Further, following the occurrence and during the continuance of an Event of Default, Borrower authorizes Bank to apply (without prior notice) any credit balance (whether or not then due) to which Borrower is at any time beneficially entitled on any account at, any sum held to its order by and/or any liability or obligation (whether or not matured) of, any office of Bank in or towards satisfaction of any sum then due and payable by it to Bank under the Loan Documents and unpaid. For these purposes, Bank may convert one currency into another, provided that nothing in this Section 12.10 shall be effective to create a charge. Bank shall not be obliged to exercise any of its rights under this Section 12.10, which shall be without prejudice and in addition to any right of set-off, combination of accounts, lien or other right (including the benefit of the Loan

Documents) to which it is at any time otherwise entitled (whether by operation of law, contract or otherwise).

12.11 Attorneys’ Fees, Costs and Expenses . In any action or proceeding between Borrower and Bank arising out of or relating to the Loan Documents, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and other costs and expenses incurred, in addition to any other relief to which it may be entitled.

12.12 Electronic Execution of Documents . The words “execution,” “signed,” “signature” and words of like import in any Loan Document executed by any party other than Borrower and UK Guarantors shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity and enforceability as a manually executed signature or the use of a paper-based recordkeeping systems, as the case may be, to the extent and as provided for in any applicable law, including, without limitation, any state law based on the Uniform Electronic Transactions Act.

12.13 Captions . The headings used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.

12.14 Construction of Agreement . The parties mutually acknowledge that they and their attorneys have participated in the preparation and negotiation of this Agreement. In cases of uncertainty this Agreement shall be construed without regard to which of the parties caused the uncertainty to exist.

12.15 Relationship . The relationship of the parties to this Agreement is determined solely by the provisions of this Agreement. The parties do not intend to create any agency, partnership, joint venture, trust, fiduciary or other relationship with duties or incidents different from those of parties to an arm’s-length contract.

12.16 Third Parties . Nothing in this Agreement, whether express or implied, is intended to: (a) confer any benefits, rights or remedies under or by reason of this Agreement on any persons other than the express parties to it and their respective permitted successors and assigns; (b) relieve or discharge the obligation or liability of any person not an express party to this Agreement; or (c) give any person not an express party to this Agreement any right of subrogation or action against any party to this Agreement. A Person who is not a party to this Agreement has no rights under the Contracts (Rights of Third Parties) Act 1999 to enforce or enjoy the benefit of any term of this Agreement.

13 DEFINITIONS

13.1 Definitions . As used in the Loan Documents, the word “shall” is mandatory, the word “may” is permissive, the word “or” is not exclusive, the words “includes” and “including” are not limiting, and the singular includes the plural. As used in this Agreement, the following capitalized terms have the following meanings:

“ Account ” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to Borrower .

“ Account Debtor ” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.

“ Acquisition ” means (a) the purchase or other acquisition by a Person or its Subsidiaries of all or substantially all of the assets of (or any division or business line of) any other Person, or (b) the purchase or other acquisition (whether by means of a merger, consolidation, or otherwise) by a Person or its Subsidiaries of all or substantially all of the Stock of any other Person.

“ Advance ” or “ Advances ” means a revolving credit loan (or revolving credit loans) under the Revolving Line.

“ Affiliate ” is, with respect to any Person, each other Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

“ Agreement ” is defined in the preamble hereof.

“ Annual Financial Statements ” is defined in Section 6.2(g).

“ Applicable Margin ” is the rate per annum set forth under the relevant column heading below:



Net Cash	LIBOR Advances	Prime Rate Advances
> $15,000,000 (Streamline Period in effect)	2.25%	1.00	%
<$15,000,000 (Streamline Period not in effect)	3.00%	1.75	%

Notwithstanding the foregoing, (a) until the delivery of the first Compliance Certificate required to be delivered pursuant to Section 6.2(d), the Applicable Margin under the Revolving Line shall be the rates corresponding to Net Cash of less than $15,000,000 in the foregoing table, (b) if the Borrower fails to timely deliver any of the financial statements required by Section 6.2 and the related Compliance Certificate required by Section 6.2(d), by the respective date required thereunder after the end of any applicable reporting period of the Borrower, the Applicable Margin applicable to Advances under the Revolving Line shall be the rates corresponding to Net Cash of less than $15,000,000 in the foregoing table until such financial statements and Compliance Certificate are delivered, and (c) no reduction to the Applicable Margin shall become effective at any time when an Event of Default has occurred and is continuing.

If, as a result of any restatement of or other adjustment to the financial statements of the Loan Parties or for any other reason, the Bank determines that (x) Net Cash as calculated by the Borrower as of any applicable date was inaccurate and (y) a proper calculation of Net Cash

would have resulted in different pricing for any period, then (i) if the proper calculation of Net Cash would have resulted in higher pricing for such period, the Borrower shall automatically and retroactively be obligated to pay to the Bank, promptly on demand by the Bank, an amount equal to the excess of the amount of interest and fees that should have been paid for such period over the amount of interest and fees actually paid for such period; provided that such period may not exceed one hundred eighty (180) days prior to such demand by Bank; and (ii) if the proper calculation of Net Cash would have resulted in lower pricing for such period, the Bank shall have no obligation to repay any interest or fees to the Borrower.

“ Authorized Signer ” is any individual listed in Borrower’s Borrowing Resolution who is authorized to execute the Loan Documents, including any Notice of Borrowing or other Advance request, on behalf of Borrower.

“ Availability Amount ” is (a) the lesser of (i) the Revolving Line or (ii) the amount available under the Borrowing Base minus (b) the aggregate Dollar Equivalent amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit plus an amount equal to the Letter of Credit Reserve), minus (c) the FX Reserves, minus (d) any amounts used for Cash Management Services, and minus (e) the outstanding principal balance of any Advances.

“ Bank ” is defined in the preamble hereof.

“ Bank Expenses ” are all audit fees and expenses, costs, and expenses (including reasonable and out-of-pocket attorneys’ fees and expenses) for preparing, amending, negotiating, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower or any Guarantor.

“ Bank’s Parent ” is defined in Section 3.7.

“ Bookham International ” means Bookham International Ltd., an exempted company incorporated under the laws of the Cayman Islands with registration number 101497 and having its registered office at P.O. Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands

“ Borrower ” is defined in the preamble hereof.

“ Borrower’s Books ” are all Borrower’s books and records including ledgers, federal and state tax returns, records regarding Borrower’s assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any equipment containing such information.

“ Borrowing Base ” is eighty percent (80%) of Eligible Accounts (whether such Eligible Accounts are payable in Dollars, Euros or Pound Sterling), as determined by Bank from Borrower’s most recent Transaction Report; provided , however , that Bank has the right to decrease the foregoing percentage in its good faith business judgment to mitigate the impact of events, conditions, contingencies, or risks which may adversely affect the Collateral or its value. Bank will endeavor to provide prior notice to Borrower of any such decrease.

“ Borrowing Resolutions ” are, with respect to any Person, those resolutions adopted by such Person’s board of directors (and, if required under the terms of such Person’s Operating Documents, stockholders) and delivered by such Person to Bank approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its secretary on behalf of such Person certifying (a) such Person has the authority to execute, deliver, and perform its obligations under each of the Loan Documents to which it is a party, (b) that set forth as a part of or attached as an exhibit to such certificate is a true, correct, and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents, including any Notice of Borrowing or other Advance request, on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that Bank may conclusively rely on such certificate unless and until such Person shall have delivered to Bank a further certificate canceling or amending such prior certificate.

“ Business Day ” is any day that is not a Saturday, Sunday or other day on which banking institutions in the State of California are authorized or required by law or other governmental action to close, except that if any determination of a “Business Day” shall relate to a LIBOR Advance, the term “Business Day” shall also mean a day on which dealings are carried on in the London interbank market, and if any determination of a “Business Day” shall relate to an FX Contract, the term “Business Day” shall mean a day on which dealings are carried on in the country of settlement of the Foreign Currency .

“ Capital Expenditures ” means, with respect to any Person for any period, the sum of (a) the aggregate of all expenditures by such Person and its Subsidiaries during such period that are capital expenditures as determined in accordance with GAAP, whether such expenditures are paid in cash or financed, plus (b) to the extent not covered by clause (a), the aggregate of all expenditures by such Person and its Subsidiaries during such period to acquire by purchase or otherwise the business or capitalized assets or the capital stock of any other Person.

“ Cash Equivalents ” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc.; (c) Bank’s certificates of deposit issued maturing no more than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition.

“ Cash Management Services ” is defined in Section 2.1.4.

“ Change in Control ” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Parent, representing twenty-five percent (25%)

or more of the combined voting power of Parent’s then outstanding securities; or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the board of directors of Parent (together with any new directors whose election by the board of directors of Parent was approved by a vote of not less than two-thirds of the directors then still in office who either were directions at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office or (c) Parent ceases to indirectly own one hundred percent (100%) of the voting securities of Borrower.

“ Claims ” is defined in Section 12.3.

“ Code ” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of California; provided , that , to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further , that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of California, the term “ Code ” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

“ Collateral ” is any and all properties, rights and assets of Borrower described on Exhibit A and the “Collateral” as defined in the Debenture, but in any event the Collateral does not include any Excluded Property.

“ Collateral Account ” is any Deposit Account, Securities Account, or Commodity Account.

“ Commodity Account ” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.

“ Compliance Certificate ” is that certain certificate in the form attached hereto as Exhibit D .

“ Contingent Obligation ” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation, in each case, directly or indirectly guaranteed, endorsed, co‑made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability

for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

“ Continuation Date ” means any date on which Borrower continues a LIBOR Advance into another Interest Period.

“ Control Agreement ” is any control agreement entered into among the depository institution at which Borrower maintains a Deposit Account or the securities intermediary or commodity intermediary at which Borrower maintains a Securities Account or a Commodity Account, Borrower, and Bank pursuant to which Bank obtains control (within the meaning of the Code) over such Deposit Account, Securities Account, or Commodity Account.

“ Conversion Date ” means any date on which Borrower converts a Prime Rate Advance to a LIBOR Advance or a LIBOR Advance to a Prime Rate Advance.

“ Copyrights ” are any and all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret.

“ Credit Extension ” is any Advance, any Overadvance, Letter of Credit, FX Contract, amount utilized for Cash Management Services, or any other extension of credit by Bank for Borrower’s benefit.

“ Currency ” is coined money and such other banknotes or other paper money as are authorized by law and circulate as a medium of exchange.

“ Debenture ” means the mortgage debenture dated on or about the Effective Date between Borrower and Bank, as amended, modified, supplemented, or restated from time to time.

“ Default ” means any event which with notice or passage of time or both, would constitute an Event of Default.

“ Default Rate ” is defined in Section 2.3(c).

“ Deferred Revenue ” is all amounts received or invoiced in advance of performance under contracts and not yet recognized as revenue.

“ Deposit Account ” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.

“ Designated Deposit Account ” is account number _____________, maintained by Borrower with Bank.

“ Dollars , ” “ dollars ” or use of the sign “ $ ” means only lawful money of the United States and not any other currency, regardless of whether that currency uses the “$” sign to denote its currency or may be readily converted into lawful money of the United States.

“ Dollar Equivalent ” is, at any time, (a) with respect to any amount denominated in Dollars, such amount, and (b) with respect to any amount denominated in a Foreign Currency, the equivalent amount therefor in Dollars as determined by Bank at such time on the basis of the then-

prevailing rate of exchange in San Francisco, California, for sales of the Foreign Currency for transfer to the country issuing such Foreign Currency.

“ EBITDA ” means, for any period, for Parent and its Subsidiaries on a consolidated basis, (x) the sum, without duplication, of the amounts for such period of (i) Net Income, plus (ii) Interest Expense, plus (iii) provisions for taxes based on income, plus (iv) total depreciation expense, plus (v) total amortization expense, including expenses associated with the amortization of capitalized software, plus (vi) all non-cash stock compensation expenses, plus (vii) fees, costs and expenses incurred in connection with the transactions contemplated by this Agreement and the other Loan Documents, plus (viii) up to $250,0000 of reasonable transactional costs, expenses and charges made at the time of, and in connection with, any Permitted Acquisition (whether or not consummated), including any financing related thereto, plus (ix) other non-cash items reducing Net Income which are reasonably acceptable to Bank (excluding any such non‑cash item to the extent that it represents an accrual or reserve for potential cash items in any future period or amortization of a prepaid cash item that was paid in a prior period), plus (x) up to $5,000,000 of restructuring charges actually incurred, minus (y) the sum, without duplication, of the amounts for such period of (i) other non-cash items increasing Net Income for such period (excluding any such non-cash item to the extent it represents the reversal of an accrual or reserve for potential cash items in any prior period) plus (ii) interest income.

“ Effective Date ” is defined in the preamble hereof.

“ Eligible Accounts ” means Accounts which arise in the ordinary course of Borrower’s and Guarantor’s business that meet all Borrower’s representations and warranties in Section 5.3. Bank reserves the right at any time after the Effective Date to adjust any of the criteria set forth below and to establish new criteria in its good faith business judgment. Unless Bank otherwise agrees in writing, Eligible Accounts shall not include:

(a) Accounts for which the Account Debtor is Borrower’s or any Guarantor’s Affiliate, officer, employee, or agent;

(b) Accounts that the Account Debtor has not paid within ninety (90) days of invoice date (one hundred twenty (120) days of invoice date for certain Account Debtors acceptable to Bank, on a case-by-case basis, in its reasonable discretion), regardless of invoice payment period terms;

(c) Accounts with credit balances over ninety (90) days of invoice date (one hundred twenty (120) days of invoice date for certain Account Debtors acceptable to Bank, on a case-by-case basis, in its reasonable discretion);

(d) Accounts owing from an Account Debtor if fifty percent (50%) or more of the Accounts owing from such Account Debtor have not been paid within ninety (90) days of invoice date (one hundred twenty (120) days of invoice date for certain Account Debtors acceptable to Bank, on a case-by-case basis, in its reasonable discretion);

(e) Accounts owing from an Account Debtor which does not have its principal place of business in the United States, Canada or the United Kingdom, unless pre-approved by Bank, in its sole discretion;

(f) Accounts billed from and/or payable to Borrower or any Guarantor outside of the United States, Canada and/or the United Kingdom, unless Bank has a first priority, perfected security interest or other enforceable Lien in such Accounts under all applicable laws, including foreign laws (sometimes called foreign invoiced accounts);

(g) Accounts owing from an Account Debtor to the extent that Borrower or any Guarantor is indebted or obligated in any manner to the Account Debtor (as creditor, lessor, supplier or otherwise - sometimes called “contra” accounts, accounts payable, customer deposits or credit accounts), with the exception of customary credits, adjustments and/or discounts given to an Account Debtor by Borrower or any Guarantor in the ordinary course of its business, but only to the extent of such indebtedness or obligation;

(h) Accounts owing from an Account Debtor which is a United States government entity or any department, agency, or instrumentality thereof unless Borrower and/or Guarantor, as applicable, has assigned its payment rights to Bank and the assignment has been acknowledged under the Federal Assignment of Claims Act of 1940, as amended;

(i) Accounts for demonstration or promotional equipment, or in which goods are consigned, or sold on a “sale guaranteed”, “sale or return”, “sale on approval”, or other terms if Account Debtor’s payment may be conditional;

(j) Accounts owing from an Account Debtor where goods or services have not yet been rendered to the Account Debtor (sometimes called memo billings or pre-billings);

(k) Accounts subject to contractual arrangements between Borrower and/or any Guarantor and an Account Debtor where payments shall be scheduled or due according to completion or fulfillment requirements where the Account Debtor has a right of offset for damages suffered as a result of Borrower’s or such Guarantor’s failure to perform in accordance with the contract (sometimes called contracts accounts receivable, progress billings, milestone billings, or fulfillment contracts);

(l) Accounts owing from an Account Debtor the amount of which may be subject to withholding based on the Account Debtor’s satisfaction of Borrower’s or any Guarantor’s complete performance (but only to the extent of the amount withheld; sometimes called retainage billings);

(m) Accounts subject to trust provisions, subrogation rights of a bonding company, or a statutory trust;

(n) Accounts owing from an Account Debtor that has been invoiced for goods that have not been shipped to the Account Debtor unless Bank, Borrower, the applicable Guarantor and the Account Debtor have entered into an agreement acceptable to Bank wherein the Account Debtor acknowledges that (i) it has title to and has ownership of the goods wherever located, (ii) a bona fide sale of the goods has occurred, and (iii) it owes payment for such goods in accordance with invoices from Borrower or such Guarantor, as applicable (sometimes called “bill and hold” accounts);

(o) Accounts for which the Account Debtor has not been invoiced;

(p) Accounts that represent non-trade receivables or that are derived by means other than in the ordinary course of Borrower’s business;

(q) Accounts for which Borrower or any Guarantor has permitted Account Debtor’s payment to extend beyond ninety (90) days (one hundred twenty (120) days for certain Account Debtors acceptable to Bank, on a case-by-case basis, in its reasonable discretion);

(r) Accounts arising from chargebacks, debit memos or other payment deductions taken by an Account Debtor;

(s) Accounts arising from product returns and/or exchanges (sometimes called “warranty” or “RMA” accounts);

(t) Accounts in which the Account Debtor disputes liability or makes any claim (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business;

(u) Accounts owing from an Account Debtor with respect to which Borrower has received Deferred Revenue (but only to the extent of such Deferred Revenue);

(v) Accounts owing from an Account Debtor, whose total obligations to Borrower exceed ten percent (10%) of all Accounts (twenty-five percent (25%) for certain Accounts pre-approved by Bank, in its sole discretion), for the amounts that exceed that percentage, unless Bank approves in writing;

(w) Accounts for which Bank in its good faith business judgment determines collection to be doubtful, including, without limitation, accounts represented by “refreshed” or “recycled” invoices.

“ Equipment ” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing .

“ ERISA ” is the Employee Retirement Income Security Act of 1974, and its regulations.

“ Euros , ” “ euros ” and “ € ” each mean the official currency of the European Union, as adopted by the European Council at its meeting in Madrid, Spain on December 15 and 16, 1995.

“ Event of Default ” is defined in Section 8.

“ Exchange Act ” is the Securities Exchange Act of 1934, as amended.

“ Excluded Property ” is certain Intellectual Property owned by Parent or its Subsidiaries previously disclosed to Bank scheduled to be sold in connection with the sale of all or substantially all of the assets of Oclaro Korea, Inc.

“ Excluded Taxes ” means (a) taxes based upon, or measured by, Bank’s or other recipient’s overall net income, or overall net profits (including franchise taxes imposed in lieu of such taxes and/or United States federal branch profits taxes), but only to the extent such taxes are imposed by a taxing authority (i) in a jurisdiction in which Bank or such other recipient is organized or (ii) in a jurisdiction which Bank or such other recipient’s principal office is located and (b) with respect to Bank or other recipient, any United States federal withholding tax imposed on amounts payable to Bank or such other recipient by reason of the failure of Bank or such other recipient to comply with its obligations under Section 2.6 or to the extent that such documentation fails to establish a complete exemption from such applicable withholding taxes, other than, in each case, due to a change in applicable laws after the Effective Date.

“ Fixed Charge Coverage Ratio ” means with respect to Parent and its Subsidiaries on a consolidated basis measured quarterly as of the last day of each fiscal quarter for the most recently ended twelve (12) month period, the ratio of (a) EBITDA for such period minus Capital Expenditures made (to the extent not already incurred in a prior period) or incurred during such period to (b) Fixed Charges for such period.

“ Fixed Charges ” means, for any period and with respect to Parent and its Subsidiaries determined on a consolidated basis in accordance with GAAP, the sum (without duplication) of: (a) Interest Expense paid in cash for such period, plus (b) principal payments in respect of Indebtedness that are required to be paid during such period, plus (c) all federal, state and local income taxes accrued during such period.

“ Foreign Currency ” means lawful money of a country other than the United States.

“ Funding Date ” is any date on which a Credit Extension is made to or for the account of Borrower which shall be a Business Day.

“ FX Business Day ” i s any day when (a) Bank’s Foreign Exchange Department is conducting its normal business and (b) the Foreign Currency being purchased or sold by Borrower is available to Bank from the entity from which Bank shall buy or sell such Foreign Currency.

“ FX Contract ” is defined in Section 2.1.3.

“ FX Contract ” is any foreign exchange contract by and between Borrower and Bank under which Borrower commits to purchase from or sell to Bank a specific amount of Foreign Currency on a specified date.

“ FX Reserves ” is defined in Section 2.1.3 .

“ GAAP ” is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination.

“ General Intangibles ” is all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all Intellectual Property, claims, income and other tax refunds, security and other deposits, payment intangibles, contract rights, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

“ Governmental Approval ” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.

“ Governmental Authority ” is any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.

“ Guarantor ” is Parent, any Subsidiary party to the Guarantor Security Agreement as of the Effective Date, and any future guarantor of the Obligations.

“ Guarantor Security Agreement ” is the security agreement executed by Parent and each Guarantor, dated as of the Effective Date, together with any other security agreement executed by any Person in favor of Bank, pledging such Person’s assets as security for the Obligations.

“ Guaranty ” is any agreement pursuant to which any Loan Party (other than Borrower), guaranties the repayment of the Obligations, including, without limitation, each Guaranty executed by each Guarantor on the Effective Date .

“ Immaterial Subsidiary ” means Oclaro (Canada) Inc., a company organized under the laws of Canada.

“ Inactive Subsidiaries ” means, collectively, Oclaro (New Jersey), Inc., a company organized under the laws of Delaware, Oclaro Photonics, Inc., a company organized under the laws

of Delaware, Forthaven Limited a company incorporated under the laws of England and Wales with company number 02133288 and its registered address at Caswell, Towcester, Northamptonshire NN12 8EQ, UK, and Oclaro International Ltd., an exempted company incorporated under the laws of the Cayman Islands with registration number 264052 and having its registered office at P.O. Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands, and “ Inactive Subsidiary ” means any one of them.

“ Indebtedness ” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.

“ Indemnified Person ” is defined in Section 12.3.

“ Insolvency Proceeding ” is (a) any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief; or (b) in respect of Borrower or UK Guarantor means (i) any step is taken with a view to a moratorium or a composition, assignment or similar arrangement with any of a Person’s creditors; (ii) a meeting of a Person’s shareholders, directors or other officers is convened for the purpose of considering any resolution for, to petition for or to make an application to or to file documents with a court or any registrar for, a Person’s winding-up, administration or dissolution or any such resolution is passed; (iii) an order is made for a Person’s winding-up, administration or dissolution, or any Person presents a petition, or makes an application to or files documents with a court or any registrar, for such Person’s winding-up, administration or dissolution, or gives notice to Bank of an intention to appoint an administrator; (iv) any liquidator, receiver, administrative receiver, administrator or similar officer is appointed in respect of a Person or any of such Person’s assets; or (v) a Person’s shareholders, directors or other officers request the appointment of, or give notice of their intention to appoint, a liquidator, receiver, administrator or similar officer.

“ Intercompany Advances ” means loans or advances or the repayment of loans or advances from Parent or one of its Subsidiaries to Parent or one of its Subsidiaries.

“ Intellectual Property ” means, with respect to any Person, means all of such Person’s right, title, and interest in and to the following:

(a) its Copyrights, Trademarks and Patents;

(b) any and all trade secrets and trade secret rights, including, without limitation, any rights to unpatented inventions, know-how and operating manuals;

(d) any and all design rights which may be available to such Person;

(e) any and all claims for damages by way of past, present and future infringement of any of the foregoing, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the Intellectual Property rights identified above; and

(f) all amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents.

“ Interest Expense ” means for any fiscal period, interest expense (whether cash or non-cash) determined in accordance with GAAP for the relevant period ending on such date, including, in any event, interest expense with respect to any Credit Extension and other Indebtedness of Parent and its Subsidiaries, including, without limitation or duplication, all commissions, discounts, or related amortization and other fees and charges with respect to letters of credit and bankers’ acceptance financing and the net costs associated with interest rate swap, cap, and similar arrangements, and the interest portion of any deferred payment obligation (including leases of all types).

“ Interest Payment Date ” means (a) as to any Prime Rate Advance, the last Business Day of each calendar month to occur while such Prime Rate Advance is outstanding and the Revolving Line Maturity Date, (b) as to any LIBOR Advance having an Interest Period of three (3) months or less, the last Business Day of such Interest Period, (c) as to any LIBOR Advance having an Interest Period longer than three (3) months, each day that is three (3) months (or, if such date is not a Business Day, the Business Day next succeeding such date) after the first day of such Interest Period and the last Business Day of such Interest Period, and (d) as to any other Credit Extension, the date of any repayment or prepayment made in respect thereof.

“ Interest Period ” means, as to any LIBOR Advance, the period commencing on the date of such LIBOR Advance, or on the conversion/continuation date on which the LIBOR Advance is converted into or continued as a LIBOR Advance, and ending on the date that is one (1), two (2), three (3), or six (6) months thereafter, in each case as Borrower may elect in the applicable Notice of Borrowing or Notice of Conversion/Continuation; provided , however , that (a) no Interest Period with respect to any LIBOR Advance shall end later than the Revolving Line Maturity Date, (b) the last day of an Interest Period shall be determined in accordance with the practices of the LIBOR interbank market as from time to time in effect, (c) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of a LIBOR Advance, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day, (d) any Interest Period pertaining to a LIBOR Advance that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period, and (e) interest shall accrue from and include the first Business Day of an Interest Period but exclude the last Business Day of such Interest Period.

“ Interest Rate Determination Date ” means each date for calculating the LIBOR for purposes of determining the interest rate in respect of an Interest Period. The Interest Rate

Determination Date shall be the second Business Day prior to the first day of the related Interest Period for a LIBOR Advance.

“ Inventory ” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

“ Investment ” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person.

“ IP Agreement ” is that certain Intellectual Property Security Agreement executed and delivered by each Loan Party to Bank dated as of the Effective Date.

“ Key Person ” is each of Parent’s (a) Chief Executive Officer, who is Greg Dougherty as of the Effective Date, and (b) Chief Financial Officer, who is Peter Mangan as of the Effective Date.

“ Letter of Credit ” means a standby letter of credit issued by Bank or another institution based upon an application, guarantee, indemnity or similar agreement on the part of Bank as set forth in Section 2.1.2.

“ Letter of Credit Application ” is defined in Section 2.1.2(b).

“ Letter of Credit Reserve ” has the meaning set forth in Section 2.1.2(e).

“ LIBOR ” means, for any Interest Rate Determination Date with respect to an Interest Period for any Advance to be made, continued as or converted into a LIBOR Advance, the rate of interest per annum determined by Bank to be the per annum rate of interest at which deposits in Dollars are offered to Bank in the London interbank market (rounded upward, if necessary, to the nearest 0.0001%) in which Bank customarily participates at 11:00 a.m. (local time in such interbank market) two (2) Business Days prior to the first day of such Interest Period for a period approximately equal to such Interest Period and in an amount approximately equal to the amount of such Advance.

“ LIBOR Advance ” means an Advance that bears interest based at the LIBOR Rate.

“ LIBOR Rate ” means, for each Interest Period in respect of LIBOR Advances comprising part of the same Advances, an interest rate per annum (rounded upward, if necessary, to the nearest 0.0001%) equal to LIBOR for such Interest Period divided by one (1) minus the Reserve Requirement for such Interest Period.

“ Lien ” is a claim, mortgage, deed of trust, levy, charge, pledge, security interest or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.

“ Loan Documents ” are, collectively, this Agreement and any schedules, exhibits, certificates, notices, and any other documents related to this Agreement, each UK Collateral Document, each IP Agreement, any Stock Pledge Agreement, each Guaranty, each Guarantor

Security Agreement, any other subordination agreement, any note, or notes or guaranties executed by Borrower or any Guarantor, and any other present or future agreement by Borrower and/or any Guarantor with or for the benefit of Bank in connection with this Agreement, all as amended, restated, or otherwise modified.

“ Loan Party ” and “ Loan Parties ” means Borrower, Parent and/or any other Guarantor.

“ Material Adverse Change ” is (a) a material impairment in the perfection or priority of Bank’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower; (c) a material impairment of the prospect of repayment of any portion of the Obligations; or (d) Bank determines, after consultation with Borrower, based upon information available to it and in its reasonable judgment, that there is a substantial likelihood that Borrower shall fail to comply with one or more of the financial covenants in Section 6 during the next succeeding financial reporting period.

“ Minimum Interest ” is defined in Section 2.3(d).

“ Minimum Interest Period ” is defined in Section 2.3(d).

“ Monthly Financial Statements ” is defined in Section 6.2(c).

“ Net Cash ” is, as of any date of measurement, the result of (i) Qualified Cash minus (ii) all outstanding Obligations owed to Bank.

“ Net Income ” means, as calculated on a consolidated basis for Parent and its Subsidiaries for any period as at any date of determination, the net profit (or loss), after provision for taxes, of Parent and its Subsidiaries for such period taken as a single accounting period.

“ Notice of Borrowing ” means a notice given by Borrower to Bank in accordance with Section 3.4, substantially in the form of Exhibit B , with appropriate insertions.

“ Notice of Conversion/Continuation ” means a notice given by Borrower to Bank in accordance with Section 3.5, substantially in the form of Exhibit C , with appropriate insertions.

“ Obligations ” are Borrower’s obligations to pay when due any debts, principal, interest, fees, Bank Expenses, and other amounts Borrower owes Bank now or later, whether under this Agreement, the other Loan Documents, or otherwise, including, without limitation, all obligations relating to Letters of Credit (including reimbursement obligations for drawn and undrawn Letters of Credit), Cash Management Services, and FX Contracts, if any, and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank, and to perform Borrower’s duties under the Loan Documents.

“ Oclaro Japan ” means Oclaro Japan Inc., a company organized under the laws of Japan.

“ Oclaro North America ” means Oclaro (North America) Inc., a Delaware corporation and wholly owned Subsidiary of Parent.

“ Oclaro Thailand ” means Oclaro Thailand Ltd., a company organized under the laws of Thailand.

“ Operating Documents ” are, for any Person, such Person’s formation documents, as certified by the Secretary of State (or equivalent agency) of such Person’s jurisdiction of organization on a date that is no earlier than thirty (30) days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments or modifications thereto.

“ Overadvance ” is defined in Section 2.2.

“ Parent ” is defined in the preamble hereof.

“ Patents ” means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

“ Perfection Certificate ” is defined in Section 5.1.

“ Permitted Acquisition ” means any Acquisition so long as:

(a) no Default or Event of Default shall have occurred and be continuing or would result from the consummation of the proposed Acquisition and the proposed Acquisition is consensual;

(b) no Indebtedness will be incurred, assumed, or would exist with respect to Parent or its Subsidiaries as a result of such Acquisition, other than Permitted Indebtedness and no Liens will be incurred, assumed, or would exist with respect to the assets of Parent or its Subsidiaries as a result of such Acquisition other than Permitted Liens;

(c) Borrower has provided Bank with their due diligence package relative to the proposed Acquisition, including forecasted balance sheets, profit and loss statements, and cash flow statements of the Person or assets to be acquired, all prepared on a basis consistent with such Person’s (or assets’) historical financial statements, together with appropriate supporting details and a statement of underlying assumptions for the one (1) year period following the date of the proposed Acquisition, on a quarter by quarter basis), in form and substance (including as to scope and underlying assumptions) reasonably satisfactory to Bank;

(d) Borrower shall have (i) an Availability Amount in an amount greater than 37.5% of the Revolving Line, (ii) an average daily Availability Amount measured for the thirty (30) days prior to the consummation of the proposed Acquisition in an amount greater than 37.5% of the Revolving Line and (iii) Net Cash in an amount greater than Fifteen Million Dollars ($15,000,000), in each case immediately after giving effect to the consummation of the proposed Acquisition;

(e) Borrower has provided Bank with written notice of the proposed Acquisition at least fifteen (15) Business Days prior to the anticipated closing date of the proposed Acquisition and, not later than five (5) Business Days prior to the anticipated closing date of the proposed Acquisition, copies of the then current drafts of acquisition agreement and other material documents relative to the proposed Acquisition;

(f) the assets being acquired (other than a de minimis amount of assets in relation to Parent’s and its Subsidiaries’ total assets), or the Person whose Stock is being acquired, are useful in or engaged in, as applicable, the business of Parent and its Subsidiaries or a business reasonably related thereto;

(g) the subject assets or Stock, as applicable, are being acquired directly by Borrower or one of its Subsidiaries that is a Loan Party, and, in connection therewith, such Borrower or the applicable Loan Party shall comply with Section 6.12 and Section 6.13, and, in the case of an acquisition of Stock, Borrower or the applicable Loan Party shall have demonstrated to Bank that the new Loan Parties have received consideration sufficient to make the joinder documents binding and enforceable against such new Loan Parties;

(h) total cash and non-cash consideration (including, without limitation, the assumption of any Indebtedness (which in any event shall be limited to Permitted Indebtedness)), shall not exceed Fifteen Million Dollars ($15,000,000) in the aggregate for any Acquisition, whether comprised of one transaction or a series of transactions; and

(i) Borrower has delivered to Bank updated pro forma projections (after giving effect to the proposed Acquisition) for Parent and its Subsidiaries.

Notwithstanding anything contained herein to the contrary, in no event will assets acquired pursuant to a Permitted Acquisition constitute assets eligible for inclusion in the Borrowing Base prior to completion of a field examination and other due diligence acceptable to Bank in its reasonable discretion (which field examination may be conducted prior to the closing of such Permitted Acquisition) and unless and until such assets meet the eligibility criteria herein for inclusion in any such Borrowing Base.

“ Permitted Indebtedness ” is:

(a) Borrower’s Indebtedness to Bank under this Agreement and the other Loan Documents;

(b) Indebtedness existing on the Effective Date and shown on the Perfection Certificate;

(d) Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of business;

(e) Indebtedness incurred by Parent or its Subsidiaries in connection with interest rate swap agreements for the bona fide purpose of hedging the interest rate, commodity or foreign currency risks associated with Parent’s and its Subsidiaries’ operations and not for speculative purposes;

(f) Indebtedness secured by Liens permitted under clauses (a) and (c) of the definition of “Permitted Liens” hereunder;

(g) Indebtedness evidenced by Permitted Intercompany Advances;

(h) Subordinated Debt in a maximum aggregate amount not to exceed Five Million Dollars ($5,000,000) (or its equivalent in any other Currency) at any time outstanding;

(i) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (h) above; provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be;

(j) Indebtedness consisting of (i) unsecured guarantees incurred in the ordinary course of business with respect to surety and appeal bonds, performance bonds, bid bonds, appeal bonds, completion guarantee and similar obligations; (ii) unsecured guarantees arising with respect to customary indemnification obligations to purchasers in connection with Transfers permitted hereunder; and (iii) unsecured guarantees with respect to Indebtedness of Parent or one of its Subsidiaries, to the extent that the Person that is obligated under such guaranty could have incurred such underlying Indebtedness;

(k) Indebtedness incurred in the ordinary course of business under performance, surety, statutory, and appeal bonds;

(l) up to Six Hundred Thousand Dollars ($600,000) in the aggregate outstanding at any time of Indebtedness incurred in respect of credit cards, credit card processing services, debit cards, stored value cards, purchase cards (including so-called “procurement cards” or “P-cards”), or cash management services, in each case, incurred in the ordinary course of business; and

(m) contingent liabilities in respect of any indemnification obligation, adjustment of purchase price, non-compete, or similar obligation of Parent or the applicable Loan Party incurred in connection with the consummation of one or more Permitted Acquisitions.

“ Permitted Intercompany Advance ” means Intercompany Advances:

(a) made by any of Parent’s Subsidiaries that is not a Loan Party to any of Parent’s other Subsidiaries that is not a Loan Party;

(b) made by any Loan Party to any other Loan Party;

(c) made by any of Parent’s Subsidiaries that is a Loan Party to any of Parent’s other Subsidiaries that is not a Loan Party (other than any Inactive Subsidiary), so long as (i) no Default or Event of Default has occurred and is continuing or would result therefrom, and (ii) Borrower shall have (X) an Availability Amount in an amount greater than 37.5% of the Revolving Line, (Y) an average daily Availability Amount measured for the thirty (30) days prior to the consummation of the proposed Acquisition in an amount greater than 37.5% of the Revolving Line and (Z) Net Cash in an amount greater than Fifteen Million Dollars ($15,000,000), in each case immediately after giving effect to any such Intercompany Advance; and

(d) made by any of Parent’s Subsidiaries that is a Loan Party to any of Parent’s other Subsidiaries that is not a Loan Party, which Intercompany Advance is not permitted under clause (c) above, so long as the following conditions are satisfied:

(i) made by any of Parent’s Subsidiaries that is a Loan Party to Oclaro China, so long as (X) no Default or Event of Default has occurred and is continuing or would result therefrom, and (Y) all such Intercompany Advances do not exceed Two Million Five Hundred Thousand Dollars ($2,500,000) in any calendar month;

(ii) made by any of Parent’s Subsidiaries that is a Loan Party to Oclaro Thailand, so long as (X) no Default or Event of Default has occurred and is continuing or would result therefrom, and (Y) all such Intercompany Advances do not exceed One Million Dollars ($1,000,000) in any calendar month;

(iii) made by any of Parent’s Subsidiaries that is a Loan Party to any of Parent’s other Subsidiaries that is not a Loan Party (other than Oclaro China, Oclaro Thailand, and any Inactive Subsidiary), so long as (X) no Default or Event of Default has occurred and is continuing or would result therefrom, and (Y) all such Intercompany Advances do not exceed One Hundred Thousand Dollars ($100,000) in the aggregate in any calendar month; and

(iv) made by any of Parent’s Subsidiaries that is a Loan Party to Opnext Germany GmbH, and Oclaro Japan, so long as (X) no Default or Event of Default has occurred and is continuing or would result therefrom, and (Y) all such Intercompany Advances do not exceed Five Million Dollars ($5,000,000) in the aggregate in any calendar month.

“ Permitted Investments ” are:

(a) Investments (including, without limitation, Subsidiaries) existing on the Effective Date and shown on the Perfection Certificate;

(b) Investments consisting of Cash Equivalents;

(c) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower;

(d) Investments consisting of Collateral Accounts permitted hereunder;

(e) Investments accepted in connection with Transfers permitted by Section 7.1;

(f) Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower’s board of directors;

(g) Investments in Permitted Acquisitions;

(h) Investments evidencing Permitted Intercompany Advances;

(i) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; and

(j) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (j) shall not apply to Investments of Borrower in any Subsidiary.

“ Permitted Liens ” are:

(a) Liens existing on the Effective Date and shown on the Perfection Certificate or arising under this Agreement and the other Loan Documents;

(b) Liens for taxes, fees, assessments or other government charges or levies, either (i) not due and payable or (ii) being contested in good faith and for which Borrower maintains adequate reserves on its Books, provided that no notice of any such Lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;

(c) purchase money Liens (i) on Equipment acquired or held by Borrower incurred for financing the acquisition of the Equipment securing no more than Five Million Dollars ($5,000,000) in the aggregate amount outstanding, or (ii) existing on Equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the Equipment;

(d) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);

(e) Liens incurred in the extension, renewal or refinancing of the Indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase;

(f) leases or subleases of real property granted in the ordinary course of Borrower’s business (or, if referring to another Person, in the ordinary course of such Person’s business), and leases, subleases, non-exclusive licenses or sublicenses of personal property (other than Intellectual Property) granted in the ordinary course of Borrower’s business (or, if referring to another Person, in the ordinary course of such Person’s business), if the leases, subleases, licenses and sublicenses do not prohibit granting Bank a security interest therein;

(g) non-exclusive license of Intellectual Property granted to third parties in the ordinary course of business or covenants not to assert granted to third parties in the operation of the Parent and its Subsidiaries' business, including the sales of products or services, joint development programs or the settlement of litigation;

(h) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business and not in connection with the borrowing of money;

(i) Liens on amounts deposited to secure Parent’s and its Subsidiaries obligations in connection with worker’s compensation or other unemployment insurance;

(j) Liens on amounts deposited to secure Parent’s and its Subsidiaries obligations in connection with the making or entering into of bids, tenders, or leases in the ordinary course of business and not in connection with the borrowing of money;

(k) Liens on amounts deposited to secure Parent’s and its Subsidiaries reimbursement obligations with respect to surety or appeal bonds obtained in the ordinary course of business;

(l) with respect to any real property, easements, rights of way, and zoning restrictions that do not materially interfere with or impair the use or operation thereof;

(m) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;

(n) Liens solely on any cash earnest money deposits made by Parent or any of its Subsidiaries in connection with any letter of intent or purchase agreement with respect to a Permitted Acquisition;

(o) Liens on cash collateral securing purchase cards (including so-called “procurement cards” or “P-cards”) that constitute Permitted Indebtedness;

(p) Liens arising from attachments or judgments, orders, or decrees in circumstances not constituting an Event of Default under Sections 8.4 and 8.7; and

(q) Liens in favor of other financial institutions arising in connection with Borrower’s deposit and/or securities accounts held at such institutions; provided that Bank has a perfected security interest in the amounts held in such deposit and/or securities accounts.

“ Permitted Transfers ” are:

Transfers of Inventory in the ordinary course of business;

(a) Transfers of worn-out or obsolete Equipment that is, in the reasonable judgment of Borrower, no longer economically practicable to maintain or useful in the ordinary course of business of Borrower;

(b) Transfers consisting of Permitted Liens and Permitted Investments;

(c) the licensing, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of business;

(d) the lapse of registered patents, trademarks and other intellectual property of Parent and its Subsidiaries to the extent not economically desirable in the conduct of their business and so long as such lapse is not materially adverse to the interests of the Lenders,

(e) Transfers consisting of the sale or issuance of any stock of Borrower permitted under Section 7.2 of this Agreement;

(f) * * *;

(g) Transfers consisting of Borrower’s use or transfer of money or Cash Equivalents in the ordinary course of business in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents; and

(h) * * *.

“ Person ” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

“ Pound Sterling ” and the sign “ £ ” each mean the lawful currency for the time being of the United Kingdom.

“ Prime Rate ” is the rate of interest per annum from time to time published in the money rates section of The Wall Street Journal or any successor publication thereto as the “prime rate” then in effect; provided that if such rate of interest, as set forth from time to time in the money rates section of The Wall Street Journal , becomes unavailable for any reason as determined by Bank, the “Prime Rate” shall mean the rate of interest per annum announced by Bank as its prime rate in effect at its principal office in the State of California (such Bank announced Prime Rate not being intended to be the lowest rate of interest charged by Bank in connection with extensions of credit to debtors).

* * * CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

“ Prime Rate Advance ” means an Advance that bears interest based at the Prime Rate.

“ Qualified Cash ” means unrestricted cash or unrestricted Cash Equivalents of Borrower and any Guarantor that are deposited in an account that is (a) subject to a first-priority perfected security interest in favor of Bank; (b) either with Bank or subject to a Control Agreement in favor of Bank (or otherwise subject to a security interest in favor of Bank that provides Bank with equivalent perfection, priority, and rights) and (c) is maintained by a branch office of the Bank or a securities intermediary located in the United States, the United Kingdom or Canada.

“ Quarterly Financial Statements ” is defined in Section 6.2(e).

“ Registered Organization ” is any “registered organization” as defined in the Code with such additions to such term as may hereafter be made.

“ Regulatory Change ” means, with respect to Bank, any change on or after the date of this Agreement in United States federal, state, or foreign laws or regulations, including Regulation D, or the adoption or making on or after such date of any interpretations, directives, or requests applying to a class of lenders including Bank, of or under any United States federal or state, or any foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.

“ Requirement of Law ” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

“ Reserve Requirement ” means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental, or emergency reserves) are required to be maintained during such Interest Period under Regulation D against “Eurocurrency liabilities” (as such term is used in Regulation D) by member banks of the Federal Reserve System. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by Bank by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the LIBOR Rate is to be determined as provided in the definition of LIBOR or (b) any category of extensions of credit or other assets which include Advances.

“ Reserves ” means, as of any date of determination, such amounts as Bank may, after consultation with and notice to Borrower, from time to time establish and revise in its good faith business judgment, reducing the amount of Advances and other financial accommodations which would otherwise be available to Borrower (a) to reflect events, conditions, contingencies or risks which, as determined by Bank in its good faith business judgment, do or may adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Accounts), (ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the security interests and other rights of Bank in the Collateral

(including the enforceability, perfection and priority thereof); or (b) to reflect Bank’s reasonable belief that any collateral report or financial information furnished by or on behalf of Borrower or any Guarantor to Bank is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Bank determines constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.

“ Responsible Officer ” is any of the Chief Executive Officer, President, Chief Financial Officer and Controller (or the UK equivalent thereof) of Parent and/or Borrower.

“ Restricted License ” is any material license or other agreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with the Bank’s right to sell any Collateral.

“ Revolving Line ” is an aggregate principal amount not to exceed Forty Million Dollars ($40,000,000) outstanding at any time.

“ Revolving Line Maturity Date ” is March 28, 2017 (3 years after the Effective Date).

“ SEC ” shall mean the Securities and Exchange Commission, any successor thereto, and any analogous Governmental Authority.

“ Securities Account ” is any “securities account” as defined in the Code with such additions to such term as may hereafter be made.

“ Settlement Date ” is defined in Section 2.1.3

“ Streamline Period ” is, on and after the Effective Date, provided no Event of Default has occurred and is continuing, the period (a) commencing on the first day of the month following the day that Borrower provides to Bank a written report that Borrower has, for each consecutive day in the immediately preceding monthly period, Net Cash, as determined by Bank in its reasonable discretion, in an amount at all times equal to or greater than Fifteen Million Dollars ($15,000,000) (the “ Streamline Balance ”); and (b) terminating on the earlier to occur of (i) the occurrence of an Event of Default, and (ii) the first day thereafter in which Borrower fails to maintain the Streamline Balance, as determined by Bank in its reasonable discretion. Upon the termination of a Streamline Period, Borrower must maintain the Streamline Balance each consecutive day for one (1) calendar month as determined by Bank in its reasonable discretion, prior to entering into a subsequent Streamline Period. Borrower shall give Bank prior written notice of Borrower’s election to enter into any such Streamline Period, and each such Streamline Period shall commence on the first day of the monthly period following the date the Bank determines, in its reasonable discretion, that the Streamline Balance has been achieved. Notwithstanding the foregoing, on the Effective Date, so long as Borrower can demonstrate to Bank, to Bank’s reasonable satisfaction, that Borrower has achieved the Streamline Balance for each day in the monthly period ending as of the Effective Date, Borrower shall be deemed to be in a Streamline Period.

“ Stock ” means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including

common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act).

“ Stock Pledge Agreement ” is any agreement pursuant to which any Person pledges to Bank such Person’s equity ownership in any third party as security securing the repayment of the Obligations.

“ Subordinated Debt ” is indebtedness incurred by Borrower subordinated to all of Borrower’s now or hereafter indebtedness to Bank (pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to Bank entered into between Bank and the other creditor), on terms acceptable to Bank.

“ Subsidiary ” is, as to any Person, (a) a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person or (b) a subsidiary as defined in Section 1159 of the UK Companies Act 2006, or (c) unless the context otherwise requires, a subsidiary undertaking within the meaning of Section 1162 of the UK Companies Act 2006. Unless the context otherwise requires, each reference to a Subsidiary herein shall be a reference to a Subsidiary of Borrower or any Guarantor.

“ Trademarks ” means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.

“ Transaction Report ” is that certain report of transactions and schedule of collections in the form provided by Bank to Borrower.

“ Transfer ” is defined in Section 7.1.

“ UK ” and “ United Kingdom ” means the United Kingdom of Great Britain and Northern Ireland.

“ UK Collateral Document ” means together (i) the Debenture, (ii) the mortgage debentures dated on or about the Effective Date between each of Bookham Nominees Limited, Oclaro Innovations LLP and Bank and (iii) the charge over members interests dated on or about the Effective Date between Oclaro, Inc. and Bank.

“ UK Guarantors ” means together or separately as the context requires (a) Bookham Nominees Limited a company incorporated under the laws of England and Wales with company number 05865912 and its registered address at Caswell, Towcester, Northamptonshire NN12 8EQ, UK, and (b) Oclaro Innovations LLP a limited liability partnership incorporated under the laws of England and Wales with company number OC356079 and its registered address at Caswell, Towcester, Northamptonshire NN12 8EQ, UK.

[Signature page follows.]

IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed as of the Effective Date.

BORROWER:

OCLARO TECHNOLOGY LIMITED

By /s/ James Haynes
Name: James Haynes
Title: Director

PARENT:

OCLARO, INC.

By /s/ Pete Mangan
Name: Pete Mangan
Title: Chief Financial Officer

BANK:

SILICON VALLEY BANK

By /s/ Ryan Edwards
Name: Ryan Edwards
Title: Vice President

[Signature Page – Loan and Security Agreement]

EXHIBIT A – COLLATERAL DESCRIPTION

The Collateral consists of all of Borrower’s right, title and interest in and to the following personal property:

All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles, commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and

all Borrower’s Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.

Notwithstanding the foregoing, the Collateral does not include any Excluded Property.

EXHIBIT B

FORM OF NOTICE OF BORROWING

OCLARO TECHNOLOGY LIMITED

Date: ______________

To: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attention:
Email:

RE: Loan and Security Agreement dated as of March , 2014 (as amended, modified, supplemented or restated from time to time, the “ Loan Agreement ”), by and among Oclaro, Inc. (“ Parent ”), OCLARO TECHNOLOGY LIMITED (“ Borrower ”) and SILICON VALLEY BANK (the “ Bank ”)

Ladies and Gentlemen:

The undersigned refers to the Loan Agreement, the terms defined therein and used herein as so defined, and hereby gives you notice irrevocably, pursuant to Section 3.4 of the Loan Agreement, of the borrowing of Advances.

1. The Funding Date, which shall be a Business Day, of the requested borrowing is _______, 201 .

2. The Currency of the requested borrowing is U.S. Dollars.

3. The duration of the Interest Period for the LIBOR Advance included in the requested Advance shall be [one (1)/ two (2)/ three (3)/six(6)] __________ months.

4. The aggregate amount of requested Advances is $ .

5. The requested Advances shall consist of $___________ of Prime Rate Advances and $______ of LIBOR Advances.

The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed Credit Extension before and after giving effect thereto, and to the application of the proceeds therefrom, as applicable:

(a) all representations and warranties of Borrower contained in the Loan Agreement are true, complete and correct in all material respects as of the date hereof; provided , however , that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided , further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and

(b) no Event of Default has occurred and is continuing, or would result from the disbursement of such proposed Credit Extension.

BORROWER OCLARO TECHNOLOGY LIMITED

By:

Name:

Title:

For internal Bank use only



LIBOR Pricing Date	LIBOR	LIBOR Variance	Maturity Date
		____%

EXHIBIT C

FORM OF NOTICE OF CONVERSION/CONTINUATION

OCLARO TECHNOLOGY LIMITED

Date:


To:	Silicon Valley Bank 3003 Tasman Drive Santa Clara, CA 95054 Attention: Email:

RE: Loan and Security Agreement dated as of March , 2014 (as amended, modified, supplemented or restated from time to time, the “ Loan Agreement ”), by and among OCLARO, INC. , (“ Parent ’), OCLARO TECHNOLOGY LIMITED (“ Borrower ”) and SILICON VALLEY BANK (the “ Bank ”)

Ladies and Gentlemen:

The undersigned refers to the Loan Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 3.6 of the Loan Agreement, of the [conversion] [continuation] of the Advances specified herein, that:

1. The date of the [conversion] [continuation] is , 20___.

2. The aggregate amount of the proposed Advances to be [converted] is

[$] or continued is [$] .

3. The Advances are to be [converted into] [continued as] [LIBOR] [Prime Rate] Advances.

4. The duration of the Interest Period for the LIBOR Advances included in the [conversion] [continuation] shall be [one (1)/ two (2)/ three (3)] months.

The undersigned, on behalf of Borrower, hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed [conversion] [continuation], before and after giving effect thereto and to the application of the proceeds therefrom:

(a) all representations and warranties of Borrower stated in the Loan Agreement are true, complete and correct in all material respects as of the date hereof; provided , however , that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided , further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and

(b) no Event of Default has occurred and is continuing, or would result from such proposed [conversion] [continuation].

BORROWER OCLARO TECHNOLOGY LIMITED

By:

Name:

Title:

For internal Bank use only



LIBOR Pricing Date	LIBOR	LIBOR Variance	Maturity Date
		____%

EXHIBIT E

COMPLIANCE CERTIFICATE

TO: SILICON VALLEY BANK Date:

FROM: OCLARO TECHNOLOGY LIMITED

The undersigned authorized officer of OCLARO TECHNOLOGY LIMITED (“ Borrower ”) certifies that under the terms and conditions of the Loan and Security Agreement by and among OCLARO, INC. , a Delaware corporation (“ Parent ”), Borrower and Bank (the “ Agreement ”): (1) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below; (2) unless noted below, there are no Events of Default; (3) all representations and warranties in the Agreement are true and correct in all material respects on this date except as noted below; provided , however , that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided , further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date ; (4) Borrower, and each of its Subsidiaries, has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement; and (5) no Liens have been levied or claims made against Borrower or any of its Subsidiaries relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Bank.

Attached are the required documents supporting the certification. The undersigned certifies that these supporting documents have been prepared in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.



Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenants	Required	Complies

Monthly Financial Statements	Monthly within 30 days	Yes No
Quarterly Financial Statements	Quarterly within 45 days
Compliance Certificates	With delivery of Monthly Financial Statements, Quarterly Financial Statements and Annual Financial Statements	Yes No
Annual Financial Statement (CPA Audited)	FYE within 90 days	Yes No
10‑Q, 10‑K and 8-K	Within 5 days after filing with SEC – e-mail notification when posted	Yes No
Transaction Reports	Weekly by Friday of each week (Monthly within 10 days when A Streamline Period is in effect) and with each request for an Advance	Yes No
A/R & A/P Aging and Cash Reconciliation/Cash balance Reports (Parent and all Subsidiaries worldwide)	Weekly by Friday of each week (Monthly within 10 days when A Streamline Period is in effect)	Yes No
Projections	45 days prior to FYE	Yes No

The following Intellectual Property was registered (or a registration application submitted) after the Effective Date (if no registrations, state “None”) ___________________________________________________________________________________________ ___________________________________________________________________________________________



Financial Covenants	Required	Actual	Complies

Maintain as indicated:
Fixed Charge Coverage Ratio (quarterly when a Streamline Period is not in effect)	1.10:1.00	_____ :1.00	Yes No



Streamline Period		Applies

Net Cash > $15,000,000	Streamline Period in effect	Yes No
Net Cash < $15,000,000	Streamline Period not in effect	Yes No

The following financial covenant analyses and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.

Other Matters



Have there been any amendments of or other changes to the capitalization table of Borrower and to the Operating Documents of Parent or any of its Subsidiaries? If yes, provide copies of any such amendments or changes with this Compliance Certificate.	Yes	No

The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)

--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



OCLARO TECHNOLOGY LIMITED By: Name: Title:	BANK USE ONLY Received by: _____________________ AUTHORIZED SIGNER Date: _________________________ Verified: ________________________ AUTHORIZED SIGNER Date: _________________________ Compliance Status: Yes No

Schedule 1 to Compliance Certificate

Financial Covenants of Borrower

In the event of a conflict between this Schedule and the Loan Agreement, the terms of the Loan Agreement shall govern.

Dated: ____________________

I. Fixed Charge Coverage Ratio (Section 6.7(a))

Required: Maintain a Fixed Charge Coverage Ratio, as at the last day of each fiscal quarter in which a Streamline Period has not been in effect at any time during such fiscal quarter, measured on a trailing twelve-month basis, equal to or greater than 1.10:1.00.

Actual: All amounts measured quarterly, on a trailing twelve month basis.



E.	EBITDA	$
F.	Capital Expenditures	$
G.	Adjusted EBITDA (line E minus line F)	$
H.	the sum (without duplication) of: (a) Interest Expense paid in cash for such period, plus (b) principal payments in respect of Indebtedness that are required to be paid during such period, plus (c) all federal, state and local income taxes accrued during such period	$
I.	FIXED CHARGE COVERAGE RATIO (line G divided by line H, expressed as a ratio)	:1.00

Net Cash: ?

Is Borrower’s Net Cash greater than or equal to $15,000,000 at any time during the preceding quarterly period?

, No, FCCR is tested quarterly Yes, FCCR is not tested

Is line I equal to or greater than 1.10:1:00?

No, not in compliance Yes, in compliance

UNCONDITIONAL GUARANTY

This continuing UNCONDITIONAL GUARANTY (“ Guaranty ”) is entered into as of March 28, 2014 by each Person listed on the signature page hereof (individually and collectively, jointly and severally, the “ Guarantor ”), in favor of SILICON VALLEY BANK , a California corporation with a loan production office located at 2400 Hanover Street, Palo Alto, CA 94304 (“ Bank ”).

RECITALS

A. Concurrently herewith, OCLARO, INC. , a Delaware corporation (“ Parent ”) and OCLARO TECHNOLOGY LIMITED , a company incorporated under the laws of England and Wales (“ Borrower ”) have entered into that certain Loan and Security Agreement with Bank, dated as of the date hereof (as may be amended, restated, or otherwise modified from time to time, the “ Loan Agreement ”), pursuant to which Bank has agreed to make certain advances of money and to extend certain financial accommodations to Borrower (collectively, the “ Loans ”), subject to the terms and conditions set forth therein. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Loan Agreement.

B. In consideration of the agreement of Bank to make the Loans to Borrower under the Loan Agreement, Guarantor is willing to guaranty the full payment and performance by Borrower of all of its obligations thereunder and under the other Loan Documents, all as further set forth herein.

C. Each Guarantor is an affiliate of Borrower and will obtain substantial direct and indirect benefit from the Loans made by Bank to Borrower under the Loan Agreement.

NOW, THEREFORE, to induce Bank to enter into the Loan Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, Guarantor hereby represents, warrants, covenants and agrees as follows:

Section 1. Guaranty .

1.1 Unconditional Guaranty of Payment . In consideration of the foregoing, Guarantor hereby irrevocably, absolutely and unconditionally guarantees to Bank the prompt and complete payment and performance when due (whether at stated maturity, by acceleration or otherwise) of all Obligations. Guarantor agrees that it shall execute such other documents or agreements and take such action as Bank shall reasonably request to effect the purposes of this Guaranty.

1.2 Separate Obligations . These obligations are independent of Borrower’s obligations and separate actions may be brought against Guarantor (whether action is brought against Borrower or whether Borrower is joined in the action).

Section 2. Representations and Warranties .

Guarantor hereby makes the representations and warranties set forth in Section 5 of the Loan Agreement (which representations and warranties are incorporated by reference herein), with reference to “Borrower” therein being deemed a reference to “Guarantor” save that in the case of Oclaro Innovations LLP, for the purposes of Section 5.1 it represents and warrants that it is a limited liability partnership instead of a private limited company.

Section 3. General Waivers .

Guarantor waives:

(a) Any right to require Bank to (i) proceed against Borrower or any other person; (ii) proceed against or exhaust any security or (iii) pursue any other remedy. Bank may exercise or not exercise any right or remedy

it has against Borrower or any security it holds (including the right to foreclose by judicial or nonjudicial sale) without affecting Guarantor’s liability hereunder.

(b) Any defenses from disability or other defense of Borrower (other than the defense that the Obligations have been fully paid), or from the cessation of Borrower’s liabilities.

(c) Any setoff, defense or counterclaim against Bank, and any claim, set-off or other rights which any Guarantor may have at any time against the Debtor.

(d) any defense from the absence, impairment or loss of any right of reimbursement or subrogation or any other rights against Borrower. Until Borrower’s obligations to Bank have been paid and the Borrower’s financing arrangements have been terminated, Guarantor has no right of subrogation or reimbursement or other rights against Borrower.

(e) Any right to enforce any remedy that Bank has against Borrower.

(f) Any rights to participate in any security held by Bank.

(g) Any demands for performance, notices of nonperformance or of new or additional indebtedness incurred by Borrower to Bank. Guarantor is responsible for being and keeping itself informed of Borrower’s financial condition.

(h) The benefit of any act or omission by Bank which directly or indirectly results in or aids the discharge of Borrower from any of the Obligations by operation of law or otherwise.

(i) The benefit of California Civil Code Section 2815 permitting the revocation of this Guaranty as to future transactions and the benefit of California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2849, 2850, 2899 and 1432 with respect to certain suretyship defenses.

(j) With respect to Oclaro (Canada) Inc. (the “ Canadian Guarantor ”), the benefit of any defense arising by reason of the invalidity, illegality or lack of enforceability of the Loan Agreement or any part thereof of any security or guarantee, or by reason of any incapacity, lack of authority, or other defense of the Borrower or any other person, or by reason of any limitation, postponement, prohibition on the Bank’s right to payment under the Loan Agreement.

(k) With respect to the Canadian Guarantor, the benefit of any defense arising by reason of any failure by the Bank to obtain, perfect or maintain a perfected or prior (or any) security interest in or lien or encumbrance upon any property of the Borrower, or any other person, or by reason of any interest of the Bank in any property, whether as owner thereof or the holder of a security interest therein or lien or encumbrance thereon, being invalidated, voided, declared fraudulent or preferential or otherwise set aside, or by reason of any impairment by the Bank of any right to recourse or collateral.

(l) With respect to the Canadian Guarantor, the benefit of any defense arising by reason of any failure by the Bank to (i) marshal any assets, or (ii) give to the Borrower or any Guarantor notice of any sale or other disposition of any property.

(m) With respect to the Canadian Guarantor, the benefit of any defense based upon or arising out of any bankruptcy, insolvency, reorganization, moratorium, arrangement, readjustment of debt, liquidation or dissolution proceeding commenced by or against the Borrower or any other person, including any discharge of, or bar against collecting the Obligations, in or as a result of any such proceeding.

In addition the liability of Guarantor shall not be affected nor shall this Guaranty be discharged or reduced by reason of:

(a) the incapacity or any change in the name, style or constitution of Borrower or any other Guarantor or any other person liable from time to time, directly or indirectly, for the Obligations;

(b) any Insolvency Proceeding in respect of any Guarantor;

(d) Bank compounding with, discharging, releasing, terminating, amending, varying, novating, supplementing or increasing the liability of Borrower or any other Guarantor for the Obligations;

(e) Bank renewing, determining, terminating, amending, varying, novating, supplementing or increasing any accommodation, facility or transaction or otherwise dealing with the same in any manner whatsoever or concurring in, accepting or varying any compromise, arrangement or settlement with Borrower or any other Guarantor;

(f) Bank omitting to claim or enforce payment from Borrower or any other Guarantor;

(g) any invalidity, illegality, unenforceability, irregularity or frustration of any actual or purported obligation of, or any security held from Borrower or any other Guarantor;

(h) any act or omission by Bank or any other person in taking up, perfecting or enforcing any security, indemnity or guaranty from or Borrower or any other Guarantor; or

(i) any act or omission which would not have discharged or affected the liability of any Guarantor had it been Borrower instead of a Guarantor or by anything done or omitted which but for this provision might operate to exonerate or discharge Guarantor or otherwise reduce or extinguish its liability under this Guaranty.

Section 4. Real Property Security Waiver . Guarantor acknowledges that, to the extent Guarantor has or may have rights of subrogation or reimbursement against Borrower for claims arising out of this Guaranty, those rights may be impaired or destroyed if Bank elects to proceed against any real property security of Borrower by non-judicial foreclosure. That impairment or destruction could, under certain judicial cases and based on equitable principles of estoppel, give rise to a defense by Guarantor against its obligations under this Guaranty. Without limiting the generality of the foregoing, Guarantor waives that defense and any others arising from Bank’s election to pursue non-judicial foreclosure. Without limiting the generality of the foregoing, Guarantor expressly waives all rights, benefits and defenses, if any, applicable or available to Guarantor under either California Code of Civil Procedure Sections 580a or 726, which provide, among other things, that the amount of any deficiency judgment which may be recovered following either a judicial or nonjudicial foreclosure sale is limited to the difference between the amount of any indebtedness owed and the greater of the fair value of the security or the amount for which the security was actually sold. Without limiting the generality of the foregoing, Guarantor further expressly waives all rights, benefits and defenses, if any, applicable or available to Guarantor under either California Code of Civil Procedure Sections 580b, providing that no deficiency may be recovered on a real property purchase money obligation, or 580d, providing that no deficiency may be recovered on a note secured by a deed of trust on real property if the real property is sold under a power of sale contained in the deed of trust.

Section 5. Reinstatement . Notwithstanding any provision of the Loan Agreement to the contrary, the liability of Guarantor hereunder shall be reinstated and revived and the rights of Bank shall continue if and to the extent

that for any reason any payment by or on behalf of Guarantor or Borrower is rescinded or must be otherwise restored by Bank, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, all as though such amount had not been paid. The determination as to whether any such payment must be rescinded or restored shall be made by Bank in its sole discretion; provided , however , that if Bank chooses to contest any such matter at the request of Guarantor, Guarantor agrees to indemnify and hold harmless Bank from all costs and expenses (including, without limitation, reasonable attorneys’ fees) of such litigation. To the extent any payment is rescinded or restored, Guarantor’s obligations hereunder shall be revived in full force and effect without reduction or discharge for that payment.

Section 6. No Waiver; Amendments . No failure on the part of Bank to exercise, no delay in exercising and no course of dealing with respect to, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. This Guaranty may not be amended or modified except by written agreement between Guarantor and Bank, and no consent or waiver hereunder shall be valid unless in writing and signed by Bank.

Section 7. Compromise and Settlement . No compromise, settlement, release, renewal, extension, indulgence, change in, waiver or modification of any of the Obligations or the release or discharge of Borrower from the performance of any of the Obligations shall release or discharge Guarantor from this Guaranty or the performance of the obligations hereunder.

Section 8. Notice . Any notice or other communication herein required or permitted to be given shall be in writing and may be delivered in person or sent by facsimile transmission, electronic mail, overnight courier, or by United States mail, registered or certified, return receipt requested, postage prepaid and addressed as follows:



If to Guarantor:		c/o Oclaro Technology Limited 2560 Junction Avenue San Jose, CA 95134 Attn: Pete Mangan - fax (408) 435-5025 Email: pete.mangan@oclaro.com David Teichmann - fax (408) 904-4913 Email: david.teichmann@oclaro.com
If to Bank:		Silicon Valley Bank 2400 Hanover Street Palo Alto, CA 94304 Attn: Ryan Edwards Fax: ( ) Email: redwards@svb.com
with a copy to:		Riemer & Braunstein LLP Three Center Plaza Boston, Massachusetts 02108 Attn: Charles W. Stavros, Esquire Fax: (617) 880-3456 Email: cstavros@riemerlaw.com

or at such other address as may be substituted by notice given as herein provided. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered or sent by facsimile transmission, or electronic mail, or three (3) Business Days after the same shall have been deposited in the United States mail. If sent by overnight courier service, the date of delivery shall be deemed to be the next Business Day after deposited with such service.

Section 9. Entire Agreement and Execution . This Guaranty constitutes and contains the entire agreement of the parties and supersedes any and all prior and contemporaneous agreements, negotiations, correspondence, understandings and communications between Guarantor and Bank, whether written or oral, respecting the subject matter hereof. It is intended that this Guaranty shall take effect as a deed in respect of Borrower notwithstanding the method of execution of this Guaranty by the other parties hereto.

Section 10. Severability . If any provision of this Guaranty is held to be unenforceable under applicable law for any reason, it shall be adjusted, if possible, rather than voided in order to achieve the intent of Guarantor and Bank to the extent possible. In any event, all other provisions of this Guaranty shall be deemed valid and enforceable to the full extent possible under applicable law.

Section 11. Subordination of Indebtedness . Any indebtedness or other obligation of Borrower now or hereafter held by or owing to Guarantor is hereby subordinated in time and right of payment to all obligations of Borrower to Bank, except as such indebtedness or other obligation is expressly permitted to be paid under the Loan Agreement; and such indebtedness of Borrower to Guarantor is assigned to Bank as security for this Guaranty, and if Bank so requests, after the occurrence and during the continuance of an Event of Default, shall be collected, enforced and received by Guarantor in trust for Bank and to be paid over to Bank on account of the Obligations of Borrower to Bank, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. At Bank’s request, any notes now or hereafter evidencing such indebtedness of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Bank.

Section 12. Subrogration. Until all the Obligations have been paid, discharged or satisfied in full (and notwithstanding payment of a dividend in any liquidation or bankruptcy or under any compromise or arrangement) Guarantor agrees that, without the prior written consent or in the absence of a written direction from Bank, it shall not:

(a) exercise its rights of subrogation, reimbursement and indemnity against Borrower;

(b) demand or accept repayment in whole or in part of any indebtedness now or hereafter due to Guarantor from Borrower or from any other person liable from time to time, directly or indirectly, for the Obligations;

(d) claim any set off or counterclaim against Borrower or any other Guarantor nor claim or prove in competition with Bank in the bankruptcy or liquidation of Borrower or any other person liable as above nor have the benefit of, or share in, any payment from or composition with, Borrower or any other person liable as above or any other Collateral held by Bank for any Obligations.

Section 13. Separate Property . Notwithstanding anything to the contrary contained herein, Guarantor hereby expressly agrees that recourse may be had against Guarantor’s separate property for the payment and performance of Guarantor’s obligations hereunder.

Section 14. Payment of Expenses . Guarantor shall pay, promptly on demand, all Expenses incurred by Bank in defending and/or enforcing this Guaranty. For purposes hereof, “Expenses” shall mean costs and expenses (including reasonable fees and disbursements of any law firm or other external counsel and the allocated cost of internal legal services and all disbursements of internal counsel) for defending and/or enforcing this Guaranty (including those incurred in connection with appeals or proceedings by or against any Guarantor under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief).

Section 15. Assignment; Governing Law . This Guaranty shall be binding upon and inure to the benefit of Guarantor and Bank and their respective successors and assigns, except that Guarantor shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of Bank, which may be granted or withheld in Bank’s sole discretion. Any such purported assignment by Guarantor without Bank’s written consent shall

be void. This Guaranty shall be governed by, and construed in accordance with, the laws of the State of California without regard to principles thereof regarding conflict of laws.

Section 16. Third Party Rights . Any Person who is not a party to this Agreement shall have no rights under the UK Contracts (Rights of Third parties) Act 1999 to enforce or enjoy the benefits of any term of this Agreement.

Section 17. PERSONAL JURISDICTION . GUARANTOR HEREBY IRREVOCABLY AGREES THAT ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS GUARANTY OR ANY OF THE AGREEMENTS, DOCUMENTS OR INSTRUMENTS DELIVERED IN CONNECTION HEREWITH MAY BE BROUGHT IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF CALIFORNIA AS BANK MAY ELECT (PROVIDED THAT GUARANTOR ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE STATE OF CALIFORNIA), AND, BY EXECUTION AND DELIVERY HEREOF, GUARATNOR ACCEPTS AND CONSENTS TO, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND AGREES THAT SUCH JURISDICTION SHALL BE EXCLUSIVE, UNLESS WAIVED BY BANK IN WRITING, WITH RESPECT TO ANY ACTION OR PROCEEDING BROUGHT BY GUARANTOR AGAINST BANK. NOTHING HEREIN SHALL LIMIT THE RIGHT OF BANK TO BRING PROCEEDINGS AGAINST GUARANTOR IN THE COURTS OF ANY OTHER JURISICTION, GUARANTOR HEREBY WAIVES, TO THE FULL EXTENT PERMITTED BY LAW, ANY RIGHT TO STAY OR TO DISMISS ANY ACTION OR PROCEEDING BROUGHT BEFORE SAID COURTS ON THE BASIS OF FORUM NON CONVENIENS.

Section 18. WAIVER OF JURY TRIAL . EACH OF BANK AND GUARANTOR HEREBY WAIVES, TO THE FULL EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS GUARANTY. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTY HERETO HAVE BEEN INDUCED TO ENTER INTO THIS GUARANTY AND ANY RELATED INSTRUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 18.

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the Santa Clara County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and orders applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of any

party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

[Signature page follows.]

IN WITNESS WHEREOF, the undersigned has entered into this Unconditional Guaranty, effective as of the date first written above.

GUARANTOR:



OCLARO, INC. By: /s/ Pete J. Mangan Name: Pete Mangan Title: Chief Financial Officer	OCLARO TECHNOLOGY, INC. By: /s/ Pete J. Mangan Name: Pete Mangan Title: President, Treasurer and Secretary
OCLARO (NORTH AMERICA), INC. By: /s/ Pete J. Mangan Name: Pete Mangan Title: Chief Executive Officer, Chief Financial Officer and Secretary	MINTERA CORPORATION By: /s/ Pete J. Mangan Name: Pete Mangan Title: President, Chief Financial Officer and Secretary
OPNEXT, INC. By: /s/ Pete J. Mangan Name: Pete Mangan Title: Chief Executive Officer, President, Chief Financial Officer and Secretary	PINE PHOTONICS COMMUNICATIONS, INC. By: /s/ Pete J. Mangan Name: Pete Mangan Title: President, Treasurer and Secretary
OPNEXT SUBSYSTEMS INC. By: /s/ Pete J. Mangan Name: Pete Mangan Title: President, Chief Financial Officer and Secretary	BOOKHAM NOMINEES LIMITED By: /s/ James Haynes Name: James Haynes Title: Director
	OCLARO INNOVATIONS LLP By Oclaro Inc., its member By: /s/ Pete J. Mangan Name: Pete Mangan Title: Chief Financial Officer By Oclaro (North America) Inc., its member By: /s/ Pete J. Mangan Name: Pete Mangan Title: Chief Executive Officer, Chief Financial Officer and Secretary

[Signature Page – Unconditional Guaranty]

PRIVATE AND CONFIDENTIAL

April 21, 2014

Richard Craig

719 La Para Ave.

Palo Alto, CA. 94306

RE: Offer of Employment

Dear Rich:

We are pleased to offer you the position of President, Integrated Photonics Division, reporting directly to me. We believe that you will bring great value to Oclaro, and we are excited about you joining our team.

Your base compensation for the regular, full-time, exempt position will be at the annualized rate of $300,000. Such rate may be adjusted from time to time in accordance with normal business practices and in the sole discretion of the Company. Applicable payroll deductions as required by state and federal law will be withheld from your paycheck, along with any mandatory or voluntary deductions that you authorize. The Company issues payroll on a bi-weekly basis. Your compensation package also includes:

1. Eligibility to participate in the Company’s Variable Pay Scheme, which is a discretionary arrangement that is based on Company performance on specific objectives. Your target participation level will be 60% of your base compensation. If you are not actively employed with the Company as of the payment date, you will not be eligible to receive any variable pay, and no right to such variable pay will have accrued. Details of the Variable Pay Scheme will be provided to you by Human Resources. The Company reserves all rights to terminate, amend, suspend, withdraw or modify the Variable Pay Scheme at any time.

2. Participation in the Company’s Benefits Program is effective on your first day of employment. A Benefits Summary is enclosed. Further details will be provided to you by Human Resources at the New Hire Orientation.

3. As an Executive, you will also be entitled to our Executive Severance and Retention Agreement. Further details on this will be shared with you at the start of your employment with the Company.

4. Subject to formal approval by the Board of Directors (the "Board"), the position being offered to you includes 100,000 Restricted Stock (Unit) (RSU or RSA) of the Company under the terms of the 2004 Amended and Restated Oclaro Stock Incentive Plan and any other policies, laws or rulings that may govern the (RSU/RSA) and its issuance. The grant date of the (RSU/RSA) will be on the 10th day of the month following the month of your first date of employment. The first 25% of the (RSU/RSA) will vest on or before the first anniversary of the grant date. Specifically,

the 25% vesting will occur on the February 10th, May 10th, August 10th or November 10th which occurs on or immediately preceding the one year anniversary of the date of grant. Thereafter, 6.25% of the (RSU/RSA) will vest each February 10th, May 10th, August 10th and November 10th over the following three years of continuous service to the Company. All vesting will cease upon termination of employment.

5. Additionally, subject to formal approval by the Board of Directors (the "Board"), the position being offered to you includes a stock option to own 100,000 shares under the terms of the Company’s plan and any other policies, laws or rulings that may govern the stock options and their issuance. The exercise price of the options will be the market price at the time of formal Board approval. The stock options will vest over a four year period, with twenty-five (25%) percent vesting after the first year and the balance vesting monthly over the following three years, however, all vesting will cease upon termination of employment at will.

Pursuant to the Immigration Reform and Control Act of 1986, the Company is required to verify the identity and employment eligibility of all new hires. In order to comply with this legal obligation, we can only hire those individuals who are eligible to work in the United States. As a condition of employment, you will be required to provide documents verifying your identity and your eligibility to work in the United States; and to complete an Employment Eligibility Verification form I-9 within three (3) business days from your hire date. To verify your identity, we have enclosed a list of acceptable documents for the I-9 which you will complete at the New Hire Orientation. Please note that you will need to bring either (i) one document from List A or (ii) one document from List B and one document from List C. If you anticipate having difficulty producing the required documents, please contact the Human Resources Department at (408) 919-6070 .

This agreement represents the entire agreement and the understanding between you and the Company as to the subject matter hereof and supersede all prior contemporaneous agreements, whether written or oral. No waiver, alteration or modification of any of the provisions of this agreement shall be binding, unless in writing and signed by duly authorized representatives of the company and yourself.

You represent that you are not bound by any employment contract, restrictive covenant or other restriction preventing you from entering into employment with or carrying out your responsibilities for the Company, or which is in any way inconsistent with the terms of this letter.

To accept this offer, subject to the foregoing conditions and the other conditions set forth herein, please sign in the space provided below, and return the signed letter to me by close of business on Friday, April 25, 2014. I have enclosed a copy of the Offer Letter for your records.

This employment opportunity is contingent upon the completion of an application for employment, satisfactory references and background checks and upon your signature of the Oclaro, Inc. Employment Agreement that will be distributed and reviewed in the New Hire Orientation.

Any future employment at the Company is subject to the terms and conditions of the Company and is terminable at will by either the employee or the Company. Further details will be provided to you by Human Resources. This letter supersedes all prior understandings, whether written or oral, relating to the terms of your employment.

Except as otherwise specifically provided for in the Executive Severance and Retention Agreement between you and Oclaro, if any, the offer outlined in this Offer Letter contains the entire agreement between you and the Company and constitutes the complete, final and exclusive embodiment of the subject matter herein. This Offer Letter is executed without reliance upon any promise, warranty, or representation by the Company or any representatives of the Company not expressly contained herein. This Offer Letter may not be modified unless in writing signed by the Company’s Chief Executive Officer, except that the policies of the company may be modified from time to time with reasonable advance notice.

We look forward to your joining Oclaro and hope that you find your employment with the Company enjoyable and professionally rewarding.

Yours Sincerely,

/s/ Greg Dougherty

Greg Dougherty

Chief Executive Officer, Oclaro Inc.

I HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS AGREEMENT. I FULLY INTEND TO COMPLY WITH, AND BE BOUND BY, THE PROVISIONS SET FORTH HEREIN.

I ACCEPT THIS OFFER OF EMPLOYMENT WITH Oclaro, Inc. and will begin work on: April 28, 2014. I AM NOT RELYING ON ANY REPRESENTATIONS OTHER THAN AS SET FORTH ABOVE.

Signed: /s/ Richard Craig Date: April 23, 2014

Richard Craig

Cc: file

Exhibit 31.1

SECTION 302(a) CERTIFICATION

I, Greg Dougherty, certify that:


1.	I have reviewed this Quarterly Report on Form 10-Q of Oclaro, Inc. for the period ended March 29, 2014 ;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: May 8, 2014	By:	/s/ GREG DOUGHERTY
		Greg Dougherty
		Chief Executive Officer
		(Principal Executive Officer)

Exhibit 31.2

SECTION 302(a) CERTIFICATION

I, Pete Mangan, certify that:


1.	I have reviewed this Quarterly Report on Form 10-Q of Oclaro, Inc. for the period ended March 29, 2014 ;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: May 8, 2014	By:	/s/ P ETE M ANGAN
		Pete Mangan
		Chief Financial Officer
		(Principal Financial Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Oclaro, Inc. (the “Company”) for the period ended March 29, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Greg Dougherty, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that to his knowledge:


(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: May 8, 2014	By:	/s/ G REG D OUGHERTY
		Greg Dougherty
		Chief Executive Officer
		(Principal Executive Officer)

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Oclaro, Inc. (the “Company”) for the period ended March 29, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Pete Mangan, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that to his knowledge:


(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: May 8, 2014	By:	/s/ P ETE M ANGAN
		Pete Mangan
		Chief Financial Officer
		(Principal Financial Officer)