BUSINESS COMBINATIONS AND DISPOSITIONS

During the fiscal years ended June 28, 2014, June 29, 2013 and June 30, 2012, we recorded $7.8 million, $3.7 million and $2.6 million, respectively, in legal and other direct acquisition-related costs in connection with business combinations and asset dispositions. These costs are recorded within restructuring, acquisition and related (income) expense, net in our consolidated statements of operations.

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 consisting 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 an 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 $3.0 million in legal fees, commissions and other administrative costs related to this transaction. We recognized a gain of $68.9 million on the sale of the Amplifier Business, which is recorded within discontinued operations in the consolidated statements of operations for the year ended June 28, 2014. As of June 28, 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 consolidated balance sheet at June 29, 2013, and consist of the following:



	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:



	Year Ended
	June 28, 2014		June 29, 2013		June 30, 2012
	(Thousands)
Revenues	$	35,185	$	93,902	$	96,085
Cost of revenues	26,389		72,901		74,226
Gross profit	8,796		21,001		21,859
Operating expenses	5,545		18,739		18,907
Other income (expense), net	68,923		—		—
Income from discontinued operations before income taxes	72,174		2,262		2,952
Income tax provision	13,068		800		822
Income from discontinued operations	$	59,106	$	1,462	$	2,130

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. Also, as part of the agreement, II-VI purchased certain pieces of equipment which are located in our Caswell facility. We continue to operate this equipment on behalf of II-VI, and provide certain wafer processing services in Caswell as part of an ongoing manufacturing services agreement.

As part of the transition services agreement, during fiscal year 2014, we temporarily supplied II-VI with back-end manufacturing of the 980 nm pump and certain high power laser diode products from our Shenzhen, China manufacturing facility. 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, we transferred $31.4 million in net assets to II-VI and incurred approximately $4.8 million in legal fees, commissions and other administrative costs. We recognized a gain of $63.2 million on the sale of the Zurich Business, which was included in income (loss) from discontinued operations, net of tax, for the year ended June 28, 2014 in our consolidated statements of operations.

During fiscal year 2014, in connection with the sale of the Zurich Business, we also recorded $3.1 million in income from discontinued operations related to the release of the cumulative translation adjustment from deconsolidating our Swiss subsidiary and a $4.8 million loss from discontinued operations related to the interest charges incurred in connection with the settlement of the term loan (refer to Note 7, Credit Line and Notes for further details.)

As of June 28, 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 consolidated balance sheet at June 29, 2013, and consist of the following:



	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

	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:



	Year Ended
	June 28, 2014		June 29, 2013			June 30, 2012
	(Thousands)
Revenues	$	13,896	$	87,497		$	95,165
Cost of revenues	11,029		72,264			75,659
Gross profit	2,867		15,233			19,506
Operating expenses	3,426		17,456			18,537
Other income (expense), net	61,595		(996		)	(1,469		)
Income (loss) from discontinued operations before income taxes	61,036		(3,219		)	(500		)
Income tax provision	198		693			4,136
Income (loss) from discontinued operations	$	60,838	$	(3,912	)	$	(4,636	)

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. During fiscal year 2013, we received $26.0 million in cash proceeds and the remaining $1.0 million during fiscal year 2014.

Under the asset purchase agreement, we made certain customary representations and warranties regarding our thin film filter business and interleaver product line, and we are subject to customary indemnification obligations related to pre-closing liabilities and breaches of representations, warranties and covenants. Also pursuant to the asset purchase agreement, we have agreed not to compete in the thin film filter or interleaver business for a period of five years, subject to certain limitations and exceptions.

In connection with these transactions, we transferred $0.9 million of property, plant and equipment at net book value, $0.7 million of inventory and $0.2 million of other net assets. We also incurred approximately $0.4 million in legal fees, commissions and other administrative costs related to the transactions. We recognized a gain of $24.8 million under the asset purchase agreement within restructuring, acquisition and related (income) expense, net in the consolidated statements of operations for the year ended June 29, 2013.

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.

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

In connection with the acquisition: (i) 91,467,739 shares of Opnext common stock were converted into the right to receive 38,416,355 shares of our common stock; (ii) outstanding options to purchase 10,119,340 shares of Opnext common stock were converted into options to purchase 4,250,011 shares of our common stock; and (iii) stock appreciation rights ("SARs") with respect to 412,123 shares of Opnext common stock were converted into SARs with respect to 172,970 shares of our common stock. Immediately following the effective time of the merger, Oclaro stockholders immediately prior to the merger owned approximately 57 percent and Opnext’s stockholders owned approximately 43 percent of the combined company. The combination is intended to qualify as a tax-free reorganization for federal income tax purposes. We accounted for this acquisition under the purchase method of accounting. The estimated fair value of assets acquired and liabilities assumed and the results of operations of Opnext from the closing date of the acquisition, July 23, 2012, are included in our consolidated financial statements at June 28, 2014 and June 29, 2013 and for the years then ended.

For accounting purposes, the fair value of the consideration paid to Opnext stockholders in the acquisition was $89.8 million; which includes the fair value of $88.7 million in common stock, based on the 38.4 million shares of common stock issued at a price of $2.31 per share, which was the closing market price of our common stock on the day the acquisition was consummated; and $1.1 million representing the fair value of vested stock options and SARs to purchase our common stock that we assumed.



	Total Consideration
	(Thousands)
Common shares issued to Opnext stockholders	$	88,742
Estimated fair value of vested stock options assumed	1,095
Estimated fair value of vested stock appreciation rights assumed	5
Total consideration	$	89,842

The total consideration given to former stockholders of Opnext has been allocated to the assets acquired and liabilities assumed based on their estimated relative fair values as of the date of the acquisition. Because of the complexities involved with performing our valuation, we initially recorded the tangible and intangible assets acquired and liabilities assumed based upon preliminary management estimates of their fair values as of July 23, 2012. During the fourth quarter of fiscal year 2013, we completed our fair value assessment of the Opnext acquisition, which resulted in changes to the estimated fair values of the assets acquired and liabilities assumed from the amounts we previously reported in our Quarterly Reports on Form 10-Q during fiscal year 2013.

Our final purchase price allocation, as adjusted, is as follows:



	Purchase Price Allocation
	(Thousands)
Cash and cash equivalents	$	36,123
Restricted cash	20,000
Accounts receivable	55,572
Inventories	68,011
Prepaid expenses and other current assets	14,432
Property and equipment	58,701
Intangible assets	16,420
Other non-current assets	212
Accounts payable	(68,503		)
Accrued expenses and other current liabilities	(27,081		)
Note payable	(19,133		)
Capital lease obligations	(29,003		)
Deferred tax liabilities	(2,131		)
Other non-current liabilities	(8,912		)
Estimate of the fair value of assets acquired and liabilities assumed	114,708
Gain on bargain purchase	(24,866		)
Total purchase price	$	89,842

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

The preliminary fair value of property and equipment was determined using management estimates based on currently available information and a high-level review of similar historical transactions completed by us during the previous three fiscal years. In the third and fourth quarters of fiscal year 2013, we adjusted our initial estimates by reducing the fair value of property and equipment by a total of $4.0 million based on completing our valuation. We recorded a corresponding reduction in our gain on bargain purchase as of the acquisition date and adjusted depreciation expense for all interim periods to reflect the revised fair value estimate as of the acquisition date.

During the fourth quarter of fiscal year 2013, we reduced the preliminary fair value of the capital lease obligations by $1.0 million upon completion of our valuation.

The fair value of intangible assets was based on internal assessments using the “income approach,” which requires an estimate or forecast of all the expected future cash flows through the application of the multi-period excess earnings method, relief-from-royalty method or other acceptable methods. During the fourth quarter of fiscal year 2013, we completed our valuation and identified the following significant intangible assets: $8.7 million of developed technology with an estimated weighted average useful life of 6 years, $0.2 million of contract backlog with an estimated weighted average useful life of 1 year, $4.9 million of customer relationships with an estimated weighted average useful life of 11 years, and $2.7 million of trademarks and other with an estimated weighted average useful life of 6 years.

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 in the fourth quarter of fiscal year 2013, upon completing our purchase price allocation and finalizing our fair value estimates of assets acquired and liabilities assumed.

The bargain purchase gain of $24.9 million results from the difference between the fair value of consideration given and our estimate of the fair value of assets acquired and liabilities assumed. The consideration given for Opnext consisted of a fixed number of our shares for each Opnext Share (0.42 for one), which was agreed upon on March 26, 2012. On that date, the closing price of our common stock was $4.66. At the consummation of the merger on July 23, 2012, the closing price of our common stock was $2.31. This share price, multiplied by the fixed number of our shares outstanding at the merger, and including the fair value of vested stock awards assumed by us, resulted in the fair value of consideration given being $89.8 million, less than the estimate of the fair market value of the net assets acquired and liabilities assumed of $114.7 million.

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

Asset Sale

In December 2011, we entered into an asset sale agreement to sell certain assets related to a legacy product, including inventory, equipment and intangibles, in exchange for $3.9 million of initial consideration plus potential earnout consideration based on the purchaser’s revenues from the legacy product over a 15 months period following the closing date. As of June 30, 2012, we received the full $3.9 million of the initial consideration.

During the year ended June 30, 2012, we completed the asset transfer and recognized a gain of $1.9 million within restructuring, acquisition and related (income) expense, net in the consolidated statements of operations. In fiscal year 2013, we recorded $0.4 million earnout consideration related to this agreement. Earnout consideration is recognized in the period it is reported to us as due, provided we believe cash collections are reasonably assured.

Acquisition of Mintera

On July 21, 2010, we acquired Mintera, a privately-held company providing high-performance optical transport sub-systems solutions. We accounted for the assets acquired and liabilities assumed from this acquisition using the purchase method of accounting. Under the terms of this agreement, we paid $10.5 million in cash to the former security holders and creditors of Mintera at the time of close and assumed $1.5 million in liabilities due by the security holders of Mintera, which we paid during fiscal year 2011.

We also agreed to pay additional revenue-based consideration whereby former security holders of Mintera were entitled to receive up to $20.0 million. The earnout consideration was payable in cash or, at our option, newly issued shares of our common stock, or a combination of cash and stock. During the year ended June 30, 2012, we recorded a $2.2 million decrease in the fair value of these earnout obligations within restructuring, acquisition and related (income) expense, net in the consolidated statements of operations. During fiscal year 2012, we settled the 12 month earnout obligation with the former security holders by paying them $0.5 million in cash and issuing 0.8 million shares of our common stock valued at $2.8 million. During fiscal year 2012, we also settled a portion of the 18 month earnout obligation with the former security holders by paying them $2.2 million in cash. The remaining 18 month earnout obligation of $8.6 million was settled in fiscal year 2013.

For accounting purposes, the total fair value of consideration given in connection with the acquisition of Mintera was $25.6 million, We recorded goodwill of $10.9 million in connection with the acquisition. In fiscal year 2013, we determined the goodwill related to this acquisition was impaired. Refer to Note 4, Goodwill and Other Intangible Assets for more information on the impairment of the goodwill.