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 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. The Loan Agreement also contains restrictions on our ability to pay cash dividends on our common stock.

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 June 28, 2014, there were no amounts outstanding under the Loan Agreement.

Wells Fargo Credit Line and Term Loan

On August 2, 2006, Oclaro, Inc., as the (“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.

In connection with the Credit Agreement, we paid an arrangement fee of $0.2 million, a closing fee of $0.3 million and agreed to pay a monthly servicing fee of $4,000 and an unused line fee equal to 0.375 percentage points per annum, payable monthly on the unused amount of revolving credit commitments. Borrowings made under the Credit Agreement bear interest at a rate based on either the London Interbank Offered Rate plus 2.50 percentage points or the bank’s prime rate plus 1.25 percentage points. During fiscal year 2014 and 2013, we made interest payments of $0.3 million and $1.2 million, respectively, in connection with the Credit Agreement.

From time to time, we amended and restated the Credit Agreement, before terminating the agreement on March 14, 2014.


•	On November 2, 2012, Borrower and the Parent entered into a Second Amended and Restated Credit Agreement with Wells Fargo and the other lenders regarding the senior secured revolving credit facility, increasing the facility size from $45.0 million to $50.0 million and extending the term thereof to November 2, 2017.

•

On January 23, 2013, Silicon Valley Bank ("SVB") and Wells Fargo ("Agent"), collectively the Lenders, entered into a Joinder Agreement (the "Joinder Agreement") pursuant to the Second Amended and Restated Credit Agreement among Parent, Borrower, the Lenders and the Agent, as administrative agent for the Lenders. Pursuant to the Joinder Agreement, SVB agreed to become an additional Lender under the Second Amended and Restated Credit Agreement, and the Lenders agreed to increase the revolving credit facility under the Credit Agreement from $50.0 million to $80.0 million. In connection with the Joinder Agreement, the Parent paid SVB a lender fee of $0.2 million.

•

On January 23, 2013, Parent, Borrower, the Lenders and the Agent entered into Amendment Number One to the Credit Agreement and the associated security agreements (the "Amendment"), pursuant to which the parties agreed that (i) the senior secured second lien notes due 2018 issued by Oclaro Luxembourg S.A. in the original principal amount of $25.0 million shall be applied against the maximum dollar limit of senior unsecured convertible notes that Parent may issue without the consent of Agent, and (ii) the cash balances of Opnext, Pine Photonics Communications, Inc., and Opnext Subsystems Inc. would be subject to a required sweep to the Agent’s account upon the occurrence of certain triggering events. Under the Credit Agreement advances are available based on up to 85 percent of “eligible accounts receivable,” as defined in the Credit Agreement.

•

On May 6, 2013, Parent, Borrower, the Lenders, the 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 (“Amendment Number Two”), which amended the Credit Agreement in pertinent part by: (i) adding a $25 million, one year term loan (the “Term Loan”) to be provided by the Term Lenders; (ii) 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), eliminating the Borrower’s option to increase the revolving credit facility to $100.0 million and implementing an availability block under the revolving credit facility of at least $10.0 million; (iii) removing the financial covenants so that Borrower is not required to maintain a minimum of $15.0 million of availability under the revolving credit facility or $15.0 million in qualified cash balances; (iv) adding an affirmative covenant that Borrower shall have consummated one or more asset sales by July 15, 2013 and with a minimum threshold of net proceeds as set forth in the Amendment, and (v) providing for payments and proceeds of asset sales to be applied to repay the credit facility and the Term Loan (with the first $20.0 million of such proceeds being applied to repay Wells Fargo and SVB, the next $25.0 million being applied to repay the Term Lenders and the remaining proceeds being used to repay Wells Fargo and SVB all amounts outstanding under the credit facility), and events of default relating thereto. During a continuing event of default, the Agent or Lenders can declare any amounts outstanding under the Credit Agreement immediately due and payable.

Interest on the Term Loan obligations accrued at a per annum rate equal to the sum of: (i) the PIK Term Loan Interest Rate, with such accrued interest to be capitalized quarterly and added to the outstanding principal balance of the Term Loan, and (b) the Cash Term Loan Interest Rate. The PIK Term Loan Interest Rate is 2.0 percent beginning on the effective date of the Term Loan (the “Effective Date”) up to but excluding the date six months thereafter, then it is 4.0 percent until the date twelve months after the Effective Date and then it is 5.0 percent. The Cash Term Loan Interest Rate is 7.0 percent beginning on the Effective Date up to but excluding the date six months thereafter, then it is 8.5 percent until the date twelve months after the Effective Date and then it is 10.0 percent.

In connection with Amendment Number Two, the Borrower paid the revolving lenders an amendment fee of $0.5 million and the Term Lenders a closing fee of $2.1 million. These costs were capitalized and scheduled to be amortized straight-line to expense over the one year term of the loan. In connection with the Term Loan, we also issued certain warrants. The Term Lenders exercised these warrants in May 2014, which is more fully discussed in Note 10, Stockholders’ Equity.

•

On August 21, 2013, Parent, Borrower, the Lenders and the Agent entered into Waiver and Amendment Number Three to the Credit Agreement, which amended the Credit Agreement in pertinent part by: (i) 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; (ii) eliminating the mandatory reduction of the revolving credit facility upon the consummation of the asset sales described in (i) above; and (iii) adding a covenant that the Borrower is required to maintain a minimum liquidity of at least $45.0 million at all times (liquidity being the sum of the Borrower’s excess availability under the revolving credit facility plus the lesser of $25.0 million and qualified cash balances). The Borrower paid the lenders an amendment fee of $0.7 million.

Under the Credit Agreement, as amended, we were required to complete certain asset sales on or by September 2, 2013. We completed the sale of the Zurich Business on September 12, 2013 and applied the net proceeds to repay all amounts outstanding under the Credit Agreement. The event of default resulting from not completing the transaction 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 prevented 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.

•On March 14, 2014, we terminated the Credit Agreement.

At June 28, 2014, there were no amounts outstanding under the Credit Agreement or the Term Loan. All amounts owed under the Credit Agreement and Term Loan were repaid during the first quarter of fiscal year 2014. During the year ended June 28, 2014, we recorded the remaining unamortized debt discount and issuance costs of $4.8 million related to the Term Loan in discontinued operations within the consolidated statement of operations for the year ended June 28, 2014. At June 29, 2013, there was $40.0 million outstanding under the Credit Agreement at an average interest rate of 2.9 percent per annum and $24.6 million outstanding related to the Term Loan at an average interest rate of 9 percent per annum.

7.50% Exchangeable Senior Secured Second Lien Notes (convertible notes)

On December 14, 2012, we and our indirect, wholly owned subsidiary, Oclaro Luxembourg S.A., closed the private placement of $25.0 million aggregate principal amount 7.50% Exchangeable Senior Secured Second Lien Notes due 2018 ("convertible notes"). The sale of the convertible notes resulted in net proceeds of approximately $22.8 million. The private placement was completed pursuant to a purchase agreement, dated December 14, 2012 entered into by us, certain of our domestic and foreign subsidiaries (the "Guarantors") and Morgan Stanley & Co. LLC. The convertible notes are governed by an Indenture, entered into by us and the Guarantors with Wells Fargo Bank, National Association, as trustee and second lien collateral agent (the "Trustee"). The Indenture contains affirmative and negative covenants that, among other things, limit the ability of us and the Guarantors to incur, assume or guarantee additional indebtedness; make restricted payments including, without limitation, paying dividends, repurchasing capital stock and redeeming debt that is junior in right of payment to the convertible notes; create liens; sell or otherwise dispose of assets, including capital stock of subsidiaries; and enter into mergers and consolidations. The Indenture also contains customary events of default. Upon the occurrence of certain events of default, the Trustee or the holders of the convertible notes may declare all outstanding convertible notes to be due and payable immediately. The convertible notes are unconditionally guaranteed, jointly and severally, on a senior secured basis by us and all of the Guarantors.

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. 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 consolidated statements of operations for the year ended June 28, 2014.

During the year ended June 28, 2014 and June 29, 2013, we recorded and paid $0.9 million and $0.9 million, respectively, in routine interest payments related to these convertible notes. Interest on the convertible notes was payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2013.

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 consolidated balance sheet.

The following table sets forth balance sheet information related to the convertible notes at June 28, 2014 and June 29, 2013:



	June 28, 2014		June 29, 2013
	(Thousands)
Principal value of the liability component	$	—	$	25,000
Unamortized value of the debt discount and issuance costs	—		(2,010		)
Net carrying value of the liability component	$	—	$	22,990

Sumitomo Note

In connection with the acquisition of Opnext, we assumed a 1.5 billion Japanese yen note payable (approximately $19.2 million at July 23, 2012) to The Sumitomo Trust Bank ("Sumitomo"). The note was due monthly unless renewed by Sumitomo. During the fourth quarter of fiscal year 2013, we repaid the entire $14.7 million note payable. As of June 29, 2013, we had no outstanding loan balance with Sumitomo. Interest expense for the year ended June 29, 2013 was $0.3 million. Interest accrued and was paid monthly at the Tokyo Interbank Offered Rate plus a premium, which for our fiscal year 2013 was 1.7 percent per annum.