Attached files

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EX-3.1 - AMENDED AND RESTATED MEMORANDUM AND ARTICLES OF ASSOCIATION - Fabrinetdex31.htm
EX-23.1 - CONSENT OF PRICEWATERHOUSECOOPERS ABAS LIMITED - Fabrinetdex231.htm
EX-10.2.1 - FABRINET 2010 PERFORMANCE INCENTIVE PLAN - Fabrinetdex1021.htm
EX-10.2.2 - FORM OF SHARE OPTION AWARD AGREEMENT - Fabrinetdex1022.htm
EX-10.2.3 - FORM OF NOTICE OF GRANT OF RESTRICTED SHARES - Fabrinetdex1023.htm
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As filed with the Securities and Exchange Commission on May 3, 2010

Registration No. 333-163258

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 4

to

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

Fabrinet

(Exact name of registrant as specified in its charter)

 

 

 

Cayman Islands   3661   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

Walker House

87 Mary Street

George Town

Grand Cayman

KY1-9005

Cayman Islands

(662) 998-9956

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Corporation Service Company

1090 Vermont Avenue, N.E., Suite 430

Washington, D.C. 20005

(800) 927-9800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Larry W. Sonsini, Esq.

Robert P. Latta, Esq.

Nathaniel P. Gallon, Esq.

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304-1050

(650) 493-9300

 

James C. Lin, Esq.

Davis Polk & Wardwell LLP

18th Floor, The Hong Kong Club Building

3A Chater Road, Hong Kong

(852) 2533-3300

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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.

 

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

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we and the selling shareholders are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued May 3, 2010

 

[            ] Shares

LOGO

 

ORDINARY SHARES

 

 

 

Fabrinet is offering [            ] ordinary shares and the selling shareholders are offering [            ] ordinary shares. This is our initial public offering and no public market exists for our ordinary shares. We anticipate that the initial public offering price will be between $[        ] and $[        ] per ordinary share.

 

 

 

Our ordinary shares have been approved for listing on the New York Stock Exchange under the symbol “FN,” subject to official notice of issuance.

 

 

 

Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 8.

 

 

 

PRICE $            A SHARE

 

 

 

      

Price to
Public

    

Underwriting
Discounts
and
Commissions

    

Proceeds to
Fabrinet

    

Proceeds to
Selling
Shareholders

Per share

     $                  $                  $                  $            

Total

     $                      $                      $                      $                

 

The selling shareholders have granted the underwriters the right to purchase up to an additional [            ] ordinary shares to cover over-allotments.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the ordinary shares to purchasers on                    , 2010.

 

 

 

MORGAN STANLEY    DEUTSCHE BANK SECURITIES

 

RBS
        THOMAS WEISEL PARTNERS LLC
    COWEN AND COMPANY

 

                    , 2010


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TABLE OF CONTENTS

 


 

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission in connection with this offering. We have not, and the underwriters and selling shareholders have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus. We and the selling shareholders are offering to sell, and seeking offers to buy, ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or in any free writing prospectus is accurate only as of its date, regardless of the time of its delivery or of any sale of ordinary shares.

 

We have not taken any action to permit a public offering of the ordinary shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who came into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ordinary shares and the distribution of this prospectus outside of the United States.

 

Through and including                    , 2010 (the 25th date after the date of this prospectus), U.S. federal securities laws may require all dealers that effect transactions in these securities, whether or not participating in this offering, to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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CONVENTIONS THAT APPLY TO THIS PROSPECTUS

 

Unless we indicate otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option to purchase up to [            ] additional ordinary shares from the selling shareholders.

 

Except where the context otherwise requires, references in this prospectus to:

 

   

“we,” “us,” “our company” and “our” are to Fabrinet and its direct and indirect wholly-owned subsidiaries, including Fabrinet USA, Inc., Fabrinet Co., Ltd., FBN New Jersey Manufacturing, Inc., Fabrinet China Holdings, CASIX, Inc. and Fabrinet Pte. Ltd.;

 

   

“ordinary shares” are to our ordinary shares;

 

   

“dollars” or “$” are to the legal currency of the United States;

 

   

“RMB” are to renminbi, the legal currency of the People’s Republic of China;

 

   

“China” or “the PRC” are to the People’s Republic of China, excluding Hong Kong, Macau and Taiwan; and

 

   

“the U.S.” are to the United States of America.

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our ordinary shares. You should carefully read this prospectus, including our financial statements and related notes beginning on page F-1, and the registration statement of which this prospectus is a part in their entirety before investing in our ordinary shares, especially the risks of investing in our ordinary shares, which we discuss under “Risk Factors.”

 

Overview

 

We provide precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers (OEMs) of complex products, such as optical communication components, modules and sub-systems. We offer a broad range of advanced optical capabilities across the entire manufacturing process, including process engineering, design for manufacturability, supply chain management, manufacturing, final assembly and test. We focus primarily on low-volume production of a wide variety of products, which we refer to as “low-volume, high-mix.” Based on our experiences with, and feedback from, customers, we believe we are a global leader in providing these services to the optical communications market.

 

We have also expanded our customer base to include companies in other similarly complex industries that require advanced precision manufacturing capabilities, such as industrial lasers and sensors. Our customers in these industries support a growing number of end-markets, including semiconductor processing, biotechnology, metrology, material processing, auto safety and medical devices. Our revenues from lasers, sensors and other markets as a percentage of total revenues have increased from 9.2% for the quarter ended March 27, 2009 to 20.3% for the quarter ended March 26, 2010.

 

Our customers include four of the six largest optical communications components companies worldwide in terms of revenue for the twelve months ended September 30, 2009, according to Ovum-RHK, a market research firm. Our diverse customer base includes Coherent, Inc., EMCORE Corporation, Finisar Corporation, Infinera Corporation, JDS Uniphase Corporation, Newport Corporation, Oclaro, Inc., and Opnext, Inc. In many cases, we are the sole outsourced manufacturing partner used by our customers for the products that we produce for them. The products that we manufacture for our OEM customers include: selective switching products; tunable transponders and transceivers; active optical cables; solid state, diode-pumped and gas lasers; and sensors.

 

We also design and fabricate application-specific crystals, prisms, mirrors, laser components and substrates (collectively referred to as “customized optics”) and other custom and standard borosilicate, clear fused quartz, and synthetic fused silica glass products (collectively referred to as “customized glass”). We incorporate our customized optics and glass into many of the products we manufacture for our OEM customers, and we also sell customized optics and glass in the merchant market.

 

We believe we offer differentiated manufacturing services through our optical and electro-mechanical process technologies and our strategic alignment with our customers. Our dedicated process and design engineers, who have a deep knowledge in materials sciences and physics, are able to tailor our service offerings to accommodate our customers’ most complex engineering assignments. Our range of capabilities, from the design of customized optics and glass through process engineering and testing of finished assemblies, provides us with a knowledge base that we believe often leads to improvements in our customers’ product development cycles, manufacturing cycle times, quality and reliability, manufacturing yields and end product costs. We offer an efficient, technologically advanced and flexible manufacturing infrastructure designed to enable the scale production of low-volume, high-mix products, as well as high-volume products. We often provide a “factory-within-a-factory” manufacturing environment to protect our customers’ intellectual property by segregating certain key employees and manufacturing space from the resources we use for other customers. We also provide

 

 

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our customers with a customized software platform to monitor all aspects of the manufacturing process, enabling our customers to remotely access our databases to monitor yields, inventory positions, work-in-progress status and vendor quality data. We believe there is no other manufacturing services provider with a similar breadth and depth of optical and electro-mechanical engineering and process technology capabilities that does not directly compete with its customers in their end-markets. As a result, we believe we are more closely aligned and better able to develop long-term relationships with our customers than our competitors.

 

We have been consistently profitable since our inception, achieving 41 consecutive quarters of profitable operations. Over our last five fiscal years, despite the 13.7% decline in our revenues from fiscal 2008 to fiscal 2009, our total revenues increased from $202.0 million in fiscal 2005 to $441.1 million in fiscal 2009, representing a compound annual growth rate of 21.6%. Our gross profit margin increased from 5.6% in fiscal 2005 to 13.2% in fiscal 2009, while our operating income as a percentage of revenues increased from 2.4% in fiscal 2005 to 7.6% in fiscal 2009.

 

As of March 26, 2010, our facilities comprised approximately 1,100,000 total square feet, including approximately 168,000 square feet of office space and approximately 932,000 square feet devoted to manufacturing and related activities, of which approximately 290,000 square feet were clean room facilities. Of the aggregate square footage of our facilities, approximately 832,000 square feet are located in Thailand and the balance is located in the PRC and the U.S.

 

Industry Background

 

Optical Communications

 

Since 2001, most optical communications OEMs have reduced manufacturing capacity and transitioned to a low-cost and more efficient manufacturing base. By outsourcing production to third parties, these vendors are better able to concentrate on what they believe are their core strengths, such as research and development, and sales and marketing. Outsourcing production often allows these vendors to reduce product costs, achieve accelerated time-to-market and time-to-volume production and access advanced process design and manufacturing technologies. The principal barrier to the trend towards outsourcing in the optics industry has been the shortage of third-party manufacturing partners with the necessary optical process capabilities and robust intellectual property protection.

 

Demand for optical communications components and modules is influenced by the level and rate of development of optical communications infrastructure and carrier and enterprise network expansion. According to Ovum-RHK, annual sales for the global optical communications components and modules market are expected to increase from approximately $3.1 billion in 2009 to approximately $5.2 billion in 2014. The increase in carrier demand for optical communications network equipment is a direct result of higher network utilization and increased demand for bandwidth capacity. The increases in network traffic volumes have been driven by increasing demand for voice, data and video delivered over internet protocol, or IP, networks.

 

Industrial Lasers and Sensors

 

The optical and electro-mechanical process technologies used in the optical communications market also have applications in other similarly complex end-markets, such as industrial lasers and sensors that require advanced precision manufacturing capabilities. These markets are substantially larger than the optical communications components market. For example, according to the Optoelectronics Industry Development Association, the diode and non-diode lasers market is expected to increase from approximately $8.3 billion in 2009 to approximately $10.3 billion in 2013. Moreover, according to Frost & Sullivan, a business research and

 

 

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consulting firm, the total sensors market is expected to increase from approximately $44.1 billion in 2008 to approximately $69.2 billion in 2013. This growth in the industrial lasers and sensors markets is expected to be driven by demand for:

 

   

industrial laser applications across a growing number of end-markets, particularly in semiconductor processing, biotechnology, metrology and material processing;

 

   

precision, non-contact and low power requirement sensors, particularly in auto safety, medical and industrial end-markets; and

 

   

lower cost products used on both enterprise and consumer levels.

 

Outsourcing of production by industrial laser and sensor OEMs has historically been limited. We believe industrial laser and sensor OEMs are increasingly recognizing the benefits of outsourcing that OEMs in other industries, such as optical communications, have been able to achieve.

 

Our Competitive Strengths

 

We believe we have succeeded in providing differentiated services to the optical communications, industrial lasers and sensors industries due to our long-term focus on optical and electro-mechanical process technologies, strategic alignment with our customers and our commitment to total customer satisfaction. More specifically, our key competitive strengths include:

 

   

advanced optical and electro-mechanical manufacturing technologies;

 

   

efficient, flexible and low cost process engineering and manufacturing platform;

 

   

customizable factory-within-a-factory production environment;

 

   

vertical integration targeting customized optics and glass; and

 

   

a management team with a demonstrated track record of financial and strategic execution.

 

Our Growth Strategy

 

The key elements of our growth strategy are to:

 

   

strengthen our presence in the optical communications market;

 

   

leverage our technology and manufacturing capabilities to continue to diversify our end-markets;

 

   

continue diversification into the industrial lasers and sensors markets;

 

   

diversify into other markets that require precision electro-mechanical manufacturing;

 

   

continue to extend our customized optics and glass vertical integration; and

 

   

broaden our client base geographically.

 

Risks Associated With Our Business

 

We face numerous challenges and risks in our business, including those described under “Risk Factors.” In particular, we may be subject to risks associated with:

 

   

dependence on a limited number of customers;

 

   

less than expected growth in the optical communications market and challenges in further diversifying our vertically integrated manufacturing services;

 

 

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the financial viability of our customers and suppliers;

 

   

shortages of materials used in our manufacturing processes and increases in the prices that we pay for these materials;

 

   

competitive factors, including actions by our competitors, entry of new competitors into the markets in which we compete, and our customers’ expansion of their internal manufacturing capacity and capabilities;

 

   

challenges in accurately predicting demand and any resulting difficulties managing inventory and capacity; and

 

   

risks associated with an international business, including adverse political, business or economic changes in Thailand or the PRC, such as wage inflation, currency rate fluctuations, import/export regulations and tax rate changes.

 

Corporate Information and Corporate Structure

 

We were organized under the laws of the Cayman Islands in August 1999 and commenced our business operations in January 2000. Our principal executive office is located at Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9005, Cayman Islands, and our telephone number is (662) 998-9956. Our agent for service of process in the U.S. is Corporation Service Company, 1090 Vermont Avenue, N.E., Suite 430, Washington, D.C. 20005, and its telephone number is (800) 927-9800. Our website address is www.fabrinet.com. The information on or accessible through our website is not part of this prospectus.

 

We have six direct and indirect subsidiaries. All of these subsidiaries, other than our Thai subsidiary, Fabrinet Co., Ltd., are wholly-owned. We own over 99.99% of Fabrinet Co., Ltd., and the remainder is owned by Mr. Tom Mitchell, our chief executive officer, president and chairman of the board of directors, and certain of his family members. We formed Fabrinet Co., Ltd. and incorporated Fabrinet USA, Inc. in 1999. We incorporated FBN New Jersey Manufacturing, Inc. and acquired Fabrinet China Holdings and CASIX, Inc. in 2005. We incorporated Fabrinet Pte. Ltd. in 2007.

 

Fabrinet, CASIX and VitroCom are registered trademarks of Fabrinet. The Fabrinet logo is a registered stylized trademark of Fabrinet. All other trademarks appearing in this prospectus are the property of their respective holders. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

 

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THE OFFERING

 

Ordinary shares offered by us

[                ] shares

 

Ordinary shares offered by the selling shareholders

[                ] shares

 

Over-allotment option

The selling shareholders have granted the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an additional [                ] ordinary shares to cover over-allotments.

 

Price per ordinary share

$[    ]

 

Ordinary shares to be outstanding after this offering

[                ] shares

 

Use of proceeds

We intend to use the net proceeds from this offering for general corporate purposes, including working capital, capital expenditures and potential acquisitions of complementary businesses, technologies or other assets. We will not receive any of the proceeds from the sale of shares by the selling shareholders. See “Use of Proceeds” for additional information.

 

Dividend policy

We currently do not intend to pay dividends.

 

Listing

Our ordinary shares have been approved for listing on the New York Stock Exchange, subject to official notice of issuance. Our ordinary shares will not be listed on any other exchange or quoted for trading on any over-the-counter trading system.

 

NYSE symbol

“FN”

 

Lock-up

We, the selling shareholders, all of our directors and executive officers and a substantial portion of our other shareholders and optionholders have agreed, subject to certain exceptions, not to transfer or dispose of, directly or indirectly, any of our ordinary shares or securities convertible into or exercisable or exchangeable for our ordinary shares for a period of 180 days after the date of this prospectus. See “Underwriting.”

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.

 

The number of ordinary shares that will be outstanding immediately after the closing of this offering is based on 30,913,709 ordinary shares outstanding as of March 26, 2010, and [                ] ordinary shares offered by us in connection with this offering, and excludes:

 

   

864,909 ordinary shares issuable upon the exercise of all share options, whether vested or unvested, outstanding under our 1999 Share Option Plan as of March 26, 2010, at a weighted average exercise price of $3.65 per share;

 

   

9,953 ordinary shares available for future issuance under our 1999 Share Option Plan as of March 26, 2010; and

 

   

1,500,000 ordinary shares that will be available for future issuance under our 2010 Performance Incentive Plan, which will be effective upon the completion of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

We have derived the summary consolidated financial data for the three and nine months ended March 26, 2010 and March 27, 2009, and as of March 26, 2010, from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. We have derived the summary consolidated financial data for the years ended June 26, 2009, June 27, 2008 and June 29, 2007, and as of June 26, 2009 and June 27, 2008, from our audited consolidated financial statements that are included elsewhere in this prospectus. We have derived the summary consolidated financial data for the years ended June 30, 2006 and June 24, 2005, and as of June 29, 2007, June 30, 2006 and June 24, 2005, from our audited consolidated financial statements that are not included in this prospectus. We use a 52-53 week fiscal year ending on the last Friday in June and a 13 week fiscal quarter ending on the last Friday in March for our third fiscal quarter. The summary consolidated financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. The results presented below are not necessarily indicative of financial results to be achieved in future periods.

 

Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the U.S., or U.S. GAAP.

 

    Three Months Ended     Nine Months Ended     Year Ended  
    March 26,
2010
    March 27,
2009
    March 26,
2010
    March 27,
2009
    June 26,
2009
    June 27,
2008
    June 29,
2007
    June 30,
2006
    June 24,
2005
 
    (unaudited)              
    (in thousands, except per share data)  

Summary Consolidated Statements of Operations Data:(1)

                 

Revenues:

           

Revenues

  $ 114,406      $ 65,553      $ 296,543      $ 270,533      $ 337,846      $ 345,071      $ 295,338      $ 200,171      $ 77,187   

Revenues, related parties

    22,484        19,281        51,758        86,808        101,895        163,312        191,690        170,272        120,014   

Other

                         1,358        1,358        2,715        9,115        5,216        4,751   
                                                                       

Total revenues

    136,890        84,834        348,301        358,699        441,099        511,098        496,143        375,659        201,952   

Cost of revenues

    (117,761     (75,299     (303,339     (309,009     (383,058     (442,784     (423,858     (339,682     (190,633
                                                                       

Gross profit

    19,129        9,535        44,962        49,690        58,041        68,314        72,285        35,977        11,319   

Selling, general and administrative expenses

    (4,356     (3,992     (11,965     (18,624     (21,960     (21,741     (18,036     (10,935     (6,389

Restructuring charges

           (2,389            (2,389     (2,389                            
                                                                       

Operating income

    14,773        3,154        32,997        28,677        33,692        46,573        54,249        25,042        4,930   

Interest income

    62        165        254        622        756        1,364        1,370        1,015        508   

Interest expense

    (108     (288     (397     (1,046     (1,266     (1,547     (2,842     (3,346     (834

Foreign exchange (loss) gain, net

    (97     (16     (131     649        360        (599     (336     (181     165   
                                                                       

Income before income taxes

    14,630        3,015        32,723        28,902        33,542        45,791        52,441        22,530        4,769   

Income tax (expense) benefit

    (1,119     385        (1,974     (1,535     (2,238     (3,962     (2,702     (1,076     730   
                                                                       

Net income

  $ 13,511      $ 3,400      $ 30,749      $ 27,367      $ 31,304      $ 41,829      $ 49,739      $ 21,454      $ 5,499   
                                                                       

Earnings per share:

           

Basic

  $ 0.44      $ 0.11      $ 1.00      $ 0.90      $ 1.03      $ 1.40      $ 1.68      $ 0.73      $ 0.19   

Diluted

  $ 0.43      $ 0.11      $ 0.98      $ 0.88      $ 1.00      $ 1.33      $ 1.60      $ 0.71      $ 0.18   

Weighted average number of ordinary shares outstanding:

           

Basic

    30,901        30,472        30,821        30,287        30,360        29,889        29,600        29,469        29,451   

Diluted

    31,365        30,932        31,340        31,142        31,183        31,349        31,077        30,403        30,032   

Cash dividends declared per share

  $      $      $ 1.00      $ 0.33      $ 0.33      $      $      $      $   

 

(1)   We adopted FASB ASC 718 and ASC 740 during fiscal 2007 and fiscal 2008, respectively. Please see Notes 3 and 14 to our audited consolidated financial statements, included as part of this prospectus.

 

 

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    As of March 26, 2010   As of
    Actual   As  Adjusted(1)(2)   June 26,
2009
  June 27,
2008
  June 29,
2007
  June 30,
2006
  June 24,
2005
    (unaudited)                    
    (in thousands)

Summary Consolidated Balance Sheet Data:

             

Cash and cash equivalents

  $ 90,044   $                $ 114,845   $ 55,682   $ 40,873   $ 40,063   $ 42,953

Working capital(3)

    80,985       58,311     99,260     105,347     83,152     65,505

Total assets

    330,344       288,085     292,713     240,081     240,815     180,325

Current and long-term debt

    21,003       27,318     29,575     35,498     33,006     31,606

Total liabilities

    135,984       94,580     122,148     110,726     162,132     123,287

Total shareholders’ equity

    194,360       193,505     170,565     129,355     78,683     57,038

 

(1)   The as adjusted balance sheet data reflect the receipt of estimated net proceeds of $[        ] million from the sale of [            ] ordinary shares offered by us at an assumed initial public offering price of $[        ] per ordinary share, which is the midpoint of the estimated public offering price range shown on the cover page of this prospectus, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.
(2)   A $1.00 increase or decrease in the assumed initial public offering price of $[        ] per ordinary share, the midpoint of the range set forth on the cover of this prospectus, would increase or decrease, as applicable, our as adjusted cash and cash equivalents, working capital, total assets and total shareholders’ equity by approximately $[        ] million, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same.
(3)   Working capital is defined as trade accounts receivable plus inventories, less trade accounts payable.

 

    Nine Months Ended     Year Ended  
    March 26,
2010
    March 27,
2009
    June 26,
2009
    June 27,
2008
    June 29,
2007
    June 30,
2006
    June 24,
2005
 
    (unaudited)                                
    (in thousands)  

Summary Consolidated Statements of Cash Flows Data:

             

Net cash provided by (used in) operating activities

  $ 16,376      $ 57,929      $ 80,357      $ 51,891      $ 26,244      $ 25,073      $ (4,935

Net cash (used in) provided by investing activities

    (4,716     (6,775     (7,187     (29,815     (12,380     (10,845     2,615   

 

 

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RISK FACTORS

 

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks described below and all of the other information included in this prospectus before deciding to invest in our ordinary shares. The risks and uncertainties described below are not the only ones that we may face. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, also may become important factors that affect us or our ordinary shares.

 

If any of the following risks actually occur, they may harm our business, financial condition and operating results. In this event, the market price of our ordinary shares could decline and you could lose some or all of your investment.

 

This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially and in adverse ways from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this prospectus.

 

Risks Related To Our Business

 

Our sales depend on and may continue to depend on a few customers, many of which have substantial purchasing power and leverage in negotiating contracts with us. A reduction in orders from any of these customers, the loss of any of these customers, or a customer exerting significant pricing and margin pressures on us could harm our business, financial condition and operating results.

 

We have depended, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of our total revenues. For the nine months ended March 26, 2010, our top three customers accounted for approximately 16%, 15% and 15%, respectively, of our total revenues. Our top three customers accounted for approximately 20%, 20% and 16%, respectively, of our total revenues during fiscal 2009, 22%, 20% and 12%, respectively, of our total revenues during fiscal 2008, and 26%, 26% and 15%, respectively, of our total revenues during fiscal 2007. Dependence on a limited number of customers means that a reduction in orders from, a loss of, or other adverse actions by any one of these customers could have an adverse effect on our revenues. Further, our customer concentration increases the concentration of our accounts receivable and our exposure to payment default by any of our key customers. Many of our existing and potential customers have substantial debt burdens, have experienced financial distress or have static or declining revenues. Certain of our customers have gone out of business, been acquired, or announced their withdrawal from segments of the optics market. We generate significant accounts payable and inventory for the services that we provide to our customers, which could expose us to substantial and potentially unrecoverable costs if we do not receive payment from our customers.

 

Reliance on a small number of customers gives those customers substantial purchasing power and leverage in negotiating contracts with us. In addition, although we enter into master supply agreements with our customers, the level of business to be transacted under those agreements is not guaranteed. Instead, we are awarded business under those agreements on a project-by-project basis. Some of our customers have at times significantly reduced or delayed the volume of manufacturing services that they order from us. If we are unable to maintain our relationships with our existing significant customers, our business, financial condition and operating results could be harmed.

 

If the optical communications market does not expand as we expect, our business may not grow as fast as we expect, which could adversely impact our business, financial condition and operating results.

 

Our future success as a provider of precision optical, electro-mechanical and electronic manufacturing services for the optical communications market depends on the continued growth of the optics industry and, in particular, the continued expansion of global information networks, particularly those directly or indirectly

 

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dependent upon a fiber optics infrastructure. As part of that growth, we are relying on increasing demand for voice, video, text and other data delivered over high-speed connections. Without network and bandwidth growth, the need for enhanced communications products would be jeopardized. Currently, demand for network services and for broadband access, in particular, is increasing but growth may be limited by several factors, including, among others: (i) the recent global economic recession, (ii) an uncertain regulatory environment, (iii) potential reluctance from network carriers to supply video and audio content over the communications infrastructure and (iv) uncertainty regarding long-term sustainable business models as multiple industries, such as the cable, traditional telecommunications, wireless and satellite industries, offer competing content delivery solutions. The optical communications market also has experienced periods of overcapacity, some of which have occurred even during periods of relatively high network usage and bandwidth demands. If the factors described above were to slow, stop or reverse the expansion in the optical communications market, our business, financial condition and operating results would be negatively affected.

 

If we are unable to continue diversifying our precision optical and electro-mechanical manufacturing services across other markets within the optics industry, such as the semiconductor processing, biotechnology, metrology and material processing markets, our business may not grow as fast as we expect.

 

We intend to continue diversifying across other markets within the optics industry, such as the semiconductor processing, biotechnology, metrology and material processing markets, to reduce our dependence on the optical communications market and to grow our business. Currently, the optical communications market contributes the majority of our revenues. There can be no assurance that our efforts to further expand and diversify into other markets within the optics industry will prove successful. In the event that the opportunities presented by these markets prove to be less than anticipated, if we are less successful than expected in diversifying into these markets, or if our margins in these markets prove to be less than expected, our growth may slow or stall, and we may incur costs that are not offset by revenues in these markets, all of which could harm our business, financial condition and operating results.

 

Our quarterly revenues, gross profit margins and operating results have fluctuated significantly and may continue to do so in the future, which may cause the market price of our ordinary shares to decline or be volatile.

 

Our quarterly revenues, gross profit margins, and operating results have fluctuated significantly and may continue to fluctuate significantly in the future. For example, between our quarter ended September 26, 2008 and our quarter ended June 26, 2009, our total revenues declined from $145.9 million to $82.4 million and then increased to $136.9 million for the quarter ended March 26, 2010. Our gross profit margins and operating results experienced similar fluctuations during those periods. Therefore, we believe that quarter-to-quarter comparisons of our operating results may not be useful in predicting our future operating results. You should not rely on our results for one quarter as any indication of our future performance. Quarterly variations in our operations could result in significant volatility in the market price of our ordinary shares, and the market price of our ordinary shares might fall below the initial public offering price.

 

Our exposure to financially troubled customers or suppliers could harm our business, financial condition and operating results.

 

We provide manufacturing services to companies, and rely on suppliers, that have in the past and may in the future experience financial difficulty, particularly in light of recent conditions in the credit markets and the overall economy that affected access to capital and liquidity. As a result, we devote significant resources to monitor receivables and inventory balances with certain of our customers. If our customers experience financial difficulty, we could have difficulty recovering amounts owed to us from these customers, or demand for our services from these customers could decline. If our suppliers experience financial difficulty, we could have trouble sourcing materials necessary to fulfill production requirements and meet scheduled shipments. Any such financial difficulty could adversely affect our operating results and financial condition by resulting in a reduction

 

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in our revenues, a charge for inventory write-offs, a provision for doubtful accounts, and an increase in working capital requirements due to increases in days in inventory and in days in accounts receivable.

 

We purchase some of the critical materials used in certain of our products from a single source or a limited number of suppliers. Supply shortages have in the past, and could in the future, impair the quality, reduce the availability or increase the cost of materials, which could harm our revenues, profitability and customer relations.

 

We rely on a single source or a limited number of suppliers for critical materials used in a significant number of the products we manufacture. We generally purchase these single or limited source materials through standard purchase orders and do not maintain long-term supply agreements with our suppliers. We generally use a rolling 12 month forecast based on anticipated product orders, customer forecasts, product order history, backlog, and warranty and service demand to determine our materials requirements. Lead times for the parts and components that we order vary significantly and depend on factors such as manufacturing cycle times, manufacturing yields and the availability of raw materials used to produce the parts or components. Historically, we have experienced supply shortages resulting from various causes, including reduced yields by our suppliers, which prevented us from manufacturing products for our customers in a timely manner. Our revenues, profitability and customer relations could be harmed by a stoppage or delay of supply, a substitution of more expensive or less reliable parts, the receipt of defective parts or contaminated materials, an increase in the price of supplies, or an inability to obtain reduced pricing from our suppliers in response to competitive pressures.

 

We continue to undertake programs to strengthen our supply chain. Nevertheless, we are experiencing, and expect for the foreseeable future to continue to experience, strain on our supply chain and periodic supplier problems. We have incurred, and expect to continue to incur for the foreseeable future, costs to address these problems.

 

Managing our inventory is complex and may require write-downs due to excess or obsolete inventory, which could cause our operating results to decrease significantly in a given fiscal period.

 

Managing our inventory is complex. We are generally required to procure material based upon the anticipated demand of our customers. The inaccuracy of these forecasts or estimates could result in excess supply or shortages of certain materials. Inventory that is not used or expected to be used as and when planned may become excess or obsolete. Generally, we are unable to use most of the materials purchased for one of our customers to manufacture products for any of our other customers. Additionally, we could experience reduced or delayed product shipments or incur additional inventory write-downs and cancellation charges or penalties, which would increase costs and could harm our business, financial condition and operating results. While our agreements with customers are structured to mitigate our risks related to excess or obsolete inventory, enforcement of these provisions may result in material expense and delay in payment for inventory. If any of our significant customers becomes unable or unwilling to purchase inventory or does not agree to such contractual provisions in the future, our business, financial condition and operating results may be harmed.

 

We face significant competition in our business. If we are unable to compete successfully against our current and future competitors, our business, financial condition and operating results could be harmed.

 

Our current and prospective customers tend to evaluate our capabilities against the merits of their internal manufacturing, and these internal manufacturing capabilities are our primary competition. This competition is particularly strong when our customers have excess manufacturing capacity, as was the case when the markets that we serve experienced a downturn from 2001 through 2004 and again in 2008 and 2009, that resulted in underutilized capacity. Many of our potential customers continue to have excess manufacturing capacity at their facilities. If our customers choose to manufacture products internally rather than to outsource production to us, our business, financial condition and operating results could be harmed.

 

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Competitors in the market for optical manufacturing services include Benchmark Electronics, Inc., Hon Hai Precision Industry Co. Ltd., MMI Holdings Limited, Oplink Communications, Inc., Sanmina-SCI Corporation and Venture Corporation Limited. Our customized optics and glass operations face competition from companies such as Alps Electric Co., Ltd., Browave Corporation, Fujian Castech Crystals, Inc. and Photop Technologies, Inc. Larger existing contract manufacturing companies, original design manufacturers or outsourced semiconductor assembly and test companies could also enter our target markets. In addition, we may face more competitors as we attempt to penetrate new markets.

 

Many of our customers and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater resources than we have. These advantages may allow them to devote greater resources than we can to the development and promotion of service offerings that are similar or superior to our service offerings. These competitors may also engage in more extensive research and development, undertake more far-reaching marketing campaigns, adopt more aggressive pricing policies or offer services that achieve greater market acceptance than ours. These competitors may also compete with us by making more attractive offers to our existing and potential employees, suppliers and strategic partners. Further, consolidation in the optics industry could lead to larger and more geographically diverse competitors. New and increased competition could result in price reductions for our services, reduced gross profit margins or loss of market share. We may not be able to compete successfully against our current and future competitors, and the competitive pressures we face may harm our business, financial condition and operating results.

 

We conduct operations in a number of countries, which creates logistical and communications challenges for us and exposes us to other risks that could harm our business, financial condition and operating results.

 

The vast majority of our operations, including manufacturing and customer support, are located in jurisdictions outside the U.S., primarily in the Asia-Pacific region. The distances between Thailand, the PRC and the U.S. create a number of logistical and communications challenges for us, including managing operations across multiple time zones, directing the manufacture and delivery of products across significant distances, coordinating the procurement of raw materials and their delivery to multiple locations and coordinating the activities and decisions of our management team, the members of which are based in different countries.

 

Our customers are located throughout the world. Total revenues from shipments to our customers’ sites outside of North America accounted for 47.6%, 38.5%, 37.7% and 35.0% of our total revenues for the nine months ended March 26, 2010, fiscal 2009, fiscal 2008 and fiscal 2007, respectively. We expect that total revenues from shipments outside of North America will continue to account for a significant portion of our total revenues. Our customers also depend on international sales, which further exposes us to the risks associated with international operations. In addition, our international operations and sales subject us to a variety of domestic and foreign trade regulatory requirements.

 

Political unrest and demonstrations, as well as changes in the political, social, business or economic conditions in Thailand, could harm our business, financial condition and operating results.

 

The majority of our assets and manufacturing operations are located in Thailand. Therefore, political, social, business and economic conditions in Thailand have a significant effect on our business. As of January 28, 2010, Thailand had been assessed as a medium-high political risk by AON Political Risk, a risk management, insurance and consulting firm. Any changes to tax regimes, laws, exchange controls or political action in Thailand may harm our business, financial condition and operating results.

 

In September 2006, Thailand experienced a military coup that overturned the existing government, and in 2008, political unrest and demonstrations in Bangkok sparked a series of violent incidents that resulted in several deaths and numerous injuries. Most of the casualties occurred around the Government House compound and the two Bangkok airports, Suvarnabhumi International Airport and Don Muang Airport, which were temporarily closed after being occupied by anti-government protestors at the end of November 2008. In April 2009,

 

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anti-government demonstrations in Bangkok caused severe traffic congestion and numerous injuries, and in March 2010, protestors again held demonstrations calling for new elections. These demonstrations, which have escalated in violence over the last month, are currently ongoing and have resulted in the country’s worst political violence in nearly two decades with more than 25 deaths and 800 injuries as of April 24, 2010. Certain hotels and businesses in Bangkok have been closed for weeks as the protestors continue to occupy Bangkok’s commercial center, and governments around the world have issued travel advisories urging their citizens to avoid non-essential travel to Bangkok.

 

Any succession crisis in the Kingdom of Thailand could cause new or increased instability and unrest. In the event that a violent coup were to occur or the current political unrest were to worsen, such activity could prevent shipments from entering or leaving the country and disrupt our ability to manufacture products in Thailand, and we could be forced to transfer our manufacturing activities to more stable, and potentially more costly, regions. Further, a new Thai government might repeal certain promotional certificates that we have received or tax holidays for certain export and value added taxes that we enjoy, either preventing us from engaging in our current or anticipated activities or subjecting us to higher tax rates. A new regime could nationalize our business or otherwise seize our assets. Future political instability such as the coup that occurred in September 2006 or the demonstrations that occurred during 2008 and 2009 and are presently occurring could harm our business, financial condition and operating results.

 

We expect to increase our manufacturing operations in the PRC, which will continue to expose us to risks inherent in doing business in the PRC, any of which risks could harm our business, financial condition and operating results.

 

We anticipate that we will continue to invest in our customized optics manufacturing facilities located in Fuzhou, China. Because these operations are located in the PRC, they are subject to greater political, legal and economic risks than the geographies in which the facilities of many of our competitors and customers are located. In particular, the political and economic climate in the PRC (both at national and regional levels) is fluid and unpredictable. As of January 28, 2010, the PRC had been assessed as a medium political risk by AON Political Risk. A large part of the PRC’s economy is still being operated under varying degrees of control by the PRC government. By imposing industrial policies and other economic measures, such as control of foreign exchange, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the development of the PRC economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental and are expected to change further. Any changes to the political, legal or economic climate in the PRC could harm our business, financial condition and operating results.

 

Our PRC subsidiary is a “wholly foreign-owned enterprise” and is therefore subject to laws and regulations applicable to foreign investment in the PRC, in general, and laws and regulations applicable to wholly foreign-owned enterprises, in particular. The PRC has made significant progress in the promulgation of laws and regulations pertaining to economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation of new laws, changes in existing laws and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, these laws and regulations are relatively new, and published cases are limited in volume and non-binding. Therefore, the interpretation and enforcement of these laws and regulations involve significant uncertainties. Laws may be changed with little or no prior notice, for political or other reasons. These uncertainties could limit the legal protections available to foreign investors. Furthermore, any litigation in the PRC may be protracted and result in substantial costs and diversion of resources and management’s attention.

 

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Fluctuations in foreign currency exchange rates and changes in governmental policies regarding foreign currencies could increase our operating costs, which would adversely affect our operating results.

 

Volatility in the functional and non-functional currencies of our entities and the U.S. dollar could seriously harm our business, financial condition and operating results. The primary impact of currency exchange fluctuations is on our cash, receivables and payables of our operating entities. We may experience significant unexpected expenses from fluctuations in exchange rates.

 

Our customer contracts generally require that our customers pay us in U.S. dollars. However, the majority of our payroll and other operating expenses are paid in Thai baht. As a result of these arrangements, we have significant exposure to changes in the exchange rate between the Thai baht and the U.S. dollar, and our operating results are adversely impacted when the U.S. dollar depreciates relative to the Thai baht and other currencies. We have experienced such depreciation in the U.S. dollar as compared to the Thai baht, and our results have been adversely impacted by this fluctuation in exchange rates. For example, from March 31, 2007 to March 31, 2010, the U.S. dollar lost approximately 7.6% of its value against the Thai baht. We cannot guarantee that the depreciation of the U.S. dollar against the Thai baht will not continue. Further, while we attempt to hedge against certain exchange rate risks, we typically enter into hedging contracts of one to two month durations, leaving us exposed to longer term changes in exchange rates.

 

Also, we have significant exposure to changes in the exchange rate between the RMB and the U.S. dollar. The expenses of our PRC subsidiary are denominated in RMB. Currently, RMB are convertible under current accounts, including trade- and service-related foreign exchange transactions, foreign debt service and payment of dividends. The PRC government may at its discretion restrict access in the future to foreign currencies for current account transactions. If this occurs, our PRC subsidiary may not be able to pay us dividends in U.S. dollars without prior approval from the PRC State Administration of Foreign Exchange. In addition, conversion of RMB for most capital account items, including direct investments, is still subject to government approval in the PRC. This restriction may limit our ability to invest the earnings of our PRC subsidiary.

 

Beginning in July 2005, the official exchange rate for the conversion of RMB into U.S. dollars was revalued and permitted to fluctuate within a band against a basket of foreign currencies. As a result, as of March 31, 2010, the U.S. dollar had depreciated approximately 11.6% against the RMB since March 31, 2007. There remains significant international pressure on the PRC government to adopt a substantially more liberalized currency policy. Any further and more significant appreciation in the value of the RMB against the U.S. dollar could negatively impact our operating results.

 

Our business and operations would be adversely impacted in the event of a failure of our information technology infrastructure.

 

We rely upon the capacity, reliability and security of our information technology hardware and software infrastructure. For instance, we use a combination of standard and customized software platforms to manage, record and report all aspects of our operations and, in many instances, enable our customers to remotely access certain areas of our databases to monitor yields, inventory positions, work-in-progress status and vendor quality data. We are constantly expanding and updating our information technology infrastructure in response to our changing needs. Any failure to manage, expand and update our information technology infrastructure or any failure in the operation of this infrastructure could harm our business.

 

Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruptions or security breach results in a loss or damage to our data, or inappropriate disclosure of confidential information, it could harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

 

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Cancellations, delays or reductions of customer orders and the relatively short-term nature of the commitments of our customers could harm our business, financial condition and operating results.

 

We do not typically obtain firm purchase orders or commitments from our customers that extend beyond 13 weeks. While we work closely with our customers to develop forecasts for periods of up to one year, these forecasts are not binding and may be unreliable. Customers may cancel their orders, change production quantities from forecasted volumes or delay production for a number of reasons beyond our control. Any material delay, cancellation or reduction of orders could cause our revenues to decline significantly and could cause us to hold excess materials. Many of our costs and operating expenses are fixed. As a result, a reduction in customer demand could decrease our gross profit and harm our business, financial condition and operating results.

 

In addition, we make significant decisions, including production schedules, component procurement commitments, personnel needs and other resource requirements, based on our estimate of our customers’ requirements. The short-term nature of our customers’ commitments and the possibility of rapid changes in demand for their products reduce our ability to accurately estimate the future requirements of our customers. Inability to forecast the level of customer orders with certainty makes it difficult to allocate resources to specific customers, order appropriate levels of materials and maximize the use of our manufacturing capacity. This could also lead to an inability to meet a spike in production demand, all of which could harm our business, financial condition and operating results.

 

Consolidation in the markets we serve could harm our business, financial condition and operating results.

 

Consolidation in the markets we serve has resulted in a reduction in the number of potential customers for our services. For example, in February 2008, EMCORE Corporation, one of our customers, acquired certain product lines and other assets from another of our customers. Also, in April 2009, Bookham, Inc. and Avanex Corporation, both of which are our customers, merged to form a new company called Oclaro, Inc. In July 2009, Newport Corporation, also our customer, acquired Oclaro’s New Focus photonics business, and Oclaro acquired Newport’s high-power laser diode manufacturing operations. In some cases, consolidation among our customers has led to a reduction in demand for our services as customers acquired the capacity to manufacture products in-house.

 

In addition, consolidation in the markets in which our customers compete has resulted in a greater concentration of purchasing power in a small number of OEMs. For example, Nortel Networks Corporation intends to sell certain communications businesses and assets to its competitors, including Ciena Corporation, Ericsson and Avaya Inc. Such consolidation among our customers and their customers may continue and may adversely affect our business, financial condition and operating results in several ways. Consolidation among our customers and their customers may result in a smaller number of large customers whose size and purchasing power give them increased leverage that may result in, among other things, decreases in our average selling prices. In addition to pricing pressures, this consolidation may also reduce overall demand for our manufacturing services if customers obtain new capacity to manufacture products in-house or discontinue duplicate or competing product lines in order to streamline operations. If demand for our manufacturing services decreases, our business, financial condition and operating results could be harmed.

 

If we fail to adequately expand our manufacturing capacity, we will not be able to grow our business, which would harm our business, financial condition and operating results.

 

We may not be able to pursue many large customer orders or sustain our historical growth rates if we do not have sufficient manufacturing capacity to enable us to commit to provide customers with specified quantities of products. If our customers do not believe that we have sufficient manufacturing capacity, they may: (i) outsource all of their production to another source that they believe can fulfill all of their production requirements; (ii) look to a second source for the manufacture of additional quantities of the products that we currently manufacture for them; (iii) manufacture the products themselves; or (iv) otherwise decide against using our services for their new products.

 

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We most recently expanded our manufacturing capacity at our Thailand facilities in May 2008 with the completion of Pinehurst Building 5 and may further expand our manufacturing capacity in the future. We must continue to devote significant resources to the expansion of our manufacturing capacity, and any such expansion will be expensive, will require management’s time and may disrupt our operations. In the event we are unsuccessful in our attempts to expand our manufacturing capacity, our business, financial condition and operating results could be harmed.

 

We may encounter difficulties completing or integrating acquisitions, asset purchases and other types of transactions that we may pursue in the future, which could disrupt our business, cause dilution to our shareholders and harm our business, financial condition and operating results.

 

We have grown and may continue to grow our business through acquisitions, asset purchases and other types of transactions, including the transfer of products from our customers and their suppliers. Acquisitions and other strategic transactions typically involve many risks, including the following:

 

   

the integration of the acquired assets and facilities into our business may be difficult, time-consuming and costly, and may adversely impact our profitability;

 

   

we may lose key employees of the acquired companies or divisions;

 

   

we may issue additional ordinary shares, which would dilute our current shareholders’ percentage ownership in us;

 

   

we may incur indebtedness to pay for the transactions;

 

   

we may assume liabilities, some of which may be unknown at the time of the transactions;

 

   

we may record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges;

 

   

we may incur amortization expenses related to certain intangible assets;

 

   

we may devote significant resources to transactions that may not ultimately yield anticipated benefits;

 

   

we may incur greater than expected expenses or lower than expected revenues;

 

   

we may assume obligations with respect to regulatory requirements, including environmental regulations, which may prove more burdensome than expected; or

 

   

we may become subject to litigation.

 

Acquisitions are inherently risky, and we can provide no assurance that our previous or future acquisitions will be successful or will not harm our business, financial condition and operating results.

 

We may experience manufacturing yields that are lower than expected, potentially resulting in increased costs, which could harm our business, operating results and customer relations.

 

Manufacturing yields depend on a number of factors, including the following:

 

   

the quality of input, materials and equipment;

 

   

the quality and feasibility of our customer’s design;

 

   

the repeatability and complexity of the manufacturing process;

 

   

the experience and quality of training of our manufacturing and engineering teams; and

 

   

the monitoring of the manufacturing environment.

 

Lower volume production due to continually changing designs generally results in lower yields. Manufacturing yields and margins can also be lower if we receive or inadvertently use defective or contaminated

 

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materials from our suppliers. In addition, our customer contracts typically provide that we will supply products at a fixed price each quarter, which assumes specific production yields and quality metrics. If we do not meet the yield assumptions and quality metrics used in calculating the price of a product, we may not be able to recover the costs associated with our failure to do so. Consequently, our operating results and profitability may be harmed.

 

If the products that we manufacture contain defects, we could incur significant correction costs, demand for our services may decline and we may be exposed to product liability and product warranty claims, which could harm our business, financial condition, operating results and customer relations.

 

We manufacture products to our customers’ specifications, and our manufacturing processes and facilities must comply with applicable statutory and regulatory requirements. In addition, our customers’ products and the manufacturing processes that we use to produce them are often complex. As a result, products that we manufacture may at times contain manufacturing or design defects, and our manufacturing processes may be subject to errors or fail to be in compliance with applicable statutory or regulatory requirements. Additionally, not all defects are immediately detectible. The testing procedures of our customers are generally limited to the evaluation of the products that we manufacture under likely and foreseeable failure scenarios. For various reasons (including, among others, the occurrence of performance problems that are unforeseeable at the time of testing or that are detected only when products are fully deployed and operated under peak stress conditions), these products may fail to perform as expected after their initial acceptance by a customer.

 

We generally provide a warranty of between one and five years on the products that we manufacture for our customers. This warranty typically guarantees that products will conform to our customers’ specifications and be free from defects in workmanship. Defects in the products we manufacture, whether caused by a design, engineering, manufacturing or component failure or by deficiencies in our manufacturing processes and whether during or after the warranty period, could result in product or component failures, which may damage our business reputation, whether or not we are indemnified for such failures. We could also incur significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems. In some instances, we may also be required to incur costs to repair or replace defective products outside of the warranty period in the event that a recurring defect is discovered in a certain percentage of a customer’s products delivered over an agreed upon period of time. We have experienced product or component failures in the past and remain exposed to such failures, as the products that we manufacture are widely deployed throughout the world in multiple environments and applications. Further, due to the difficulty in determining whether a given defect resulted from our customer’s design of the product or our manufacturing process, we may be exposed to product liability or product warranty claims arising from defects that are not our fault. In addition, if the number or type of defects exceeds certain percentage limitations contained in our contractual arrangements, we may be required to conduct extensive failure analysis, re-qualify for production or cease production of the specified products.

 

Product liability claims may include liability for personal injury or property damage. Product warranty claims may include liability to pay for a recall, repair or replacement of a product or component. Although liability for these claims is generally assigned to our customers in our contracts, even where they have assumed liability, our customers may not, or may not have the resources to, satisfy claims for costs or liabilities arising from a defective product. Additionally, under one of our contracts, in the event the products we manufacture do not meet the end-customer’s testing requirements or otherwise fail, we may be required to pay penalties to our customer, including a fee during the time period that the customer or end-customer’s production line is not operational as a result of the failure of the products that we manufacture, all of which could harm our business, operating results and customer relations. If we engineer or manufacture a product that is found to cause any personal injury or property damage or is otherwise found to be defective, we could incur significant costs to resolve the claim. While we maintain insurance for certain product liability claims, we do not maintain insurance for any recalls and, therefore, would be required to pay any associated costs that are determined to be our responsibility. A successful product liability or product warranty claim in excess of our insurance coverage or any material claim for which insurance coverage is denied, limited, is not available or has not been obtained could harm our business, financial condition and operating results.

 

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If we are unable to meet regulatory quality standards applicable to our manufacturing and quality processes for the products we manufacture, our business, financial condition or operating results could be harmed.

 

As a manufacturer of products for the optics industry, we are required to meet certain certification standards, including the following: ISO 9001:2000 for Manufacturing Quality Systems; ISO 14001 for Environmental Quality Systems; OHSAS18001 for Occupational Health and Safety Management Systems; TL9000 for Telecommunications Industry Quality Certification; TS16949:2002 for Automotive Industry Quality Certification; ISO 13485:2003 for medical devices; and various additional standards imposed by the U.S. Food and Drug Administration, or FDA, with respect to the manufacture of medical devices. Additionally, we are required to register with the FDA and other regulatory bodies and are subject to continual review and periodic inspection for compliance with these requirements, which require manufacturers to adhere to certain regulations, including testing, quality control and documentation procedures. We hold the following additional certifications: SONY Green Partner for Environmental Management Systems and CSR-DIW for Corporate Social Responsibility in Thailand. In the European Union, we are required to maintain certain ISO certifications in order to sell our precision optical, electro-mechanical and electronic manufacturing services and we must undergo periodic inspections by regulatory bodies to obtain and maintain these certifications. If any regulatory inspection reveals that we are not in compliance with applicable standards, regulators may take action against us, including issuing a warning letter, imposing fines on us, requiring a recall of the products we manufactured for our customers, or closing our manufacturing facilities. If any of these actions were to occur, it could harm our reputation as well as our business, financial condition and operating results.

 

If we fail to attract additional skilled employees or retain key personnel, our business, financial condition and operating results could suffer.

 

Our future success depends, in part, upon our ability to attract additional skilled employees and retain our current key personnel. We have identified several areas where we intend to expand our hiring, including human resources, supply chain management, business development and finance. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Our future also depends on the continued contributions of our executive management team, including Mr. Mitchell, and other key management and technical personnel, each of whom would be difficult to replace. We do not have key person life insurance or long-term employment contracts with any of our key personnel. The loss of any of our executive officers or key personnel or the inability to continue to attract qualified personnel could harm our business, financial condition and operating results.

 

Failure to comply with applicable environmental laws and regulations could have a material adverse effect on our business, results of operations and financial condition.

 

The sale and manufacturing of products in certain states and countries may subject us to environmental laws and regulations. Although we do not anticipate any material adverse effects based on the nature of our operations and these laws and regulations, we will need to ensure that we and our suppliers comply with such laws and regulations as they are enacted. If we fail to timely comply with such laws and regulations, our customers may cease doing business with us, which would have a material adverse effect on our business, results of operations and financial condition. In addition, if we were found to be in violation of these laws, we could be subject to governmental fines, liability to our customers and damage to our reputation, which would also have a material adverse effect on our business, results of operations and financial condition.

 

The effects of the recent global economic crisis have and may continue to adversely impact our business, operating results and financial condition.

 

The recent global economic crisis has caused disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy, and impacted levels of business and consumer spending. These macroeconomic developments have negatively affected and may continue to negatively affect our business, operating results and financial condition in a number of ways. For example, in fiscal 2009, various customers

 

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delayed or decreased spending on new projects with us while others delayed paying us for products and services that we had previously provided. Additionally, as a result of these macroeconomic developments, in fiscal 2009, there was a decline in demand for our customers’ products across all of the industries we serve, which caused our customers to reduce their inventories, resulting in a 13.7% decline in our total revenues and a 25.2% decline in our net income from fiscal 2008 to fiscal 2009. Further, concern about the stability of the markets generally and the strength of counterparties led many lenders and institutional investors to reduce, and in some cases, cease to provide credit to businesses and consumers, including to our suppliers and customers, which further exacerbated downward pressure on demand for our products and services.

 

If these significant adverse global economic conditions were to return, they could, among other things, make it more difficult for us, our customers and our suppliers to obtain credit, cause our customers or potential customers to reduce or delay their orders with us or cancel their orders altogether, lead to further downward pricing pressures, result in further delays in paying us or result in insolvency for key suppliers or customers, any of which could harm our business, financial condition and operating results.

 

Epidemics, natural disasters, acts of terrorism and other political and economic developments could harm our business, financial condition and operating results.

 

In some countries in which we operate, including the PRC and Thailand, potential outbreaks of infectious diseases such as the H1N1 influenza virus, severe acute respiratory syndrome (SARS) or bird flu could disrupt our manufacturing operations, reduce demand for our customers’ products and increase our supply chain costs. Natural disasters, such as the May 2008 earthquake in Sichuan, China, which reported a magnitude of 7.9 on the Richter scale and resulted in the death of tens of thousands of people, could severely disrupt manufacturing operations and increase our supply chain costs. Increased international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures, conflicts in the Middle East and Asia, strained international relations arising from these conflicts and the related decline in consumer confidence and economic weakness, may hinder our ability to do business. Any escalation in these events or similar future events may disrupt our operations and the operations of our customers and suppliers, and may affect the availability of materials needed for our manufacturing services. Such events may also disrupt the transportation of materials to our manufacturing facilities and finished products to our customers. These events have had, and may continue to have, an adverse impact on the U.S. and world economy in general, and customer confidence and spending in particular, which in turn could adversely affect our total revenues and operating results. The impact of these events on the volatility of the U.S. and world financial markets also could increase the volatility of the market price of our ordinary shares and may limit the capital resources available to us, our customers and our suppliers.

 

If we fail to develop and maintain an effective system of internal controls or comply with the requirements of Section 404 of the Sarbanes-Oxley Act, we may not be able to accurately report our financial results or prevent fraud. As a result, our shareholders could lose confidence in our financial reporting, which would harm our business and the market price of our ordinary shares.

 

U.S. securities laws require, among other things, that public companies maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, as a public company we will be required to perform system and process evaluation and testing of our internal control over financial reporting to allow our management to assess annually the effectiveness of our internal control over financial reporting and to enable our independent registered public accounting firm to issue a report on the assessment of our controls, as required by Section 404 of the Sarbanes-Oxley Act, beginning with our annual report on Form 10-K for the fiscal year ending June 24, 2011. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses (defined as deficiencies, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis).

 

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Given the nature and complexity of our business and the fact that some members of our management team are located in Thailand while others are located in the U.S., control deficiencies may periodically occur. While we have ongoing measures and procedures to prevent and remedy such deficiencies, if they occur there can be no assurance that we will be successful or that we will be able to prevent material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Moreover, if we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our ordinary shares could decline and we could be subject to potential delisting by the New York Stock Exchange and review by the New York Stock Exchange, the SEC, or other regulatory authorities, which would require the expenditure by us of additional financial and management resources. As a result, our shareholders could lose confidence in our financial reporting, which would harm our business and the market price of our ordinary shares.

 

We are subject to the risk of increased income taxes, which could harm our business, financial condition and operating results.

 

We base our tax position upon the anticipated nature and conduct of our business and upon our understanding of the tax laws of the various countries in which we have assets or conduct activities. However, our tax position is subject to review and possible challenge by tax authorities and to possible changes in law, which may have retroactive effect. We were formed in the Cayman Islands and we maintain manufacturing operations in Thailand, the PRC and the U.S. Any of these jurisdictions could assert tax claims against us. We cannot determine in advance the extent to which some jurisdictions may require us to pay taxes or make payments in lieu of taxes. Preferential tax treatment from the Thai government is currently available to us, and we intend to take advantage of it beginning in July 2010 for a period of three years, which will be contingent on, among other things, the export of our customers’ products out of Thailand and our agreement not to move our manufacturing facilities out of our current province in Thailand for at least 15 years. We will lose this favorable tax treatment in Thailand unless we comply with these restrictions, and as a result we may delay or forego certain strategic business decisions due to these tax considerations. We cannot guarantee that such preferential tax treatment will continue. Our PRC subsidiary does not qualify for any such tax incentives, and we do not anticipate that it will qualify for any tax incentives in the future. There is also a risk that Thailand or another jurisdiction in which we operate may treat our Cayman Islands parent as having a permanent establishment in such jurisdiction and subject its income to tax. If we become subject to additional taxes in any jurisdiction or if any jurisdiction begins to treat our Cayman Islands parent as having a permanent establishment, such tax treatment could materially and adversely affect our business, financial condition and operating results.

 

Certain of our subsidiaries provide products and services to, and may from time to time undertake certain significant transactions with, us and our other subsidiaries in different jurisdictions. For instance, we have inter-company agreements in place that provide for our California and Singapore subsidiaries to provide administrative services for our Cayman Islands parent, and our Cayman Islands parent has entered into manufacturing agreements with our Thai subsidiary. In general, related party transactions and, in particular, related party financing transactions, are subject to close review by tax authorities. Moreover, several jurisdictions in which we operate have tax laws with detailed transfer pricing rules that require all transactions with non-resident related parties to be priced using arm’s length pricing principles and require the existence of contemporaneous documentation to support such pricing. International tax authorities could challenge the validity of our related party transfer pricing policies. Such a challenge generally involves a complex area of taxation and a significant degree of judgment by management. If any taxation authorities are successful in challenging our financing or transfer pricing policies, our income tax expense may be adversely affected and we could become subject to interest and penalty charges, which may harm our business, financial condition and operating results.

 

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We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.

 

Based upon the value of our assets, which will be determined in part on the trading price of our ordinary shares, we do not expect to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for the taxable year 2010 or for the foreseeable future. However, despite our expectations, we cannot assure you that we will not be a PFIC for the taxable year 2010 or any future year because our PFIC status is determined at the end of each year and depends on the composition of our income and assets during such year. Our special U.S. counsel expresses no opinion with respect to our PFIC status or our expectations contained in this paragraph. If we are a PFIC, our U.S. investors will be subject to increased tax liabilities under U.S. tax laws and regulations and to burdensome reporting requirements. See “Taxation—U.S. Federal Income Taxation” for a more detailed description of the PFIC rules.

 

We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our shareholders.

 

We anticipate that the net proceeds from this offering, together with current cash, cash equivalents, cash provided by operating activities and funds available through our working capital line of credit, will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. We operate in a market, however, that makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to execute on our current or future business strategies.

 

Furthermore, if we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing shareholders, including those acquiring shares in this offering. If adequate additional funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our manufacturing services, hire additional technical and other personnel, or otherwise respond to competitive pressures could be significantly limited.

 

We are controlled by a small group of existing shareholders, whose interests may differ from the interests of our other shareholders.

 

As of March 26, 2010, our existing shareholders Asia Pacific Growth Fund III, L.P., an affiliate of H&Q Asia Pacific, JDS Uniphase Corporation, Shea Ventures, LLC and Mr. Mitchell, our chief executive officer, president and chairman of the board of directors, beneficially owned, collectively, approximately 91.6% of our outstanding ordinary shares. Following this offering, Asia Pacific Growth Fund III, L.P. and Mr. Mitchell are together expected to continue to have three representatives on our board of directors and are expected to beneficially own, collectively, approximately [        ]% of our outstanding ordinary shares. Accordingly, they have had, and will continue to have, significant influence in determining the outcome of any corporate transaction or other matter submitted to our shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. They will also have the power to prevent or cause a change in control. The interests of these shareholders may differ from the interests of our other shareholders.

 

The loan agreements for our long-term debt obligations contain financial ratio covenants that may impair our ability to conduct our business.

 

We have loan agreements for our long-term debt obligations, which contain financial ratio covenants that may limit management’s discretion with respect to certain business matters. These covenants require us to maintain a specified debt-to-equity ratio and debt service coverage ratio (earnings before interest and depreciation and amortization plus cash on hand minus short-term debt), which may restrict our ability to incur

 

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additional indebtedness and limit our ability to use our cash. In the event of our default on these loans or a breach of a covenant, the lenders may immediately cancel the loan agreement, deem the full amount of the outstanding indebtedness immediately due and payable, charge us interest on a monthly basis on the full amount of the outstanding indebtedness and, if we cannot repay all of our outstanding obligations, sell the assets pledged as collateral for the loan in order to fulfill our obligation. We may also be held responsible for any damages and related expenses incurred by the lender as a result of any default. Any failure by us or our subsidiaries to comply with these agreements could harm our business, financial condition and operating results.

 

We are subject to risks associated with the availability and coverage of insurance.

 

For certain risks, we do not maintain insurance coverage because of the cost or availability of certain coverage. Because we retain some portion of our insurable risks, and in some cases self-insure completely, unforeseen or catastrophic losses in excess of insured limits may have a material adverse effect on our business, financial condition and operating results.

 

Energy price increases may negatively impact our results of operations.

 

We, along with our suppliers and customers, rely on various energy sources in our manufacturing and transportation activities. Energy prices have been subject to increases and volatility caused by market fluctuations, supply and demand, currency fluctuation, production and transportation disruption, world events and government regulations. While significant uncertainty currently exists about the future levels of energy prices, a significant increase is possible. Increased energy prices could increase our raw material and transportation costs. In addition, increased transportation costs of our suppliers and customers could be passed along to us. We may not be able to increase our prices enough to offset these increased costs. In addition, any increase in our prices may reduce our future customer orders which could harm our business, financial condition and operating results.

 

Intellectual property infringement claims against our customers or us could harm our business, financial condition and operating results.

 

Our services involve the creation and use of intellectual property rights, which subject us to the risk of intellectual property infringement claims from third parties and claims arising from the allocation of intellectual property rights among us and our customers. For example, in December 2008, Fabrinet USA, Inc. was served with a complaint, along with one of our customers, filed by Avago Technologies in the United States District Court for the Northern District of California, San Jose Division (Case No. C08-05394SI), alleging infringement of two patents by certain of our customer’s products. On January 28, 2009, Avago Technologies dismissed the complaint against Fabrinet USA, Inc. by filing a notice of voluntary dismissal without prejudice with the United States District Court.

 

Our customers may require that we indemnify them against the risk of intellectual property infringement arising out of our manufacturing processes. If any claims are brought against us or our customers for such infringement, whether or not these claims have merit, we could be required to expend significant resources in defense of such claims. In the event of an infringement claim, we may be required to spend a significant amount of money to develop non-infringing alternatives or obtain licenses. We may not be successful in developing such alternatives or obtaining such licenses on reasonable terms or at all, which could harm our business, financial condition and operating results.

 

Any failure to protect our customers’ intellectual property that we use in the products we manufacture for them could harm our customer relationships and subject us to liability.

 

We focus on manufacturing complex optical products for our customers. These products often contain our customers’ intellectual property, including trade secrets and know-how. Our success depends, in part, on our

 

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ability to protect our customers’ intellectual property. We may maintain separate and secure areas for customer proprietary manufacturing processes and materials and dedicate floor space, equipment, engineers and supply chain management to protect our customers’ proprietary drawings, materials and products. The steps we take to protect our customers’ intellectual property may not adequately prevent its disclosure or misappropriation. If we fail to protect our customers’ intellectual property, our customer relationships could be harmed and we may experience difficulty in establishing new customer relationships. In addition, our customers might pursue legal claims against us for any failure to protect their intellectual property, possibly resulting in harm to our reputation and our business, financial condition and operating results.

 

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with U.S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial condition and operating results.

 

The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our business, financial condition and operating results.

 

We could be adversely affected as a result of conflicts of interest arising from perceived confidentiality concerns relating to some of our customer relationships.

 

JDS Uniphase Corporation, or JDSU, one of our largest customers, owned approximately 6.4% of our outstanding ordinary shares on a fully-diluted basis as of March 26, 2010. JDSU accounted for approximately 15%, 20%, 20% and 26% of our total revenues for the nine months ended March 26, 2010, fiscal 2009, fiscal 2008 and fiscal 2007, respectively. Our existing and potential customers may view our relationship with JDSU and its affiliates as likely to adversely affect the protection of their confidential information and, as a result, may choose to use one of our competitors for their production or manufacture products internally.

 

We are subject to governmental export and import controls in several jurisdictions that could subject us to liability or impair our ability to compete in international markets.

 

We are subject to governmental export and import controls in Thailand, the PRC and the U.S. that may limit our business opportunities. Various countries regulate the import of certain technologies and have enacted laws that could limit our ability to export or sell the products we manufacture. The export of certain technologies from the U.S. and other nations to the PRC is barred by applicable export controls, and similar prohibitions could be extended to Thailand, thereby limiting our ability to manufacture certain products. Any change in export or import regulations or related legislation, shift in approach to the enforcement of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could limit our ability to offer our manufacturing services to existing or potential customers, which could harm our business, financial condition and operating results.

 

Risks Related To This Offering

 

An active trading market for our ordinary shares may not develop, and the market price of our ordinary shares may fluctuate significantly.

 

Prior to this offering, there has been no public market for our ordinary shares. If an active public market for our ordinary shares does not develop after this offering, the market price and liquidity of our ordinary shares may be adversely affected. Our ordinary shares have been approved for listing on the New York Stock Exchange under the symbol FN, subject to official notice of issuance. However, we can provide no assurance that a liquid public market for our ordinary shares will develop. The initial public offering price of our ordinary shares will be determined by negotiations between us and the underwriters based upon several factors, and we can provide no assurance that the

 

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price at which our ordinary shares trade after this offering will not decline below the initial public offering price. As a result, investors in our ordinary shares may experience a decrease in the value of their ordinary shares regardless of our operating performance or prospects. In the past, following periods of volatility in the market price of a company’s securities, shareholders have often initiated securities class action litigation against that company. If we were involved in a class action suit, it could divert the attention of senior management and, if adversely determined against us, could harm our business, financial condition and operating results.

 

Stock prices of technology, communications and manufacturing services companies have fluctuated widely in recent years, and the market price of our ordinary shares is likely to be volatile, which could result in substantial losses to investors.

 

The market price of our ordinary shares is likely to be volatile and could fluctuate widely in response to factors beyond our control. In particular, the market prices of shares of technology-related companies often reach levels that bear no established relationship to the past operating performance of these companies. Historically, the market prices of the securities of technology, communications and manufacturing services companies have been especially volatile. These broad market and industry factors may significantly affect the market price of our ordinary shares regardless of our actual operating performance.

 

In addition to market and industry factors, the price and trading volume of our ordinary shares may be highly volatile for specific business reasons. Factors such as variations in our total revenues, earnings and cash flow, announcements of new investments or acquisitions, changes in our pricing practices or those of our competitors, commencement or outcome of litigation, sales of ordinary shares by us or our principal shareholders, fluctuations in market prices for our services and general market conditions could cause the market price of our ordinary shares to change substantially. Any of these factors may result in large and sudden changes in the volume and price at which our ordinary shares will trade. We cannot give any assurance that these factors will not occur in the future.

 

The sale or availability for sale of substantial amounts of our ordinary shares could adversely affect their market price.

 

Sales of substantial amounts of our ordinary shares in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ordinary shares and impair our ability to raise capital through offerings of our ordinary shares.

 

Based on the number of ordinary shares outstanding as of March 26, 2010, there will be [            ] ordinary shares outstanding immediately after this offering. Of these shares, the [            ] ordinary shares to be sold in this offering, plus any shares sold upon exercise of the underwriters’ over-allotment option, will be freely tradable without restriction or further registration under the Securities Act, unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act. The remaining [            ] ordinary shares outstanding as of March 26, 2010 are “restricted securities” as defined in Rule 144 and may not be sold in the absence of registration other than in accordance with Rule 144 under the Securities Act or another exemption from registration. In addition, as of March 26, 2010, there were outstanding options to purchase 864,909 ordinary shares, 570,135 of which were vested and exercisable.

 

In connection with this offering, we, the selling shareholders, all of our directors and executive officers and a substantial portion of our other shareholders and optionholders have entered into lock-up agreements pursuant to which we and they have agreed not to sell any ordinary shares for 180 days after the date of this prospectus without the written consent of the underwriters. In addition, our amended and restated memorandum and articles of association include a similar 180-day lock-up that applies to all of our shareholders of record as of April 29, 2010. However, the underwriters may release these securities from these restrictions at any time without notice. We cannot predict what effect, if any, market sales of securities held by our shareholders or the availability of these securities for future sale will have on the market price of our ordinary shares.

 

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After this offering, we intend to register on Form S-8 approximately 2,374,862 ordinary shares subject to share options that we have issued or may issue under our equity incentive plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements, if applicable, described above.

 

In addition, Asia Pacific Growth Fund III, L.P., which beneficially owns 18 million shares, Mr. Mitchell, who beneficially owns 6.3 million shares, JDSU and Shea Ventures, LLC will have rights, under certain conditions, to cause us to register under the Securities Act the sale of their ordinary shares after the expiration of the 180-day lock-up period. Registration of these shares under the Securities Act will result in these shares becoming freely tradable without restrictions under the Securities Act immediately upon the effectiveness of the registration. Sale of these registered shares in the public market could cause the price of our ordinary shares to decline. See “Certain Relationships and Related Party Transactions—Registration Rights.”

 

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, impose additional requirements on public companies, including requiring changes in corporate governance practices. For example, the listing requirements of the New York Stock Exchange require that we satisfy certain corporate governance requirements relating to independent directors, audit committees, distribution of annual and interim reports, shareholder meetings, shareholder approvals, solicitation of proxies, conflicts of interest, shareholder voting rights and codes of conduct. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming. For example, in order to comply with Section 404 of the Sarbanes-Oxley Act, we will incur substantial accounting expense and expend significant management time on compliance-related issues. In addition, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial additional costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

 

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

 

If you purchase ordinary shares in this offering, you will pay more for your ordinary shares than the amount paid by existing shareholders for their ordinary shares. As a result, you will experience immediate and substantial dilution of approximately $[        ] per ordinary share (assuming no exercise of outstanding share options), representing the difference between the net tangible book value per share of our ordinary shares as of March 26, 2010 (after giving effect to this offering) and the assumed initial public offering price per share of $[        ] (the mid-point of the estimated offering price range set forth on the cover page of this prospectus). In addition, you will experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options. All of our ordinary shares issuable upon the exercise of currently outstanding share options will be issued at a purchase price that is less than the initial public offering price per share in this offering. See “Dilution” for a more complete description of how the value of your investment in our ordinary shares will be diluted upon the completion of this offering.

 

If securities or industry analysts do not publish research or if they publish misleading or unfavorable research about our business, the market price and trading volume of our ordinary shares could decline.

 

The trading market for our ordinary shares depends in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. Further, foreign companies like us often receive less research

 

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coverage than domestic companies. If no or few securities or industry analysts commence coverage of us, the market price of our ordinary shares would be adversely impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our ordinary shares or publishes misleading or unfavorable research about our business, our market price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our ordinary shares could decrease, which could cause the market price or trading volume of our ordinary shares to decline.

 

Certain provisions in our constitutional documents may discourage our acquisition by a third party, which could limit your opportunity to sell shares at a premium.

 

Our constitutional documents include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change-of-control transactions, including, among other things, provisions that:

 

   

establish a classified board of directors;

 

   

prohibit our shareholders from calling meetings or acting by written consent in lieu of a meeting;

 

   

limit the ability of our shareholders to propose actions at duly convened meetings; and

 

   

authorize our board of directors, without action by our shareholders, to issue preferred shares and additional ordinary shares.

 

These provisions could have the effect of depriving you of an opportunity to sell your ordinary shares at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transaction.

 

Our shareholders may face difficulties in protecting their interests because we are organized under Cayman Islands law.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association, by the Companies Law (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly established as under statutes or judicial precedent in existence in jurisdictions in the U.S. Therefore, you may have more difficulty in protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the U.S., due to the comparatively less developed nature of Cayman Islands law in this area.

 

While Cayman Islands law allows a dissenting shareholder to express the shareholder’s view that a court sanctioned reorganization of a Cayman Islands company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law does not specifically provide for shareholder appraisal rights on a merger or consolidation of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient.

 

Shareholders of Cayman Islands exempted companies such as our company have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our amended and restated memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

 

Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against the board of directors. Our Cayman Islands counsel has advised us that they are not aware of any reported class action or derivative action having been brought in a Cayman Islands court.

 

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Certain judgments obtained against us by our shareholders may not be enforceable.

 

We are a Cayman Islands company and substantially all of our assets are located outside of the U.S. In addition, many of our directors and officers are nationals and residents of countries other than the U.S. A substantial portion of the assets of these persons is located outside of the U.S. As a result, it may be difficult to effect service of process within the U.S. upon these persons. It may also be difficult to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors who are not resident in the U.S. and the substantial majority of whose assets are located outside of the U.S. In addition, there is uncertainty as to whether the courts of the Cayman Islands, Thailand or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the U.S. or any state. In particular, a judgment in a U.S. court would not be recognized and accepted by Thai courts without a re-trial or examination of the merits of the case. In addition, there is uncertainty as to whether such Cayman Islands, Thai or PRC courts would be competent to hear original actions brought in the Cayman Islands, Thailand or the PRC against us or such persons predicated upon the securities laws of the U.S. or any state.

 

We have not determined a specific use for the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.

 

We have not determined a specific use for the net proceeds from this offering. Our management will have considerable discretion in the application of the net proceeds we receive. You will not have the opportunity, as part of your investment decision, to assess whether the net proceeds from this offering are being used appropriately. You must rely on the judgment of our management regarding the application of such proceeds. The net proceeds may be used for corporate purposes that do not improve our profitability or increase the market price of our ordinary shares. Further, the net proceeds may be used to pursue various acquisitions or other strategic transactions that may prove unsuccessful and cause the market price of our ordinary shares to decline. The net proceeds from this offering may also be placed in investments that do not produce income or that lose value.

 

Although we recently paid cash dividends, we do not anticipate paying any dividends on our ordinary shares in the future.

 

In October 2008, we paid a cash dividend of $0.33 per share, totaling $10.1 million. In September 2009, we paid a cash dividend of $1.00 per share, totaling $30.8 million. Although we previously paid such cash dividends, we currently intend to retain any earnings to finance our operations and growth. Because we do not anticipate paying any dividends on our ordinary shares in the future, any short-term return on your investment will depend on the market price of our ordinary shares.

 

Shareholders may challenge the enforceability of the lock-up provision in our amended and restated memorandum and articles of association, which could have an adverse affect on our business.

 

On April 30, 2010, shareholders representing 96.3% of our ordinary shares entitled to vote approved an amendment to our amended and restated memorandum and articles of association to include a provision that restricts all of our shareholders of record as of April 29, 2010 from selling any of our ordinary shares for a period of 180 days after the closing of this offering. This provision is similar to the contractual lock-up provision that substantially all of our shareholders and optionholders have entered into with the underwriters. This amendment is intended to ensure that all of our shareholders, whether or not they have entered into a contractual lock-up with the underwriters, do not sell or transfer any of their ordinary shares for the first 180 days after the closing of this offering. Shareholders of record as of April 29, 2010 that have not signed contractual lock-up agreements with the underwriters may challenge the enforceability of such a provision in our amended and restated memorandum

and articles of association. While we believe we would prevail in the event of any such challenge, any such challenge could result in negative publicity and litigation, which could have an adverse effect on our business.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. The forward-looking statements are contained principally in, but not limited to, the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

our goals and strategies;

 

   

our and our customers’ estimates regarding future revenues, operating results, expenses, capital requirements and liquidity and our needs for additional financing;

 

   

our future capital expenditures;

 

   

expansion of our manufacturing capacity;

 

   

the growth rates of our existing markets and potential new markets;

 

   

our and our customers’ and our suppliers’ ability to respond successfully to technological or industry developments;

 

   

our suppliers’ estimates regarding future costs;

 

   

our ability to increase our penetration of existing markets and penetrate new markets;

 

   

our plans to diversify our sources of revenues;

 

   

our use of proceeds from this offering;

 

   

trends in the optical communications, industrial lasers and sensors markets, including trends to outsource the production of components used in those markets;

 

   

our ability to attract and retain a qualified management team and other qualified personnel and advisors; and

 

   

competition in our existing and new markets.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.

 

This prospectus also contains data related to the optical communications, industrial lasers and sensors markets. This market data includes projections that are based on a number of assumptions. These markets may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ordinary shares. In addition, the

 

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changing nature of these markets subjects any projections or estimates relating to the growth prospects or future condition of these markets to significant uncertainties. Furthermore, if any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions.

 

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds from this offering of approximately $[            ] million after deducting underwriting discounts and commissions and the estimated offering expenses payable by us and based upon an assumed initial public offering price of $[            ] per ordinary share (the mid-point of the estimated public offering price range shown on the cover page of this prospectus). We will not receive any proceeds from the sale of shares by the selling shareholders.

 

A $1.00 increase or decrease in the assumed initial public offering price of $[            ] per ordinary share, the midpoint of the range set forth on the cover of this prospectus, would increase or decrease, as applicable, the net proceeds from this offering by approximately $[            ] million, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same.

 

As of the date of this prospectus, we have not allocated any specific portion of the net proceeds from this offering for any particular purpose. We anticipate using the net proceeds from this offering for general corporate purposes, including working capital, capital expenditures and potential acquisitions of complementary businesses, technologies or other assets.

 

For a discussion of our strategies and business plan, see “Business—Our Growth Strategy.” We do not currently have any agreements or understandings to make any material acquisitions of, or investments in, other businesses.

 

The foregoing represents our current intentions with respect to the use of the net proceeds from this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in using the net proceeds from this offering. The occurrence of unforeseen events or changed business conditions may result in the use of the proceeds from this offering in a manner other than as described in this prospectus.

 

Pending use of the net proceeds, we intend to invest our net proceeds in short-term, interest-bearing debt instruments or bank deposits.

 

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DIVIDEND POLICY

 

On October 28, 2008, we paid a cash dividend of $0.33 per share, totaling $10.1 million. On September 1, 2009, we paid a cash dividend of $1.00 per share, totaling $30.8 million. Although we previously paid cash dividends, we currently intend to retain any earnings for use in our business and do not currently intend to pay dividends on our ordinary shares after this offering. Dividends, if any, on our ordinary shares will be declared by and subject to the discretion of our board of directors. Even if our board of directors decides to distribute dividends, the form, frequency and amount of such dividends will depend upon our future operations and earnings, capital requirements and surplus, general financial conditions, contractual restrictions, applicable laws and regulations and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and total capitalization as of March 26, 2010:

 

   

on an actual basis; and

 

   

on an as adjusted basis to reflect the receipt of estimated net proceeds of $[        ] million from the issuance and sale by us of [                ] ordinary shares in this offering at an assumed initial public offering price of $[        ] per ordinary share, which is the mid-point of the estimated public offering price range shown on the front cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, included elsewhere in this prospectus.

 

     As of March 26, 2010  
     Actual    As
Adjusted
 
    

(unaudited)

(in thousands)

 

Cash and cash equivalents

   $ 90,044    $ [            
               

Long-term loans from banks, non-current portion(1)

   $ 14,964    $ [            

Shareholders’ equity:

     

Preferred shares, $0.01 par value; Authorized: 5,000,000 preferred shares actual and as adjusted; Issued and outstanding: No preferred shares actual and as adjusted

            

Ordinary shares, $0.01 par value; Authorized: 500,000,000 ordinary shares actual and as adjusted; Issued and outstanding: 30,913,709 ordinary shares actual, [                ] ordinary shares, as adjusted

     309      [            

Additional paid-in capital

     30,585      [            

Retained earnings

     163,466      [            
               

Total shareholders’ equity

     194,360      [            
               

Total capitalization(2)

   $ 209,324    $ [            
               

 

(1)   The long-term loans from banks are secured by certain property, plant and equipment.
(2)   Excludes cash and cash equivalents.

 

This table excludes:

 

   

864,909 ordinary shares issuable upon the exercise of all share options, whether vested or unvested, outstanding under our 1999 Share Option Plan as of March 26, 2010, at a weighted average exercise price of $3.65 per ordinary share;

 

   

9,953 ordinary shares available for future issuance under our 1999 Share Option Plan as of March 26, 2010; and

 

   

1,500,000 ordinary shares that will be available for future issuance under our 2010 Performance Incentive Plan, which will be effective upon the completion of this offering.

 

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DILUTION

 

Our net tangible book value as of March 26, 2010 was approximately $193 million, or $6.25 per ordinary share outstanding at that date. Net tangible book value per ordinary share is determined by dividing our net tangible book value by the number of outstanding ordinary shares. Our net tangible book value is determined by subtracting the value of our intangible assets and total liabilities from our total assets. Dilution is determined by subtracting the as adjusted net tangible book value per ordinary share from the assumed initial public offering price per ordinary share.

 

Without taking into account any other changes in such net tangible book value after March 26, 2010, other than to give effect to our sale of [            ] ordinary shares in this offering at an assumed initial public offering price of $[            ] per ordinary share with estimated net proceeds of $[            ] million after deducting underwriting discounts and commissions and estimated offering expenses, our as adjusted net tangible book value as of March 26, 2010 would have been $[            ] million, or $[            ] per ordinary share. This represents an immediate increase in as adjusted net tangible book value of $[            ] per ordinary share to existing shareholders and an immediate dilution in as adjusted net tangible book value of $[            ] per ordinary share to new investors in this offering.

 

The following table illustrates the dilution on a per ordinary share basis:

 

     Per Ordinary Share  

Assumed initial public offering price

     $ [            

Net tangible book value as of March 26, 2010, before giving effect to this offering

   $ 6.25     

Increase in net tangible book value attributable to this offering

     [              
          

As adjusted net tangible book value after giving effect to this offering

       [            
          

Dilution to new investors in this offering

     $ [            
          

 

A $1.00 increase (decrease) in the assumed initial public offering price of $[            ] per ordinary share, which is the mid-point of the estimated public offering price range shown on the cover page of this prospectus, would increase (decrease) our as adjusted net tangible book value per share by $[            ] ([            ]), assuming the number of shares that we offer remains the same as set forth on the cover page of this prospectus and after deducting underwriting discounts and commissions and estimated offering expenses.

 

The following table summarizes on an as adjusted basis described above, as of March 26, 2010, the differences between the number of ordinary shares purchased from us, the total cash consideration paid and the average price per ordinary share paid by our existing shareholders and by new investors (based upon an assumed initial public offering price of $[            ] per ordinary share, which is the midpoint of the estimated public offering price range shown on the front cover page of this prospectus).

 

     Ordinary Shares
Purchased
  Total
Consideration
  Average
Price per
Ordinary
Share
      Number   Percent   Amount   Percent  
     (in thousands, other than
percentages and per share data)
   

Existing shareholders

   30,914   [            ]%   $[            ]   [            ]%   $[            ]

New investors

   [            ]   [            ]     [            ]   [            ]     [            ]
                    

Total

   [            ]   [            ]%   $[            ]   [            ]%   $[            ]
                    

 

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Sales by the selling shareholders in this offering will cause the number of shares beneficially owned by existing shareholders to be reduced to approximately [    ]% of the total number of our ordinary shares outstanding after this offering. If the underwriters exercise their over-allotment option in full, our current shareholders would own [    ]% and our new investors would own [    ]% of the total number of our ordinary shares outstanding after this offering.

 

The preceding discussion and tables assume no exercise of share options outstanding as of March 26, 2010. As of March 26, 2010, there were:

 

   

864,909 ordinary shares issuable upon the exercise of all share options, whether vested or unvested, outstanding under our 1999 Share Option Plan at a weighted average exercise price of $3.65 per share;

 

   

9,953 ordinary shares available for future issuance under our 1999 Share Option Plan; and

 

   

1,500,000 ordinary shares that will be available for future issuance under our 2010 Performance Incentive Plan, which will be effective upon the completion of this offering.

 

To the extent outstanding share options are exercised, new investors will experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

We have derived the selected consolidated financial data for the three and nine months ended March 26, 2010 and March 27, 2009, and as of March 26, 2010, from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. We have derived the selected consolidated financial data for the years ended June 26, 2009, June 27, 2008 and June 29, 2007, and as of June 26, 2009 and June 27, 2008, from our audited consolidated financial statements that are included elsewhere in this prospectus. We have derived the selected consolidated financial data for the years ended June 30, 2006 and June 24, 2005, and as of June 29, 2007, June 30, 2006 and June 24, 2005, from our audited consolidated financial statements that are not included in this prospectus. We use a 52-53 week fiscal year ending on the last Friday in June and a 13 week fiscal quarter ending on the last Friday in March for our third fiscal quarter. The selected consolidated financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. The results presented below are not necessarily indicative of financial results to be achieved in future periods.

 

Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

 

    Three Months Ended     Nine Months Ended     Year Ended  
    March 26,
2010
    March 27,
2009
    March 26,
2010
    March 27,
2009
    June 26,
2009
    June 27,
2008
    June 29,
2007
    June 30,
2006
    June 24,
2005
 
    (unaudited)              
    (in thousands, except per share data)  

Summary Consolidated Statements of Operations Data:(1)

                 

Revenues:

           

Revenues

  $ 114,406      $ 65,553      $ 296,543      $ 270,533      $ 337,846      $ 345,071      $ 295,338      $ 200,171      $ 77,187   

Revenues, related parties

    22,484        19,281        51,758        86,808        101,895        163,312        191,690        170,272        120,014   

Other

                         1,358        1,358        2,715        9,115        5,216        4,751   
                                                                       

Total revenues

    136,890        84,834        348,301        358,699        441,099        511,098        496,143        375,659        201,952   

Cost of revenues

    (117,761     (75,299     (303,339     (309,009     (383,058     (442,784     (423,858     (339,682     (190,633
                                                                       

Gross profit

    19,129        9,535        44,962        49,690        58,041        68,314        72,285        35,977        11,319   

Selling, general and administrative expenses

    (4,356     (3,992     (11,965     (18,624     (21,960     (21,741     (18,036     (10,935     (6,389

Restructuring charges

           (2,389            (2,389 )       (2,389                            
                                                                       

Operating income

    14,773        3,154        32,997        28,677        33,692        46,573        54,249        25,042        4,930   

Interest income

    62        165        254        622        756        1,364        1,370        1,015        508   

Interest expense

    (108     (288     (397     (1,046     (1,266     (1,547     (2,842     (3,346     (834

Foreign exchange (loss) gain, net

    (97     (16     (131     649        360        (599     (336     (181     165   
                                                                       

Income before income taxes

    14,630        3,015        32,723        28,902        33,542        45,791        52,441        22,530        4,769   

Income tax (expense) benefit

    (1,119     385        (1,974     (1,535     (2,238     (3,962     (2,702     (1,076     730   
                                                                       

Net income

  $ 13,511      $ 3,400      $ 30,749      $ 27,367      $ 31,304      $ 41,829      $ 49,739      $ 21,454      $ 5,499   
                                                                       

Earnings per share:

                 

Basic

  $ 0.44      $ 0.11      $ 1.00      $ 0.90      $ 1.03      $ 1.40      $ 1.68      $ 0.73      $ 0.19   

Diluted

  $ 0.43      $ 0.11      $ 0.98      $ 0.88      $ 1.00      $ 1.33      $ 1.60      $ 0.71      $ 0.18   

Weighted average number of ordinary shares outstanding:

                 

Basic

    30,901        30,472        30,821        30,287        30,360        29,889        29,600        29,469        29,451   

Diluted

    31,365        30,932        31,340        31,142        31,183        31,349        31,077        30,403        30,032   

Cash dividends declared per share

  $      $      $ 1.00      $ 0.33      $ 0.33      $      $      $      $   

 

(1)   We adopted FASB ASC 718 and ASC 740 during fiscal 2007 and fiscal 2008, respectively. Please see Notes 3 and 14 to our audited consolidated financial statements, included as part of this prospectus.

 

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    As of March 26, 2010   As of
  Actual   As  Adjusted(1)(2)   June 26,
2009
  June 27,
2008
  June 29,
2007
  June 30,
2006
  June 24,
2005
    (unaudited)        
    (in thousands)

Summary Consolidated Balance Sheet Data:

             

Cash and cash equivalents

  $ 90,044     $ 114,845   $ 55,682   $ 40,873   $ 40,063   $ 42,953

Working capital(3)

    80,985       58,311     99,260     105,347     83,152     65,505

Total assets

    330,344       288,085     292,713     240,081     240,815     180,325

Current and long-term debt

    21,003       27,318     29,575     35,498     33,006     31,606

Total liabilities

    135,984       94,580     122,148     110,726     162,132     123,287

Total shareholders’ equity

    194,360       193,505     170,565     129,355     78,683     57,038

 

(1)   The as adjusted balance sheet data reflect the receipt of estimated net proceeds of $[            ] million from the sale of [            ] ordinary shares offered by us at an assumed initial public offering price of $[            ] per ordinary share, which is the midpoint of the estimated public offering price range shown on the cover page of this prospectus, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.
(2)   A $1.00 increase or decrease in the assumed initial public offering price of $[            ] per ordinary share, the midpoint of the range set forth on the cover of this prospectus, would increase or decrease, as applicable, our as adjusted cash and cash equivalents, working capital, total assets and total shareholders’ equity by approximately $[            ] million, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(3)   Working capital is defined as trade accounts receivable plus inventories, less trade accounts payable.

 

    Nine Months Ended     Year Ended  
  March 26,
2010
    March 27,
2009
    June 26,
2009
    June 27,
2008
    June 29,
2007
    June 30,
2006
    June 24,
2005
 
    (unaudited)        
    (in thousands)  

Summary Consolidated Statements of Cash Flows Data:

             

Net cash provided by (used in) operating activities

  $ 16,376      $ 57,929      $ 80,357      $ 51,891      $ 26,244      $ 25,073      $ (4,935

Net cash (used in) provided by investing activities

    (4,716     (6,775     (7,187     (29,815     (12,380     (10,845     2,615   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S., or U.S. GAAP. The following discussion and analysis contains forward-looking statements that involve known and unknown risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under the heading “Risk Factors.” See also the section entitled “Special Note Regarding Forward-Looking Statements” elsewhere in this prospectus.

 

Overview

 

We provide precision optical, electro-mechanical and electronic manufacturing services to OEMs of complex products, such as optical communication components, modules and sub-systems. We offer a broad range of advanced optical capabilities across the entire manufacturing process, including process engineering, design for manufacturability, supply chain management, manufacturing, final assembly and test. We focus primarily on low-volume production of a wide variety of products, which we refer to as “low-volume, high-mix.” Based on our experiences with, and feedback from, customers, we believe we are a global leader in providing these services to the optical communications market.

 

We have also expanded our customer base to include companies in other similarly complex industries that require advanced precision manufacturing capabilities, such as industrial lasers and sensors. Our customers in these industries support a growing number of end-markets, including semiconductor processing, biotechnology, metrology, material processing, auto safety and medical devices. Our revenues from lasers, sensors and other markets as a percentage of total revenues have increased from 9.2% for the quarter ended March 27, 2009 to 20.3% for the quarter ended March 26, 2010.

 

Our customers include four of the six largest optical communications components companies worldwide in terms of revenue for the twelve months ended September 30, 2009, according to Ovum-RHK, a market research firm. Our diverse customer base includes EMCORE Corporation, Finisar Corporation, JDS Uniphase Corporation, Oclaro, Inc., and Opnext, Inc., all of which represent significant portions of our revenues. In addition, our customer base includes customers such as Coherent, Inc. and Newport Corporation, for whom we only manufacture industrial lasers, and Infinera Corporation, a provider of communications systems to network carriers, each of which represent large and growing end-markets that we view as important areas for our future growth.

 

In many cases, we are the sole outsourced manufacturing partner used by our customers for the products that we produce for them. The products that we manufacture for our OEM customers include: selective switching products; tunable transponders and transceivers; active optical cables; solid state, diode-pumped and gas lasers; and sensors.

 

We also design and fabricate application-specific crystals, prisms, mirrors, laser components, substrates and other custom and standard borosilicate, clear fused quartz, and synthetic fused silica glass products. We incorporate our customized optics and glass into many of the products we manufacture for our OEM customers, and we also sell customized optics and glass in the merchant market.

 

We have been consistently profitable since our inception, achieving 41 consecutive quarters of profitable operations. Over our last five fiscal years, despite the 13.7% decline in our revenues from fiscal 2008 to fiscal 2009, our total revenues increased from $202.0 million in fiscal 2005 to $441.1 million in fiscal 2009, representing a compound annual growth rate of 21.6%. Our gross profit margin increased from 5.6% in fiscal

 

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2005 to 13.2% in fiscal 2009, while our operating income as a percentage of revenues increased from 2.4% in fiscal 2005 to 7.6% in fiscal 2009. Our revenues sharply declined beginning in the second quarter of fiscal 2009 as a result of the recent global economic slowdown and the related decline in our customers’ demand for our products and services. Commencing in the first quarter of fiscal 2009, we aggressively decreased our cost of revenues and selling, general and administrative expenses in response to the global economic downturn by, among other things, reducing employee overtime, reducing discretionary spending and implementing a reduction in our workforce. We recognized restructuring charges for severance and benefits of $2.4 million during our third quarter of fiscal 2009 as a result of such efforts. Our revenues have increased significantly from $82.4 million in the fourth quarter of fiscal 2009 to $136.9 million in the third quarter of fiscal 2010 as a result of an increase in our optical communications customers’ demand for our products and services, as well as the growth of our revenues from industrial lasers and sensors.

 

Revenues

 

We generated substantially all of our total revenues during fiscal 2009 from the optical communications, industrial lasers and sensors markets. From fiscal 2005 through fiscal 2008, our compound annual revenue growth rate was 36.3%. Our total revenues declined by 13.7% from fiscal 2008 to fiscal 2009 and declined by 2.9% from the first nine months of fiscal 2009 to the first nine months of fiscal 2010 due to a decline in our revenues from optical communications products. This was the result of reduced demand for optical communications products caused by the recent global economic slowdown, as well as a reduction of inventory levels by our customers. However despite the recent downturn, we believe the long-term outlook for our services will continue to benefit from increased demand for optical equipment, as well as the ongoing trend towards outsourced manufacturing by our targeted OEM customers. Since fiscal 2008, our revenues from products for markets other than the optical communications market have increased substantially as a result of greater willingness of OEMs in all our target markets to outsource production and due to our expanded marketing efforts. We intend to use our recently established track record of manufacturing industrial lasers and sensors to pursue additional outsourcing opportunities with existing and new customers. We expect that industrial lasers and sensors will represent an increasing portion of our revenues in the future. Because our share of the available business in the industrial lasers and sensors end-markets is presently small, we hope to grow our business in those end-markets in excess of industry growth forecasts.

 

We believe our success in expanding our relationships with existing customers and attracting new customers is due to a number of factors, including our broad range of complex engineering and manufacturing service offerings, flexible low-cost manufacturing platform, process optimization capabilities, advanced supply chain management, excellent customer service and experienced management team. We expect the prices we charge for the products we manufacture for our customers to decrease over time due in part to competitive market forces. However, we believe we will be able to maintain favorable pricing for our services due to our ability to reduce cycle time, adjust our product mix by focusing on more complicated products, improve yields, and reduce material costs for the products we manufacture. We believe these capabilities have enabled us to help our OEM customers reduce their manufacturing costs while maintaining or improving the design, quality, reliability and delivery times for their products.

 

Revenues, by percentage, from individual customers representing 10% or more of our total revenues in the respective periods were as follows:

 

     Three Months Ended     Nine Months Ended     Year Ended  
     March 26,
2010
    March 27,
2009
    March 26,
2010
    March 27,
2009
    June 26,
2009
    June 27,
2008
    June 29,
2007
 

Oclaro, Inc.#

   16   18   16   20   20   22   26

JDS Uniphase Corporation

   16
  
  23      15      21      20      20      26   

Opnext, Inc.

   13      12      15      10      11      11      12   

Finisar Corporation

   13
  
  19      12      15      15      12      15   

EMCORE Corporation

   10
  
  10
  
  10      18      16      *      *   

 

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  #  

Pursuant to the merger of Avanex Corporation and Bookham, Inc. (both customers of Fabrinet) on April 27, 2009, Bookham, Inc. changed its name to Oclaro, Inc. These figures represent the combined revenues of Bookham, Inc. and Avanex Corporation.

  *   Less than 10% of total revenues in the period.

 

During the nine months ended March 26, 2010 and fiscal 2009, we had five customers that each contributed 10% or more of our total revenues. During the nine months ended March 26, 2010 and fiscal 2009, such customers together accounted for 68% and 82%, respectively, of our total revenues. During fiscal 2008 and fiscal 2007, we had four customers that each contributed 10% or more of our total revenues.

 

Revenues, Related Parties

 

Revenues, related parties, represents revenues from our manufacturing of optical communications products for JDS Uniphase Corporation (or JDSU) and Finisar Corporation (or Finisar), a classification required by Rule 4-08(k) of Regulation S-X under the Exchange Act. JDSU is classified as a related party for all fiscal periods discussed below under “Results of Operations” because it held 6.4%, 6.4%, 6.4% and 6.5% of our share capital on a fully diluted basis as of March 26, 2010, June 26, 2009, June 27, 2008 and June 29, 2007, respectively. Finisar is classified as a related party for all fiscal periods discussed below under “Results of Operations” (other than the nine months ended March 26, 2010) because Frank H. Levinson, a member of our board of directors, served on Finisar’s board of directors until August 2008. As of August 29, 2008, Finisar was no longer classified as a related party.

 

Other Revenues

 

Other revenues represents revenues from production wind-down and transfer agreements and, solely for fiscal 2005, revenues from our disk storage solutions business. Through the three months ended December 26, 2008, we recognized income from production wind-down and transfer agreements, primarily consisting of income received from the production wind-down and transfer agreements we entered into during fiscal 2005 and fiscal 2006. We recognized this income on a straight-line basis over the estimated wind-down period and the product life cycle of the products transferred to our Thailand facilities under those various agreements. Currently, we do not expect to enter into new production wind-down and transfer agreements. See the section titled “revenue recognition” at Note 2.1 of our audited consolidated financial statements for further details.

 

Revenues by Geography

 

We generate revenues from three geographic regions: North America, Asia-Pacific and Europe. Revenues are attributed to a particular geographic area based on the location to which we ship our customer’s products notwithstanding that our customers may ultimately ship their products to end customers in a different geographic region. Virtually all of our revenues are derived from our manufacturing facilities in Asia.

 

The percentage of our revenues generated from shipments to locations outside of North America has increased from 35.0% in fiscal 2007 to 38.5% in fiscal 2009 and from 37.4% in the nine months ended March 27, 2009 to 47.6% in the nine months ended March 26, 2010, primarily as a result of increasing sales in Asia-Pacific and Europe. We expect that an increasing portion of our revenues will come from shipments to locations outside of North America in the future.

 

The following table presents total revenues, by percentage, by geographic regions:

 

     Nine Months Ended     Year Ended  
     March 26,
2010
    March 27,
2009
    June 26,
2009
    June 27,
2008
    June 29,
2007
 

North America

   52.4   62.6   61.5   62.3   65.0

Asia-Pacific

   39.8      33.0      34.3      30.5      31.1   

Europe

   7.8      4.4      4.2      7.2      3.9   
                              
   100.0   100.0   100.0   100.0   100.0
                              

 

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Our Contracts

 

We enter into supply agreements with our customers that generally have an initial term of two to three years. There are no minimum purchase requirements in our supply agreements. However, these supply agreements generally include provisions for pricing and periodic review of pricing, consignment of our customer’s unique production equipment to us, sharing benefits from cost-savings derived from our efforts and providing us with forecasts of demand requirements. We are generally required to purchase materials, which may include long lead-time materials, to meet the stated demands of our customers. After procuring materials, we manufacture products for a customer based on purchase orders that contain terms regarding quantity, delivery location and delivery dates and generally require the customer to purchase the finished goods from us. Materials that are not consumed by our customers within a specified period of time or are no longer required due to a product’s cancellation or end-of-life are typically designated as excess or obsolete inventory under our contracts. After materials are designated as either excess or obsolete inventory, our customers are typically required to purchase the inventory from us even if they have chosen to cancel production of the related products.

 

Cost of Revenues

 

The key components of our cost of revenues are material costs, employee costs, and infrastructure-related costs. Material costs generally represent the majority of our cost of revenues. Several of the materials we require to manufacture products for our customers are customized for their products and, in many instances, sourced from a single supplier, in some cases our own subsidiaries. Shortages from sole-source suppliers due to yield loss, quality concerns and capacity constraints, among other factors, may increase our expenses and negatively impact our gross profit margin or total revenues in a given quarter. Material costs include scrap material. Historically, our rate of scrap diminishes during a product’s life cycle due to process, fixturing and test improvement and optimization.

 

A second significant element of cost of revenues is employee costs, including: indirect employee costs related to design, configuration and optimization of manufacturing processes for our customers, quality testing, materials testing and other engineering services; and direct costs related to our manufacturing employees. Direct employee costs include employee salaries, insurance and benefits, merit-based bonuses, recruitment, training and retention. Historically, our employee costs have increased primarily due to increases in the number of employees necessary to support our growth and, to a lesser extent, costs to recruit, train and retain employees. Salary levels in Thailand and the PRC, the fluctuation of the Thai baht and RMB against our functional currency, the U.S. dollar, and our ability to retain our employees significantly impact our cost of revenues. We expect our employee costs to increase as we continue to increase our headcount to service additional business and as wages continue to increase in Thailand and the PRC. Wage increases may impact our ability to sustain our competitive advantage and may reduce our profit margin. We seek to mitigate these cost increases through improvements in employee productivity, employee retention and asset utilization.

 

Our infrastructure costs are comprised of depreciation, utilities, and facilities management and overhead costs. Most of our facility leases are long-term agreements. Our depreciation costs are comprised of buildings and fixed assets, primarily at our Pinehurst Campus in Thailand, and capital equipment located at each of our manufacturing locations.

 

We previously maintained an Employee Profit Sharing Plan, under which we allocated ten percent of our adjusted pre-tax profits to be distributed quarterly to our employees. A portion of the Employee Profit Sharing Plan was allocated to the Executive Bonus Plan and made available for our executive officers and senior management, collectively known as our senior staff. The remainder of the Employee Profit Sharing Plan was distributed to our employees as direct profit sharing and merit-based bonus compensation. The Employee Profit Sharing Plan was eliminated during the three months ended March 27, 2009. Currently, merit-based bonus awards are available and distributed to non-senior staff. There is currently no bonus or incentive compensation available to senior staff. Charges included in cost of revenues for profit sharing and merit-based bonus distributions to employees under these plans were $0, $1.3 million, $2.3 million and $2.5 million for the nine months ended March 26, 2010, fiscal 2009, fiscal 2008 and fiscal 2007, respectively.

 

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Share-based compensation expense included in cost of revenues was $0.2 million, $0.4 million, $0.6 million and $0.4 million for the nine months ended March 26, 2010, fiscal 2009, fiscal 2008 and fiscal 2007, respectively.

 

Other than incremental costs associated with growing our business generally, we do not expect to incur material incremental costs of revenue as a result of our planned expansion into new geographic markets, our continued diversification into the industrial lasers and sensors markets and other end-markets outside of the optical communications market or our further development of customized optics and glass manufacturing capabilities.

 

Selling, General and Administrative Expenses

 

Our selling, general and administrative expenses, or SG&A expenses, primarily consist of corporate employee costs for sales and marketing, general and administrative and other support personnel, including amounts previously paid under our Employee Profit Sharing Plan, research and development expenses related to the design of customized optics and glass, travel expenses, legal and other professional fees, share-based compensation expense, and other general expenses not related to cost of revenues. We expect our SG&A expenses to increase as we respond to the requirements of being a public company, including increased expenses associated with: preparing and filing required reports under the U.S. securities laws; comprehensively documenting and assessing our system of internal controls and maintaining our disclosure controls and procedures as a result of the requirements of the Sarbanes-Oxley Act; competitively compensating our board of directors; and insuring against additional risks associated with being a public company.

 

Charges included in SG&A expenses for profit sharing distributions to senior staff were $0, $1.6 million, $2.7 million and $2.7 million for the nine months ended March 26, 2010, fiscal 2009, fiscal 2008 and fiscal 2007, respectively. Share-based compensation expense included in SG&A expenses was $0.3 million, $0.4 million, $0.6 million and $0.4 million for the nine months ended March 26, 2010, fiscal 2009, fiscal 2008 and fiscal 2007, respectively.

 

Other than incremental costs associated with growing our business generally, we do not expect to incur material incremental SG&A expenses as a result of our planned expansion into new geographic markets, our continued diversification into the industrial lasers and sensors markets and other end-markets outside of the optical communications market or our further development of customized optics and glass manufacturing capabilities.

 

Additional Financial Disclosures

 

Foreign Exchange

 

As a result of our international operations, we are exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Thai baht and RMB. Although a majority of our total revenues is denominated in U.S. dollars, a substantial portion of our payroll as well as certain other operating expenses are incurred and paid in Thai baht. The exchange rates between the Thai baht and the U.S. dollar have fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We report our financial results in U.S. dollars and our results of operations have been and may continue to be negatively impacted due to Thai baht appreciation against the U.S. dollar. Smaller portions of our expenses are incurred in a variety of other currencies, including RMB, Canadian dollars, Euros and Japanese yen, the appreciation of which may also negatively impact our financial results.

 

In order to manage the risks arising from fluctuations in currency exchange rates, we use derivative financial instruments. We may enter into short-term forward foreign currency contracts to help manage currency exposures associated with certain assets and liabilities, primarily short-term obligations. The forward exchange

 

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contracts have generally ranged from one to three months in original maturity, and no forward exchange contract has had an original maturity greater than one year. All foreign currency exchange contracts are recognized on the balance sheet at fair value. As we do not apply hedge accounting to these instruments, the derivatives are recorded at fair value through earnings. The gains and losses on our forward contracts generally offset losses and gains on the assets, liabilities and transactions economically hedged and, accordingly, generally do not subject us to the risk of significant accounting losses.

 

As of June 26, 2009 and June 27, 2008, we had outstanding foreign currency assets and liabilities in Thai baht and RMB as follows:

 

     June 26, 2009     June 27, 2008  
     Currency    $    %     Currency    $    %  
     (in thousands)  

Assets

                

Thai baht

   110,018    3,228    29.1   137,845    4,104    23.6

RMB

   53,758    7,868    70.9      90,936    13,253    76.4   
                            
      11,096    100.0      17,357    100.0
                            

Liabilities

                

Thai baht

   295,114    8,659    83.3   499,321    14,865    84.0

RMB

   11,831    1,740    16.7      19,379    2,822    16.0   
                            
      10,399    100.0      17,687    100.0
                            

 

The Thai baht assets represent cash and cash equivalents, accounts receivable, deposits and other current assets. The Thai baht liabilities represent trade accounts payable, accrued expenses and other payables. We manage our exposure to fluctuations in foreign exchange rates by using foreign currency contracts and offsetting assets and liabilities denominated in the same currency. As of June 26, 2009, there was $3.0 million in selling forward contracts outstanding on the Thai baht payables. As of June 27, 2008, there was $18.0 million in selling forward contracts outstanding on the Thai baht payables, $4.0 million selling forward contracts outstanding to fix the Thai baht amount to be received in relation to U.S. dollar long-term loan proceeds, and CAD $2.4 million in buying forward contracts outstanding for payment to a Canadian vendor.

 

The RMB assets represent cash and cash equivalents, accounts receivable and other current assets. The RMB liabilities represent trade accounts payable, accrued expenses and other payables. RMB liabilities are hedged using RMB assets. As of June 26, 2009 and June 27, 2008, there were no outstanding forward contracts with respect to RMB assets or liabilities.

 

Currency Regulation and Dividend Distribution

 

Foreign exchange regulation in the PRC is primarily governed by the following rules:

 

   

Foreign Currency Administration Rules, as amended on August 5, 2008, or the Exchange Rules;

 

   

Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules; and

 

   

Notice on Perfecting Practices Concerning Foreign Exchange Settlement Regarding the Capital Contribution by Foreign-invested Enterprises, as promulgated by the State Administration of Foreign Exchange, or SAFE, on August 29, 2008, or Circular 142.

 

Under the Exchange Rules, RMB is freely convertible into foreign currencies for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. However, conversion of RMB for capital account items, such as direct investments, loans, security investments and repatriation of investments, is still subject to the approval of SAFE.

 

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Under the Administration Rules, foreign-invested enterprises may only buy, sell or remit foreign currencies at banks authorized to conduct foreign exchange business after providing valid commercial documents and relevant supporting documents and, in the case of capital account item transactions, obtaining approval from SAFE. Capital investments by foreign-invested enterprises outside of the PRC are also subject to limitations, which include approvals by the Ministry of Commerce, SAFE and the State Development and Reform Commission.

 

Circular 142 regulates the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that the registered capital of a foreign-invested enterprise settled in RMB converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of foreign-invested enterprises settled in RMB converted from foreign currencies. The use of such RMB capital may not be changed without SAFE’s approval and may not be used to repay RMB loans if the proceeds of such loans have not been used.

 

On January 5, 2007, SAFE promulgated the Detailed Rules for Implementing the Measures for the Administration on Individual Foreign Exchange, or the Implementation Rules. Under the Implementation Rules, PRC citizens who are granted share options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures.

 

In addition, the General Administration of Taxation has issued circulars concerning employee share options. Under these circulars, our employees working in the PRC who exercise share options will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to employee share options with relevant tax authorities and withhold individual income taxes of those employees who exercise their share options.

 

In addition, our transfer of funds to our subsidiaries in Thailand and the PRC are each subject to approval by governmental authorities in case of an increase in registered capital, or subject to registration with governmental authorities in case of a shareholder loan. These limitations on the flow of funds between us and our subsidiaries could restrict our ability to act in response to changing market conditions.

 

Income Tax

 

Our effective tax rate is a function of the mix of tax rates in the various jurisdictions in which we do business. We are domiciled in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to tax on income or capital gains in the Cayman Islands. We have received this undertaking for a twenty-year period ending August 24, 2019.

 

Throughout the period of our operations in Thailand, we have generally received income tax and other incentives from the Thailand Board of Investment. While we will not receive any income tax incentive in our operations in Thailand for fiscal 2010, a new tax incentive will commence for a period of three years beginning in July 2010 for income generated from new products manufactured at our Pinehurst Building 5. We do not currently qualify for any available tax incentives at our Fuzhou, PRC facility under the laws of the PRC.

 

Critical Accounting Policies and Use of Estimates

 

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and on various other assumptions that we believe to be reasonable

 

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under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Because the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on our management’s judgment.

 

A quantitative sensitivity analysis is provided where such information is reasonably available, can be reliably estimated and provides material information to investors. The amounts used to assess sensitivity are included for illustrative purposes only and do not represent management’s predictions of variability.

 

Long-Lived Assets

 

We review property, plant and equipment for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. Recoverability of property and equipment is measured by comparing its carrying amount to the projected undiscounted cash flows the property and equipment are expected to generate. If such assets are considered to be impaired, the impairment loss recognized, if any, is the amount by which the carrying amount of the property and equipment exceeds its fair value. As of the end of fiscal 2009, 2008 and 2007, there were no trigger events that required an assessment of our long-lived assets for impairment.

 

Allowance for Doubtful Accounts

 

We perform ongoing credit evaluations of our customers’ financial condition and make provisions for doubtful accounts based on the outcome of these credit evaluations. We evaluate the collectability of our accounts receivable based on specific customer circumstances, current economic trends, historical experience with collections and the age of past due receivables. Unanticipated changes in the liquidity or financial position of our customers may require additional provisions for doubtful accounts. Under our specific identification method it is not practical to assess the sensitivity of our estimates. As of March 26, 2010, we had identified receivables of approximately $18.0 million, or approximately 19.0% of total receivables, the collection of which may be adversely affected. We continue to monitor these exposures and currently believe no material losses will be incurred.

 

Inventory Valuation

 

Our inventories are stated at the lower of cost, on a first-in, first-out basis, or market value. Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand. We make provisions for estimated excess and obsolete inventory based on regular reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers. If actual market conditions or our customers’ product demands are less favorable than those projected, additional provisions may be required. In addition, unanticipated changes in liquidity or the financial position of our customers or changes in economic conditions may require additional provisions for inventories due to our customers’ inability to fulfill their contractual obligations. During the nine months ended March 26, 2010 and the year ended June 26, 2009, a change of 10% for excess and obsolete materials, based on product demand and production requirements from our customers, would have affected our net income in each period by approximately $0.2 million and $0.3 million, respectively.

 

Deferred Income Taxes

 

Our deferred income tax assets represent temporary differences between the carrying amount and the tax basis of existing assets and liabilities that will result in deductible amounts in future years, including net operating loss carry forwards. Based on estimates, the carrying value of our net deferred tax assets assumes that it

 

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is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize these deferred income tax assets. Our judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. If these estimates and related assumptions change in the future, we may be required to increase or decrease our valuation allowance against the deferred tax assets resulting in additional or lesser income tax expense. As of June 26, 2009 and June 27, 2008, we assessed all of our deferred tax assets as more likely than not to be realizable and, accordingly, did not have a valuation allowance against our deferred tax assets.

 

We assess tax positions in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods, based on the technical merits of the position. We apply a “more likely than not” basis (i.e., a likelihood greater than 50 percent), in accordance with FASB ASC 740-10, and recognize a tax provision in the financial statements for an uncertain tax position that would not be sustained.

 

Share-Based Compensation

 

We have adopted the 1999 Share Option Plan and, as of March 26, 2010, have awarded options to purchase 3,492,904 ordinary shares to our directors, officers and employees, 864,909 of which were outstanding as of March 26, 2010. See “Executive Compensation—Incentive Compensation Plans—1999 Share Option Plan.” These options include in each case an exercise price that is set by our board of directors. The fair market value of an ordinary share is determined by our board of directors by taking into consideration a number of assumptions, including valuation metrics of publicly-traded competitors and industry comparables.

 

On March 12, 2010, our shareholders adopted our 2010 Performance Incentive Plan, or the 2010 Plan, to be effective upon the completion of this offering. A total of 1,500,000 of our ordinary shares are authorized for issuance under the 2010 Plan, plus any shares subject to share options under the 1999 Share Option Plan outstanding as of the date the registration statement of which this prospectus is a part is declared effective that expire, are canceled or terminate after the effective date of such registration statement.

 

Effective July 1, 2006, we adopted the fair value recognition provisions of FASB ASC Topic 718, Compensation—Stock Compensation (“FASB ASC 718”). Under the fair value recognition provisions of FASB ASC 718, we applied the prospective transition method and measured share-based compensation expense at fair value on the later of the awards’ grant date or board of directors’ approval date, based on the estimated number of awards that are expected to vest. Awards granted (or modified, repurchased, or cancelled) after the adoption of FASB ASC 718 are accounted for by recognizing the cost of employee services received in exchange for awards of equity instruments, based on the fair value of those awards, in the financial statements. In determining the fair value of awards, we are required to make estimates of the fair value of our ordinary shares, expected dividends to be issued, expected volatility of our shares, expected forfeitures of the awards, risk free interest rates for the expected terms of the awards, expected terms of the awards, and the vesting period of the respective awards.

 

The determination of our share-based compensation expense under FASB ASC 718 for both current and future periods requires the input of highly subjective assumptions, including estimated forfeitures and the price volatility of the underlying ordinary shares. We estimate forfeitures based on past employee retention rates and our expectations of future retention rates, and we will prospectively revise our forfeiture rates based on actual history. Our share-based compensation expense may change based on changes to our actual forfeitures.

 

For accounting purposes only, the fair value of each option grant is estimated using the Black-Scholes option pricing model, which takes into account the following factors: (i) the exercise price of the options, (ii) the estimated fair value of the underlying ordinary shares, (iii) the expected life of the options, (iv) the expected volatility of the underlying ordinary shares, (v) the risk-free interest rate during the expected life of the options, and (vi) the expected dividend yield of the underlying ordinary shares. However, these fair values are inherently uncertain and highly subjective.

 

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The exercise price of the options is stated in the option agreements. Generally, for accounting purposes the estimated fair value of the underlying ordinary shares is based on our equity value as estimated by a valuation model comprised of different valuation approaches described in greater detail below. The expected life of the options involves estimates of the anticipated timing of the exercise of the vested options. The expected volatility is based on the historical volatility of the capital stock of comparable publicly-traded companies. We have applied the U.S. Treasury Bill interest rate with a maturity similar to the expected life of our options as the risk-free interest rate and assumed a dividend yield for periods when we paid dividends.

 

The following table summarizes the weighted average assumptions used in the Black-Scholes option pricing model for our options granted during fiscal 2009, 2008, and 2007.

 

     Year Ended  
    
June 26, 2009
   
June 27, 2008
   
June 29, 2007
 

Risk-free rate of return

   2.80   3.51   4.76

Expected life (in years)

   4.6      4.6      4.5   

Expected volatility rate

   77.40   60.50   63.00

Dividend yield

   5.28   0.00   0.00

 

The following table summarizes information regarding share options granted since the beginning of fiscal 2007.

 

Grant Date

   Number of
Options Granted
   Fair Value of
Ordinary Share(1)
   Exercise Price
Per Share

July 2006

   3,600    $ 6.25    $ 2.75

August 2006

   7,200      6.25      3.00

September 2006

   10,000      6.25      2.75

September 2006

   7,200      6.25      3.00

October 2006

   8,600      7.50      3.00

January 2007

   40,000      10.75      3.00

January 2007

   203,800      10.75      3.50

May 2007

   7,200      12.00      4.00

August 2007

   32,600      15.75      4.25

November 2007

   29,700      15.00      4.75

February 2008

   57,400      13.75      5.00

May 2008

   25,400      8.75      5.25

August 2008

   79,800      10.50      5.50

November 2008

   28,800      6.25      5.75

November 2009

   147,700      9.50      5.75

January 2010

   12,400      9.50      5.75
          
   701,400      
          

 

(1)   Represents the fair value of an ordinary share as of the date our board of directors approved the option grant, which, in some cases, may have occurred on a date after management communicated to an employee a commitment to grant the option.

 

When estimating the fair value of our ordinary shares, we began by applying a market multiple methodology to determine our equity value. Because all equity investments in Fabrinet were made either in advance of the commencement of operations, by our founder and chief executive officer, or within the first quarter of our operations ended March 31, 2000, there were no additional financing transactions to use as benchmarks in our valuation. We have not issued any convertible shares or shares with any preferences.

 

We have used appropriate valuation techniques and certain other third-party information available to us in determining the fair value of our ordinary shares. We determined the fair value of our ordinary shares each

 

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quarter to be equal to the mean of our (i) price earnings multiple enterprise value and (ii) revenue multiple enterprise value, divided by the total number of ordinary shares outstanding on a fully-diluted basis, rounded down to the nearest one-fourth. During fiscal 2009 and fiscal 2008, a change of $2.00 per share to our estimate of the fair value of our ordinary shares underlying our incentive share options granted during the same periods would not result in a material change to the share-based compensation expense recorded during those periods.

 

In determining the price earnings multiples and the revenue multiples to be used in the above calculations, we obtained from third parties the price earnings multiples and revenue multiples of a group of comparable companies each quarter. We then calculated our price earnings multiple enterprise value and revenue multiple enterprise value by taking the average price earnings multiple and average revenue multiple of the group and multiplying such averages by our trailing 12-month earnings and revenues, respectively, each quarter.

 

In order to ensure that the calculated fair value per ordinary share amount is reasonable, each period we compared the fair value amount to third-party information available to us and assessed whether the fair value is consistent with our assessment of business performance and value.

 

From June 30, 2006 to September 29, 2006, the estimated fair value of our ordinary shares increased from $4.75 per share to $6.25 per share due to the following factors:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value increased compared to the previous quarter as a result of strong overall equity markets and the strong performance of our industry; and

 

   

We recorded total revenues of $108.6 million and net profit of $8.0 million during the quarter ended June 30, 2006, and aggregate total revenues of $375.7 million and net profit of $21.5 million during the four previous quarters.

 

From September 29, 2006 to December 29, 2006, the estimated fair value of our ordinary shares increased from $6.25 per share to $7.50 per share due to the following factors:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value did not change significantly; and

 

   

We recorded total revenues of $122.9 million and net profit of $12.0 million during the quarter ended September 29, 2006, and aggregate total revenues of $419.3 million and net profit of $30.7 million during the four previous quarters.

 

From December 29, 2006 to March 30, 2007, the estimated fair value of our ordinary shares increased from $7.50 per share to $10.75 per share due to the following factors:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value increased compared to the previous quarter as a result of continued strong overall equity markets and the strong performance of our industry; and

 

   

We recorded total revenues of $127.0 million and net profit of $14.3 million during the quarter ended December 29, 2006, and aggregate total revenues of $453.3 million and net profit of $41.7 million during the four previous quarters.

 

From March 30, 2007 to June 29, 2007, the estimated fair value of our ordinary shares increased from $10.75 per share to $12.00 per share due to the following factors:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value did not change significantly; and

 

   

We recorded total revenues of $126.4 million and net profit of $12.8 million during the quarter ended March 30, 2007, and aggregate total revenues of $484.8 million and net profit of $47.0 million during the four previous quarters.

 

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From June 29, 2007 to September 28, 2007, the estimated fair value of our ordinary shares increased from $12.00 per share to $15.75 per share due to the following factors:

 

   

We commenced our prior effort to sell our ordinary shares in a proposed initial public offering and, as a result, we removed the discount factor we had applied to third-party estimates of our publicly-traded valuation levels in determining the fair value of our ordinary shares;

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value did not change significantly; and

 

   

We recorded total revenues of $119.9 million and net profit of $10.7 million during the quarter ended June 30, 2007, and aggregate total revenues of $496.1 million and net profit of $49.7 million during the four previous quarters.

 

From September 28, 2007 to December 28, 2007, the estimated fair value of our ordinary shares decreased from $15.75 per share to $15.00 per share due to the following factors:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value decreased compared to the previous quarter as a result of weak equity markets in general and the weak performance of our industry; and

 

   

We recorded total revenues of $118.2 million and net profit of $9.4 million during the quarter ended September 28, 2007, and aggregate total revenues of $491.4 million and net profit of $47.2 million during the four previous quarters.

 

From December 28, 2007 to March 28, 2008, the estimated fair value of our ordinary shares decreased from $15.00 per share to $13.75 per share due to the following factors:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value decreased compared to the previous quarter as a result of continued weak equity markets in general and the weak performance of our industry; and

 

   

We recorded total revenues of $123.6 million and net profit of $10.7 million during the quarter ended December 28, 2007, and aggregate total revenues of $488.1 million and net profit of $43.7 million during the four previous quarters.

 

From March 28, 2008 to June 27, 2008, the estimated fair value of our ordinary shares decreased from $13.75 per share to $8.75 per share due to the following factors:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value decreased compared to the previous quarter as a result of continued weak equity markets in general and the weak performance of our industry; and

 

   

We recorded total revenues of $124.0 million and net profit of $8.7 million during the quarter ended March 28, 2008, and aggregate total revenues of $485.7 million and net profit of $39.5 million during the four previous quarters.

 

From June 27, 2008 to September 26, 2008, the estimated fair value of our ordinary shares increased from $8.75 per share to $10.50 per share due to the following factors:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value slightly increased; and

 

   

We recorded total revenues of $145.3 million and net profit of $12.9 million during the quarter ended June 27, 2008, and aggregate total revenues of $511.1 million and net profit of $41.8 million during the four previous quarters.

 

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From September 26, 2008 to December 26, 2008, the estimated fair value of our ordinary shares decreased from $10.50 per share to $6.25 per share due to the following factors:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value decreased compared to the previous quarter as a result of continued weak equity markets in general and the weak performance of our industry; and

 

   

We recorded total revenues of $145.9 million and net profit of $12.2 million during the quarter ended September 26, 2008, and aggregate total revenues of $538.7 million and net profit of $44.5 million during the four previous quarters.

 

From December 26, 2008 to December 25, 2009, the estimated fair value of our ordinary shares increased from $6.25 per share to $9.50 per share due to the following factor:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value increased as a result of strength in the equity markets in general and the improved performance of our industry.

 

From December 25, 2009 to March 26, 2010, the estimated fair value of our ordinary shares remained unchanged at $9.50 per share due to the following factor:

 

   

The price earnings index and revenue multiple index of our publicly-traded comparables used to determine enterprise value remained the same.

 

From March 26, 2010 to May [    ], 2010, the estimated fair value of our ordinary shares increased from $9.50 per share to $[            ] per share (the mid-point of the estimated public offering price range shown on the cover page of this prospectus) due to the following factor:

 

   

We expect to sell our ordinary shares in this offering at the estimated public offering price range shown on the cover page of this prospectus.

 

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Results of Operations

 

The following table sets forth a summary of our consolidated statements of operations. We believe that period-to-period comparisons of operating results should not be relied upon as indicative of future performance.

 

     Three Months Ended     Nine Months Ended     Year Ended  
     March 26,
2010
    March 27,
2009
    March 26,
2010
    March 27,
2009
    June 26,
2009
    June 27,
2008
    June 29,
2007
 
    

(unaudited)

                   
     (in thousands)  

Revenues:

              

Revenues

   $ 114,406      $ 65,553      $ 296,543      $ 270,533      $ 337,846      $ 345,071      $ 295,338   

Revenues, related parties

     22,484        19,281        51,758        86,808        101,895        163,312        191,690   

Other

                          1,358        1,358        2,715        9,115   
                                                        

Total revenues

     136,890        84,834        348,301        358,699        441,099        511,098        496,143   

Cost of revenues

     (117,761     (75,299     (303,339     (309,009     (383,058     (442,784     (423,858
                                                        

Gross profit

     19,129        9,535        44,962        49,690        58,041        68,314        72,285   
                                                        

Selling, general and administrative expenses

     (4,356     (3,992     (11,965     (18,624     (21,960     (21,741     (18,036

Restructuring charges

            (2,389            (2,389     (2,389              
                                                        

Operating income

     14,773        3,154        32,997        28,677        33,692        46,573        54,249   
                                                        

Interest income

     62        165        254        622        756        1,364        1,370   

Interest expense

     (108     (288     (397     (1,046     (1,266     (1,547     (2,842

Foreign exchange (loss) gain, net

     (97     (16     (131     649        360        (599     (336
                                                        

Income before income taxes

     14,630        3,015        32,723        28,902        33,542        45,791        52,441   
                                                        

Income tax

     (1,119     385        (1,974     (1,535     (2,238     (3,962     (2,702
                                                        

Net income

   $ 13,511      $ 3,400      $ 30,749      $ 27,367      $ 31,304      $ 41,829      $ 49,739   
                                                        

 

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The following table sets forth a summary of our consolidated statements of operations as a percentage of total revenues for the periods indicated.

 

     Three Months Ended     Nine Months Ended     Year Ended  
     March 26,
2010
    March 27,
2009
    March 26,
2010
    March 27,
2009
    June 26,
2009
    June 27,
2008
    June 29,
2007
 
                 (unaudited)                    

Revenues:

              

Revenues

   83.6   77.3   85.1   75.4   76.6   67.5   59.5

Revenues, related parties

   16.4      22.7      14.9      24.2      23.1      32.0      38.6   

Other

   —        —        —        0.4      0.3      0.5      1.9   
                                          

Total revenues

   100.0      100.0      100.0      100.0      100.0      100.0      100.0   

Cost of revenues

   (86.0   (88.8   (87.1   (86.1   (86.8   (86.6   (85.4
                                          

Gross profit

   14.0      11.2      12.9      13.9      13.2      13.4      14.6   
                                          

Selling, general and administrative expenses

   (3.2   (4.7   (3.4   (5.2   (5.0   (4.3   (3.7

Restructuring charges

   —        (2.8   —        (0.7   (0.6          
                                          

Operating income

   10.8      3.7      9.5      8.0      7.6      9.1      10.9   
                                          

Interest income

   0.1      0.2      0.1      0.2      0.2      0.3      0.3   

Interest expense

   (0.1   (0.3   (0.1   (0.3   (0.3   (0.3   (0.6

Foreign exchange (loss) gain, net

   (0.1   (0.1   (0.1   0.2      0.1      (0.1   (0.1
                                          

Income before income taxes

   10.7      3.5      9.4      8.1      7.6      9.0      10.5   
                                          

Income tax

   (0.8   0.5
  
  (0.6   (0.4   (0.5   (0.8   (0.5
                                          

Net income

   9.9   4.0

  8.8   7.7   7.1   8.2   10.0
                                          

 

The following table sets forth our revenues by end market for the periods indicated.

 

     Three Months Ended    Nine Months Ended    Year Ended
     March 26,
2010
   March
26, 2010
   March 26,
2010
   March 27,
2009
   June 26,
2009
   June 27,
2008
   June 29,
2007
    

(unaudited)

              
    

(in thousands)

Optical communications

   $ 109,079    $ 77,064    $ 287,554    $ 333,149    $ 406,322    $ 493,299    $ 479,090

Lasers, sensors, and other

     27,811      7,770      60,747      25,550      34,777      17,799      17,053
                                                

Total

   $ 136,890    $ 84,834    $ 348,301    $ 358,699    $ 441,099    $ 511,098    $ 496,143
                                                

 

The Company operates and internally manages a single operating segment. As such, discrete information with respect to separate product lines and segments are not accumulated.

 

Comparison of Three Months Ended March 26, 2010 to Three Months Ended March 27, 2009

 

Total revenues. Our total revenues increased by $52.1 million, or 61.4%, to $136.9 million for the three months ended March 26, 2010, as compared to $84.8 million for the three months ended March 27, 2009. This increase was the result of a 41.5% increase in our revenues from optical communications products caused by a recovery in demand for optical communications products following the global economic slowdown and a 257.9% increase in our revenues from non-optical communications products, primarily reflecting the growth of our programs for industrial laser customers. Revenues from optical communications products represented 79.7% of our total revenues for the three months ended March 26, 2010, as compared to 90.8% for the three months ended March 27, 2009.

 

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Cost of revenues. Our cost of revenues increased by $42.5 million, or 56.4%, to $117.8 million, or 86.0% of total revenues, for the three months ended March 26, 2010, as compared to $75.3 million, or 88.8% of total revenues, for the three months ended March 27, 2009. The increase in absolute dollars was primarily due to substantially higher levels of business activity. Additionally, cost of revenues for the three months ended March 27, 2009 was reduced by $1.7 million, primarily as a result of the recovery of the costs of obsolete inventory from customers and the reversal of certain long outstanding payables. For the three months ended March 26, 2010, cost of revenues was also reduced by $2.3 million of obsolete inventory costs recovered from a customer and the reversal of certain long outstanding payables. Cost of revenues also included share-based compensation expense of $0.1 million for the three months ended March 26, 2010, as compared to $0.1 million for the three months ended March 27, 2009.

 

Gross profit. Our gross profit increased by $9.6 million, or 100.6%, to $19.1 million, or 14.0% of total revenues, for the three months ended March 26, 2010, as compared to $9.5 million, or 11.2% of total revenues, for the three months ended March 27, 2009.

 

SG&A expenses. Our SG&A expenses increased by $0.4 million, or 9.1%, to $4.4 million, or 3.2% of total revenues, for the three months ended March 26, 2010, as compared to $4.0 million, or 4.7% of total revenues, for the three months ended March 27, 2009. Our SG&A expenses increased in absolute dollars during the three months ended March 26, 2010 as compared to the three months ended March 27, 2009 due primarily to an increase in sales and marketing activities.

 

Restructuring charges. During the three months ended March 27, 2009, we recorded $2.4 million in restructuring charges related to the reduction of our global headcount in response to the recent global economic slowdown.

 

Operating income. Our operating income increased by $11.6 million to $14.8 million, or 10.8% of total revenues, for the three months ended March 26, 2010, as compared to $3.2 million, or 3.7% of total revenues, for the three months ended March 27, 2009.

 

Interest income. Our interest income decreased by $0.1 million to $0.1 million, for the three months ended March 26, 2010, as compared to $0.2 million for the three months ended March 27, 2009. The decrease was due to decreases in interest rates.

 

Interest expense. Our interest expense decreased by $0.2 million to $0.1 million for the three months ended March 26, 2010, as compared to $0.3 million for the three months ended March 27, 2009. The decrease was due to decreases in our long-term loan interest rates and the repayment of $2.0 million of our long-term loans during the three months ended March 26, 2010.

 

Income before income taxes. We recorded income before income tax expenses of $14.6 million for the three months ended March 26, 2010, as compared to $3.0 million for the three months ended March 27, 2009.

 

Provision for income tax. For the three months ended March 26, 2010, our provision for income tax of $1.1 million reflects an effective tax rate of 7.6%. For the three months ended March 26, 2009, we recorded a net tax benefit of $0.4 million which was the result of a tax benefit of $0.7 million from the restructuring charges.

 

Net income. Our net income increased to $13.5 million, or 9.9% of total revenues, for the three months ended March 26, 2010, as compared to $3.4 million, or 4.0% of total revenues, for the three months ended March 27, 2009, an increase of $10.1 million, or 297.4%.

 

Comparison of Nine Months Ended March 26, 2010 to Nine Months Ended March 27, 2009

 

Total revenues. Our total revenues decreased by $10.4 million, or 2.9%, to $348.3 million for the nine months ended March 26, 2010, as compared to $358.7 million for the nine months ended March 27, 2009. This decrease was the result of a 13.7% decline in our revenues from optical communications products caused by

 

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reduced demand for optical communications products due to the recent global economic slowdown and our customers’ corresponding reduction of their inventory levels, partially offset by the growth in our non-optical communications businesses. Our revenues from non-optical communications products increased by 137.8%, primarily reflecting the growth of our programs for industrial laser customers. Revenues from optical communications products represented 82.6% of our total revenues for the nine months ended March 26, 2010, as compared to 92.9% for the nine months ended March 27, 2009. All income from production wind-down and transfer agreements had been recognized by the end of the six months ended December 26, 2008 and, as a result, income from production wind-down and transfer agreements declined from $1.4 million for the nine months ended March 27, 2009 to zero for the nine months ended March 26, 2010. These decreases were partially offset by an increase of $35.6 million from the sale of new products to existing customers, particularly in the industrial lasers market. As of August 29, 2008, Finisar was no longer classified as a related party. For the nine months ended March 26, 2010, revenue from the sale of products to Finisar was no longer recorded as revenues, related parties, due to a change in the composition of Finisar’s board of directors.

 

Cost of revenues. Our cost of revenues decreased by $5.7 million, or 1.8%, to $303.3 million, or 87.1% of total revenues, for the nine months ended March 26, 2010, as compared to $309.0 million, or 86.1% of total revenues, for the nine months ended March 27, 2009. The decrease in absolute dollars was primarily due to the recent global economic slowdown and resulting decrease in customer demand. Additionally, cost of revenues for the nine months ended March 27, 2009 was reduced by $4.5 million, primarily as a result of the recovery of the costs of obsolete inventory from customers and the reversal of certain long outstanding payables. For the nine months ended March 26, 2010, cost of revenues also included $5.1 million of obsolete inventory costs recovered from a customer and the reversal of certain long outstanding payables. Cost of revenues also included share-based compensation expense of $0.2 million for the nine months ended March 26, 2010, as compared to $0.4 million for the nine months ended March 27, 2009.

 

Gross profit. Our gross profit decreased by $4.7 million, or 9.5%, to $45.0 million, or 12.9% of total revenues, for the nine months ended March 26, 2010, as compared to $49.7 million, or 13.9% of total revenues, for the nine months ended March 27, 2009.

 

SG&A expenses. Our SG&A expenses decreased by $6.7 million, or 35.8%, to $12.0 million, or 3.4% of total revenues, for the nine months ended March 26, 2010, as compared to $18.6 million, or 5.2% of total revenues, for the nine months ended March 27, 2009. Our SG&A expenses decreased in absolute dollars during the nine months ended March 26, 2010 as compared to the nine months ended March 27, 2009 due primarily to the recognition, during the nine months ended March 27, 2009, of accrued legal, accounting, printing and consulting expenses of $4.0 million incurred in connection with our prior efforts to sell our ordinary shares in an initial public offering during calendar years 2007 and 2008. Our SG&A expenses also decreased in absolute dollars during the nine months ended March 26, 2010, as compared to the nine months ended March 27, 2009, by $2.4 million due to the reduction in salary and benefits expenses, primarily as a result of the restructuring efforts we undertook in March 2009 to reduce our global headcount in response to the recent global economic slowdown and the termination of our Employee Profit Sharing Plan during the three months ended March 27, 2009. We also recorded stock-based compensation charges of $0.3 million for the nine months ended March 26, 2010, as compared to $0.3 million for the nine months ended March 27, 2009.

 

Operating income. Our operating income increased by $4.3 million to $33.0 million, or 9.5% of total revenues, for the nine months ended March 26, 2010, as compared to $28.7 million, or 8.0% of total revenues, for the nine months ended March 27, 2009.

 

Interest income. Our interest income decreased by $0.4 million to $0.3 million, for the nine months ended March 26, 2010, as compared to $0.6 million for the nine months ended March 27, 2009. The decrease was due to decreases in interest rates.

 

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Interest expense. Our interest expense decreased by $0.6 million to $0.4 million for the nine months ended March 26, 2010, as compared to $1.0 million for the nine months ended March 27, 2009. The decrease was due to decreases in our long-term loan interest rates and the repayment of $6.3 million of our long-term loans.

 

Income before income taxes. We recorded income before income tax expenses of $32.7 million for the nine months ended March 26, 2010, as compared to $28.9 million for the nine months ended March 27, 2009.

 

Provision for income tax. Our provision for income tax included $0.1 million as a result of a tax audit adjustment from the State of New Jersey for the tax years ended April 2006, April 2007, April 2008 and June 2008 (due to a change in our tax year) and release of tax reserves recognized for uncertain tax positions resulting from the expiration of certain statutes of limitations of $0.9 million for the nine months ended March 26, 2010, as compared to release of uncertain tax positions of $0.3 million for the nine months ended March 27, 2009.

 

Net income. Our net income increased to $30.7 million, or 8.8% of total revenues, for the nine months ended March 26, 2010, as compared to $27.4 million, or 7.7% of total revenues, for the nine months ended March 27, 2009, an increase of $3.3 million, or 12.4%. No income from production wind-down and transfer agreements was included in net income for the nine months ended March 26, 2010, as compared to $1.4 million of income from production wind-down and transfer agreements, or 0.4% of total revenues, included in net income for the nine months ended March 27, 2009. Net income for the nine months ended March 27, 2009 included $4.0 million incurred in connection with our prior efforts to sell our ordinary shares in an initial public offering during calendar years 2007 and 2008.

 

Comparison of Year Ended June 26, 2009 to Year Ended June 27, 2008

 

Total revenues. Our total revenues decreased by $70.0 million, or 13.7%, to $441.1 million for fiscal 2009, as compared to $511.1 million for fiscal 2008. This decrease was the result of a 17.8% decline in our revenues from optical communications products caused by reduced demand for optical communications products due to the recent global economic slowdown and our customers’ corresponding reduction of their inventory levels, partially offset by the growth in our non-optical communications businesses. Our revenues from non-optical communications products increased by 116.2%, as we commenced volume shipments to our industrial lasers customers. Revenues from optical communications products represented 92.1% of our total revenues for fiscal 2009, as compared to 96.7% for fiscal 2008. Income from production wind-down and transfer agreements decreased from $2.7 million for fiscal 2008 to $1.4 million for fiscal 2009. These decreases were partially offset by an increase of $15.5 million from the sale of new products to existing customers, particularly in the industrial lasers and sensors markets.

 

Cost of revenues. Our cost of revenues decreased by $59.7 million, or 13.5%, to $383.1 million, or 86.8% of total revenues, for fiscal 2009, as compared to $442.8 million, or 86.6% of total revenues, for fiscal 2008. The decrease in absolute dollars was primarily due to a decrease in customer demand. Additionally, cost of revenues for fiscal 2009 was reduced by $3.5 million primarily as a result of the recovery of the costs of obsolete inventory from customers and the reversal of certain long outstanding payables. The decreases were partially offset by a $0.7 million increase in depreciation cost attributable to our Pinehurst Building 5, which was put into operation in May 2008. Cost of revenues also included share-based compensation expense of $0.4 million for fiscal 2009, as compared to $0.6 million for fiscal 2008.

 

Gross profit. Our gross profit decreased by $10.3 million, or 15.0%, to $58.0 million, or 13.2% of total revenues, for fiscal 2009, as compared to $68.3 million, or 13.4% of total revenues, for fiscal 2008.

 

SG&A expenses. Our SG&A expenses increased by $0.3 million, or 1.4%, to $22.0 million, or 5.0% of total revenues, for fiscal 2009, as compared to $21.7 million, or 4.3% of total revenues, for fiscal 2008. Our SG&A expenses increased as a percentage of revenues primarily due to the reduction in total revenues and declines in demand from our customers as a result of the recent global economic slowdown. The increased SG&A expenses in absolute dollars were primarily due to the recognition of accrued legal, accounting, printing and consulting expenses

 

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of $4.0 million incurred in connection with our prior efforts to sell our ordinary shares in a proposed initial public offering during calendar years 2007 and 2008, partially offset by a reduction of $0.4 million in employment costs resulting from general attrition and our restructuring activities in March 2009 undertaken in response to the recent global economic slowdown and a decrease in stock-based compensation charges of $0.2 million.

 

Operating income. Our operating income decreased by $12.9 million to $33.7 million, or 7.6% of total revenues, for fiscal 2009, as compared to $46.6 million, or 9.1% of total revenues, for fiscal 2008.

 

Interest income. Our interest income decreased by $0.6 million to $0.8 million, or 0.2% of total revenues, for fiscal 2009, as compared to $1.4 million, or 0.3% of total revenues, for fiscal 2008. The decrease was due to decreases in interest rates, partially offset by increased cash and cash equivalents on our balance sheet during fiscal 2009, as compared to fiscal 2008.

 

Interest expense. Our interest expense decreased by $0.2 million, or 18.2%, to $1.3 million for fiscal 2009, as compared to $1.5 million for fiscal 2008. The decrease was due to decreases in our long-term loan interest rate obligations and the repayment of $6.3 million of our long-term loans.

 

Income before income taxes. We recorded income before income tax expenses of $33.5 million for fiscal 2009, as compared to $45.8 million for fiscal 2008.

 

Provision for income tax. Our provision for income tax reflects an effective tax rate of 6.7% for fiscal 2009, as compared to an effective tax rate of 8.7% for fiscal 2008.

 

Net income. Our net income decreased to $31.3 million, or 7.1% of total revenues, for fiscal 2009, as compared to $41.8 million, or 8.2% of total revenues, for fiscal 2008, a decrease of 25.2%. Net income included income from production wind-down and transfer agreements of $1.4 million, or 0.3% of total revenues, for fiscal 2009, as compared to $2.7 million, or 0.5% of total revenues, for fiscal 2008. Net income for fiscal 2009 included $4.0 million incurred in connection with our prior efforts to sell our ordinary shares in an initial public offering during calendar years 2007 and 2008 and $2.4 million incurred in connection with the restructuring activities we undertook in March 2009.

 

Comparison of Year Ended June 27, 2008 to Year Ended June 29, 2007

 

Total revenues. Our total revenues increased by $15.0 million, or 3.0%, to $511.1 million for fiscal 2008, as compared to $496.1 million for fiscal 2007. Revenue from optical communications represented 96.7% of our total revenues for fiscal 2008, as compared to 96.6% for fiscal 2007. The increase in our total revenues was primarily due to an increase of $17.5 million in production volumes on existing products and an increase of $4.9 million from the scaling of production of new products for our existing customers and, to a lesser extent, revenues from new customers. These increases were partially offset by a decrease in income from production wind-down and transfer agreements, from $9.1 million for fiscal 2007 to $2.7 million for fiscal 2008 and a $1.1 million decline in revenues associated with products approaching their end-of-life.

 

Cost of revenues. Our cost of revenues increased by $18.9 million, or 4.5%, to $442.8 million, or 86.6% of total revenues, for fiscal 2008, as compared to $423.9 million, or 85.4% of total revenues, for fiscal 2007. The increase was primarily due to a $4.0 million increase associated with purchases of materials, number of employees and related overhead resulting from increased volumes of products manufactured for our customers and depreciation costs for Pinehurst Building 5. The increases were partially offset by a favorable product mix shift to more advanced high speed modules, reductions in cost of revenues associated with the reduced cost of certain pass-through materials billed to customers on a cost-plus basis, and gains in employee efficiency and capacity utilization, including improved utilization of Pinehurst Building 4, in fiscal 2008 relative to fiscal 2007. Cost of revenues also included share-based compensation expense of $0.6 million for fiscal 2008, as compared to approximately $0.4 million for fiscal 2007.

 

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Gross profit. Our gross profit decreased by $4.0 million, or 5.5%, to $68.3 million, or 13.4% of total revenues, for fiscal 2008, as compared to $72.3 million, or 14.6% of total revenues, for fiscal 2007.

 

SG&A expenses. Our SG&A expenses increased by $3.7 million, or 20.6%, to $21.7 million, or 4.3% of total revenues, for fiscal 2008, as compared to $18.0 million, or 3.7% of total revenues, for fiscal 2007. This increase was due primarily to efforts to expand into new markets, the addition of senior staff and other personnel to support our increased revenues, growing customer base and prior efforts to sell our ordinary shares in a proposed initial public offering, and payments made under our Employee Profit Sharing Plan. SG&A expenses also included share-based compensation expense of $0.6 million for fiscal 2008, as compared to approximately $0.4 million for fiscal 2007.

 

Operating income. Our operating income decreased by $7.6 million to $46.6 million, or 9.1% of total revenues, for fiscal 2008, as compared to $54.2 million, or 10.9% of total revenues, for fiscal 2007.

 

Interest income. Our interest income was $1.4 million for each of the years ended June 27, 2008 and June 29, 2007.

 

Interest expense. Our interest expense decreased by $1.3 million, or 46%, to $1.5 million for fiscal 2008, as compared to $2.8 million for fiscal 2007. This decrease was due to our repayment of certain outstanding loan obligations and reductions in the floating interest rates charged on our long term loan obligations.

 

Income before income taxes. We recorded income before income tax expenses of $45.8 million for fiscal 2008, as compared to $52.4 million for fiscal 2007.

 

Provision for income tax. Our provision for income tax reflects an effective tax rate of 8.7% for fiscal 2008, as compared to an effective tax rate of 5.2% for fiscal 2007.

 

Net income. Our net income decreased to $41.8 million, or 8.2% of total revenues, for fiscal 2008, as compared to $49.7 million, or 10.0% of total revenues, for fiscal 2007, a decrease of 15.9%. Net income included $9.1 million in income from production wind-down and transfer agreements for fiscal 2007, as compared to $2.7 million for fiscal 2008, and $0.8 million from the after tax impact of share-based compensation expense for fiscal 2007, as compared to $1.1 million for fiscal 2008.

 

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Selected Quarterly Results of Operations

 

The following table presents our unaudited consolidated selected quarterly results of operations for each of the nine quarters ended March 26, 2010. In management’s opinion, the data has been prepared on the same basis as our audited consolidated financial statements included in this prospectus, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data.(1) The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period. You should read the following table in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Three Months Ended  
    Mar 26,
2010
    Dec 25,
2009
    Sep 25,
2009
    Jun 26,
2009
    Mar 27,
2009
    Dec 26,
2008
    Sep 26,
2008
    Jun 27,
2008
    Mar 28,
2008
 
    (unaudited)  
   

(in thousands)

 

Revenues:

                 

Revenues

  $ 114,406      $ 97,893      $ 84,244      $ 67,313      $ 65,553      $ 98,973      $ 106,007      $ 106,909      $ 80,086   

Revenues, related parties

    22,484        16,500        12,774        15,087        19,281        28,352        39,175        37,673        43,278   

Other

                                       679        679        678        679   
                                                                       

Total revenues

    136,890        114,393        97,018        82,400        84,834        128,004        145,861        145,260        124,043   

Cost of revenues

    (117,761     (99,520     (86,058     (74,049     (75,299     (111,173     (122,537     (125,882     (108,204
                                                                       

Gross profit

    19,129        14,873        10,960        8,351        9,535        16,831        23,324        19,378        15,839   
                                                                       

Selling, general and administrative expenses

    (4,356     (3,800     (3,809     (3,336     (3,992     (4,988     (9,644     (5,523     (5,446

Restructuring charges

                                (2,389                            
                                                                       

Operating income

    14,773        11,073        7,151        5,015        3,154        11,843        13,680        13,855        10,393   
                                                                       

Interest income

    62        81        111        134        165        149        308        237        390   

Interest expense

    (108     (128     (161     (220     (288     (374     (384     (218     (288

Foreign exchange (loss) gain, net

    (97     26        (60     (289     (16     419        246        (548     127   
                                                                       

Income before income taxes

    14,630        11,052        7,041        4,640        3,015        12,037        13,850        13,326        10,622   
                                                                       

Income tax (expense) benefit

 

 

(1,119

           (855     (703     385        (282     (1,638     (398     (1,907
                                                                       

Net income

  $ 13,511      $ 11,052      $ 6,186      $ 3,937      $ 3,400      $ 11,755      $ 12,212      $ 12,928      $ 8,715   
                                                                       

 

(1)   We adopted FASB ASC 718 and ASC 740 during fiscal 2007 and fiscal 2008, respectively. Please see Notes 3 and 14 to our audited consolidated financial statements, included as part of this prospectus.

 

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The following table sets forth our historical results, for the periods indicated, as a percentage of total revenues.

 

    Three Months Ended  
    Mar 26,
2010
    Dec 25,
2009
    Sep 25,
2009
    Jun 26,
2009
    Mar 27,
2009
    Dec 26,
2008
    Sep 26,
2008
    Jun 27,
2008
    Mar 28,
2008
 
    (unaudited)  

Revenues:

                 

Revenues

  83.6   85.6   86.8   81.7   77.3   77.3   72.7   73.6.   64.6

Revenues, related parties

  16.4      14.4      13.2      18.3      22.7      22.2      26.8      25.9      34.9   

Other

                           0.5      0.5      0.5      0.5   
                                                     

Total revenues

  100.0      100.0      100.0      100.0      100.0      100.0      100.0      100.0      100.0   

Cost of revenues

  (86.0   (87.0   (88.7   (89.9   (88.8   (86.9   (84.0   (86.7   (87.2
                                                     

Gross profit

  14.0      13.0      11.3      10.1      11.2      13.1      16.0      13.3      12.8   
                                                     

Selling, general and administrative expenses

  (3.2   (3.3   (3.9   (4.0   (4.7   (3.8   (6.6   (3.8   (4.4

Restructuring charges

                      (2.8                    
                                                     

Operating income

  10.8      9.7      7.4      6.1      3.7      9.3      9.4      9.5      8.4   
                                                     

Interest income

  0.1      0.1      0.1      0.2      0.2      0.1      0.2      0.2      0.3   

Interest expense

  (0.1   (0.1   (0.2   (0.3   (0.3   (0.3   (0.3   (0.2   (0.2

Foreign exchange (loss) gain, net

  (0.1   0.1      (0.1   (0.4   (0.1   0.3      0.2      (0.4   0.1   
                                                     

Income before income taxes

  10.7      9.8      7.2      5.6      3.5      9.4      9.5      9.1      8.6   
                                                     

Income tax (expense) benefit

  (0.8        (0.9   (0.9   0.5      (0.2   (1.1   (0.3   (1.5
                                                     

Net income

  9.9   9.8   6.3   4.7   4.0   9.2   8.4   8.8   7.1
                                                     

 

The following table sets forth our revenues by end market for the periods indicated.

 

    Three Months Ended
    Mar 26,
2010
  Dec 25,
2009
  Sep 29,
2009
  Jun 26,
2009
  Mar 27,
2009
  Dec 26,
2008
  Sep 26,
2008
  Jun 27,
2008
  Mar 28,
2008
   

(unaudited)

(in thousands)

Optical communications

  $ 109,079   $ 93,775   $ 84,700   $ 73,173   $ 77,064   $ 117,451   $ 138,634   $ 139,769   $ 120,082

Lasers, sensors, and other

    27,811     20,618     12,318     9,227     7,770     10,553     7,227     5,491     3,961
                                                     

Total

  $ 136,890   $ 114,393   $ 97,018   $ 82,400   $ 84,834   $ 128,004   $ 145,861   $ 145,260   $ 124,043
                                                     

 

The Company operates and internally manages a single operating segment. As such, discrete information with respect to separate product lines and segments are not accumulated.

 

Total Revenues

 

Our total revenues increased for each consecutive fiscal quarter beginning with the three months ended March 28, 2008 through the three months ended September 26, 2008, culminating in the highest revenue quarter in our history at $145.9 million, primarily due to increased customer demand. Subsequently, our total revenues declined through the three months ended June 26, 2009 to $82.4 million, primarily as a result of the decline in demand for optical communications products caused by the recent global economic slowdown and our customers’ corresponding reduction of their inventory levels. During this period, we also experienced a shift in the composition of our revenues. Between the three months ended June 27, 2008 and the three months ended June 26, 2009, our revenues from optical communications products declined by 47.8% while our revenues from non-optical communications products increased by 73.5%. Thereafter, our total revenues increased to

 

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$97.0 million for the three months ended September 25, 2009, $114.4 million for the three months ended December 25, 2009 and $136.9 million for the three months ended March 26, 2010. This increase in our total revenues was a result of increased demand for optical communications products as market conditions improved as well as increased revenues from non-optical communications products, particularly for industrial lasers, as we continued to expand our capabilities for new and existing customers. Between the three months ended June 26, 2009 and the three months ended March 26, 2010, our revenues from optical communications products increased by 49.1% while our revenues from non-optical communications products increased by 201.4%. During this period, revenues from non-optical communications products increased from 11.2% of total revenues to 20.3% of total revenues.

 

Gross Profit

 

Prior to the economic downturn, we reported a gross profit margin of 16.0% in the three months ended September 26, 2008. This increase in our gross profit margin was the result of a cost reduction of $3.5 million, or 2.4% of total revenues, primarily generated from the recovery of the cost of obsolete inventory from customers and the reversal of certain long outstanding payables. For the three months ended December 26, 2008 through the three months ended June 26, 2009, our gross profit margin declined primarily due to the recent global economic slowdown and the resulting decrease in customer demand, which led to higher overhead costs as a percentage of revenues. As a result of efforts to align expenses with prevailing economic conditions, our gross profit margin increased during the three months ended September 25, 2009 to 11.3%, as compared to 10.1% for the three months ended June 26, 2009, increased again during the three months ended December 25, 2009 to 13.0%, and further increased to 14.0% during the three months ended March 26, 2010, as a result of the growth of our business, the recovery of costs of obsolete inventory from customers and the reversal of certain long outstanding payables.

 

SG&A Expenses

 

Our SG&A expenses as a percentage of total revenues ranged from 3.8% to 4.4% prior to the three months ended September 26, 2008. SG&A expenses as a percentage of total revenues increased during the three months ended September 26, 2008 as we expanded our senior staff to address new market opportunities and incurred $4.0 million in expenses related to our previous effort to offer our ordinary shares in a proposed initial public offering during fiscal year 2008. As a result of our restructuring efforts implemented during the three months ended March 27, 2009, SG&A expenses declined as a percentage of revenues during the three months ended June 26, 2009 and have continued to decline during each of the subsequent three quarters as expenses were brought in line with current market conditions and revenues increased.

 

Liquidity and Capital Resources

 

Cash Flows and Working Capital

 

To date, we have primarily financed our operations through the sale of ordinary shares to investors in March 2000, cash flow from operations and commercial loans. As of March 26, 2010, we had approximately $90.0 million in cash and cash equivalents and approximately $21.0 million of outstanding debt. As of June 26, 2009, we had approximately $114.8 million in cash and cash equivalents and approximately $27.3 million of outstanding debt. The decline in our cash and cash equivalents was primarily due to a dividend payment of $30.8 million to our shareholders in the nine months ended March 26, 2010.

 

Our cash and cash equivalents primarily consist of cash on hand, demand deposits and liquid investments with original maturities of three months or less which are placed with banks and other financial institutions. For fiscal 2009, the weighted average interest rate on our cash and cash equivalents was 1.31%.

 

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The following table shows our net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities for the periods indicated:

 

    Nine Months Ended     Year Ended  
    March 26,
2010
    March 27,
2009
    June 26,
2009
    June 27,
2008
    June 29,
2007
 
    (unaudited)           (in thousands)              

Net cash provided by operating activities

  $ 16,376      $ 57,929      $ 80,357      $ 51,891      $ 26,244   

Net cash used in investing activities

    (4,716     (6,775     (7,187     (29,815     (12,380

Net cash used in financing activities

    (36,703     (11,127     (13,836     (8,223     (13,133

Net (decrease) increase in cash and cash equivalents

    (25,043     40,027        59,334        13,853        731   

Cash and cash equivalents, beginning of period

    114,845        55,682        55,682        40,873        40,063   

Cash and cash equivalents, end of period

    90,044        95,460        114,845        55,682        40,873   

 

Cash Flows for the Nine Months Ended March 26, 2010 and March 27, 2009

 

Net cash provided by operating activities decreased by $41.6 million, or 71.7%, to $16.4 million for the nine months ended March 26, 2010, as compared to $57.9 million for the nine months ended March 27, 2009. Cash provided by operating activities for the nine months ended March 26, 2010 primarily consisted of net income adjusted for depreciation, amortization and non-cash related items. The decrease in net cash from operations for the nine months ended March 26, 2010 was primarily due to an increase in accounts receivable and inventories, partially offset by an increase in accounts payable to address increasing customer demand.

 

Net cash used in investing activities decreased by $2.1 million to $4.7 million for the nine months ended March 26, 2010, as compared to $6.8 million for the nine months ended March 27, 2009. The decrease in net cash used in investing activities was primarily related to a reduction in new equipment purchases.

 

Net cash used in financing activities increased by $25.6 million to $36.7 million for the nine months ended March 26, 2010, as compared to $11.1 million for the nine months ended March 27, 2009. This increase in net cash used in financing activities was primarily due to a dividend payment of $30.8 million to shareholders in the nine months ended March 26, 2010, as compared to a dividend payment of $10.1 million to shareholders in the nine months ended March 27, 2009.

 

Cash Flows for the Years Ended June 26, 2009 and June 27, 2008

 

Net cash provided by operating activities was $80.4 million for fiscal 2009, as compared to $51.9 million for fiscal 2008. The increase in net cash provided by operating activities was primarily due to reductions in our accounts receivable and inventory outstanding resulting from reduced customer demand. These increases were partially offset by reductions in accounts payable.

 

Net cash used in investing activities was $7.2 million for fiscal 2009, as compared to $29.8 million for fiscal 2008. Our net cash used in investing activities for fiscal 2009 was primarily attributable to $2.3 million in capital expenditures related to equipment and $2.4 million in construction costs for Pinehurst Building 5. Our net cash used in investing activities for fiscal 2008 was primarily attributable to $8.4 million in capital expenditures related to equipment and $20.8 million in construction costs for Pinehurst Building 5.

 

Net cash used in financing activities was $13.8 million for fiscal 2009, as compared to $8.2 million for fiscal 2008. Our net cash used in financing activities for fiscal 2009 was primarily the result of a dividend payment of $10.1 million and repayments of long-term debt and installment payments for production wind-down and transfer agreements and acquisitions, offset in part by borrowings under our long-term bank loans. Our net cash used in financing activities for fiscal 2008 was primarily the result of repayment of short-term loans of $22.0 million and repayments of long-term debt and installment payments for production wind-down and transfer agreements and acquisitions, offset by borrowings under our long-term bank loans of $20.0 million.

 

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We believe that our current cash and cash equivalents, short-term investments, cash flow from operations and the net proceeds from this offering will be sufficient to meet our anticipated cash needs, including for working capital and capital expenditures, for at least the next 12 months. Our cash flows from operations have generally been sufficient to internally fund our working capital requirements in recent years. Additionally, we have access to short-term credit facilities of approximately $50 million to support any unanticipated liquidity requirements. Historically, our internally generated working capital and short-term credit facilities have been adequate to support our liquidity requirements.

 

We completed the construction of Pinehurst Building 5 in Thailand in May 2008. With the addition of Building 5, we believe that we will have sufficient manufacturing capacity in place for the next 18 months. We have three long-term loans that will come due within the next 15 months and anticipate that our internally generated working capital will be adequate to repay these obligations.

 

If our sources of liquidity are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or to obtain additional credit facilities. The sale of additional equity or convertible debt securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financial covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

 

From time to time, we evaluate possible investments, acquisitions or divestments and may, if a suitable opportunity arises, make an investment or acquisition or conduct a divestment. We currently have no commitments to make any material investment or acquisition or conduct any material divestment.

 

Contractual Obligations

 

The following table sets forth certain of our contractual obligations as of June 26, 2009:

 

     Total    Fiscal Year Ending June,    2015
and
Beyond
      2010    2011    2012    2013    2014   
     (in thousands)

Long-term debt obligations

   $ 27,318    $ 7,933    $ 6,008    $ 4,298    $ 3,668    $ 3,668    $ 1,743

Interest expense obligation(1)

     1,462      562      384      254      166      84      12

Operating lease obligations

     7,016      1,729      1,457      1,444      1,444      942     
                                                

Total

   $ 35,796    $ 10,224    $ 7,849    $ 5,996    $ 5,278    $ 4,694    $ 1,755
                                                

 

(1)   Interest expense obligation reflects the variable interest rates on long-term debt obligations using interest rates as of June 26, 2009. The interest rates ranged between 2.2% and 4.2%. For further discussion of long-term debt obligations, see Note 11 of our audited consolidated financial statements.

 

As of June 26, 2009, our long-term debt obligations consisted of five loan agreements and our aggregate outstanding borrowings under these agreements were approximately $27.3 million. Certain of the obligations are secured by certain property, plant and equipment. Certain of the long term loans prescribe maximum ratios of debt to equity, and minimum levels of debt service coverage ratios (i.e., earnings before interest and depreciation and amortization plus cash on hand minus short-term debt). These financial ratio covenants could restrict our ability to incur additional indebtedness and limit our ability to use our cash. Our long-term debt obligations also include customary events of default.

 

As of June 26, 2009, we were in compliance with our long-term loan agreements. Nonetheless, in the event of a default on these loans or a breach of a financial ratio covenant, the lenders may immediately cancel the loan agreements, deem the full amount of the outstanding indebtedness immediately due and payable, charge us interest on a monthly basis on the full amount of the outstanding indebtedness and, if we cannot repay all of our

 

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outstanding obligations, sell the assets pledged as collateral for the loans in order to fulfill our obligations to the lenders. We may also be held responsible for any damages and related expenses incurred by the lender as a result of any default.

 

We have entered into short-term lending arrangements that are unused but available as needed. As of June 26, 2009, unused borrowing capacity available under both short-term and long-term debt obligations totaled $50.9 million.

 

As of June 26, 2009, we also had certain operating lease arrangements where the lease payments are calculated based on specified formulas. Our rental expenses under these leases were $1.7 million, $1.7 million and $1.5 million for fiscal 2009, fiscal 2008 and fiscal 2007, respectively.

 

Capital Expenditures

 

The following table sets forth our capital expenditures, which include amounts for which payments have been accrued, for the periods indicated. Actual future capital expenditures for the periods after June 26, 2009 may differ from the amounts indicated below.

 

     Nine Months Ended    Year Ended
     March 26,
2010
   June 26,
2009
   June 27,
2008
   June 29,
2007
          (in thousands)

Capital expenditures

   $ 7,213    $ 4,871    $ 29,115    $ 15,569

 

Our capital expenditures for fiscal 2008 principally consisted of costs associated with the construction of Pinehurst Building 5 in Thailand, which was completed in May 2008. Our capital expenditures for fiscal 2009 principally consisted of investments in equipment in our manufacturing facilities. Over the next four fiscal quarters, we expect to purchase additional equipment for our manufacturing facilities. We also intend to upgrade our IT systems, our enterprise resource planning systems, software and hardware, and our other infras