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EX-31.1 - EX-31.1 - OPNEXT INC | v56498exv31w1.htm |
EX-32.2 - EX-32.2 - OPNEXT INC | v56498exv32w2.htm |
EX-23.1 - EX-23.1 - OPNEXT INC | v56498exv23w1.htm |
EX-31.2 - EX-31.2 - OPNEXT INC | v56498exv31w2.htm |
EX-32.1 - EX-32.1 - OPNEXT INC | v56498exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2010
Commission file number 001-33306
Opnext, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
22-3761205 (I.R.S. Employer Identification No.) |
|
46429 Landing Parkway, Fremont, California (Address of principal executive office) |
94538 (Zip Code) |
(510) 580-8828
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $0.01 par value | The NASDAQ Stock Market LLC |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act of 1933. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No
þ
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
As of
September 30, 2009, the aggregate market value of the registrants voting and
non-voting common equity held by non-affiliates of the registrant was
approximately $154,622,572,
based upon the closing sales price of the registrants common stock as reported on the Nasdaq Stock
Market on September 30, 2009 of $2.93 per share.
As
of June 8, 2010, 89,880,632 shares of the registrants common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrants 2010 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K Report.
Table of Contents
PART I |
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PART II |
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PART III |
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85 | ||||||||
85 | ||||||||
85 | ||||||||
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85 | ||||||||
PART IV |
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85 | ||||||||
89 | ||||||||
EX-23.1 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
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Table of Contents
PART I
Item 1. Business
Business Description
Opnext, Inc. (which may be referred to in this Form 10-K as the Company, we, us, or
our) is a designer and manufacturer of optical components, modules, and subsystems for
communications uses. The majority of our revenue is derived from the sale of high speed optical
communications products related to the transmission and reception of high speed optical signals
over optical fiber. We sell our products, which enable high speed network connectivity to address
the increasing data usage by the global population, to other businesses. Additionally, we sell
infrared and visible light optical devices for industrial and commercial use.
Our optical communications components consist of discrete transmitters and receivers typically
consisting of a hermetically packaged compound semiconductor laser or photodetectors. These
components utilize internally fabricated lasers or photodetectors built from InP (indium phosphide)
or GaAs (gallium arsenide) compound semiconductor materials systems. Our optical transceiver
modules, which often use our components, convert signals between electrical and optical for
transmitting and receiving data over fiber optic networks, providing the physical communications
interface for both data communications and telecommunications systems. These optical transceiver
modules are used for both client-side interfaces consisting of short distance dedicated fiber
cables as well as line-side interfaces consisting of long distance transmission with shared fiber
cable and amplification media. Our subsystems and custom designs, which utilize our transmission
and photonics know-how, optimize performance for high speed transport networks. Our subsystems
generally specialize in 40Gbps or 100Gbps long-distance optical communications. Our expertise in
mixed-signal high frequency transmission, core semiconductor laser technology and other optical
communications technologies has enabled us to create a broad portfolio of products that address
demands for higher speeds, optimized long-haul links, wider temperature ranges, smaller sizes,
lower power consumption and greater reliability.
Most of our customers are engaged in the design, manufacturing and service of optical
communication systems for telecommunications and data communications networks. We view ourselves as
a strategic vendor to our customers. Our customers include many of the leading telecommunications
and data communications network systems vendors such as Alcatel-Lucent, Cisco Systems, Inc. and
subsidiaries (Cisco) and Nokia Siemens Networks (NSN). Through our direct sales force supported
by manufacturer representatives and distributors, we sell products to network systems vendors
throughout the Americas, Europe, Japan and the rest of the Asia Pacific region. We also supply
components to several major transceiver module companies and sell into select industrial and
commercial applications where we can apply our core laser capabilities, such as mini projectors,
defense products, laser projection, medical systems, display applications, laser printers and
barcode scanners.
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We
were founded in September 2000 as a subsidiary of Hitachi, Ltd. (Hitachi) and subsequently
spun out of Hitachis fiber optic components business. We draw upon a nearly 40-year history of
fundamental laser research, manufacturing excellence and product development that has helped create
several technological innovations, including the creation of 10Gbps and 40Gbps laser technologies.
We work closely with Hitachis renowned research laboratories to conduct research and commercialize
products based on fundamental laser and photodetector technology. These research efforts have
enabled us to develop market leadership in the 10Gbps and 40Gbps transceiver module market and are
supporting our development of differentiated products for emerging higher-speed markets, such as
the 40GbE and 100Gbps markets.
Since our founding, we have acquired and integrated three businesses and, in February 2007, we
completed our initial public offering and the listing of our common shares on the NASDAQ market.
Prior to our IPO, we acquired Pine Photonics Communications, Inc., a transceiver module company
that expanded our product line of SFP transceivers with data rates less than 10Gbps, and Hitachis
Opto device business, which is the foundation of our industrial and commercial product line. Our
most recent acquisition, StrataLight Communications, Inc. (StrataLight), a high-speed data
transport company, was completed on January 9, 2009, and complements our core of high speed client
technologies.
Industry Background
Networks are frequently described in terms of the distances they span and the hardware and
software protocols used to transport and store data. The physical medium through which signals are
best transmitted over these networks depends on the distance involved and the amount of data or
bandwidth to be transmitted, often expressed as gigabits per second, or Gbps. Voice-grade copper
wire can only support connections of about two kilometers without the use of repeaters to amplify
the signal and at speeds of greater than 1 Gbps the ability of copper wire to transmit more than
300 meters is limited due to the degradation of the signal over distance as well as interference
from external signal generating equipment. Optical systems, on the other hand, can carry signals in
excess of 80 kilometers at speeds of 10 Gbps without further processing. For networks with longer
links, such as submarine or inter-continental spans, long haul or coast-to-coast spans, or regional
spans, the distances range from a few hundred to thousands of kilometers and the signaling is
almost exclusively transmitted optically. These long distances require processing and
amplification in order for the signal to be transmitted without errors.
Telephone networks historically spanned longer distances and demanded higher performance than
early computer networks. Early computer networks had relatively limited performance requirements,
short connection distances and low transmission speeds and, therefore, relied almost exclusively on
copper wire as the medium of choice. Accordingly, telephone network service providers were the
first adopters of fiber optic communications technology, especially for links spanning hundreds of
kilometers.
Over the past two decades, the proliferation of electronic commerce, communications and
broadband entertainment has resulted in the digitization and accumulation of enormous amounts of
data. The growth of computer networks, the Internet, mobile computing and high-bandwidth intensive
applications such as video and music downloads and streaming, on-line gaming and peer-to-peer file
sharing has placed greater requirements on the former telephone networks to transport an increased
amount of data traffic unrelated to telephone calls. These applications drive increased network
utilization across the core and at the edge of wireline, wireless and cable networks, challenging
network service providers to supply increasing bandwidth to their customers. This has caused
telecommunications network service providers to install fiber optic cable connections progressively
closer to the end user in an effort to transmit more data at a lower operating cost. Thus, while
copper continues to be the primary medium used for delivering signals to the desktop, the need to
quickly transmit, store and retrieve large blocks of data in a cost-effective manner has
increasingly required service providers to add high-speed network access such as Wi-Fi, WiMAX, and
3G and to expand the capacity, or bandwidth, of their networks by using fiber optic technology to
transmit data at higher speeds and over greater distances.
Additionally, in data communications, enterprises and institutions are managing the rapidly
escalating demands for data and bandwidth and are upgrading and deploying their own high-speed
local, storage and wide-area networks, also called LANs, SANs and WANs, respectively. These
deployments increase the ability to utilize high-bandwidth applications that are growing in
importance to their organizations and also increase utilization across telecommunications networks
as this traffic leaves the LANs, SANs and WANs and travels over the network service providers edge
and core networks.
Telecommunications and data communications network service providers are laboring under common
objectives of moving an increasing amount of data traffic. As a result, network service providers
are converging traditionally separate networks for delivering voice, video and data into IP-based
integrated networks. These formerly distinct networks are increasingly using optical networking
technologies capable of supporting higher speeds with additional features and greater flexibility
to accommodate greater bandwidth requirements.
Mirroring the convergence of telecommunications and data communications networks, network
systems vendors are increasingly addressing both telecommunications and data communications
applications. Traditional telecommunications network systems vendors, such as NSN and
Alcatel-Lucent, and traditional data communications network systems vendors, such as Cisco, are
producing optical systems increasingly based on 10Gbps and 40Gbps speeds, including multi-service
switches, DWDM (Dense Wave Division Multiplexing) transport
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terminals, access multiplexers, routers, and Ethernet switches. These same vendors are
planning systems capable of 100Gbps speeds to be released in the coming years.
Faced with technological and cost challenges, network system vendors are focusing on their
core competencies of software and systems integration, and are relying upon established subsystem,
module, and component suppliers for the design, development and supply of critical hardware
components such as products that perform the optical transmit and receive functions. Network system
vendors rely upon optical component designers and manufacturers such as us to provide their optical
interface technologies.
Standardization in the Optical Communications Industry
As a subset of the communications industry, the optical component industry typically relies on
standard interfaces and form factors for products to insure that point A can communicate with point
B. However, different network system vendors and even different systems designed by the same
vendor may use a different level of product integration ranging from a fully integrated
subsystem to an optical module to a discrete optical component while still complying with industry
standard interfaces.
There are two broad categories of standardization in the optical communications industry. The
first is industry standard interfaces that specify the frequency of light, data structure, detailed
optical and electrical parameters, and data encoding. These are usually specified by international
standards bodies such as the IEEE (Institute of Electrical and Electronics Engineers) and the ITU
(International Telecommunication Union). Some examples include 10Gigabit Ethernet and DWDM channel
grid used primarily in telecommunications networks. The second broad category is a mechanical and
electrical definition of a form factor generally specified as Multi-Source Agreements (MSAs). Many
customers use these MSAs as a framework for the design of their new systems. These MSAs specify the
mechanical dimensions, electrical interface, diagnostic and management features and other key
specifications, such as heat and electrical interference, of the form factor and enable network
systems vendors to plan their new systems accordingly. We were founders or early members of
successfully adopted 10Gbps MSAs such as 300 pin, XENPAK, X2,
SFP+, XLMD and XMD. In addition, we were
a founding member of a group that announced an industry MSA for 40Gbps and 100Gbps modules called
CFP in 2009.
Our products typically comply both with the industry standard interfaces as well as with
MSA-defined form factors. The existence of these standards generally increases the level of
competition, yet the two layers of standardization allow for a larger market size and reduce the
risk that a custom design might never achieve mass deployment. Additionally, from the optical
systems vendor to the network service provider, there is higher confidence to more rapidly and
widely deploy standards-based equipment and interfaces. This confidence stems from the reduced
supply risk as well as the backwards and forwards compatibility that industry standards provide.
Within the constraints of these industry standards, optical subsystems, module and component
companies still face significant technology challenges. We need to provide products that
incorporate improved semiconductor laser technology and improved mixed-signal logic that address
performance, power consumption, operating temperature and size, all of which are inter-related
primary challenges, while also meeting customers stringent demands for product reliability and low
cost. The following are some of the primary technical challenges we encounter in designing and
bringing our products to market:
The Power Challenge. Modules that operate at 10Gbps and 40Gbps consume two to more than
five times as much electrical power as modules operating at the preceding data rate and the power
challenges are expected to become more difficult as the industry moves toward 100Gbps. Network
service providers generally have fixed, limited space in their network central offices, closets,
and data centers to house network equipment, creating de facto standards on the physical size
allowed for each piece of network equipment regardless of data rate. To offer increasingly
higher-speed systems, network system vendors need more efficient modules to support greater port
density while adhering to power supply and cooling system constraints. These constraints drive the
need for laser technology with higher temperature tolerance and improved efficiency, which reduces
power consumption and enables smaller form factor modules to be used. Most carriers and system
vendors also now have well established green programs and award preference to suppliers that help
them reduce their carbon footprint through lower power consumption.
The Temperature Challenge. Within an optical module, the laser diode is the component most
sensitive to temperature. As a result, 10Gbps modules have in the past been constrained to 70°C
maximum operating case temperature. Even in temperature controlled environments, heat dissipation
from neighboring electronic components can raise internal equipment temperatures to levels that
degrade laser and module performance. Furthermore, some network equipment is located outdoors in
non-temperature controlled environments where transceiver modules need to operate reliably up to an
operating case temperature of 85° C. Therefore, customers are demanding optical modules that can
operate at wider temperature ranges, especially incorporating uncooled lasers that do not require
costly and inefficient thermoelectric coolers. A benefit of more efficient and uncooled lasers is
that they draw less current, which reduces power consumption and helps the environment. We are
extending this technology to reaches of up to 80km at 10Gbps.
The Size Challenge. The system throughput, data rate of each port and the overall chassis
dimensions of a system define the bandwidth capacity of that system. Network service providers and
enterprises have limited space in which to house their optical network equipment within an office
or equipment room. Expanding the capacity of a system requires increasing the number of ports and
the data rate of those ports. To meet these higher speed and density requirements, industry leaders
have defined smaller transceiver packages. As the size of these packages decreases, so does their
ability to dissipate heat, making it virtually impossible to support cooled-laser technology.
Therefore, lower power consumption uncooled-laser technology with higher temperature tolerance and
improved efficiency is required to meet the thermal capacity of these smaller packages.
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These three challenges become greater factors as we move further into 40Gbps and to 100Gbps
client-side and line-side solutions.
Technology and Research and Development
We use our proprietary technology at many levels within our product development, ranging from
the basic materials to the component integration and optimization techniques for our modules and
subsystems. We are conducting fundamental research in laser and photonic integration technologies.
In addition, we are developing technology and designs for analog and digital integrated circuits to
best complement our high speed optical components. Our technology is protected by our strong patent
portfolio and our trade secrets. In particular, the following technologies are central to our
business:
Semiconductor Laser Design & Manufacturing. We are a leading designer and manufacturer of
lasers for high-speed fiber optic communications such as 10Gbps and 40Gbps. In the development and
manufacturing of new lasers, we utilize accumulated knowledge in areas such as semiconductor
growth, semiconductor materials systems, quantum well engineering, wavelength design, and
high-frequency performance. This knowledge enables performance improvements such as
miniaturization, wavelength control, wide temperature and high-speed operation, and provides us
with a time to market and design advantage over companies that source their 10Gbps and 40Gbps
lasers from other companies.
Optical Semiconductor Materials. Central to our laser design and manufacturing is our
experience and research in materials, one of the most challenging aspects of optical communications
technology and a source of competitive advantage. Our advances in optical semiconductor materials
have enabled us to develop new lasers that are more compact, offer greater control of the light
emitted and utilize less power to operate. For example, our innovations in the use of aluminum in
semiconductor lasers are utilized in several of our new lasers including our uncooled DFB laser and
our EA-DFB laser, which integrates a modulator with the DFB laser on the same chip. The use of
aluminum gives these lasers increased temperature tolerance, improved efficiency, faster response
time and greater wavelength stability, all while achieving or exceeding industry reliability
requirements. Our research continues on new materials systems for use in developing new laser
structures to further improve laser operating temperature and efficiency.
Subassembly Design. Laser diodes and photodetectors are particularly sensitive to external
forces, fields and chemical environments, so they are typically housed in a hermetically sealed
package. These laser diodes and photodetectors are placed upon special ceramic circuit boards and
packaged into a mechanical housing with certain electronics into transmit or receive optical
subassemblies, or TOSA (transmitter optical sub-assembly) and ROSA (receiver optical sub-assembly),
respectively. We have experts dedicated to TOSA and ROSA design with fundamental knowledge in laser
physics, high-frequency design and mechanical design who have been awarded numerous patents. We are
a founding member of the XMD and XLMD MSAs, which create a platform of miniature, high-performance
TOSAs and ROSAs for 10Gbps and 40Gbps that are used across multiple products.
Analog Integrated Circuit and Radio Frequency Design. We internally develop both silicon
germanium integrated circuits and monolithic microwave integrated circuits for modulator driver
amplifier applications. This analog electronics expertise captured in our integrated circuits
provides our 40Gbps and 100Gbps transponders with improved performance and fast time-to-market. In
addition, we are continuing to optimize radio frequency techniques for 40Gbps applications and
packaging and interconnect design at 40Gbps and 100Gbps.
High Speed Optical Design. High speed optical interfaces such as 40Gbps and 100Gbps require
significant development of the analog optical design to meet performance requirements while
remaining readily manufacturable. In addition to delivering advanced performance for high speed
40Gbps and 100Gbps transponders, we have also pioneered the development of carrier-class
polarization mode dispersion compensation (PMDC). Polarization mode dispersion is primarily
created by mechanical stress in the fiber link, causing the polarization states of an optical
signal to travel with different propagation velocities and thus arrive at different times at the
receiver.
Digital Logic Design. Applications such as regional and long haul transmission are
increasingly using digital logic to compensate for long haul optical transmission impairments. We
internally developed the digital logic for our 40Gbps products, including optical carrier and
transport framers, integrated random data traffic testers, precoder logic and enhanced FEC (Forward
Error Correction). We are developing digital logic designs for a 100Gbps long haul coherent
receiver to provide superior performance and cost structure for our products.
Module Design. Transceiver modules integrate the TOSA, ROSA, integrated circuits and other
components into compact packages specified by various MSAs. We develop key technology in the form
of high-speed circuit design to allow for error-free receiving, processing and transmitting of
information, exceptional mechanical design to allow for higher tolerance of electrical and
mechanical shock and excellent thermal design to transfer heat away from key components of the
module and the module itself. Long-distance transmission modules generally require special
manipulation of the optical signal to ensure that error-free transmission is achieved over hundreds
of kilometers of optical fiber.
Modulation Techniques. In the communications industry, the modulation scheme refers to how
bits of binary data are encoded into a new set of symbols that are more easily transmitted and
received. A historical example is Morse code, which encodes data in short pulses, dots, and long
pulses, dashes. Conventionally, optical communication has used a pulse of light to encode a binary
1 and the absence of light to encode a binary 0. However, at higher data rates such as 40 Gbps
and beyond, more complex modulation schemes are required. With the acquisition of StrataLight, we
now possess expertise and know-how in using modulation schemes for long reach and high data rate
optical transmission, including continuously optimized DPSK (Differential Phase Shift Keying),
RZ-DQPSK (Return to Zero Differential
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Quadrature Phase Shift Keying) and coherent technologies. Additionally, we maintain a database
of carrier fiber characteristics and deployed infrastructure that allows us to accurately model our
modulation solutions based upon real-world impairments.
System-Level Software. At the system level, we offer a web-based graphical user interface
that provides fault, configuration, accounting, performance and security, or FCAPS, capabilities
within a self-contained, network-managed subsystem. Our software enables fast and simple
integration into our OEM customers management systems via XML (eXtensible Markup Language) or SNMP
(Simple Network Management Protocol) management interfaces. By combining our standards-compliant
software interfaces with our 40Gbps subsystem, OEM customers are not required to independently
develop hardware to integrate our 40Gbps subsystems into their existing DWDM systems.
Our research and development plans are driven by customer input obtained by our sales and
marketing teams and by our participation in various MSAs, as well as by our long-term technology
and product strategies. One example of our long-term technology strategy has been our investment in
coherent technologies for long haul optical transmission. We believe that this technology
investment more closely resembles traditional IC semiconductor investments with higher initial
costs and potentially mid- to long-term higher margins than traditional optical component
technology investments. We review research and development priorities on a regular basis and advise
key customers and Tier 1 carriers of our research and development progress to achieve better
alignment in our product and technology planning. For new components and more complex modules,
research and development is conducted in close collaboration with our manufacturing operations to
shorten the time-to-market and optimize the manufacturing process. We generally perform product
commercialization activities ourselves and utilize our Hitachi relationship to jointly develop or
fund more fundamental optical technology such as new laser designs and materials systems.
Products
We categorize our communications products along three axes: data rate, application and reach,
and product integration. The first axis of data rate indicates the speed at which the optical
transceiver or device may operate. We have been a leader at the 10Gbps data rate, and we are
investing in technically more challenging 40Gbps and 100Gbps technologies in an effort to extend
our leadership to such data rates. The second axis application and reach indicates the type
of link and the distance over which the optical signal is transmitted and received. The terms
client-side and line-side indicate the type of link. Line-side applications typically transport
multiple signals over a shared fiber cable spanning distances within a large city to
inter-continental reaches. Client-side applications use a dedicated fiber cable to transport the
data over a distance spanning the interior of a building or within a small city. Sometimes we
further segment the client-side applications by the type of optical fiber, such as multimode fiber,
which is used for less than 100 meters or within building links, or single mode fiber, which is
used for reaches that can extend between buildings or across municipalities. Finally, the third
axis product integration indicates the level of complexity and functionality of the
particular product. These range from discrete laser and photodiodes sold in chip or TOSA/ROSA form
factors to optical transceiver modules, to integrated subsystems with full software management
implementations.
The primary technologies that comprise all of our products are laser diodes, photodetectors,
digital logic and mixed-signal integrated circuits. These components are at the semiconductor chip
level and are sometimes abbreviated as chips. The laser diode provides the light source for
communication over fiber optic cables. Our current communications laser diode product offering
includes DFB lasers and EA-DFB lasers at selected 2.5Gbps, 10Gbps, 25Gbps and 40Gbps data rates and
1310nm and 1550nm wavelengths. We expect our future developments to include tunable lasers and
40GbE laser source(s). We offer high-performance positive-intrinsic-negative and avalanche
photodiodes, or PINs and APDs, which operate at the same data rates and wavelengths as our lasers.
We develop our laser diodes and photodetectors to offer superior performance in key metrics such as
link distance, reliability, temperature range, power consumption, stability and sensitivity.
The next level of integration is for our TOSA (transmitter optical sub-assembly) and ROSA
(receiver optical sub-assembly) products. These involve packaging the laser diodes or
photodetectors with integrated circuits and other electronic components that perform various
control and signal conversion functions as well as optical focusing elements. A transmitter
combines a laser diode with electronic components that control the laser and convert electrical
signals from a digital integrated circuit into optical signals suitable for transmission over
optical fiber. A receiver combines a photodetector with electronic components that perform the
opposite function, converting the optical signal back into electrical form for processing by a
digital integrated circuit.
The integration of the transmit functionality and the receive functionality is accomplished in
optical modules often referred to as transceivers or transponders. The term transceiver is used
more often for client-side applications and usually implies a more compact size and module
footprint, whereas a transponder is more often used for line-side applications and usually implies
a larger form factor size with more complex digital controls. Optical network systems vendors rely
upon these optical modules to perform transmit and receive functions in most of their new system
designs. Telecommunications systems may have anywhere from two to 16 transceiver modules typically
mounted onto line cards while data communications systems may have anywhere from two to 48 ports. A
few network system vendors design and build the optical interfaces for line-side applications
internally; however, almost all network system vendors use optical modules for client-side
applications. Our modules support a wide range of protocol interfaces for telecommunications and
data communications systems such as OTN, Ethernet, Fibre Channel, and SONET/SDH ranging in speeds
from 155Mbps to 40Gbps, as well as utilizing DWDM and tunable technology.
The final level of integration extends to optical terminal subsystems and custom subsystems,
which encompass the optical interface, digital management, digital processing, and software
management. Our custom 40Gbps subsystem is currently embedded in next generation 40Gbps DWDM
interfaces on an IP router, but could be customized for optical cross connect switches, SONET/SDH
multiplexers and transponder-based DWDM solutions. We provide custom integrated modules that meet
network system vendors existing software control interface and mechanical, thermal and power
design constraints, thus minimizing their development overhead and time-to-market. Our OTS-4000
optical terminal subsystem is an industry-compliant, shelf-level product that occupies one-third of
a standard seven-foot equipment rack
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and supports eight hot-swappable line cards, each with 40Gbps total capacity, consisting of
transponders, regenerators, shelf controllers and dispersion compensators. The OTS-4000 is scalable
to nearly a terabit per second in a single seven-foot rack in single 40Gbps channel increments and
provides a service provider with an immediate reduction in transmission cost per bit. Our 40Gbps
transponder technology supports long-haul transmission using existing optical amplification
techniques. The OTS-4000 chassis supports redundant direct current power feeds and provides full
redundancy of all common equipment.
Our products include:
Reach and | |||||||||||||||||
Application | <10G | 10G | 40G | 100G | |||||||||||||
Client- side |
<300 m | SFP | SFP, SFP+, XFP, X2, XENPAK, XPAK | ||||||||||||||
<2/10 km | SFP | SFP, SFP+, XFP, X2, XENPAK, XPAK, 300pin, XMD TOSA, XMD ROSA, chips |
300pin, CFP, XLMD TOSA, XLMD ROSA |
CFP | |||||||||||||
<40 km | SFP, chips | SFP, SFP+, XFP, X2, XENPAK, 300pin, XMD TOSA, XMD ROSA, chips |
|||||||||||||||
<80 km | SFP, chips | SFP, SFP+, XFP, X2, XENPAK, 300pin, XMD TOSA, XMD ROSA, chips |
|||||||||||||||
Line- side |
Metro to Long Haul | SFP, laser diode modules, chips |
SFP, SFP+, XFP, X2, XENPAK, 300pin | 300pin DPSK, 300pin DQPSK, DPSK Subsystem |
Under Development |
||||||||||||
In addition to our communication products, we offer lasers and infrared LEDs for a
variety of industrial and commercial applications. Our products include 635nm, 650nm and
670nm wavelength-visible lasers for applications such as mini-projectors, laser printing,
industrial barcode scanning, medical imaging and professional contractor tools; 780nm and
830nm wavelength infrared lasers for scientific measurement, night vision, and other
infrared applications; and 640nm, 760nm, 840nm and 880nm wavelength infrared LEDs for
sensors used in robotics and other industrial applications.
Customers
We have a global customer base for both the telecommunications and data communications markets
that consists of many of the leading network systems vendors worldwide, including Cisco, NSN,
Alcatel-Lucent, Huawei Technologies Co., Ltd, Juniper Networks, Inc., Hitachi, Ciena Corporation,
Extreme Networks, Inc. and ECI Telecom LTD. These customers purchase from us directly or, in
certain cases, indirectly through their specified contract manufacturers. We have established
long-term relationships by working closely with our customers to better understand the requirements
of their products and by providing customer service and technical support.
The number of leading network systems vendors that supply the global telecommunications and
data communications market is concentrated, and so, in turn, is our customer base. Cisco and
Alcatel-Lucent historically have been our two largest customers. Sales to Cisco and Alcatel-Lucent
represented 48.2% and 60.0% in aggregate of our total revenues in the fiscal years ended March 31,
2009 and 2008, respectively. As a result of our acquisition of StrataLight, NSN became one of our
significant customers during the fiscal year ended March 31, 2010. Sales to Cisco and NSN
represented 44.8% in aggregate of our total revenues in the fiscal year ended March 31, 2010.
Our customers in the industrial and commercial markets consist of a broad range of companies
that design and manufacture laser-based products, including medical and scientific systems,
industrial bar code scanners, professional grade construction and surveying tools, gun sights and
other security equipment, display and projection systems for mini-projectors and other projection
applications, sensors for robotics and industrial automation, and printing engines for high-speed
laser printers and plain paper copiers.
Competition
The market for optical subsystems, modules and components is highly competitive and is
characterized by continuous innovation. While no individual company competes against us in all of
our product areas, our competitors range from the large, multinational companies offering a wide
range of products to smaller companies specializing in narrow markets. In the telecommunications
and data communications markets, we compete at the level of basic building blocks, such as lasers
and photodetectors, as well as at the integrated module level, such as transceivers. Competitors
include Avago, Emcore, Finisar, Fujitsu, JDS Uniphase, Oclaro, Source Photonics, and Sumitomo
Electric Devices. With respect to subsystems and certain emerging technologies such as 100Gbps
line-side technologies, we also compete with the internal development efforts of network systems
companies. We believe the principal competitive factors are:
| product performance, including size, speed, operating temperature range, power consumption and reliability; | ||
| price-to-performance characteristics; | ||
| delivery performance and lead times; | ||
| ability to introduce new products in a timely manner that meet customers design-in schedules and requirements; | ||
| ability to dedicate resources to, and successfully progress, research and development efforts; | ||
| breadth of product solutions; |
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| sales, technical and post-sales service and support; | ||
| sales channels; and | ||
| ability to comply with new industry standard interfaces and MSAs. |
In our industrial and commercial product lines, we principally compete with Sanyo, Sony, Arima
and QSI. We believe the principal competitive factors are:
| price-to-performance characteristics; | ||
| delivery performance and lead times; | ||
| breadth-of-product solutions; | ||
| sales, technical and post-sales service and support; and | ||
| sales channels. |
Manufacturing
We
fabricate key lasers and photodetectors for use in our modules and for sale to other
module suppliers in our research and development and manufacturing facilities in Totsuka and
Komoro, Japan. Optical component manufacturing is highly complex, utilizing extensive know-how in
multiple disciplines and accumulated knowledge of the fabrication equipment used to achieve high
manufacturing yields, low cost and high product consistency and reliability. Co-location of our
research and development and manufacturing teams and utilization of well-proven fabrication
equipment helps us shorten the time-to-market and generally achieve or exceed manufacturing cost
and quantity targets. After chip fabrication, we generally utilize contract manufacturers for the
more labor intensive step of packaging the bare die into standardized components such as TOSAs,
ROSAs, laser diode modules and TO-cans that are then integrated into transceiver modules and other
products.
We complete the manufacturing of certain of our 40Gbps subsystems and modules in our Los Gatos
facility from the subassemblies and components provided by our contract manufacturers and other
suppliers, while others are completed by one of our contract manufacturers. Our expertise in
optical, electrical and radio frequency design enables us or one of our contract manufacturers to
combine the subassemblies and components from our contract manufacturers with our proprietary
technologies, install custom embedded software and conduct extensive system calibration and
testing.
For our 10Gbps transceiver modules, we use a combination of internal manufacturing and
contract manufacturing. We strive to develop long-term relationships with contract manufacturers to
reduce assembly costs and provide greater manufacturing flexibility. We are in the process of
transitioning most 10Gbps module production to our contract manufacturers. The manufacture of
highly complex 40Gbps and 100Gbps transceiver modules will remain in house to ensure time-to-market
and the highest level of quality.
For our 2.5Gbps and lower speed SFP modules, we transfer all designs to contract manufacturers
once the design phase is completed. These lower speed modules are generally less complex than
10Gbps and above modules and ramp up to much greater volumes in mass production.
Our contract manufacturers are located in China, Japan, the Philippines, Taiwan, Thailand and
the United States. Certain of our contract manufacturers that assemble or produce modules are
strategically located close to our customers contract manufacturing facilities to shorten lead
times and enhance flexibility.
We follow established new product introduction processes that ensure product reliability and
manufacturability by controlling when new products move from sampling stage to mass production. We
have stringent quality control processes in place for both internal and contract manufacturing. We
utilize comprehensive manufacturing resource planning systems to coordinate procurement and
manufacturing with our customers forecasts. These processes and systems help us closely coordinate
with our customers, support their purchasing needs and product release plans, and streamline our
supply chain.
Sales, Marketing and Technical Support
In the communications market, we primarily sell our products through our direct sales force
supported by a network of manufacturer representatives and distributors. Our sales force works
closely with our field application engineers and product marketing and sales operations teams in an
integrated approach to address our customers current and future needs. We assign an account
manager to each customer account to provide a clear interface for the customer, with some account
managers responsible for multiple customers. The support provided by our field application
engineers is critical in the product qualification stage. Transceiver modules, especially at higher
data rates, are complex products that are subject to rigorous qualification procedures of both the
product and the supplier and these procedures differ from customer to customer. Also, many
customers have custom requirements in addition to those defined by MSAs to differentiate their
products and meet design constraints. Our product marketing teams interface with our customers
product development staffs to address customization requests, collect market intelligence to define
future product development and represent us in MSAs. Our market development team meets regularly
with the Tier 1 carriers to understand their requirements so we can better address the needs of our
direct customer, the system vendor.
For key customers, we hold periodic technology forums to allow their product development teams
to interact directly with our research and development teams. These forums provide us insight into
our customers long term needs while helping our customers adjust their plans to the product
advances we can deliver. Also, our customers are increasingly utilizing contract manufacturers
while retaining design and key
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component qualification activities. This trend requires us to continually upgrade our sales
operations and manufacturing support to maximize our efficiency and coordination with our
customers.
In the industrial and commercial market, we primarily sell through a network of manufacturing
representatives and distributors to address the broad range of applications and industries in which
our products are used. The sales effort is managed by an internal sales team and supported by
dedicated field application engineering and product marketing staff. We also sell directly to
certain strategic customers. Through our customer interactions, we continually increase our
knowledge of each applications requirements, using this information to improve our sales
effectiveness and guide product development.
Since inception, we have actively communicated our brand worldwide through participation at
trade shows and industry conferences, publication of research papers and bylined articles in trade
media, advertisements in trade publications and interactive media, interactions with industry press
and analysts, press releases and our company website, as well as through print and electronic sales
material.
Patents and Other Intellectual Property Rights
We rely on patent, trademark, copyright and trade secret laws and internal controls and
procedures to protect our technology and brand.
As of March 31, 2010, we have been issued 531 patents, of which 131 patents are from the same
technology in different jurisdictions, and had 343 patent applications pending, of which 107
patents are from the same technology in different jurisdictions. We have been issued patents in
various countries, including the U.S., Japan, Germany and France, with the main concentrations in
the U.S. and Japan. Of the 218 patents issued in the U.S., 19 will expire within the next five
years and, of those, 14 will expire in the next two years. Of the 207 patents issued in Japan, 29
will expire in the next five years and, of those, 22 will expire in the next two years. We do not
expect the expiration of our patents in the next two years to materially affect our business. Our
patent portfolio covers a broad range of intellectual property, including semiconductor design and
manufacturing, optical device packaging, TOSA/ROSA and module design and manufacturing, electrical
circuit design, tunable and DWDM technology, connectors and manufacturing tools. We follow
well-established procedures for patenting intellectual property and have internal incentive plans
to encourage the protection of new inventions.
For technologies that we develop in cooperation with Hitachi, either on a joint development or
funded project basis, we have contractual terms that define the ownership, use rights and
responsibility for intellectual property protection for any inventions that arise. We also benefit
from long-term cross-licensing agreements with Hitachi that allow either party to leverage certain
of the other partys intellectual property rights worldwide.
Opnext is a registered trademark in the U.S., Japan, China and in the European Union as a
Community Trademark (CTM). We have five product family names trademarked.
We take extensive measures to protect our intellectual property rights and information. For
example, every employee enters into a confidential information and invention assignment agreement
with us when they join us and employees are reminded of their responsibilities pursuant to such
agreement when they depart from the Company. We also enter into confidential information and
invention assignment agreements with our contractors.
Employees
As of March 31, 2010, we had 554 full-time employees, of which 319 were located in Japan, 216
in the U.S., 11 in Europe, three in Canada and five in China. Of our 554 total employees as of
March 31, 2010, 228 were in research and development, 167 were in manufacturing, 89 were in sales
and marketing, and 70 were in administration. We consider our relationships with our employees to
be good. None of our employees is represented by a labor union.
Item 1A. Risk Factors
You should carefully consider each of the following risks and all of the other information set
forth in this annual report. The following risks relate principally to our business and our common
stock. The risks and uncertainties described below are not the only ones we face. Additional risks
and uncertainties that we do not know or that we currently believe to be immaterial may also
adversely affect our business. If any of the following risks and uncertainties develop into actual
events, they could have a material adverse effect on our business, financial condition or results
of operations, which could also adversely affect the trading price of our common stock.
We depend on a limited number of customers for a significant percentage of our sales, and any loss,
cancellation, reduction or delay in purchases by these customers could harm our business.
A limited number of customers have, historically, consistently accounted for a significant
portion of our sales. For example, for the fiscal year ended March 31, 2010, Cisco and NSN
accounted for 45% in aggregate of our total revenues, and for the fiscal year ended March 31, 2009,
Cisco and Alcatel-Lucent accounted for 48% in aggregate of our total revenues. Sales from any of
our major customers may decline or fluctuate significantly in the future. We may not be able to
offset any decline in sales from our existing major customers with sales from new customers or
other existing customers. Because of our reliance on a limited number of customers, any decrease in
sales from, or loss of, one or more of these customers without a corresponding increase in sales
from other customers would harm our business, operating results and
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financial condition. In addition, any negative developments in the business of existing
significant customers could result in significantly decreased sales to these customers, which could
seriously harm our business, operating results and financial condition. Although we are attempting
to expand our customer base, the markets in which we sell our optical components products are
dominated by a relatively small number of systems manufacturers, thereby limiting the number of our
potential customers. Accordingly, our success will depend on our continued ability to develop and
manage relationships with significant customers, and we expect that the majority of our sales will
continue to depend on sales of our products to a limited number of customers for the foreseeable
future.
We are dependent on contract manufacturers used by our customers for a significant portion of our
sales.
Many of our original equipment manufacturer (OEM) customers, including Cisco and
Alcatel-Lucent, use third-party contract manufacturers to manufacture their networking systems.
Sales to contract manufacturers used by our customers represented 32.2% and 40.2% of our total
revenues for the fiscal years ended March 31, 2010 and 2009, respectively. Certain contract
manufacturers purchase our products directly from us on behalf of networking OEMs. Although we work
with our OEM customers in the design and development phases of their systems, these OEM customers
are gradually giving contract manufacturers more authority in product purchasing decisions. As a
result, we depend on a concentrated group of contract manufacturers for a significant portion of
our sales. If we cannot compete effectively for the business of these contract manufacturers or if
any of the contract manufacturers that work with our OEM customers experience financial or other
difficulties in their businesses, our sales and our business could be adversely affected.
Uncertainty in customers forecasts of their demands and other factors may lead to delays and
disruptions in manufacturing, which could result in delays in product shipments to customers and
could adversely affect our business.
Fluctuations and changes in our customers demand are common in our industry. Such
fluctuations, as well as quality control problems experienced in our manufacturing operations or
those of our third-party contract manufacturers, may cause us to experience delays and disruptions
in our manufacturing process and overall operations and reduce our output. As a result, product
shipments could be delayed beyond the shipment schedules requested by our customers or could be
cancelled, which would negatively affect our sales, operating income, strategic position with
customers, market share and reputation. In addition, disruptions, delays or cancellations could
cause inefficient production that in turn could result in higher manufacturing costs, lower yields
and potential excess and obsolete inventory or manufacturing equipment. In the past, we have
experienced such disruptions, delays and cancellations.
We participate in vendor managed inventory programs for the benefit of certain of our customers,
which could result in increased inventory levels and/or decreased visibility into the timing of
sales.
Certain of our more significant customers have implemented a supply chain management tool
called vendor managed inventory (VMI) that requires suppliers, such as Opnext, to assume
responsibility for maintaining an agreed upon level of consigned inventory at the customers
location or at a third-party logistics provider, based on the customers demand forecast.
Notwithstanding the fact that the supplier builds and ships the inventory, the customer does not
purchase the consigned inventory until the inventory is drawn or pulled from the customer or
third-party location to be used in the manufacture of the customers product. Though the consigned
inventory may be at the customers or third-party logistics providers physical location, it
remains inventory owned by the supplier until the inventory is drawn or pulled, which is the time
at which the sale takes place. Our participation in VMI programs has resulted in our experiencing
higher levels of inventory than we might otherwise and has decreased our visibility into the timing
of when our finished goods will ultimately result in revenue-generating sales.
Certain VMI programs, particularly any involving products considered to be standard products,
may require us to commit to delivering certain quantities of our products to our customers as
consigned inventory without the customers having committed to purchase any such products. Such VMI
programs increase the likelihood that estimates of our customers requirements that prove to be
greater than our customers actual purchases could result in surplus inventory and we could be
required to record charges for obsolete or excess inventories. Some of our products and supplies
have in the past become obsolete while in inventory because rapidly changing customer
specifications or a decrease in customer demand. If we or our customers with which we participate
in VMI programs fail to accurately predict the demand for our products, we could incur additional
excess and obsolete inventory write-downs. If we are unable to effectively manage the
implementation of, and proper inventory management planning associated with, our customers VMI
programs, our financial condition and results of operations could be materially adversely affected.
If our customers do not qualify our products or if their customers do not qualify their products,
our results of operations may suffer.
Most of our customers do not purchase our products prior to qualification of our products and
satisfactory completion of factory audits and vendor evaluation. Our existing products, as well as
each new product, must pass through varying levels of qualification with our customers. In
addition, because of the rapid technological changes in our market, a customer may cancel or modify
a design project before we begin large-scale manufacture of the product and receive revenues from
the customer. It is unlikely that we would be able to recover the expenses for cancelled or
unutilized custom design projects. It is difficult to predict with any certainty whether our
customers will delay or terminate product qualification or the frequency with which customers will
cancel or modify their projects, but any such delay, termination, cancellation or modification
could have a negative effect on our results of operations.
If network service providers that purchase systems from our customers fail to qualify or delay
qualifications of any products sold by our customers that contain our products, our business could
be harmed. The qualification and field testing of our customers systems by network service
providers is long and unpredictable. This process is not under our or our customers control, and,
as a result, timing of our sales is
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unpredictable. Any unanticipated delay in qualification of one of our customers network
systems could result in the delay or cancellation of orders from our customers for products
included in the applicable network system, which could harm our results of operations.
Our products are complex and may take longer to develop and qualify than anticipated and we may not
recognize sales from new products until after long customer qualification periods.
We are constantly developing new products and using new technologies in these products. These
products often take substantial time to develop because of their complexity, rigorous testing and
qualification requirements and because customer and market requirements can change during the
product development or qualification process. Such activity requires significant spending by us.
Because of the long development cycle and qualification process, we may not sell any of the new
products until long after such expenditures are made.
In the telecommunications market, there are stringent and comprehensive reliability and
qualification requirements for optical networking systems. In the data communications industry,
qualifications can also be stringent and time consuming. However, these requirements are less
uniform than those found in the telecommunications industry from application to application and
systems vendor to systems vendor.
At the component level, such as for new lasers, the development cycle may be lengthy and may
not result in a product that can be utilized cost-effectively in our modules or that meets customer
and market requirements. Additionally, we often incur substantial costs associated with the
research and development and sales and marketing activities in connection with products that may be
purchased long after we have incurred the costs associated with designing, creating and selling
such products.
We do not have long-term volume purchase contracts with our customers, and, as a result, our
customers may increase, decrease, cancel or delay their buying levels at any time with minimal
advance notice to us, which may significantly harm our business.
Our customers typically purchase our products pursuant to individual purchase orders. While
our customers generally provide us with their demand forecasts, in most cases they are not
contractually committed to buy any quantity of products. Our customers may increase, decrease,
cancel or delay purchase orders already in place. If any of our major customers were to decrease,
stop or delay purchasing our products for any reason, our business and results of operations would
be harmed. Cancellation or delays of orders may cause us to fail to achieve our short-term and
long-term financial and operating goals. In the past, during periods of severe market downturns,
certain of our largest customers cancelled significant orders with us and our competitors, which
resulted in losses of sales and excess and obsolete inventory and led to inventory and asset
disposals throughout the industry. More recently, as the global economic recession that began in
late 2007 deepened, particularly affecting the credit markets as well as equity markets, certain of
our largest customers cancelled significant, previously committed purchase orders resulting in the
loss of sales and excess and obsolete inventory for us and increasing the difficulties associated
with accurately forecasting future sales. Similar or continued decreases, deferrals or
cancellations of purchases by our customers may significantly harm our industry and specifically
our business in these and in additional unforeseen ways, particularly if such decreases, deferrals
or cancellations are not anticipated.
There is a limited number of potential suppliers for certain components used in our products. In
addition, we depend on a limited number of suppliers whose components have been qualified into our
products and who could disrupt our business if they stop, decrease or delay shipments or if the
components they ship have quality or consistency issues. We may also face component shortages if we
experience increased demand for modules and components beyond what our qualified suppliers can
deliver.
Our customers generally restrict our ability to change the component parts in our modules
without their approval, which for less critical components may require as little as a specification
comparison and for more critical components, such as lasers, photodetectors and key integrated
circuits, as much as repeating the entire qualification process. We depend on a limited number of
suppliers of key components we have qualified to use in the manufacture of certain of our products.
Some of these components are available only from a sole source or have been qualified only from a
single supplier. We typically have not entered into long-term agreements with our suppliers and,
therefore, our suppliers could stop supplying materials and equipment at any time or fail to supply
adequate quantities of component parts on a timely basis. It is difficult, costly, time consuming
and, on short notice, sometimes impossible for us to identify and qualify new component suppliers.
The reliance on a sole supplier, single qualified vendor or limited number of suppliers could
result in delivery or quality problems or reduced control over product pricing, reliability and
performance. In the past, we have had to change suppliers, which has, in some instances, resulted
in delays in product development and manufacturing until another supplier was found and qualified.
Any such delays in the future may limit our ability to respond to changes in customer and market
demands. During the last several years, the number of suppliers of components has decreased
significantly and, more recently, demand for components has increased rapidly. Any supply
deficiencies relating to the quality or quantities of components we use to manufacture our products
could adversely affect our ability to fulfill customer orders and our results of operations. For
example, during the quarter ended March 31, 2010, we experienced significant limitations on the
components available from certain of our suppliers, resulting in losses of anticipated sales and
the related revenues.
We rely substantially upon a limited number of contract manufacturers and, if these contract
manufacturers fail to meet our short and long-term needs and contractual obligations, our business
may be negatively impacted.
We rely on a limited number of contract manufacturers to assemble, manufacture and test the
majority of our finished goods. The qualification and set-up of these independent manufacturers
under quality assurance standards is an expensive and time-consuming process. Certain of our
independent manufacturers have a limited history of manufacturing optical modules or components. In
the past, we have experienced delays or other problems, such as inferior quality, insufficient
quantity of product and an inability to meet cost targets, which have led to delays in our ability
to fulfill customer orders. Additionally, in the past we have been required to qualify new
contract manufacturers and
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replace contract manufacturers, which has led to delays in deliveries. Any future interruption
in the operations of these manufacturers, or any deficiency in the quality, quantity or timely
delivery of the components or products built for us by these manufacturers, could impede our
ability to meet our scheduled product deliveries to our customers or require us to contract with
and qualify new contract manufacturers. As a result, we may lose existing or potential customers or
orders and our business may be negatively impacted.
Our financial results may vary significantly from quarter to quarter as the result of a number of
factors, which may lead to volatility in our stock price.
Our quarterly sales and operating results have varied in the past and may continue to vary
significantly from quarter to quarter. This variability may lead to volatility in our stock price
as market analysts and investors respond to these quarterly fluctuations. These fluctuations are
attributable to numerous factors, including:
| fluctuations in demand for our products; | ||
| the timing, size and product mix of sales of our products; | ||
| the timing and size of revenues derived from research and development agreements; | ||
| our ability to source component parts and to manufacture and deliver products to our customers in a timely and cost-effective manner; |
| quality control problems in our and our contract manufacturers manufacturing operations; | ||
| fluctuations in our manufacturing yields; | ||
| length and variability of the sales cycles of our products; | ||
| the loss or gain of significant customers; | ||
| new product introductions and enhancements by our competitors and ourselves and the level of market acceptance thereof; | ||
| changes in our pricing and sales policies or the pricing and sales policies of our competitors; | ||
| our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner; | ||
| the evolving and unpredictable nature of the markets for products incorporating our optical components and subsystems; | ||
| unanticipated increases in costs and expenses; and | ||
| fluctuations in foreign currency exchange rates. |
These events are difficult to forecast and these events, as well as other events, could
materially adversely affect our quarterly or annual operating results. In addition, a significant
amount of our operating expenses is relatively fixed in nature because of the extent of our
internal manufacturing operations and the level of resources dedicated to our research and
development, sales and general administrative efforts. Any failure to adjust spending quickly
enough to compensate for a sales shortfall could magnify the adverse impact of such sales shortfall
on our results of operations. Because many of the factors referenced above are beyond our control,
we believe that quarter-to-quarter comparisons of our operating results may not be a reliable
indication of our future performance, and you should not rely on our results for any single quarter
as an indication of our future performance. Moreover, our operating results may not meet our
announced guidance or expectations of equity research analysts or investors, in which case the
price of our common stock could decrease significantly.
Our future operating results may be subject to volatility as a result of exposure to foreign
currency exchange rate risks.
We are exposed to foreign currency exchange rate risks. Foreign currency exchange rate
fluctuations may affect our sales and our costs and expenses and significantly affect our operating
results. Portions of our sales are denominated in currencies other than the U.S. dollar,
principally the Japanese yen. In addition, a substantial portion of our cost of sales is
denominated in Japanese yen and portions of our operating expenses are denominated in Japanese yen
and euros. As a result, we bear the risk that fluctuations in the exchange rates of these
currencies in relation to the U.S. dollar could decrease our total sales or increase our costs and
expenses and, therefore, have a negative effect on future operating results.
We may experience low manufacturing yields or higher than expected costs.
Manufacturing yields depend on a number of factors, including the stability and
manufacturability of the product design, manufacturing improvements gained over cumulative
production volumes, the quality and consistency of component parts and the nature and extent of
customization requirements by customers. Higher volume demand for more mature designs requiring
less customization generally results in higher manufacturing yields than products with lower
volumes, less mature designs and requiring extensive customization. Capacity constraints, raw
materials shortages, logistics issues, the introduction of new product lines and changes in our
customer requirements, manufacturing facilities or processes or those of our third-party contract
manufacturers and component suppliers have historically caused, and may in the future cause,
significantly reduced manufacturing yields, negatively impacting the gross margins on, and our
production capacity for, those products. Our ability to maintain sufficient manufacturing yields is
particularly important with respect to certain products we manufacture, such as lasers and
photodetectors as a result of the long manufacturing process. Moreover, an increase in the
rejection and rework rate of products during the quality control process before, during or after
manufacture would result in lower yields, gross margins and production capacity. Finally,
manufacturing yields and margins can also be lower if we receive and inadvertently use defective or
contaminated materials from our suppliers. Because a significant portion of our manufacturing costs
is relatively fixed, manufacturing yields may have a significant effect on our results of
operations. Lower than expected manufacturing yields could delay product shipments and decrease our
sales and related revenues.
Shifts in our product mix may result in declines in operating income and net income.
Our gross profit margins vary among our product families and are generally higher on our
100Gbps, 40Gbps and longer distance 10Gbps products. Our optical products sold for longer-distance
applications typically have higher gross margins than our products for shorter-distance
applications. In addition, our gross margins are generally lower for newly introduced products and
improve as unit volumes increase. Our overall operating income has fluctuated from period to period
as a result of shifts in product mix, the introduction of new products, decreases in average
selling prices for older products, our ability to reduce product costs, and recognition of revenues
derived from research and development agreements, and these fluctuations are expected to continue
in the future.
Certain of our revenues are derived from research and development agreements, which can result in
material increases or decreases in our revenue, gross margin and net earnings from quarter to
quarter due to the recognition or deferral of revenue related to these agreements in a particular
quarter.
We periodically enter into research and development agreements primarily to design, develop
and manufacture complex 100Gbps products according to the specifications of the customer. Revenues
from such agreements are generally recognized upon the completion of certain milestones specified
in such agreements, which can result in material increases or decreases in our revenue from quarter
to quarter. Such revenue may have limited or no corresponding cost of revenue, and therefore
revenue from these agreements can have a substantial effect on our gross margin and net earnings
during the period in which such revenue and the associated cost of sales is recognized.
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Our products may contain defects that may cause us to incur significant costs, divert our attention
from product development efforts, result in a loss of customers or possibly result in product
liability claims.
Our products are complex and undergo quality testing as well as formal qualification by both
our customers and us. However, defects may be found from time to time. Our customers testing
procedures are limited to evaluating our products under likely and foreseeable failure scenarios
and over varying amounts of time. For various reasons (including, among others, the occurrence of
performance problems that are unforeseeable in testing or that are detected only when products age
or are operated under peak stress conditions), our products may fail to perform as expected long
after customer acceptance. Failures could result from faulty components or design, problems in
manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair
and/or replace defective products under warranty, particularly when such failures occur in
installed systems. In addition, certain of our customer contracts require that, in addition to
correcting the failure with the product, we reimburse the customer for the costs and expenses
incurred by the customer in connection with an epidemic failure of our product. An epidemic
failure with respect to a particular product generally occurs when in excess of a specified
percentage of such installed product exhibits a failure of the same root cause within a certain
specified time period. We have experienced such failures in the past and will continue to face this
risk going forward, as our products are widely deployed throughout the world in multiple demanding
environments and applications. In addition, we may in certain circumstances honor warranty claims
after the warranty has expired or for problems not covered by warranty in order to maintain
customer relationships. We have in the past increased our warranty reserves and have incurred
significant expenses relating to certain communications products. Any significant product failure
could result in lost future sales of the affected product and other products, as well as severe
customer relations problems, litigation or damage to our reputation.
In addition, our products are typically embedded in, or deployed in conjunction with, our
customers products which incorporate a variety of components and our products may be expected to
interoperate with modules produced by third parties. As a result, not all defects are immediately
detectable and, when problems occur, it may be difficult to identify the source of the problem.
These problems may cause us to incur significant damages or warranty and repair costs, divert the
attention of our engineering personnel from our product development efforts and cause significant
customer relation problems or loss of customers, all of which would harm our business.
The occurrence of any defects in our products could give rise to liability for damages caused
by such defects. Any defects could, moreover, impair the markets acceptance of our products. Both
could have a material adverse effect on our business and financial condition. For example, in the
fiscal year ended March 31, 2008, we incurred a $1.0 million warranty charge to cover anticipated
future costs associated with replacing defective 40Gbps Digital Mux/Demux integrated circuits
purchased from an external supplier that were included in 40Gpbs transceivers previously sold to
our customers.
The price of our common stock is highly volatile and may continue to fluctuate substantially, which
could result in substantial losses for our investors.
The trading price of our common stock has fluctuated significantly since our initial public
offering in February 2007, and is likely to remain volatile in the future. For example, since the
date of our initial public offering, our common stock has closed as low as $1.30 and as high as
$18.71 per share. The trading price of our common stock could be subject to wide fluctuations in
response to many events or factors, including the following:
| actual or anticipated fluctuations in our results of operations; | ||
| variance in our financial performance from the expectations of market analysts; | ||
| conditions and trends in the markets we serve; | ||
| announcements of significant new products by us or our competitors; | ||
| changes in our pricing policies or the pricing policies of our competitors; | ||
| legislation or regulatory policies, practices, or actions; | ||
| the commencement or outcome of litigation; | ||
| our sale of common stock or other securities in the future, or sales of our common stock by our principal stockholders; | ||
| changes in market valuation or earnings of our competitors; | ||
| the trading volume of our common stock; | ||
| changes in the estimation of the future size and growth rate of our markets; | ||
| general economic conditions; and | ||
| material weaknesses in internal controls. |
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In addition, the stock market in general, and the NASDAQ and the market for technology
companies in particular, have experienced extreme price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of particular companies affected.
These broad market and industry factors may materially harm the market price of our common stock,
regardless of our operating performance.
We face increasing competition from providers of competing products, which could negatively impact
our results of operations and market share.
We believe that a number of companies have developed or are developing transmit and receive
optical modules and components and lasers and infrared LEDs that compete directly with our product
offerings. Current and potential competitors may have substantially greater financial, marketing,
research and manufacturing resources than we possess, and there can be no assurance that our
current and future competitors will not be more successful than us in specific product lines or as
a whole.
Competition has intensified as additional competitors enter the market and current competitors
expand their product lines. The industry has experienced an increase in low-cost providers of
certain product lines. Companies competing with us may introduce products that are more
competitively priced, have better performance, functionality or reliability, or our competitors may
have stronger customer relationships, and may be able to react quicker to changing customer
requirements and expectations. Increased competitive pressure has in the past and may in the future
result in a loss of sales or market share or cause us to lower prices for our products, any of
which would harm our business, financial condition and operating results. To attract new customers
or retain existing customers, we may offer certain customers favorable prices on our products. A
reduction in pricing for any existing or future customers may result in reduced pricing for other
existing or future customers since our customers pricing is generally established pursuant to
pricing agreements of not more than one year in duration or upon receipt of purchase orders. Most
of the pricing agreements with our customers provide either that prices will be set at invoicing or
at various intervals during the year or require us to offer our existing customers the most
favorable pricing terms. All of these situations enable our customers to frequently negotiate based
upon prevailing market price trends. As product prices decline, our average selling prices and
operating profits decline.
Because certain of our competitors have longer operating histories, stronger strategic
alliances and greater financial, technical, marketing and other resources than we have, these
companies have the ability to devote greater resources to the development, promotion, sale and
support of their products. For example, in the telecommunications and data communications markets,
some of our competitors offer broader product portfolios by supplying passive components or a
broader range of lower speed transceivers. Other competitors may also have preferential access to
certain network systems vendors or offer directly competitive products that may have certain better
performance measures than our products. In addition, with respect to certain emerging technologies
such as 100Gbps line-side technologies, we also compete with the internal development efforts of
network system companies. Our competitors including network systems companies developing
potentially competitive products internally that have large market capitalizations or cash
reserves may be better positioned than we are to acquire other companies to gain new technologies
or products that may compete with our product lines. Any of these factors could give our
competitors a
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strategic
advantage. Therefore, we cannot assure you that we will be able to compete
successfully against either current or future competitors in the future.
The market for optical components continues to be characterized by intense price competition
which has had, and will continue to have, a material adverse effect on our results of operations,
particularly if we are not able to reduce our expenses commensurately.
The market for optical components continues to be characterized by declining average selling
prices resulting from factors such as intense price competition among optical component
manufacturers, excess capacity, the introduction of new products, and increased unit volumes as
manufacturers continue to deploy network and storage systems. In recent years, we have observed a
modest acceleration in the decline of average selling prices. We anticipate that average selling
prices will continue to decrease in the future in response to product introductions by our
competitors or us, or in response to other factors, including price pressures from significant
customers. In order to achieve and sustain profitable operations, we must, therefore, continue to
develop and introduce new products on a timely basis that incorporate features that can be sold at
higher average selling prices. Failure to do so could have an adverse
effect on our business, financial condition and results of
operations.
In the current environment of declining average selling prices, and especially when such
declines appear to be accelerating, we must continually seek ways to reduce our costs to achieve
our desired operating results. Our cost reduction efforts may not allow us to keep pace with
competitive pricing pressures. The continued uncertainties in the communications industry and the
global economy make it difficult for us to anticipate revenue levels and therefore to make
appropriate estimates and plans relating to cost management. To remain competitive, we must
continually reduce the cost of manufacturing our products through design and engineering changes.
We may not be successful in redesigning our products or delivering our products to market in a
timely manner. We cannot assure you that any redesign will result in sufficient cost reductions to
enable us to remain price competitive and achieve our desired operating results.
If demand for optical systems, particularly for 10Gbps and above network systems, does not continue
to expand as expected, our business will suffer.
Our future success as a manufacturer of transmit and receive optical modules, components and
subsystems ultimately depends on the continued growth of the communications industry and, in
particular, the continued expansion of global information networks, particularly those directly or
indirectly dependent upon a fiber optics infrastructure. The continued uncertainties in the
communications industry and the global economy make it difficult for us to anticipate sales levels.
Continued uncertain demand for optical components would have a material adverse effect on our
results of operations. Currently, while increasing demand for network services and for broadband
access, in particular, is apparent, growth is limited by several factors, including, among others,
the current global economic recession, an uncertain regulatory environment and reluctance on the
part of content providers to supply video and audio content because of insufficient copy protection
and uncertainty regarding long-term sustainable business models as multiple industries (cable TV,
traditional telecommunications, wireless, satellite, etc.) offer competing content delivery
solutions. Ultimately, if long-term expectations for network growth and bandwidth demand are not
realized or do not support a sustainable business model, our business would be significantly
harmed.
Our markets are subject to rapid technological change and, to compete effectively, we must
continually introduce new products that achieve market acceptance or our business may be
significantly harmed.
The markets for our products are characterized by rapid technological change, frequent new
product introductions, changes in customer requirements and evolving industry standards, all with
an underlying pressure to reduce cost and meet stringent reliability and qualification
requirements. We expect that new technologies will emerge as competition and the need for higher
and more cost-effective bandwidth increases. Our future performance will depend on the successful
development, introduction and market acceptance of new and enhanced products that address these
changes as well as current and potential customer requirements. The introduction of new and
enhanced products may cause our customers to defer or cancel orders for existing products. In
addition, a slowdown in demand for existing products ahead of a new product introduction could
result in a write-down in the value of inventory on hand related to existing products. We have in
the past experienced a slowdown in demand for existing products and delays in new product
development, and such delays may occur in the future. To the extent customers defer or cancel
orders for existing products for any reason, our operating results would suffer. Product
development delays may result from numerous factors, including:
| changing product specifications and customer requirements; | ||
| unanticipated engineering complexities; | ||
| delays in or denials of membership in future MSAs that become successful, or membership in and product development for MSAs that do not become successful; | ||
| difficulties in hiring and retaining necessary technical personnel; | ||
| difficulties in reallocating engineering resources and overcoming resource limitations; and | ||
| changing market or competitive product requirements. |
We expect that new technologies will continue to emerge as competition in the communications
industry increases and the need for higher and more cost efficient bandwidth expands. The
introduction of new products embodying new technologies or the emergence of new industry standards
could render our existing products or products in development uncompetitive, obsolete or
unmarketable. The development of new,
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technologically advanced products is a complex and uncertain process requiring high levels of
innovation and highly skilled engineering and development personnel, as well as the accurate
anticipation of technological and market trends. We cannot make any assurance that we will be able
to identify, develop, manufacture, market or support new or enhanced products successfully, if at
all, or on a timely basis. Further, we cannot assure you that our new
products, including those incorporating certain emerging technologies
such as 100Gbps line-side technologies, in which we have made and
continue to make significant investments, will gain market
acceptance or that we will be able to respond effectively to product introductions by competitors,
technological changes or emerging industry standards. We also may not be able to develop or license
from third parties the underlying core technologies necessary to create new products and
enhancements and to stay competitive in our markets. Any failure to respond to technological
changes could significantly harm our business.
We depend on Hitachi for assistance with our research and development efforts. Any failure of
Hitachi to provide these services could have a material adverse effect on our business.
Our product expertise is based on our research ability developed within our Hitachi heritage
and through joint research and development in lasers and optical technologies. A key factor to our
business success and strategy is fundamental laser research. We rely on access to Hitachis
research laboratories pursuant to a research and development agreement with Hitachi, which includes
access to Hitachis research facilities and engineers, to conduct research and development
activities that are important to the establishment of new technologies and products vital to our
current and future business. Our research and development agreement with Hitachi and Opnext Japans
research and development agreement with Hitachi will both expire on February 20, 2012. Should
access to Hitachis research laboratories be unavailable or available at less attractive terms in
the future, this may impede development of new technologies and products, and our financial
condition and operating results could be materially adversely affected.
Adverse conditions in the global economy have negatively impacted our customers, suppliers and our
business.
The United States, Europe and Asia have experienced significant declines in economic activity,
including, among other things, reduced consumer spending, declines in asset valuations, diminished
liquidity and credit availability, significant volatility in securities prices, rating downgrades
in certain instances, and fluctuations in foreign currency exchange rates. These economic
developments have adversely affected, or have the potential to adversely affect, our customers,
suppliers and businesses similar to ours and have resulted or could result in a variety of negative
effects, such as reduction in revenues, increased costs, lower gross margin percentages, increased
allowances for doubtful accounts and/or write-offs of accounts receivable, and required recognition
of impairments of capitalized assets, including goodwill and other intangibles. Any such
developments could have a material adverse effect on our business, results of operations, financial
condition and cash flows. We are not able to predict the duration or severity of adverse economic
conditions in the U.S. and other countries, and there can be no assurance that there will not be
further declines in economic activity.
We depend on facilities located outside of the United States to manufacture our products, which
subjects us to additional risks.
In addition to our two manufacturing facilities in Japan, we rely on contract manufacturers
located elsewhere in Asia and other countries for our supply of key products and we intend to
further expand our use of contract manufacturers outside the United States. Each of these
facilities and manufacturers subjects us to additional risks associated with international
manufacturing, including:
| unexpected changes in regulatory requirements; | ||
| legal uncertainties regarding liabilities, tariffs and other trade barriers; | ||
| inadequate protection of intellectual property in some countries; | ||
| greater incidence of shipping delays, including, but not limited to, as a result of customs delays; | ||
| greater difficulty in overseeing manufacturing operations, including, but not limited to, the levels of inventory maintained at our and our contract manufacturers facilities; | ||
| greater difficulty in hiring talent needed to oversee manufacturing operations; | ||
| potential political and economic instability; and | ||
| the outbreak of infectious diseases that could result in travel restrictions or the closure of our facilities or the facilities of our contract manufacturers or suppliers. |
Any of these factors could significantly impair our ability to source our contract
manufacturing requirements internationally.
Business disruptions resulting from international uncertainties could negatively impact our
profitability.
We derive, and expect to continue to derive, a significant portion of our sales from
international sales in various markets. Our international sales and operations are subject to a
number of material risks, including, but not limited to:
| different technical standards or requirements, such as country or region-specific requirements to eliminate the use of lead; | ||
| difficulties in staffing, managing and supporting operations in more than one country; |
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| difficulties in enforcing agreements and collecting receivables through foreign legal systems; | ||
| fewer legal protections for intellectual property; | ||
| fluctuations in foreign economies; | ||
| fluctuations in the value of foreign currencies and interest rates; | ||
| domestic and international economic or political changes, hostilities or other disruptions in regions where we currently operate or may operate in the future; | ||
| limitations on travel engendered by the outbreak of diseases and any other widespread public health problems; and | ||
| different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future. |
The risks provided above impact our business in areas in which we operate, including Japan and
Europe, which constitute a significant portion of our international operations. As an example, the
European Union enforced a mandatory requirement through a directive concerning the Reduction of
Hazardous Substances (RoHS 2002/95/EC), which required us to make changes to our product line on a
global basis to comply with the European directive, and may institute similar or additional
requirements in the future. Negative developments in one or more countries or regions in which we
operate or sell our products could result in a reduction in demand for our products, the
cancellation or delay of orders already placed, difficulties in producing and delivering our
products, threats to our intellectual property, difficulty in collecting receivables, or a higher
cost of doing business, any of which could negatively impact our business, financial condition or
results of operations.
Our business and future operating results may be adversely affected by events outside of our
control.
Our business and operating results are vulnerable to interruption by events outside of our
control, particularly possible earthquakes that may affect our factories or facilities in Japan or
California or the facilities of our contract manufacturers or critical vendors. Other possible
disruptions include: fire, volcanic activity, flood, power loss, telecommunications failures,
political instability, military conflict and uncertainties arising from terrorist attacks, the
economic consequences of military action or terrorist activities and associated political
instability, and the effect of heightened security concerns on domestic and international travel
and commerce. Any of the foregoing events could have a material adverse effect on our business,
financial condition or results of operations. In addition, in the event of an economic downturn
triggered by one or more of the foregoing events, we may suffer a decline in revenues and we may
not be able to reduce costs fast enough to compensate, particularly since we may be hampered in
eliminating employees in foreign jurisdictions because of foreign labor regulations.
We may not be able to obtain additional capital in the future, and failure to do so may harm our
business.
We believe that our existing balances of cash and cash equivalents will be sufficient to meet
our cash needs to fund working capital, capital expenditures and our capital lease obligations for
at least the next 12 months. We may, however, require additional financing to fund our operations
in the future. Due to the unpredictable nature of the capital markets, particularly in the
technology sector, we cannot assure you that we will be able to raise additional capital if and
when it is required, especially if we experience disappointing operating results. If adequate
capital is not available to us as required, or is not available on favorable terms, we could be
required to significantly reduce or restructure our business operations. If we do raise additional
funds through the issuance of equity or convertible debt securities, the percentage ownership of
our stockholders could be significantly diluted, and these newly issued securities may have rights,
preferences or privileges senior to those of existing stockholders.
If we fail to obtain the right to use others intellectual property rights necessary to operate our
business, our ability to succeed will be adversely affected.
Numerous patents in our industry are held by others, including our competitors and certain
academic institutions. Our competitors may seek to gain a competitive advantage or other third
parties may seek an economic return on their intellectual property portfolios by making
infringement claims against us. For example, on March 27, 2008, Furukawa Electric Co. (Furukawa)
filed a complaint against Opnext Japan, Inc., our wholly owned subsidiary (Opnext Japan),
alleging that certain laser diode modules sold by Opnext Japan infringe Furukawas Japanese Patent
No. 2,898,643. The complaint seeks an injunction as well as 300 million yen in royalty damages.
There can be no assurance that this action or other actions which may in the future be filed
against us will not result in a material recovery against, or expenses to, us.
In the future, we may need to obtain license rights to patents or other intellectual property
held by others to the extent necessary for our business. Unless we are able to obtain those
licenses on commercially reasonable terms, patents or other intellectual property held by others
could inhibit sales of our existing products and the development of new products for our markets.
Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or
both. These payments or other terms could have a significant adverse impact on our operating
results. Our competitors may be able to obtain licenses or cross-license their technology on better
terms than we can, which could put us at a competitive disadvantage.
If we are unable to obtain a license from a third party, or successfully defeat their
infringement claim, we could be required to:
| cease the manufacture, use or sale of the infringing products, processes or technology; | ||
| pay substantial damages for past, present and future use of the infringing technology; | ||
| expend significant resources to develop non-infringing technology; or | ||
| pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology. |
Any of the foregoing results could have a material adverse effect on our business, financial
condition and results of operations.
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We license our intellectual property to Hitachi and its wholly owned subsidiaries without
restriction. In addition, Hitachi is free to license certain of Hitachis intellectual property
that we use in our business to any third party, including our competitors, which could harm our
business and operating results.
We were initially created as a stand-alone entity by acquiring certain assets of Hitachi
through various transactions. In connection with these transactions, we acquired a number of
patents and know-how from Hitachi, but also granted Hitachi and its wholly owned subsidiaries a
perpetual right to continue to use those patents and know-how, as well as other patents and
know-how that we develop during a period ending in July 2011 (and October 2012 in certain cases).
This license back to Hitachi is broad and permits Hitachi to use this intellectual property for any
products or services anywhere in the world, including to compete with us.
Additionally, while significant intellectual property owned by Hitachi was assigned to us when
we were formed, Hitachi retained and only licensed to us the intellectual property rights to
underlying technologies used in both our products and the products of Hitachi. Under the agreement,
Hitachi remains free to license these intellectual property rights to the underlying technologies
to any party, including our competitors. The intellectual property that has been retained by
Hitachi and that can be licensed in this manner does not relate solely or primarily to one or more
of our products, or groups of products; rather, the intellectual property that is licensed to us by
Hitachi is generally used broadly across our entire product portfolio. Competition by third parties
using the underlying technologies retained by Hitachi could harm our business, financial condition
and operating results.
Our failure to protect our intellectual property may significantly harm our business.
Our success and ability to compete is dependent in part on our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality
agreements and internal procedures, to establish and protect our proprietary rights. Although a
number of patents have been issued to us and we have obtained a number of other patents as a result
of our acquisitions, we cannot assure you that our issued patents will be upheld if challenged by
another party. Additionally, with respect to any patent applications that we have filed, we cannot
assure you that any patents will issue as a result of these applications. If we fail to protect our
intellectual property, we may not receive any return on the resources expended to create the
intellectual property or generate any competitive advantage based on it.
Pursuing infringers of our intellectual property rights can be costly.
Pursuing infringers of our proprietary rights could result in significant litigation costs,
and any failure to pursue infringers could result in our competitors utilizing our technology and
offering similar products, potentially resulting in loss of a competitive advantage and decreased
sales. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark
and trade secret laws afford only limited protection. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the laws of the United
States. Protecting our intellectual property is difficult, especially after our employees or those
of our third-party contract manufacturers end their employment or engagement. We may have employees
leave us and go to work for competitors. Attempts may be made to copy or reverse-engineer aspects
of our products or to obtain and use information that we regard as proprietary. Accordingly, we may
not be able to prevent misappropriation of our technology or prevent others from developing similar
technology. Furthermore, policing the unauthorized use of our intellectual property is difficult
and expensive. Litigation may be necessary in the future to enforce our intellectual property
rights or to determine the validity and scope of the proprietary rights of others. The resulting
costs and diversion of resources could significantly harm our business. If we fail to protect our
intellectual property, we may not receive any return on the resources expended to create the
intellectual property or generate any competitive advantage based on it.
Third parties may claim we are infringing their intellectual property rights, and we could be
prevented from selling our products or suffer significant litigation expense, even if these claims
have no merit.
Our competitive position is driven in part by our intellectual property and other proprietary
rights. Third parties, however, may claim that we, or our products, operations or any products or
technology we obtain from other parties are infringing their intellectual property rights, and we
may be unaware of intellectual property rights of others that may cover some of our assets,
technology and products. There may be third parties that refrained from asserting intellectual
property infringement claims against our products or processes while we were a majority-owned
subsidiary of Hitachi that may elect to pursue such claims now that we are no longer a
majority-owned subsidiary of Hitachi. For example, on March 27, 2008, Furukawa filed a complaint
against Opnext Japan, alleging that certain laser diode modules sold by Opnext Japan infringe
Furukawas Japanese Patent No. 2,898,643. The complaint seeks an injunction as well as 300 million
yen in royalty damages. There can be no assurances that this action or other actions that might be
brought against us in the future will not result in a material recovery against, or expenses to,
us.
In addition, from time to time we receive letters from third parties that allege we are
infringing their intellectual property and asking us to license such intellectual property, and we
review the merits of each such letter. Any litigation regarding patents, trademarks, copyrights or
other intellectual property rights, even those without merit, could be costly and time consuming,
and divert our management and key personnel from operating our business. The complexity of the
technology involved and inherent uncertainty and cost of intellectual property litigation increases
our risks. If any third party has a meritorious or successful claim that we are infringing its
intellectual property rights, we may be forced to change our products or manufacturing processes or
enter into a licensing arrangement with such third party, which may be costly or impractical,
particularly in the event we are subject to a contractual commitment to continue supplying impacted
products to one or more of our customers. This also may require us to stop selling our products as
currently engineered, which could harm our competitive position. We also
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may be subject to significant damages or injunctions that prevent the further development and
sale of certain of our products or services and may result in a material decrease in sales.
The anticipated benefits of the acquisition of StrataLight may not be realized fully, or realized
at all, or may take longer to realize than expected.
Achieving the potential benefits of the acquisition of StrataLight depends in substantial part
on the successful integration of the two companies technologies, operations and personnel. We face
significant challenges in continuing to integrate StrataLights organization and operations. Some
of the challenges involved in this integration include:
| consolidating and rationalizing administrative infrastructures; | ||
| integrating product offerings; | ||
| coordinating sales and marketing efforts to effectively communicate our capabilities to customers; | ||
| coordinating and rationalizing research and development activities to enhance introduction of new products and technologies with reduced cost; and | ||
| preserving important relationships of both Opnext and StrataLight and resolving potential conflicts that may arise. |
The integration of StrataLight has been and will continue to be a complex, time consuming and
expensive process and has and will continue to require significant attention from management and
other personnel, which may distract their attention from our day-to-day business. The diversion of
managements attention and any difficulties associated with integrating StrataLight into Opnext
could have a material adverse effect on our operating results and could result in our not achieving
the anticipated benefits of the acquisition.
We may not achieve strategic objectives, anticipated synergies and cost savings and other potential
benefits of the acquisition of StrataLight.
We expect to realize strategic and other financial and operating benefits as a result of the
acquisition of StrataLight, including, among other things, certain cost and sales synergies.
However, we cannot predict with certainty the extent to which these benefits will actually be
achieved or the timing of the realization of any such benefits. The following factors, among
others, may prevent us from realizing these benefits:
| our inability to increase product sales; | ||
| unfavorable customer reaction to the our companys products; | ||
| competitive factors, including technological advances attained by competitors and patents granted to or contested by competitors, which would enhance their ability to compete against us; | ||
| the failure of key markets for our products to develop to the extent or as rapidly as currently expected; | ||
| changes in technology that increase the number of competitors that we face or require us to make significant capital expenditures to develop competitive products; and | ||
| the failure to retain key employees. |
Failure to achieve the strategic objectives and anticipated potential benefits of the
acquisition could have a material adverse effect on our sales, levels of expenses and operating
results and could result in dilution in our earnings per share. In addition, we cannot assure you
that our combined future growth rate will equal the historical growth rates Opnext and StrataLight
experienced as separate companies.
Potential future acquisitions may not generate the results expected and could be difficult to
integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value
and impair our financial results.
As part of our business strategy, we may pursue acquisitions of companies, technologies and
products that we believe could accelerate our ability to compete in our core markets or allow us to
enter new markets. If we fail to manage the pursuit, consummation and integration of acquisitions
effectively, in particular during periods of industry uncertainty, our business could suffer. In
addition, if we fail to properly evaluate acquisitions, we may not achieve the anticipated benefits
of any such acquisitions, and we may incur costs in excess of what we anticipate. Acquisitions
involve numerous risks, any of which could harm our business, including:
| difficulties in integrating the manufacturing, operations, technologies, products, existing contracts, accounting and personnel of the target company and realizing the anticipated synergies of the combined businesses; | ||
| difficulties in supporting and transitioning customers, if any, of the acquired company; | ||
| diversion of financial and management resources from existing operations; | ||
| the price we pay or other resources that we devote may exceed the value we actually realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity or for our existing operations; | ||
| risks associated with entering new markets in which we have limited or no experience; | ||
| potential loss of key employees, customers and strategic alliances from either our current business or the acquired companys business; |
| assumption of unanticipated problems or latent liabilities, such as problems with the quality of the acquired companys products; | ||
| inability to generate sufficient revenue and profitability to offset acquisition costs; | ||
| equity-based acquisitions may have a dilutive effect on our stock; and | ||
| inability to successfully consummate transactions with identified acquisition candidates. |
There can be no assurance that any acquisition we might consummate will generate the
anticipated results. While we continue to believe that the acquisition of StrataLight, a
high-speed transport company that we acquired in January of 2009, complements our core of high
speed client technologies, StrataLight has not contributed the level of revenues we initially
anticipated that it would contribute to our overall results. For example, StrataLight contributed
revenue of $14.2 million in the quarter ended March 31, 2010 as compared to revenue of $37.8
million in the quarter ended March 31, 2009.
Acquisitions also frequently result in the recording of goodwill and other intangible assets
that are subject to potential impairments in the future that could harm our financial results. We
recorded a goodwill impairment charge of $5.7 million for the quarter ended December 31, 2008,
which represented the full amount of goodwill recorded at the time of the acquisition of Pine
Photonics Communications, Inc. In addition, we recorded a goodwill impairment charge of $62.0
million for the quarter ended March 31, 2009 in connection with the acquisition of StrataLight,
which represented the full amount of goodwill recorded in connection with such acquisition.
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We could be subject to legal and regulatory consequences if we fail to comply with applicable
export control laws and regulations.
Exports of certain of our products are subject to export controls imposed by the U.S.
Government and administered by the United States Departments of State and Commerce. In certain
instances, these regulations may require pre-shipment authorization from the administering
department. For products subject to the Export Administration Regulations, or EAR, administered by
the Department of Commerces Bureau of Industry and Security, the requirement for a license is
dependent on the type and end use of the product, the final destination, the identity of the end
user and whether a license exception might apply. Virtually all exports of products subject to the
International Traffic in Arms Regulations, or ITAR, administered by the Department of States
Directorate of Defense Trade Controls, require a license. In addition, products developed and
manufactured in our foreign locations are subject to export controls of the applicable foreign
nation.
Obtaining necessary export licenses can be difficult and time-consuming. Failure to obtain
necessary export licenses could significantly reduce our revenue and materially adversely affect
our business, financial condition and results of operations. We could be subject to investigation
and potential regulatory consequences, including, but not limited to, a no-action letter, monetary
penalties, debarment from government contracting or denial of export privileges and criminal
sanctions, any of which would adversely affect our results of operations and cash flow. Compliance
with U.S. Government regulations may also subject us to significant fees and expenses, including
legal expenses, and require us to expend significant time and resources. Finally, the absence of
comparable restrictions on competitors in other countries may adversely affect our competitive
position.
Environmental laws and regulations may subject us to significant costs and liabilities.
Our operations include the use, generation and disposal of hazardous materials. We are subject
to various U.S. federal, state and foreign laws and regulations relating to the protection of the
environment, including those governing the use of hazardous substances, the management and disposal
of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe
workplace. For example, the European Union enforced a mandatory requirement through a directive
concerning the Reduction of Hazardous Substances (RoHS 2002/95/EC), which required us to make
changes to our product line on a global basis to comply with the European directive, and may
institute similar or additional directives in the future. A rework or repair expense may be
incurred if products are shipped in non-compliance with such directives. These costs may exceed
compensation, if any, from parts suppliers, and could have a material adverse effect on our
business, financial condition and results of operation. In the future, we could incur substantial
costs, including cleanup costs, as a result of violations of or liabilities under environmental
laws.
We were recently the target of securities class action complaints and are at risk of future
securities class action litigation. Any additional litigation could result in substantial costs to
us, drain our resources and divert our managements time and attention.
On February 20, 2008, a putative class action captioned Bixler v. Opnext, Inc., et al. was
filed in the United States District Court for the District of New Jersey (the Court) against us
and certain of our present and former directors and officers (the Individual Defendants),
alleging, inter alia, that the registration statement and prospectus issued in connection with our
initial public offering (the IPO) contained material misrepresentations in violation of federal
securities laws. In March 2008, two additional putative class actions were filed in the Court,
captioned Coleman v. Opnext, Inc., et al. and Johnson v. Opnext, Inc., et al., with similar
allegations and naming us, the Individual Defendants, our independent auditor and the underwriters
of the IPO as defendants. On May 22, 2008, the Court issued an order consolidating Bixler,
Coleman, and Johnson and, on July 30, 2008, a consolidated complaint was filed on behalf of all
persons who purchased our common stock on or before February 13, 2008, pursuant to or traceable to
the IPO. On November 6, 2008, our independent auditor was voluntarily dismissed from the action by
plaintiff without prejudice.
On September 8, 2009, the remaining parties, including us and the Individual Defendants,
entered into a Stipulation and Agreement of Settlement (the Settlement). On January 6, 2010, the
Court granted final approval of the Settlement, which approval is no longer subject to appeal. We
and the Individual Defendants have denied and continue to deny the claims asserted in the
consolidated action and entered into the Settlement solely to avoid the costs and risks associated
with further litigation. Under the terms of the Settlement, our insurer paid $2,000,000 to a
settlement fund that was used to pay eligible claimants and plaintiffs counsel, plaintiff
dismissed the consolidated action with prejudice and all defendants (including us and the
Individual Defendants) were released from any claims that were brought or could have been brought
in the consolidated action.
We incurred significant legal fees in responding to this lawsuit and the expense of defending
any additional litigation that may arise may also be significant. The amount of time that would be
required to resolve any future lawsuits could be unpredictable and any such litigation could
divert managements attention from the day-to-day operations of our business, which could adversely
affect our business, results of operations and cash flows.
21
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A lack of effective internal control over financial reporting could result in an inability to
accurately report our financial results, which could lead to a loss of investor confidence in our
financial reports and have an adverse effect on our stock price.
Effective internal controls are necessary for us to provide reliable financial reports. If we
cannot provide reliable financial reports or prevent fraud, our business and operating results
could be harmed. We have in the past discovered, and may in the future discover, deficiencies in
our internal controls. For example, as more fully described in Item 9A of Amendment No. 1 to our
Annual Report filed on Form 10-K/A for the fiscal year ended March 31, 2007, our management
concluded that in the course of preparing our financial statements for the quarter ended December
31, 2007 errors occurred in the valuation of inventory consigned to one of our contract
manufacturers and that, as a result, our inventory and trade payables balances and the reported
amounts of cost of goods sold and other income (expense), net, were not properly reported for each
of the fiscal years ended March 31, 2006 and March 31, 2007, and for the quarters beginning
September 30, 2005 through March 31, 2007, and our inventory and trade payables balances and the
reported amount of cost of goods sold were not properly reported for the quarter ended June 30,
2007. As a result of these errors, we restated our audited financial statements for the years ended
March 31, 2007 and 2006, and filed Amendment No. 1 to our Annual Report on Form 10-K/A for the
fiscal year ended March 31, 2007 to restate these financial statements, as well as Amendment No. 1
to our Quarterly Reports on Form 10-Q/A for the fiscal quarters ended June 30, 2007 and September
30, 2007. These restatements caused our management to conclude that we had a material weakness in
our internal control over financial reporting because the controls did not identify the errors on a
timely basis. During the quarter ended March 31, 2008, our management implemented processes and
procedures that it believes remediated this weakness. As a result, our management concluded that
our internal control over financial reporting was operating effectively as of March 31, 2008 and
for each subsequent quarterly period through the year ended March 31, 2010.
A failure to maintain effective internal control over financial reporting could result in a
material misstatement of our financial statements or otherwise cause us to fail to meet our
financial reporting obligations. This, in turn, could result in a loss of investor confidence in
the accuracy and completeness of our financial reports, which could have an adverse effect on our
business, financial condition, operating results and our stock price, and we could be subject to
further stockholder litigation and the costs associated therewith.
Prior to the closing of our acquisition of StrataLight, StrataLights independent registered
public accounting firm identified material weaknesses and significant deficiencies in StrataLights
internal control over financial reporting. The identified material weaknesses included a lack of
adequate financial statement resources and the lack of an appropriate level of qualified accounting
staff, which resulted in a failure to adequately maintain books and records relating to
non-recurring engineering arrangements and incorrect accounting for complex or unusual
transactions. StrataLight also had a material weakness with respect to inconsistency in the
effectiveness of the review over the inputs and analysis of warranty reserve, labor and overhead
capitalization and inventory valuation. These material weaknesses were identified by
StrataLights independent registered public accounting firm in connection with the audit of
StrataLights financial statements for the year ended December 31, 2007, along with other matters
involving its internal controls that constituted significant deficiencies and control deficiencies.
The existence of a material weakness could result in errors or material misstatements in
financial statements. While we believe we have been successful in remediating StrataLights
material weakness, any recurrence of such material weaknesses, or any occurrence of other material
weaknesses, may make it difficult for us to report our future financial results accurately and in a
timely fashion. Because of the size of StrataLight in relation to Opnext, any errors resulting from
StrataLights material weaknesses, significant deficiencies or control deficiencies could result in
material misstatements to our future financial statements, which could cause an adverse effect on
the trading price of our common stock.
Our ability to utilize our net operating loss carryforwards to offset future taxable income is
limited and may in the future be subject to further limitations.
On February 8, 2010, Marubeni Corporation filed a Schedule 13G/A reporting events that, when
taken together with other changes in ownership of our common stock by our five percent or greater
stockholders during the prior three-year period, constitute an ownership change for us as that
term is defined in Section 382 of the Internal Revenue Code of
1986, as Amended (Section 382), with the result of
limiting the availability of our net operating loss carryforwards
and other
related tax attributes (NOLs) for future use.
As a result of the ownership change that occurred as of December 31, 2009, our U.S. federal
and state NOLs have been reduced by $29.6 million and $37.1 million, respectively. Our U.S. federal
and state NOLs had been previously reduced by $15.8 million and $41.5 million, respectively, as a
result of prior acquisitions. After giving effect to such reductions, we had U.S. federal, state
and foreign NOLs of $149.0 million, $54.8 million and $312.7 million, respectively, at March 31,
2010. Of the NOLs at March 31, 2010, $131.9 million of U.S. federal NOLs and $44.9 million of
state NOLs are subject to annual limitations in the amounts of $6.5 million and $2.3 million,
respectively, while the remaining NOLs may be carried forward to offset future taxable income
without limitation. There can be no assurance that in the future we will not experience further
limitations with respect to the utilization of our NOLs.
If we fail to retain our senior management and other key personnel or if we fail to attract
additional qualified personnel, we may not be able to achieve our anticipated level of growth and
our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel, including the
members of our senior management team and key technical personnel, each of whom would be difficult
to replace. The loss of services of members of our senior management team or key personnel or the
inability to continue to attract qualified personnel could have a material adverse effect on our
business. Competition for highly skilled technical personnel is extremely intense and we continue
to experience difficulty identifying and hiring qualified personnel in many areas of our business.
We may not be able to hire and retain qualified personnel at compensation levels consistent with
our existing compensation and salary structure. On April 1, 2009, we announced certain plans to
reduce our cost structure and operating expenses in response to current economic conditions,
including, but not limited to, a ten percent reduction in executive salaries for a period of not
less than six months and a five percent reduction in the salaries for other employees. Such
salary reductions continued in effect until March 31, 2010, at which time they were discontinued.
There can be no assurance that such measures will not adversely impact our ability to attract and
retain key personnel. In addition, some of the companies with which we compete for hiring
experienced employees have greater resources than we have. Further, in making employment decisions,
particularly in the high technology industries, job candidates often consider the value of the
equity they are to receive in connection with their employment. Therefore, significant volatility
in the price of our stock or the
poor relative performance of our stock could adversely affect our ability to
attract or retain key technical or other personnel.
22
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Hitachi and Clarity could effectively together control the outcome of shareholder actions in the
Company.
As of June 1, 2010 Hitachi held an approximately 31.9%, and Clarity Partners, L.P. and Clarity
Opnext Holdings II, LLC (collectively, Clarity) held an approximately 7.3%, equity interest in
the Company. In addition, Hitachi and Clarity Management, L.P. each hold fully vested options to
purchase 1,010,000 and 1,000,000 shares of our common stock, respectively, and they each have
employees who serve as members of our board of directors. Their equity shareholdings could
effectively give them the power to collectively control many or all actions that require
shareholder approval, including the election of our board of directors. Significant corporate
actions, including the incurrence of material indebtedness or the issuance of a material amount of
equity securities may require the consent of our shareholders. Hitachi and Clarity, collectively or
individually, might oppose any action that would dilute their respective equity interests in the
Company, and may be unable or unwilling to participate in future financings of the Company and
thereby materially harm our business and prospects.
We may have conflicts of interest with Hitachi and, because of Hitachis significant ownership
interest in the Company, may not be able to resolve such conflicts of interest on favorable terms
for us. For example, Hitachi has another majority-owned subsidiary, Hitachi Cable, Ltd., that
directly competes with us in certain 10Gbps 300 pin and LX4 applications and certain SFP
applications.
Certain provisions of our corporate governing documents and Delaware Law could make an acquisition
of our company difficult.
Certain provisions of our organizational documents and Delaware law could discourage potential
acquisition proposals, delay or prevent a change in control of the Company or limit the price that
investors may be willing to pay in the future for shares of our common stock. For example, our
amended and restated certificate of incorporation and amended and restated bylaws:
| authorize the issuance of preferred stock that can be created and issued by our board of directors without prior stockholder approval, commonly referred to as blank check preferred stock, with rights senior to those of our common stock; | ||
| limit the persons who can call special stockholder meetings; | ||
| provide that a supermajority vote of our stockholders is required to amend some portions of our amended and restated certificate of incorporation and amended and restated bylaws; | ||
| establish advance notice requirements to nominate persons for election to our board of directors or to propose matters that can be acted on by stockholders at stockholder meetings; | ||
| do not provide for cumulative voting in the election of directors; and | ||
| provide for the filling of vacancies on our board of directors by action of a majority of the directors and not by the stockholders. |
23
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These and other provisions in our organizational documents could allow our board of directors
to affect the rights of our stockholders in a number of ways, including making it difficult for
stockholders to replace members of the board of directors. Because our board of directors is
responsible for approving the appointment of members of our management team, these provisions
could in turn affect any attempt to replace the current management team. These provisions could
also limit the price that investors would be willing to pay in the future for shares of our common
stock.
In addition to our governing documents, on June 18, 2009, our board of directors adopted a
shareholder rights plan (the Rights Plan) designed to protect our NOLs and other related tax attributes that could be used to reduce future
potential federal and state income tax obligations. The rights were designed to deter stock
accumulations made without prior approval from our board of directors that would trigger an
ownership change, as that term is defined in Section 382, with the result of limiting the availability for future use of our NOLs.
The Rights Plan was not adopted in response to any known accumulation of shares of our stock and
was approved by our stockholders at our 2009 annual meeting of stockholders. On February 8, 2010,
Marubeni Corporation filed a Schedule 13G/A reporting events that, when taken together with other
changes in ownership of our common stock by our five percent or greater stockholders during the
prior three-year period, constitute an ownership change for us as that term is defined in Section
382, with the result of limiting the availability of our NOLs and other related tax attributes for
future use. Notwithstanding such ownership change, the Rights Plan remains in place and may
continue to deter accumulations of shares of our common stock.
Section 203 of the Delaware General Corporation Law also imposes certain restrictions on
mergers and other business combinations between us and any holder of 15% or more of our common
stock that could have the effect of delaying, deferring or prohibiting a merger or other takeover
or a change of control of our company. Generally, Section 203 of the Delaware General Corporation
Law prohibits us from engaging in a business combination with any holder of 15% or more of our
common stock for a period of three years after the time that the stockholder acquired our common
stock, subject to certain exceptions.
Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties
We currently lease space in the United States, Japan, Germany, Canada and China.
We do not own any real property. We believe that our leased facilities are adequate to meet
our needs for the foreseeable future. The table below lists and describes the terms of our leased
properties:
Location | Approximate Square Feet | Function | Lease Expiration Date | |||
United States |
||||||
Eatontown, New Jersey
|
26,285 (of which 3,277 is subleased to a third party) | Administration, Sales | August 23, 2011 (sublease end date July 31, 2011) | |||
Fremont, California
|
30,574 | Administration, Sales, Marketing, Manufacturing, Research and Development | November 30, 2013 | |||
Los Gatos, California Building 1
|
33,290 | Administration, Marketing, Manufacturing, Research and Development | June 30, 2011 | |||
Los Gatos, California Building 2
|
10,073 | Administration, Marketing, Research and Development | June 30, 2011 | |||
Tulsa, Oklahoma
|
3513 | Research and Development | November 30, 2010 |
24
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Location | Approximate Square Feet | Function | Lease Expiration Date | |||
International |
||||||
Chiyoda-ku, Japan
|
2,330 (216 square meters) | Sales | June 11, 2012 (unlimited automatic 2-year extensions unless notice given by either party) | |||
Komoro, Japan
|
34,542 (3,209 square meters) | Manufacturing, Research and Development | March 31, 2011 (automatic 5-year extensions unless notice given by either party) | |||
Munich, Germany
|
2,992 (278 square meters) | Sales | October 31, 2011 | |||
Shanghai, China
|
1,356 (126 square meters) | Sales | November 15, 2010 | |||
Totsuka, Japan
|
115,852 (10,763 square meters) | Administration, Manufacturing, Research and Development | September 30, 2011 (automatic 1-year extensions unless notice given by either party) | |||
Kanazawa-ku, Japan
|
2,727 (253 square meters) | Research and Development | February 28, 2015 (automatic 2-year extensions unless notice given by either party) |
Item 3. Legal Proceedings.
On February 20, 2008, a putative class action captioned Bixler v. Opnext, Inc., et al. (D.N.J.
Civil Action # 3:08-cv-00920) was filed in the Court against Opnext
and the Individual Defendants, alleging, inter alia, that the
registration statement and prospectus issued in connection with Opnexts initial public offering
contained material misrepresentations in violation of federal securities laws. On March 7 and March
20, 2008, two additional putative class actions were filed in the Court with similar allegations.
Those complaints, captioned Coleman v. Opnext, Inc., et al. (D.N.J. Civil Action # 3:08-cv-01222)
and Johnson v. Opnext, Inc., et al. (D.N.J. Civil Action No. 3:08-cv-01451), respectively, named
Opnext, the Individual Defendants, Opnexts independent auditor and the underwriters of the IPO as
defendants.
On May 22, 2008, the Court issued an order consolidating Bixler, Coleman, and Johnson under
Civil Action No. 08-920 (JAP) and, on July 30, 2008, the Consolidated Complaint was filed. On
October 21, 2008, the defendants in the consolidated action, which include Opnext and the
Individual Defendants, responded to the Consolidated Complaint, denying the material allegations
and asserting various affirmative defenses. On November 6, 2008, Opnexts auditor was voluntarily
dismissed from the action by plaintiff without prejudice.
On September 8, 2009, the parties, including Opnext and the Individual Defendants, entered
into the Settlement, which the Court preliminary approved on October 6, 2009. On January 6, 2010,
the Court granted final approval of the Settlement, which approval is no longer subject to appeal.
Opnext and the Individual Defendants have denied and continue to deny the claims asserted in the
consolidated action and entered into the Settlement solely to avoid the costs and risks associated
with further litigation.
Under the terms of the Settlement, Opnexts insurer paid $2.0 million to a settlement fund
which was used to pay eligible claimants and plaintiffs counsel, plaintiff dismissed the
consolidated action with prejudice and all defendants (including Opnext and the Individual
Defendants) were released from any claims that were brought or could have been brought in the
consolidated action.
On March 27, 2008, Furukawa filed a complaint against Opnext Japan in the Tokyo District
Court, alleging that certain laser diode modules sold by the Company infringe the Furukawa Patent. The complaint sought an injunction as well as 300
million yen in royalty damages. Opnext Japan filed its answer on May 7, 2008 stating therein its
belief that it does not infringe the Furukawa Patent and that the Furukawa Patent is invalid. On
February 24, 2010, the Tokyo District Court entered judgment in favor of Opnext Japan, which
judgment was appealed by Furukawa to the Intellectual Property High Court on March 9, 2010. We
intend to defend ourselves vigorously in this litigation.
Item 4. Reserved
25
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PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
Since the commencement of public trading of our common stock on February 15,
2007 in connection with our initial public offering, our common stock has traded on the
NASDAQ Market under the symbol OPXT. The following table sets forth the range of high
and low closing sale prices of our common stock for the periods indicated:
High | Low | |||||||
Fiscal 2010 Quarter: |
||||||||
January 1, 2010 to March 31, 2010 |
2.69 | 1.74 | ||||||
October 1, 2009 to December 31, 2009 |
3.20 | 1.75 | ||||||
July 1, 2009 to September 30, 2009 |
3.14 | 1.72 | ||||||
April 1, 2009 to June 30, 2009 |
2.53 | 1.72 | ||||||
Fiscal 2009 Quarter: |
||||||||
January 1, 2009 to March 31, 2009 |
2.53 | 1.42 | ||||||
October 1, 2008 to December 31, 2008 |
4.09 | 1.30 | ||||||
July 1, 2008 to September 30, 2008 |
6.45 | 4.30 | ||||||
April 1, 2008 to June 30, 2008 |
7.00 | 4.84 |
The approximate number of stockholders of record as of June 3, 2010 was 347.
26
Table of Contents
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on
our common stock between February 15, 2007 and March 31, 2010, with the cumulative
total return of (i) the NASDAQ Telecommunications Index, (ii) the NASDAQ Composite
Index and (iii) the Amex Networking Index, over the same period. This graph assumes the
investment of $100.00 on February 15, 2007 in each of our common stock, the NASDAQ
Telecommunications Index, the NASDAQ Composite Index and the Amex Networking Index and
assumes the reinvestment of dividends, if any. The graph assumes our closing sale price
on February 15, 2007 of $17.40 per share as the initial value of our common stock. The
comparisons shown in the graph below are based upon historical data and are not
necessarily indicative of potential future performance.
Prior to February 15, 2007, there was no public market for our securities
and, as a result, data for the period preceding February 15, 2007 is not presented on
the graph below.
2/15/2007 | 3/31/2007 | 3/31/2008 | 3/31/2009 | 3/31/2010 | |||||||||||||||||||||||
Opnext, Inc. |
100.00 | 85.00 | 31.32 | 9.83 | 13.56 | ||||||||||||||||||||||
NASDAQ Telecommunications Index |
100.00 | 96.50 | 92.87 | 61.31 | 92.41 | ||||||||||||||||||||||
NASDAQ Composite Index |
100.00 | 96.98 | 91.27 | 61.21 | 96.03 | ||||||||||||||||||||||
Amex Networking Index |
100.00 | 95.74 | 84.07 | 52.82 | 100.57 | ||||||||||||||||||||||
27
Table of Contents
Dividend Policy
We have never declared, or paid, any cash dividends on our common stock and
we currently do not anticipate paying any cash dividends for the foreseeable future.
Instead, we anticipate that any earnings on our common stock will be used to provide
working capital, to support our operations, and to finance the growth and development
of our business, including potentially the acquisition of, or investment in,
businesses, technologies or products that complement our existing business. Any future
determination relating to dividend policy will be made at the discretion of our board
of directors and will depend on a number of factors, including, but not limited to, our
future earnings, capital requirements, financial condition, future prospects,
applicable Delaware law, which provides that dividends are only payable out of surplus
or current net profits, and other factors our board of directors might deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans |
The following table summarizes our stock-based incentive plans as of March
31, 2010 that were approved or not approved by our stockholders (in thousands, except
per share data):
Number of Securities to be issued | Weighted- | Number of securities | ||||||||||
upon exercise of outstanding | average | remaining available for | ||||||||||
options, stock appreciation rights | exercise | future issuance under equity | ||||||||||
and stock units | price | compensation plans | ||||||||||
Equity
compensation plans
approved by our
security holders |
14,240 | $ | 6.42 | 4,651 | ||||||||
Equity
compensation plans
not approved by our
security holders |
| | | |||||||||
Repurchases of Equity
We made no repurchases of our common stock during our fourth fiscal quarter
ended March 31, 2010.
28
Table of Contents
Item 6. Selected Financial Data.
The following consolidated balance sheet data as of March 31, 2010 and
2009 and the consolidated statements of operations data for the fiscal years ended
March 31, 2010, 2009 and 2008 have been derived from our audited financial statements
and related notes that are included elsewhere in this annual report. The consolidated
balance sheet data as of March 31, 2008, 2007 and 2006 and the statement of
operations data for the fiscal years ended March 31, 2007 and 2006 have been derived
from our audited financial statements and related notes that do not appear in this
annual report. The consolidated selected financial data set forth below should be
read in conjunction with our consolidated financial statements, the related notes and
Managements Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this annual report. The historical results are not
necessarily indicative of the results to be expected for any future period.
Historical Financial Data
Year Ended March 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Consolidated statements of
operations data: |
||||||||||||||||||||
Sales |
$ | 319,132 | $ | 318,555 | $ | 283,498 | $ | 222,859 | $ | 151,691 | ||||||||||
Cost of sales |
252,490 | 242,782 | 187,123 | 148,753 | 120,320 | |||||||||||||||
Amortization of acquired developed
technology |
5,780 | 1,321 | | | | |||||||||||||||
Gross margin |
60,862 | 74,452 | 96,375 | 74,106 | 31,371 | |||||||||||||||
19.1 | % | 23.4 | % | 34.0 | % | 33.3 | % | 20.7 | % | |||||||||||
Research and development expenses |
74,145 | 54,043 | 38,324 | 35,615 | 33,669 | |||||||||||||||
Selling, general, and administrative
expenses |
54,829 | 63,483 | 48,291 | 40,231 | 33,116 | |||||||||||||||
Impairment of goodwill |
| 67,681 | | | | |||||||||||||||
Acquired in-process research and
development expense |
| 15,700 | | | | |||||||||||||||
Amortization of purchased intangibles |
9,240 | 5,540 | | | | |||||||||||||||
Loss on disposal of property and
equipment |
159 | 122 | 502 | 311 | 1,065 | |||||||||||||||
Other operating expenses |
| | | | 399 | |||||||||||||||
Operating (loss) income |
(77,511 | ) | (132,117 | ) | 9,258 | (2,051 | ) | (36,878 | ) | |||||||||||
Interest (expense) income, net |
(615 | ) | 2,748 | 8,534 | 3,298 | 4,102 | ||||||||||||||
Other (expense) income |
(472 | ) | (187 | ) | (744 | ) | (551 | ) | 1,561 | |||||||||||
(Loss) income before income taxes |
(78,598 | ) | (129,556 | ) | 17,048 | 696 | (31,215 | ) | ||||||||||||
Income tax (expense) benefit |
85 | (16 | ) | | | (278 | ) | |||||||||||||
Net (loss) income |
$ | (78,513 | ) | $ | (129,572 | ) | $ | 17,048 | $ | 696 | $ | (31,493 | ) | |||||||
Net (loss) income per share: |
||||||||||||||||||||
Basic |
$ | (0.88 | ) | $ | (1.86 | ) | $ | 0.26 | $ | 0.01 | $ | (0.61 | ) | |||||||
Diluted |
(0.88 | ) | (1.86 | ) | 0.26 | 0.01 | (0.61 | ) | ||||||||||||
Weighted average number of shares: |
||||||||||||||||||||
Basic |
88,952 | 69,775 | 64,598 | 53,432 | 51,945 | |||||||||||||||
Diluted |
88,952 | 69,775 | 64,633 | 53,486 | 51,945 | |||||||||||||||
March 31, | ||||||||||||||||||||
2010 | 2010 | 2010 | 2010 | 2010 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Consolidated balance sheet data: |
||||||||||||||||||||
Total assets |
$ | 370,298 | $ | 449,764 | $ | 432,459 | $ | 367,849 | $ | 215,969 | ||||||||||
Long-term liabilities |
16,672 | 26,050 | 22,192 | 17,271 | 7,716 | |||||||||||||||
Total shareholders equity |
253,540 | 320,537 | 323,078 | 290,657 | 118,652 |
29
Table of Contents
Selected Quarterly Financial Information (Unaudited)
The following table shows our unaudited consolidated quarterly
statements of operations data for each of the quarters in the fiscal years ended
March 31, 2010 and 2009. This information has been derived from our unaudited
financial information, which, in the opinion of management, has been prepared on the
same basis as our audited financial statements and includes all adjustments necessary
for the fair presentation of the financial information for the quarters presented.
This information should be read in conjunction with the audited financial statements
and related notes included elsewhere in this annual report.
Three Months Ended | ||||||||||||||||
March 31, | Dec. 31, | Sept. 30, | June 30, | |||||||||||||
2010 | 2009 | 2009 | 2009 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Sales (1) |
$ | 76,783 | $ | 76,065 | $ | 80,975 | $ | 85,309 | ||||||||
Gross margin |
14,407 | 12,120 | 17,589 | 16,746 | ||||||||||||
Net loss (2) |
(18,303 | ) | (18,580 | ) | (17,913 | ) | (23,717 | ) | ||||||||
Net loss per share: |
||||||||||||||||
Basic |
$ | (0.20 | ) | $ | (0.21 | ) | $ | (0.20 | ) | $ | (0.27 | ) | ||||
Diluted |
(0.20 | ) | (0.21 | ) | (0.20 | ) | (0.27 | ) | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
89,392 | 88,960 | 88,769 | 88,656 | ||||||||||||
Diluted |
89,392 | 88,960 | 88,769 | 88,656 |
(1) | Sales for the three months ended March 31, 2010, December 31, 2009, September 30, 2009 and June 30, 2009 included $14.2 million, $12.1 million, $24.3 million and $32.3 million, respectively, of revenues attributable to the StrataLight acquisition. | |
(2) | Net loss for the three months ended March 31, 2010 included $1.8 million of amortization of purchased intangibles, $1.6 million of stock-based compensation expense, $0.3 million of restructuring cost and $0.1 million of StrataLight Employee Liquidity Bonus Plan expense. Net loss for the three months ended December 31, 2009 included $1.8 million of amortization of purchased intangibles, $1.7 million of stock-based compensation expense, $1.6 million of StrataLight Employee Liquidity Bonus Plan expense, $0.9 million of restructuring cost and $0.1 million of litigation expense. Net loss for the three months ended September 30, 2009 included $3.8 million of amortization of purchased intangibles, $2.9 million of StrataLight Employee Liquidity Bonus Plan expense, $1.7 million of stock-based compensation expense, $0.2 million of restructuring cost and $0.1 million of litigation expense. Net loss for the three months ended June 30, 2009 included $7.7 million of amortization of purchased intangibles expense, $2.8 million of StrataLight Employee Liquidity Bonus Plan expense, $1.6 million of stock-based compensation expense, $1.0 million of restructuring cost, $1.0 million attributable to purchase price accounting adjustments for inventory sold during the period, and $0.4 million of integration cost. |
Three Months Ended | ||||||||||||||||
March 31, | Dec. 31, | Sept. 30, | June 30, | |||||||||||||
2009 | 2008 | 2008 | 2008 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Sales (1) |
$ | 83,626 | $ | 70,533 | $ | 80,159 | $ | 84,237 | ||||||||
Gross margin |
7,288 | 15,582 | 24,451 | 27,131 | ||||||||||||
Net (loss) income (2) |
(118,831 | ) | (14,538 | ) | 1,188 | 2,609 | ||||||||||
Net (loss) income per share: |
||||||||||||||||
Basic |
$ | (1.39 | ) | $ | (0.23 | ) | $ | 0.02 | $ | 0.04 | ||||||
Diluted |
(1.39 | ) | (0.23 | ) | 0.02 | 0.04 | ||||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
85,527 | 64,612 | 64,620 | 64,623 | ||||||||||||
Diluted |
85,527 | 64,612 | 64,769 | 64,666 |
(1) | Sales for the three months ended March 31, 2009 included $37.8 million of revenues attributable to the StrataLight acquisition. | |
(2) | Net loss for the three months ended March 31, 2009 included $62.0 million of goodwill impairment expense, $15.7 million of in-process research and development expense, $11.0 million of StrataLight Employee Liquidity Bonus Plan expense, $6.9 million of amortization of purchased intangibles expense, $1.8 million attributable to purchase price accounting adjustments for inventory sold during the period, $1.5 million of stock-based compensation expense, $1.1 million of restructuring cost, $0.5 million of integration cost and $0.1 million of litigation expense. Net loss for the three months ended December 31, 2008 included $5.7 million of goodwill impairment expense, $1.6 million of stock-based compensation expense, $0.3 million of litigation expense and $0.2 million of business acquisition cost. Net income for the three months ended September 30, 2008 included $1.5 million of stock-based compensation expense and $0.7 million of litigation expense. Net income for the three months ended June 30, 2008 included $1.1 million of stock-based compensation expense. |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion relates to our consolidated financial statements
and should be read in conjunction with the financial statements and notes thereto
appearing elsewhere in this annual report. Statements contained in this Managements
Discussion and Analysis of Financial Condition and Results of Operations that are
not historical facts may be forward-looking statements. Such statements are subject
to certain risks and uncertainties, which could cause actual results to differ
materially from the forward-looking statement. Although the information is based on
our current expectations, actual results could vary from expectations stated in this
report. Numerous factors will affect our actual results, some of which are beyond our
control. These include current and future economic conditions and events and their
impact on us and our customers, the strength of telecommunications and data
communications markets, competitive market conditions, interest rate levels,
volatility in our stock price, and capital market conditions. You are cautioned not
to place undue reliance on this information, which speaks only as of the date of this
annual report. We assume no obligation to update publicly any forward-looking
information, whether as a result of new information, future events or otherwise,
except to the extent we are required to do so in connection with our ongoing
requirements under federal securities laws to disclose material information. For a
discussion of important risks related to our business, and related to investing in
our securities, including risks that could cause actual results and events to differ
materially from results and events referred to in the forward-looking information,
see Item 1A: Risk Factors and the discussion under the captions Factors That May
Influence Future Results of Operations and Liquidity and Capital Resources
below. In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report might not occur.
Overview and Background
We were incorporated as a wholly owned subsidiary of Hitachi, Ltd., or
Hitachi, in September of 2000. In July of 2001, Clarity Partners, L.P. and related
investment vehicles invested in us and we became a majority owned subsidiary of
Hitachi. In October 2002, we acquired Hitachis opto device business and expanded our
product line into select industrial and commercial markets. In June 2003, we acquired
Pine Photonics Communication Inc., or Pine, and expanded our product line of SFP
transceivers with data rates less than 10Gbps that are sold to telecommunication and
data communication customers. In February 2007, we completed our initial public
offering of common stock on the NASDAQ market. On January 9, 2009, we completed our
acquisition of StrataLight Communications, Inc. (StrataLight), which expanded our
product line to include 40Gbps subsystems. We presently have sales and marketing
offices in the U.S., Europe, Japan and China, which are strategically located in
close proximity to our major customers. We also have research and development
facilities that are co-located with each of our manufacturing facilities in the U.S.
and Japan. In addition, we use contract manufacturing partners that are located in
China, Japan, the Philippines, Taiwan, Thailand and the U.S. Certain of our contract
manufacturing partners that assemble or produce modules are strategically located
close to our customers contract manufacturing facilities to shorten lead times and
enhance flexibility.
Acquisition of StrataLight
On January 9, 2009, we completed our acquisition of StrataLight. The
aggregate consideration for such acquisition consisted of 26,545,455 shares of common
stock and $47.9 million in cash, including the impact of net
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purchase price
adjustments pursuant to the merger agreement. For the years ended March 31, 2010 and
2009, StrataLights operations contributed sales of $83.0 million and $37.8 million,
respectively, and favorably impacted our gross margin percentage as sales of
StrataLight products generally have higher relative margins. We also experienced
incremental increases of research and development and selling, general and
administrative expenses related to the StrataLight operations. During the year ended
March 31, 2009, in connection with the acquisition of StrataLight, we expensed $15.7
million of in-process research and development costs, and following the completion of
the acquisition, we recognized a goodwill impairment charge of $62.0 million.
Sales
Through our direct sales force supported by manufacturer representatives and
distributors, we sell products to many of the leading network systems vendors
throughout North America, Europe, Japan and Asia. Our customers include many of the
top telecommunications and data communications network systems vendors in the world.
We also supply components to several major transceiver module companies and we sell
to select industrial and commercial customers. Sales to telecommunication and data
communication customers, our communication sales, accounted for 95.1%, 94.1% and
93.3% of our total revenues during each of the years ended March 31, 2010, 2009 and
2008, respectively. Also during each of the years ended March 31, 2010, 2009 and
2008, sales of our communications products with 10Gbps or lower data rates, which we
refer to as our 10Gbps and below products, represented 63.2%, 74.7% and 82.9% of
total revenues, respectively, while sales of our communications products with 40Gbps
or higher data rates, which we refer to as our 40Gbps and above products,
represented 31.8%, 19.3% and 10.5% of total revenues, respectively. The term sales
when used herein in reference to our 40Gbps and above products includes revenues
received pursuant to development agreements.
The number of leading network systems vendors that supply the global
telecommunications and data communications markets is concentrated, and so, in turn,
is our customer base. For the year ended March 31, 2010, our top two customers, Cisco
Systems Inc. and subsidiaries (Cisco) and Nokia Siemens Networks (NSN), accounted
for 44.8% in the aggregate of our consolidated sales. Although we continue to attempt
to expand our customer base, we anticipate that a small number of these customers
will continue to represent a significant percentage of our total sales.
During the years ended March 31, 2010, 2009 and 2008, sales attributed to
North America represented 45.4%, 49.8% and 58.7% of total revenues, sales attributed
to Europe represented 30.6%, 27.0% and 22.8% of total
revenues, sales attributed to Japan represented 9.4%, 13.5% and 12.4% of total
revenues, and sales attributed to Asia Pacific (excluding Japan) represented 14.6%, 9.7%
and 6.1% of total revenues, respectively.
Because certain sales transactions and the related assets and liabilities are
denominated in currencies other than the U.S. dollar, primarily the Japanese yen, our
revenues are exposed to market risks related to fluctuations in foreign currency
exchange rates. For example, for the year ended March 31, 2010, 2009 and 2008, 9.4%,
16.7% and 25.9% of our revenues were denominated in Japanese yen, respectively. To
the extent we continue to generate a significant portion of our revenues in
currencies other than the U.S. dollar, our revenues will continue to be affected by
foreign currency exchange rate fluctuations.
Cost of Sales and Gross Margin
Our cost of sales primarily consists of materials including components that
are either assembled at one of our three internal manufacturing facilities or at one
of several of our contract manufacturing partners or procured from third-party
vendors. Because of the complexity and proprietary nature of laser manufacturing, and
the advantage of having our internal manufacturing resources co-located with our
research and development staffs, most of the lasers used in our optical module and
component products are manufactured in our facilities in Komoro and Totsuka, Japan.
Our materials include certain parts and components that are purchased from a limited
number of suppliers or, in certain situations, from a single supplier. Our cost of
sales also includes labor costs for employees and contract laborers engaged in the
production of our components and the assembly of our finished goods, outsourcing
costs, the cost and related depreciation of manufacturing equipment, as well as
manufacturing overhead costs, including the costs for product warranty repairs and
inventory adjustments for excess and obsolete inventory.
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Our cost of sales is exposed to market risks related to fluctuations in
foreign currency exchange rates because a significant portion of our costs and the
related assets and liabilities are denominated in Japanese yen. Our cost of sales
denominated in Japanese yen during the years ended March 31, 2010, 2009 and 2008 were
37.2%, 60.5% and 81.6%, respectively. The percentage decline during the years ended
March 31, 2010 and 2009 was primarily attributable to the contribution of cost of
sales from the StrataLight operations, which were denominated in U.S. dollars, and
our ability to procure more raw materials denominated in U.S. dollars.
Our gross margins vary among our product lines and are generally higher on
our 40Gbps and above and longer distance 10Gbps products. Our gross margins are also
generally higher on products where we enjoy a greater degree of vertical integration
with respect to the subcomponents of such products. Our overall gross margins
primarily fluctuate as a result of our overall sales volumes, changes in average
selling prices and product mix, the introduction of new products and subsequent
generations of existing products, manufacturing yields, our ability to reduce product
costs and fluctuations in foreign currency exchange rates. Our gross margins are also
impacted by amortization of acquired developed technology resulting from the
acquisition of StrataLight.
Research and Development Expense
Research and development expense consists primarily of salaries and benefits of
personnel related to the design, development and quality testing of new products or
enhancement of existing products, as well as outsourced services provided by
Hitachis research laboratories pursuant to our contractual agreements. We incurred
$4.1 million, $5.8 million and $5.0 million of expenses in connection with these
agreements during the years ended March 31, 2010, 2009 and 2008, respectively. In
addition, our research and development expenses primarily include the cost of
developing prototypes and material costs associated with the testing of products
prior to shipment, the cost and related depreciation of equipment used in the testing
of products prior to shipment, and other contract research and development related
services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries
and benefits for our employees that perform our sales and related support, marketing,
supply chain management, finance, legal, information technology, human resource and
other general corporate functions, as well as internal and outsourced logistics and
distribution costs, commissions paid to our manufacturers representatives,
professional fees and other corporate related expenses. Selling, general and
administrative expenses will also be impacted by the continuing costs associated with
pending litigation.
During the year ended March 31, 2010, we experienced a decrease in costs as we
realigned our selling, general and administrative resources on April 1, 2009 in
response to the weak macroeconomic environment at that time and to achieve synergies
associated with the integration of StrataLight. During the year ended March 31, 2009,
we experienced an increase in costs as a result of the StrataLight acquisition,
restructuring activities and the legal expenses associated with defending against
class action litigation.
Impairment of Goodwill
As a result of the significant deterioration in the macroeconomic
environment and the significant decrease in our market capitalization, for the year
ended March 31, 2009 we recorded aggregate write-downs of goodwill of $67.8 million
attributable to the previously completed acquisitions of StrataLight and Pine.
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Inventory
Certain of our more significant customers have implemented a supply chain
management tool called vendor managed inventory (VMI)
that requires suppliers, such
as us, to assume responsibility for maintaining an agreed upon level of consigned
inventory at the customers location or at a third-party logistics provider based on
the customers demand forecast. Notwithstanding the fact that we build and ship the
inventory, the customer does not purchase the consigned inventory until the inventory
is drawn or pulled by the customer or third-party logistics provider to be used in
the manufacture of the customers product. Though the consigned inventory may be at
the customers or the third-party logistics providers physical location, it remains
inventory owned by us until the inventory is drawn or pulled, which is the time at
which the sale takes place. Given that under such programs we are subject to the
production schedule and inventory management decisions of the customer or the
third-party logistics provider, our participation in VMI programs generally requires
us to carry higher levels of finished goods inventory than we might otherwise plan to
carry. As of March 31, 2010 and 2009, inventories included inventory consigned to
customers or their third-party logistics providers pursuant to VMI arrangements of
$7.5 million and $7.7 million, respectively.
Income Taxes
We are subject to taxation in the United States, Japan and various state, local
and other foreign jurisdictions. During the year ended March 31, 2010, the Internal
Revenue Service completed an examination of our U.S. Income Tax Returns for the years
ended March 31, 2007 and March 31, 2008, the State of New Jersey completed an
examination of our New Jersey Corporate Business Tax Returns for the years ended
March 31, 2004 through March 31, 2007, and the German tax authorities completed an
examination of our German tax returns for the years ended March 31, 2005 through
March 31, 2007. There were no adjustments proposed and all returns were accepted as
filed. Our Japan tax returns have been examined by the Japan tax authorities through
the year ended March 31, 2006.
On February 8, 2010, Marubeni Corporation filed a Schedule 13G/A reporting that,
as of December 31, 2009, it beneficially owned 6,350,000 shares of Opnext common
stock, and amending the Schedule 13G it had previously filed on February 8, 2008,
which had reported that as of September 18, 2007, it beneficially owned 7,500,000
shares of our common stock. The events reported in such filing, when taken together
with other changes in ownership of our common stock by its five percent or greater
stockholders during the prior three-year period, constitute an ownership change for
us as that term is defined in Section 382 of the Code, with the result of limiting
the availability of our net operating loss carryforwards and other related tax
attributes (NOLs) for future use.
As a result of the ownership change that occurred as of December 31, 2009, our
U.S. federal and state NOLs have been reduced by $29.6 million and $37.1 million,
respectively. Our U.S. federal and state NOLs had been previously reduced by $15.8
million and $41.5 million, respectively, as a result of prior acquisitions. After
giving effect to such reductions, we had U.S. federal, state and foreign NOLs of
$149.0 million, $54.8 million and $312.7 million, respectively, at March 31, 2010.
Of the NOLs at March 31, 2010, $131.9 million of U.S. federal NOLs and $44.9 million
of state NOLs are subject to annual limitations in the amounts of $6.5 million and
$2.3 million, respectively, while the remaining NOLs may be carried forward to offset
future taxable income without limitation.
Factors That May Influence Future Results of Operations
Global Economic Conditions
The
credit markets and the financial services industry continue to
experience significant volatility characterized by the bankruptcy,
failure, collapse or sale of various financial institutions, increased volatility in
securities prices, severely diminished liquidity and credit
availability, concern over the economic stability of certain
economies in Europe and a
significant level of intervention from the United States and other
governments, as applicable.
Continued concerns about the systemic impact of potential long-term or widespread
recession, unemployment, energy costs, geopolitical issues including
government deficits, the availability and cost
of credit, and reduced consumer confidence have contributed to increased market
volatility and diminished expectations for most developed and emerging economies.
While recent economic data reflect a stabilization of the economy, credit
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markets,
the cost and availability of credit may continue to
reflect volatility and uncertainty. Continued
turbulence in the United States and international markets and global economies could
restrict our ability and the ability of our customers to refinance indebtedness,
increase the costs of borrowing, limit access to capital necessary to meet liquidity
needs and materially harm operations or the ability to implement planned business
strategies. With respect to our customers, these factors could also negatively impact
the timing and amount of infrastructure spending, further negatively impacting our
sales.
Cost Reduction Actions
On April 1, 2009, we announced certain plans to reduce our cost structure
and operating expenses, including, but not limited to: an approximately ten percent
reduction in our global workforce, elimination of bonuses for the fiscal year ended
March 31, 2010, a ten percent reduction in executive salaries and director cash
compensation, a five percent reduction in salaries for other employees, and
suspension of our matching contribution to the 401(k) plan, each for a period of not
less than six months. The ten percent reduction in executive salaries and director
cash compensation, the five percent reduction in salaries for other employees and the
suspension of our matching contribution to the 401(k) plan, were each subsequently
extended through the end of the fiscal year ended March 31, 2010. In addition, in
October 2009 we further reduced our global workforce by approximately five percent.
These actions, together with synergies
associated with the StrataLight acquisition would have reduced our annualized cost structure
and operating expenses for the year ended March 31, 2010 by approximately $28.5 million as compared to the pro forma
financial results for the year ended March 31, 2009, assuming the acquisition of
StrataLight had occurred as of April 1, 2007. As of April 1, 2010, executive and other
employee salaries and director cash compensation were restored to their levels prior
to the reductions and are expected to increase our annualized cost
and operating expense structure by approximately $4.5 million. Our matching
contribution to the 401(k) plan remains suspended pending further determination.
Sales
Our sales are affected by capital spending of our customers for
telecommunications and data communications networks and for lasers and infrared LEDs
used in select industrial and commercial markets. The primary markets for our
products continue to be characterized by increasing volumes. The increasing demand
for our products is primarily driven by increases in traditional telecommunication
and data communication traffic and increasing demand for high bandwidth applications,
such as video and music downloads and streaming, on-line gaming, peer-to-peer file
sharing and IPTV, as well as new industrial and commercial laser applications.
The increased unit volumes as service providers deploy network systems has
contributed along with intense price competition among optical component
manufacturers, excess capacity, and the introduction of next generation products
to the market for optical components continuing to be characterized by declining
average selling prices. In recent years, we have observed a modest acceleration in
the decline of average selling prices. We anticipate that our average selling prices
will continue to decrease in future periods, although we cannot predict the extent of
these decreases for any particular period.
Our sales are also impacted by our ability to procure critical component parts
for our products from our suppliers. During the last several years, the number of
suppliers of components has decreased significantly and, more recently, demand for
components has increased rapidly. Any supply deficiencies relating to the quality or
quantities of components we use to manufacture our products can adversely affect our
ability to fulfill customer orders and our results of operations. For example, during
the quarter ended March 31, 2010 we experienced significant limitations on the
components available from certain of our suppliers, resulting in losses of
anticipated sales and the related revenues. While we cannot predict the duration or
extent of these supply limitations, we anticipate that such limitations will continue
to impact us to some extent at least through the first half of our fiscal year ending
March 31, 2011.
Our sales are exposed to market risks related to fluctuations in foreign
currency exchange rates because certain sales transactions and the related assets and
liabilities are denominated in currencies other than the U.S. dollar, primarily the
Japanese yen. Our sales denominated in U.S. dollars represented 89.7%, 82.3% and
73.3% of our revenues, and our sales denominated in Japanese yen
represented 9.4%, 16.7% and 25.9% of our revenues, for the
years ended March 31, 2010, 2009 and
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2008, respectively. To the extent we generate
sales in currencies other than the U.S. dollar, our future sales will be affected by
foreign currency exchange rate fluctuations, and could be materially adversely
affected.
During the year ended March 31, 2010, we began to enter into development
agreements to design, develop and manufacture complex products, primarily 40Gbps and
100Gbs optical modules and subsystems, according to the specifications of the
customer. Given that such agreements may in the future represent significant revenue
for us, the timing of execution and delivery on the requirements of any such
agreement may have a substantial effect on our ability to recognize revenue for a
particular period. In addition, since the receipt of payments and recognition of
revenue pursuant to such development agreements are generally subject to the
completion of milestones, the revenue related to any such agreement may be subject to
deferral or may not be recognized at all if the relevant milestone is not achieved.
Finally, since the revenue associated with such agreements can have nominal
corresponding cost of sales, these agreements can have a substantial effect on our
future gross margin during the period in which such revenue and associated cost of
sales is recognized.
Cost of Sales and Gross Margins
Our cost of sales is exposed to market risks related to fluctuations in
foreign currency exchange rates because a significant portion of our costs and the
related assets and liabilities are denominated in Japanese yen. The percentage of our
cost of sales denominated in Japanese yen during the years ended March 31, 2010, 2009
and 2008 were 37.2%, 60.5% and 81.6%, respectively. The percentage decline during the
year ended March 31, 2010 was primarily attributable to our acquisition of
StrataLight, as well as the fact that we procured more raw materials in U.S. dollars.
While we anticipate that we will continue to have a substantial portion of our cost
of sales denominated in Japanese yen, we expect the percentage of cost of sales
denominated in Japanese yen to diminish as we plan to expand the use of contract
manufacturers outside of Japan and procure more raw materials in U.S. dollars.
In recent periods, certain of our products that operate at 10Gbps data rates
have generated reduced gross margins, which reduced margins we believe are
attributable to, among other factors, the increased average age of such products,
delays in the development of certain internal subcomponents, the level of vertical
integration, as well as intensified competition in such product groups. To the extent
that we are unable to introduce, or experience delays in introducing, the next
generation of such products, or to the extent we are unsuccessful in achieving a
desirable level of vertical integration with respect to the subcomponents of such
products, we may continue to experience diminished gross margins in connection with
the sales of such products.
We experienced several sequential quarterly declines in sales of our 40Gbps
subsystems products during the year ended March 31, 2010. Although sales of these
products improved during the quarter ended March 31, 2010 as compared to the prior
quarter, reoccurrence of this unfavorable sales trend could negatively affect future
gross margins, given that our gross margins are generally higher on our 40Gbps and
above products.
Research and Development Expense
Our research and development costs increased during the year ended March
31, 2010 as a result of the full-year contribution of StrataLights operations. In
the future, these costs will vary with our efforts to meet the anticipated market
demand for our new and planned future products and to support enhancements to our
existing products.
Selling, General and Administrative Expenses
During the year ended March 31, 2010, we experienced a decrease in costs as
we realigned our selling, general and administrative resources on April 1, 2009 in
response to the macroeconomic environment existing at that time, and to achieve
synergies associated with the integration of StrataLight. Realignment actions
included a temporary reduction of executive and other employee salaries and director
cash compensation which were reinstated on April 1, 2010. We expect that our future
selling, general and administrative expenses will generally fluctuate with sales
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volumes and be impacted by the reinstatement of executive and other employee salaries
and director cash compensation, as well as, continuing costs associated with pending
litigation
Significant Accounting Policies and Estimates
Revenue Recognition, Warranties and Allowances
Revenue is derived principally from the sales of our products. We recognize
revenue when persuasive evidence of an arrangement exists (usually in the form of a
purchase order), delivery has occurred or services have been rendered, title and risk
of loss have passed to the customer, the price is fixed or determinable and
collection is reasonably assured based on the creditworthiness of the customer and
certainty of customer acceptance. These conditions generally exist upon shipment or
upon notice from certain customers in Japan that they have completed their inspection
and have accepted the product.
We participate in VMI programs with certain of our customers, whereby we
maintain an agreed upon quantity of certain products at a customer-designated
warehouse. Revenue pursuant to the VMI programs is recognized when the products are
physically pulled by the customer, or its designated contract manufacturer, and put
into production. Simultaneous with the inventory pulls, purchase orders are received
from the customer, or its designated contract manufacturer, as evidence that a
purchase request and delivery have occurred and that title has passed to the customer
at a previously agreed upon price.
We sell certain of our products to customers with a product warranty that
provides repairs at no cost or the issuance of a credit to the customer. The length
of the warranty term depends on the product being sold, ranging from one year to five
years. In addition to accruing for specific known warranty exposures, we accrue the
estimated exposure to warranty claims based upon historical claim costs as a
percentage of sales multiplied by prior sales still under warranty at the end of any
period. Our management reviews these estimates on a regular basis and adjusts the
warranty provisions as actual experience differs from historical estimates or as
other information becomes available.
Allowances for doubtful accounts are based upon historical payment
patterns, aging of accounts receivable and actual write-off history, as well as
assessments of customers creditworthiness. Changes in the financial condition of
customers could have an effect on the allowance balance required and result in a
related charge or credit to earnings.
Inventory Valuation
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Inventories consist of raw materials, work-in-process and
finished goods, including inventory consigned to our customers and our contract
manufacturers. Inventory valuation and firm committed purchase order assessments are
performed on a quarterly basis and those items that are identified to be obsolete or
in excess of forecasted usage are written down to their estimated realizable value.
Estimates of realizable value are based upon managements analyses and assumptions,
including, but not limited to, forecasted sales levels by product, expected product
lifecycle, product development plans and future demand requirements. We typically use
a 12-month rolling forecast based on factors, including, but not limited to, our
production cycles, anticipated product orders, marketing forecasts, backlog, shipment
activities and inventories owned by us but part of VMI programs and held at customer
locations. If market conditions are less favorable than our forecasts or actual
demand from our customers is lower than our estimates, we may require additional
inventory write-downs. If demand is higher than expected, inventories that had
previously been written down may be sold.
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Income Taxes
Income taxes are accounted for under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the
consolidated statements of operations in the period that includes the enactment date.
A valuation allowance is recorded to reduce the carrying amounts of deferred tax
assets if it is more likely than not that such assets will not be realized.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. At March 31, 2010 and 2009, management considered recent
operating results, the near-term earnings expectations, and the highly competitive
nature of our markets in making this assessment. At the end of each of the respective
years, management determined that it was
more likely than not that the full tax benefit of the deferred tax assets would
not be realized. Accordingly, full valuation allowances have been provided against
the net deferred tax assets. There can be no assurance that deferred tax assets
subject to our valuation allowance will ever be realized.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized in an amount equal to the amount by which the
carrying amount of the asset exceeds the fair value of the asset. In estimating
future cash flows, assets are grouped at the lowest level of identifiable cash flows
that are largely independent of cash flows from other groups. Assumptions underlying
future cash flow estimates are subject to risks and uncertainties. Our evaluations
for the years ended March 31, 2010, 2009 and 2008 indicated that there were no
impairments.
Goodwill and Business Combinations
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. We account for acquisitions using the purchase method of accounting.
Amounts paid for each acquisition are allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition. We then
allocate the purchase price in excess of tangible assets acquired to identifiable
intangible assets based on valuations that use information and assumptions provided
by management. We allocate any excess purchase price over the fair value of net
tangible and intangible assets acquired and liabilities assumed to goodwill.
We use a two-step impairment test to identify potential goodwill impairment and
measure the amount of the goodwill impairment loss to be recognized. In the first
step, the fair value of each reporting unit is compared to its carrying value to
determine if the goodwill is impaired. If the fair value of the reporting unit
exceeds the carrying value of the net assets assigned to that unit, then the goodwill
is not impaired and no further testing is required. If the carrying value of the net
assets assigned to the reporting unit exceeds its fair value, then a second step is
performed in order to determine the implied fair value of the reporting units
goodwill and an impairment loss is recorded in an amount equal to the difference
between the implied fair value and the carrying value of the goodwill.
Based upon the impairment analyses performed during the year ended March
31, 2009, we recorded aggregate goodwill impairment charges of $67.8 million
attributable to the acquisitions of StrataLight and Pine. Goodwill was $0 at March
31, 2010 and 2009, and $5.7 million at March 31, 2008.
Stock-Based Incentive Plans
All equity-based payments, including grants of employee stock options, are
recognized in our financial statements based on their grant-date fair value. We
estimate the fair value of our share-based awards utilizing the
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Black-Scholes pricing model. The fair value of the awards is amortized as compensation expense on a
straight-line basis over the requisite service period of the award, which is
generally the vesting period. The fair value calculations involve significant
judgments, assumptions, estimates and complexities that impact the amount of
compensation expense to be recorded in current and future periods. The factors
include:
| The time period our stock-based awards are expected to remain outstanding has been determined based on the average of the original award period and the remaining vesting period. Our expected term assumption for awards issued during the years ended March 31, 2010, 2009 and 2008 was 4.5 years, 4.9 years and 6.25 years, respectively. As additional evidence develops from our option activity, the expected term assumption may be refined to capture more relevant trends. | ||
| Through December 31, 2007, the future volatility of our stock was estimated based on the median calculated value of the historical volatility of companies believed to have similar market performance characteristics to ours. Use of comparable companies was necessary during this period since we did not possess a sufficient stock price history. Subsequent to December 31, 2007, we estimated volatility based on our historical stock prices. The expected volatility assumption for awards issued during the years ended March 31, 2010, 2009 and 2008 was 86.2%, 83.5% and 88.1%, respectively. | ||
| A dividend yield of zero has been assumed for awards issued during the years ended March 31, 2010, 2009 and 2008 based on our actual past experience and the fact that we do not anticipate paying a dividend on our shares in the near future. | ||
| We have based our risk-free interest rate assumption for awards issued during the years ended March 31, 2010, 2009 and 2008 on the implied weighted-average yields of 2.1%, 2.3% and 4.5%, respectively, available on U.S. Treasury zero-coupon issues with an equivalent expected term. | ||
| Forfeiture rates for awards issued during the years ended March 31, 2010, 2009 and 2008 have been estimated based on our actual historical forfeiture trends of approximately 10% over their expected terms. |
Compensation expense for all employee stock-based awards was $6.6 million, $5.6
million and $3.3 million for the years ended March 31, 2010, 2009 and 2008,
respectively.
Use of Estimates
The preparation of financial statements and related disclosures in
conformity with U.S. generally accepted accounting principles, or GAAP, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and expenses
during the periods reported. These estimates are based on historical experience and
on assumptions that are believed to be reasonable under the circumstances. Estimates
and assumptions are reviewed periodically and the effects of revisions are reflected
in the period that they are determined to be necessary. These estimates include
assessments of the ability to collect accounts receivable, the use and recoverability
of inventory, the realization of deferred tax assets, expected warranty costs, fair
value of stock awards, purchased tangible and intangible assets and liabilities in
business combinations, and estimated useful lives for depreciation and amortization
periods of tangible and intangible assets, among others. Actual results may differ
from these estimates, and the estimates will change under different assumptions or
conditions.
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Results of Operations for the Years Ended March 31, 2010, 2009 and 2008
The following table reflects the results of our operations in U.S. dollars
and as a percentage of sales. Our historical operating results may not be indicative
of the results of any future period.
Year Ended March 31, | Year Ended March 31, | |||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
(in thousands) | (as percentage of sales) | |||||||||||||||||||||||
Sales |
$ | 319,132 | $ | 318,555 | $ | 283,498 | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of sales |
252,490 | 242,782 | 187,123 | 79.1 | % | 76.2 | % | 66.0 | % | |||||||||||||||
Amortization of acquired
developed technology |
5,780 | 1,321 | | 1.8 | % | 0.4 | % | | ||||||||||||||||
Gross margin |
60,862 | 74,452 | 96,375 | 19.1 | % | 23.4 | % | 34.0 | % | |||||||||||||||
Research and development expenses |
74,145 | 54,043 | 38,324 | 23.3 | % | 17.0 | % | 13.5 | % | |||||||||||||||
Selling, general and
administrative expenses |
54,829 | 63,483 | 48,291 | 17.2 | % | 19.9 | % | 17.0 | % | |||||||||||||||
Impairment of goodwill |
| 67,681 | | | 21.3 | % | | |||||||||||||||||
Acquired in-process research and
development |
| 15,700 | | | 4.9 | % | | |||||||||||||||||
Amortization of purchased
intangibles |
9,240 | 5,540 | | 2.9 | % | 1.7 | % | | ||||||||||||||||
Loss on disposal of property and
equipment |
159 | 122 | 502 | 0.0 | % | 0.0 | % | 0.2 | % | |||||||||||||||
Operating (loss) income |
(77,511 | ) | (132,117 | ) | 9,258 | (24.3 | )% | (41.5 | )% | 3.3 | % | |||||||||||||
Interest (expense) income, net |
(615 | ) | 2,748 | 8,534 | (0.2 | )% | 0.9 | % | 3.0 | % | ||||||||||||||
Other expense, net |
(472 | ) | (187 | ) | (744 | ) | (0.1 | )% | (0.1 | )% | (0.3 | )% | ||||||||||||
(Loss) income before income
taxes |
(78,598 | ) | (129,556 | ) | 17,048 | (24.6 | )% | (40.7 | )% | 6.0 | % | |||||||||||||
Income tax benefit (expense) |
85 | (16 | ) | | 0.0 | % | (0.0 | )% | | |||||||||||||||
Net (loss) income |
$ | (78,513 | ) | $ | (129,572 | ) | $ | 17,048 | (24.6 | )% | (40.7 | )% | 6.0 | % | ||||||||||
Comparison of the Years Ended March 31, 2010 and 2009
Sales. Total sales increased $0.5 million, or 0.2%, to $319.1 million in
the year ended March 31, 2010 from $318.6 million in the year ended March 31, 2009,
primarily as a result of a $45.2 million increase in sales of StrataLight products
and a $1.4 million increase from fluctuations in foreign currency exchange rates,
partially offset by lower sales volumes of other communication and industrial and
commercial products as well as lower average selling prices.
For the year ended March 31, 2010, sales of our 10Gbps and below products
decreased $36.2 million, or 15.2%, to $201.8 million, while 40Gbps and above sales
increased $40.0 million, or 64.9%, to $101.6 million. The decrease in sales of our
10Gbps and below products primarily resulted from decreased demand for our 300 pin
tunable and fixed wavelength, Xenpak and SFP modules, partially offset by higher
demand for our XFP products. The increase in 40Gbps and above sales primarily
resulted from the acquisition of StrataLight. Sales of our industrial and commercial
products decreased $3.2 million, or 16.9%, to $15.7 million.
For the year ended March 31, 2010, sales to two customers, Cisco and
NSN, together accounted for 44.8% of revenues. For the year ended March 31, 2009,
sales to two customers, Cisco and Alcatel-Lucent, together accounted for 48.2% of
revenues. No other customer accounted for more than 10% of total revenues in either
such year.
Gross Margin. Gross margin decreased $13.4 million, or 18.3%, to
$60.9 million in the year ended March 31, 2010 from $74.5 million in the year ended
March 31, 2009. Gross margin for the year ended March 31, 2010 included negative
effects of $4.5 million from increased acquired developed technology amortization
associated with the StrataLight acquisition, and $4.4 million attributable to
unfavorable foreign currency exchange rate
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fluctuations, net of the impact from
foreign currency exchange forward contracts. Additional costs associated with the
StrataLight acquisition that were incurred during the years ended March 31, 2010 and
2009 include $5.8 million and $1.3 million, respectively, of amortization of acquired
developed technology, $1.0 million and $1.8 million, respectively, of charges
attributable to the purchase price accounting adjustment for inventory, and $0.9
million and $0.8 million, respectively, of Employee Liquidity Bonus Plan expense.
During the years ended March 31, 2010 and 2009, gross margin included charges for
excess and obsolete inventory of $4.1 million and $10.4 million, respectively.
As a percentage of sales, gross margin decreased to 19.1% for the year ended
March 31, 2010 from 23.4% for the year ended March 31, 2009. This decline was
primarily attributable to higher per unit manufacturing costs derived from lower sales
volumes, lower average selling prices, higher acquired developed technology
amortization and an unfavorable impact from foreign currency exchange rate
fluctuations and hedging programs, partially offset by higher relative margins from
sales of StrataLight products, lower fixed manufacturing, material and outsourcing
costs as well as lower excess and obsolete inventory and warranty charges.
Research and Development Expenses. Research and development expenses
increased $20.1 million, or 37.2%, to $74.1 million in the year ended March 31, 2010
from $54.0 million in the year ended March 31, 2009, including a $2.2 million increase
attributable to fluctuations in foreign currency exchange rates. Research and
development expenses increased as a percentage of sales to 23.3% for the year ended
March 31, 2010 from 17.0% for the year ended March 31, 2009. The increase in research
and development expenses was primarily the result of the acquisition of StrataLight,
and was partially offset by reduced outsourcing services provided by Hitachis
research laboratories, as well as lower employee and material costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $8.7 million, or 13.6%, to $54.8 million in the
year ended March 31, 2010 from $63.5 million in the year ended March 31, 2009,
including a $1.3 million increase attributable to fluctuations in foreign currency
exchange rates. Selling, general and administrative expenses decreased as a
percentage of sales to 17.2% for the year ended March 31, 2010 from 19.9% for the
year ended March 31, 2009. The decrease in selling, general and administrative
expenses was principally attributable to lower Employee Liquidity Bonus Plan costs
associated with the acquisition of StrataLight, as well as lower commission,
logistics, litigation, bad debt and employee costs, partially offset by the full year
impact of selling general and administrative costs resulting from the acquisition of
StrataLight.
Impairment of Goodwill. As part of the annual assessment of goodwill
completed during the quarter ended March 31, 2009, there were significant indicators
to conclude that an impairment of the goodwill associated with the acquisition of
StrataLight on January 9, 2009 may have occurred. This conclusion was based on the
significant decrease in our market capitalization and a significant deterioration in
the macroeconomic environment from the time of the acquisition announcement on July
9, 2008 through March 31, 2009. We concluded in the impairment analysis that the
carrying value of the goodwill associated with the StrataLight acquisition exceeded
its fair value. As a result, we recorded an impairment charge of $62.0 million in the
quarter ended March 31, 2009, which represented the full amount of goodwill recorded
in connection with the acquisition.
During the quarter ended December 31, 2008, there were sufficient
indicators to require an interim goodwill impairment analysis, including a
significant decrease in our market capitalization and a significant deterioration in
the macroeconomic environment largely caused by the widespread unavailability of
business and consumer credit. Based upon the interim goodwill impairment analysis
conducted, an impairment was indicated and we recorded a
$5.7 million charge, which represented the full amount of goodwill recorded in
connection with the Pine acquisition. As a result of such impairments, goodwill was
$0 at March 31, 2010 and 2009.
Acquired In-process Research and Development. We incurred $15.7 million
of in-process research and development expenses for the year ended March 31, 2009
related to the StrataLight acquisition. We incurred no in-process research and
development expenses for the year ended March 31, 2010.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles related to the acquisition of StrataLight was $9.2 million and $5.5
million for the years ended March 31, 2010 and 2009, respectively. For the year ended
March 31, 2010, the amortization consisted of $7.9 million related to order backlog
and $1.3 million
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related to customer relationships. For the year ended March 31,
2009, the amortization consisted of $5.2 million related to order backlog
and $0.3 million related to customer relationships.
Loss on Disposal of Property and Equipment. Loss on disposal of property
and equipment was $0.2 million and $0.1 million for the years ended March 31, 2010
and 2009, respectively.
Interest (Expense) Income, Net. Interest (expense) income, net decreased
by $3.3 million to $0.6 million of interest expense, net in the year ended March 31,
2010 from $2.7 million of interest income, net in the year ended March 31, 2009.
Interest (expense) income, net for the years ended March 31, 2010 and 2009 consisted
of interest earned on cash and cash equivalents offset by interest expense on
short-term debt and capital leases. The decrease primarily reflects the decline in
interest rates and the reduction in cash and cash equivalent balances over the
respective periods.
Other Expense, Net. Other expense, net was $0.5 million and $0.2 million
for the years ended March 31, 2010 and 2009, respectively, and consisted primarily of
net exchange losses on foreign currency transactions.
Income Taxes. During the year ended March 31, 2010, we recorded an $85,000
current income tax benefit resulting from a U.S. Federal income tax benefit of
$228,000 due to acceleration of research credits under the 2008 Housing and Economic
Recovery Act, partially offset by an income tax expense of $143,000 attributable to
income earned in certain foreign tax jurisdictions and certain state tax
jurisdictions. In other tax jurisdictions, we generated operating losses and recorded
a valuation allowance to offset potential income tax benefits associated with these
operating losses.
During the year ended March 31, 2009, we recorded current income tax expense of
$16,000. The expense was attributable to income earned in certain foreign tax
jurisdictions. In other tax jurisdictions, we generated operating losses and recorded
a valuation allowance to offset potential income tax benefits associated with these
operating losses.
Because of the uncertainty regarding the timing and extent of our future
profitability, we have recorded a valuation allowance to offset potential income tax
benefits associated with our operating losses and other net deferred tax assets.
There can be no assurance that deferred tax assets subject to our valuation allowance
will ever be realized.
Comparison of the Years Ended March 31, 2009 and 2008
Sales. Total sales increased $35.1 million, or 12.4%, to $318.6 million
in the year ended March 31, 2009 from $283.5 million in the year ended March 31,
2008, primarily as a result of $37.8 million of sales of StrataLight products, higher
sales volumes of communication products and a $6.3 million increase from fluctuations
in foreign currency exchange rates, net of the impact of decreases in average selling
prices. For the year ended March 31, 2009, sales of our 10Gbps and lower products
increased $3.0 million, or 1.3%, to $238.0 million, while sales of our
40Gbps products increased $31.9 million, or 107.4%, to $61.6 million. Sales of
our industrial and commercial products remained constant at $18.8 million. The
increase in sales of our 10Gbps and below products primarily resulted from increased
demand for our XFP and 300 pin tunable products, partially offset by lower demand for
our Xenpak and 300 pin fixed wavelength modules. Sales of our 40Gbps products
increased primarily as a result of our acquisition of StrataLight.
For the years ended March 31, 2009 and 2008, sales to two customers, Cisco
and Alcatel-Lucent, together accounted for 48.2% and 60.0% of revenues, respectively.
No other customer accounted for more than 10% of total revenues during such years.
Gross Margin. Gross margin decreased $21.9 million, or 22.7%, to $74.5
million in the year ended March 31, 2009 from $96.4 million in the year ended March
31, 2008, principally attributable to a $9.7 million increase in excess and obsolete
inventory charges, including a $4.4 million charge to discontinue certain early
generation 10Gbps multimode fibre products, and $8.5 million attributable to
unfavorable foreign currency exchange fluctuations partially offset by a $1.4 million
favorable impact from foreign currency exchange rate forward
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contracts. Additional
costs associated with the StrataLight acquisition that were incurred during the year
ended March 31, 2009 include a $1.8 million charge attributable to purchase price
accounting adjustments for inventory sold during the period, $1.3 million of
developed product technology amortization expense and $0.8 million of Employee
Liquidity Bonus Plan expense. During the years ended March 31, 2009 and 2008, we
recorded charges for excess and obsolete inventory of $10.4 million and $0.7 million,
respectively.
As a percentage of sales, gross margin decreased to 23.4% for the year
ended March 31, 2009 from 34.0% for the year ended March 31, 2008. The decrease
primarily resulted from reduced average selling prices of most products, higher
charges for excess and obsolete inventory, higher per unit costs associated with
lower sales volumes and the negative effects of fluctuations in foreign currency
exchange rates net of hedging programs, partially offset by lower material and
outsourcing costs per unit, improved product mix and higher relative margins from
sales of StrataLight products.
Research and Development Expenses. Research and development expenses
increased by $15.7 million, or 41.0%, to $54.0 million in the year ended March 31,
2009 from $38.3 million in the year ended March 31, 2008. Research and development
expenses increased as a percentage of sales to 17.0% for the year ended March 31,
2009 from 13.5% for the year ended March 31, 2008. The increase in research and
development expenses was primarily the result of the acquisition of StrataLight, a
$4.1 million increase attributable to fluctuations in foreign currency exchange
rates, higher use of outsourcing, increases in costs under our agreements with
Hitachis Central Research Lab, higher material and employee costs, as well as $3.7
million of costs associated with the Employee Liquidity Bonus Plan resulting from our
acquisition of StrataLight. Stock-based compensation expense associated with research
and development employees was $0.9 million and $0.5 million during the years ended
March 31, 2009 and 2008, respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $15.2 million, or 31.5%, to $63.5 million in the
year ended March 31, 2009 from $48.3 million in the year ended March 31, 2008.
Selling, general and administrative expenses increased as a percentage of sales to
19.9% for the year ended March 31, 2009 from 17.0% for the year ended March 31, 2008.
The increase in selling, general and administrative expenses was principally
attributable to the contribution of StrataLight operations, a $2.1 million
unfavorable effect of foreign currency exchange rate fluctuations, $6.5 million of
Employee Liquidity Bonus Plan costs resulting from our acquisition of StrataLight,
$1.1 million of restructuring costs and $0.7 million of integration costs related to
our acquisition of StrataLight. The increase in selling, general and administrative
costs also was attributable to higher employee costs, higher stock-based compensation
expense, defense costs associated with a class action lawsuit and higher bad debt
costs associated primarily with the Nortel, Inc. bankruptcy. The stock-based
compensation expense associated with selling, general and administrative employees
was $4.3 million and $2.5 million during the years ended March 31, 2009 and 2008,
respectively.
Impairment of Goodwill. As part of the annual assessment of goodwill
completed during the quarter ended March 31, 2009, there were significant indicators
to conclude that an impairment of the goodwill associated with the acquisition of
StrataLight on January 9, 2009 may have occurred. This conclusion was based on the
significant decrease in our market capitalization and a significant deterioration in
the macroeconomic environment from the time of the acquisition announcement on July
9, 2008 through March 31, 2009. We concluded in the impairment analysis that the
carrying value of the goodwill associated with the StrataLight acquisition exceeded
its fair value. As a result, we recorded an impairment charge of $62.0 million in the
quarter ended March 31, 2009 which represented the full amount of goodwill recorded
in connection with the acquisition.
During the quarter ended December 31, 2008, there were sufficient
indicators to require an interim goodwill impairment analysis, including a
significant decrease in our market capitalization and a significant deterioration in
the macroeconomic environment largely caused by the widespread unavailability of
business and consumer credit. Based upon the interim goodwill impairment analysis
conducted, an impairment was indicated and we recorded a $5.7 million charge, which
represented the full amount of goodwill recorded in connection with the Pine
acquisition. Goodwill was $0 and $5.7 million at March 31, 2009 and 2008,
respectively.
Acquired In-process Research and Development. We incurred $15.7 million
of in-process research and development expenses for the year ended March 31, 2009
related to the StrataLight acquisition, as compared to no such expenses for the year
ended March 31, 2008.
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Amortization of Purchased Intangibles. Amortization of purchased
intangibles related to the acquisition of StrataLight was $5.5 million for the year
ended March 31, 2009. The amortization consisted of
$5.2 million related to
order backlog and $0.3 million related to customer relationships. There was no
amortization of purchased intangibles for the year ended March 31, 2008.
Loss on Disposal of Property and Equipment. Loss on disposal of property
and equipment decreased $0.4 million to $0.1 million for the year ended March 31,
2009 from $0.5 million for the year ended March 31, 2008.
Interest Income, Net. Interest income, net decreased by $5.8 million, or
67.8%, to $2.7 million for the year ended March 31, 2009 from $8.5 million in the
year ended March 31, 2008. Interest income, net for the years ended March 31, 2009
and 2008 consisted of interest earned on cash and cash equivalents partially offset
by interest expense on short-term debt and capital leases of $1.0 million and $0.4
million, respectively. The decrease primarily reflects the decline in interest rates
over the respective periods.
Other (Expense) Income, Net. Other expense, net was $0.2 million and $0.7
million for the years ended March 31, 2009 and 2008, respectively, and consisted
primarily of net exchange losses on foreign currency transactions.
Income Taxes Because of the uncertainty regarding the timing and extent
of our future profitability, we have recorded a valuation allowance to offset
potential income tax benefits associated with our operating losses and other net
deferred tax assets. During the year ended March 31, 2009, we recorded a $16,000
current income tax expense attributable to income earned in certain foreign tax
jurisdictions. In other tax jurisdictions we generated operating losses and recorded
a valuation allowance to offset potential income tax benefits associated with these
operating losses. During the year ended March 31, 2008, we did not record a tax
provision in certain tax jurisdictions as the income tax benefits from our net
operating loss carryforwards were used to offset the related income tax. For those
tax jurisdictions continuing to generate operating losses, we continue to record a
valuation allowance to offset potential income tax benefits associated with these
operating losses. There can be no assurance that deferred tax assets subject to our
valuation allowance will ever be realized.
Liquidity and Capital Resources
At March 31, 2010 and 2009, cash and cash equivalents totaled $132.6
million and $168.9 million and the outstanding balances of the short-term loans were
$21.4 and $20.2 million, respectively. During the year ended March 31, 2010, cash and
cash equivalents decreased by $36.3 million as $18.6 million of net cash used in
operating activities, $10.6 million of payments on capital lease obligations, and
$7.9 million of capital expenditures were partially offset by $0.8 million from the
effect of foreign currency exchange rates on cash and cash equivalents. Net cash used
in operating activities reflected our net loss of $78.5 million, partially offset by
non-cash charges for depreciation and amortization of $22.3 million, amortization of
purchased intangibles of $15.0 million, stock-based compensation expense of $6.6
million, and $1.2 of compensation expense associated with the StrataLight Employee
Liquidity Bonus Plan (the ELBP), as well as a decrease in net current assets
excluding cash and cash equivalents of $14.6 million and a loss on disposal of
property and equipment of $0.2 million. The decrease in net current assets excluding
cash and cash equivalents primarily resulted from a decrease in inventories and
accounts receivable and an increase in accounts payable, partially offset by a
decrease in accrued expenses.
Pursuant to the terms of the Agreement and Plan of Merger, dated July 9, 2008,
by and among the Company, StrataLight, Omega Merger Sub 1, Inc., Omega Merger Sub 2,
Inc. and Jerome S. Contro, as the stockholder representative, the Company made the
second and third distributions of cash and shares of the Companys common stock to
ELBP participants during the year ended March 31, 2010. During the year ended March
31, 2010, the Company distributed approximately $5.7 million of cash and 1.2 million
shares of previously issued common stock, representing the
remaining balance of cash and shares of the Companys common
stock to be distributed to ELBP participants, and accepted cancellation of rights to
receive common stock as requested by certain ELBP participants to satisfy
approximately $2.8 million in employee withholding tax obligations paid by the
Company. During the year ended March 31, 2009, the Company distributed approximately
$1.8 million of cash and 1.8 million shares of previously issued common stock
pursuant to the ELBP.
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During the year ended March 31, 2009, cash and cash equivalents decreased
by $52.8 million to $168.9 million from $221.7 million. This decline consisted of
$10.4 million of net cash used in operating activities, $28.4 million of cash used in
the acquisition of StrataLight, net of cash acquired, $9.1 million of payments on
capital lease obligations, $4.2 million of capital expenditures, $0.6 million from
the effect of foreign exchange rates on cash and cash equivalents and $0.1 million
used to repurchase restricted shares. Net cash used by operating activities reflected
our net loss of $129.6 million, partially offset by the following non-cash charges: a
$67.7 million impairment of goodwill, a $15.7 million write-off of
in-process research and development, depreciation and amortization of $14.4 million,
amortization of purchased intangibles of $6.9 million, StrataLight Employee Liquidity
Bonus Plan costs of $5.8 million and stock-based compensation expense of $5.6
million, and a decrease in net current assets excluding cash and cash equivalents of
$3.1 million. The decrease in net current assets excluding cash and cash equivalents
primarily resulted from a decrease in inventories partially offset by a decrease in
accounts payable attributable to the reduction in sales volumes. During the year
ended March 31, 2009, we also entered into $15.4 million of new capital lease
obligations.
During the year ended March 31, 2008, cash and cash equivalents increased by
$21.9 million to $221.7 million from $199.8 million. This increase consisted of $11.5
million of net cash provided by operating activities, $20.1 million of cash provided
by an increase in short-term borrowings and $1.0 million from the effect of foreign
exchange rates on cash and cash equivalents, partially offset by $5.1 million used
for capital expenditures and $5.5 million used for payment on capital lease
obligations. Net cash used by operating activities reflected our net income of $17.0
million, depreciation and amortization of $10.6 million, stock-based compensation
expense of $3.3 million and a $0.5 million loss on disposal of certain obsolete fixed
assets, offset by an increase in working capital of approximately $19.9 million. The
increase in working capital primarily resulted from an increase in inventories both
for new products and in an effort to improve customer service levels and a decrease
in accounts payable, partially offset by a decrease in accounts receivable related to
improved collections activity. During the year ended March 31, 2008, we also entered
into $11.8 million of new capital lease obligations.
We believe that existing cash and cash equivalent balances will be
sufficient to fund our anticipated cash needs at least for the next 12 months.
However, we may require additional external financing to fund our operations in the
future and there is no assurance that we will be successful in obtaining
additional financing, especially if we experience operating results below
expectations. Also, the global credit markets have recently experienced unprecedented
volatility, which may affect both the availability and cost of our funding sources in
the future. If adequate financing is not available as required, or is not available
on favorable terms, our business, financial condition and results of operations will
be adversely affected.
Contractual Obligations
During the year ended March 31, 2010, we entered into $0.1 million of new
capital lease obligations. The following table represents a summary of our
contractual obligations at March 31, 2010 in millions of dollars.
Payments Due by Period | ||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | |||||||||||||
Capital lease obligations |
$ | 23.7 | $ | 12.5 | $ | 11.0 | $ | 0.2 | ||||||||
Operating lease obligations |
5.1 | 3.6 | 1.2 | 0.3 | ||||||||||||
Purchase obligations |
66.8 | 66.8 | | | ||||||||||||
Short-term debt |
21.4 | 21.4 | | | ||||||||||||
Total contractual obligations |
$ | 117.0 | $ | 104.3 | $ | 12.2 | $ | 0.5 | ||||||||
Capital lease obligations, including interest, consist primarily of
manufacturing assets under non-cancelable capital leases. Operating leases consist
primarily of leases on buildings. Purchase obligations represent an estimate of all
open purchase orders and contractual obligations in the ordinary course of business
for which we have not yet received the goods or services. These obligations include
purchase commitments with our contract manufacturers. We enter into agreements with
contract manufacturers and suppliers that allow them to procure inventory based
upon agreements defining our material and services requirements. In certain instances,
these agreements allow us the option to cancel, reschedule, and adjust our
requirements based on our business needs prior to firm orders being placed. Although
open purchase orders are considered enforceable and legally binding, the terms
generally allow us the option to cancel, reschedule and adjust our requirements based
on our business needs prior to the delivery of goods or the performance of services.
45
Table of Contents
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing or unconsolidated special
purpose entities.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to market risk consists of foreign currency exchange rate
fluctuations related to our international sales and operations and changes in
interest rates on cash and cash equivalents and short-term debt.
To the extent we generate sales in currencies other than the U.S. dollar,
our sales will be affected by currency fluctuations. For the years ended March 31,
2010, 2009 and 2008, 9.4%, 16.7% and 25.9% of sales were denominated in Japanese yen,
respectively, and 0.7%, 1.0% and 0.8% were denominated in euros, respectively. The
remaining sales were denominated in U.S. dollars.
To the extent we manufacture our products in Japan, our cost of sales will
be affected by currency fluctuations. During the years ended March 31, 2010, 2009 and
2008, approximately 37.2%, 60.5% and 81.6% of our cost of sales was denominated in
Japanese yen, respectively. While we anticipate that we will continue to have a
substantial portion of our cost of sales denominated in Japanese yen, we anticipate
the percentage of cost of sales denominated in Japanese yen to diminish as we plan to
expand the use of contract manufacturers outside of Japan and procure more raw
materials in U.S. dollars.
To the extent we perform research and development activities and selling,
general and administrative functions in Japan, our operating expenses will be
affected by currency fluctuations. During the years ended March 31, 2010, 2009 and
2008, approximately 34.6, 41.9% and 51.3% of our operating expenses were denominated
in Japanese yen, respectively. We anticipate that we will continue to have a
substantial portion of our operating expenses denominated in Japanese yen in the
foreseeable future.
As of March 31, 2010, we had a net receivable position of $1.2 million and
as of March 31, 2009, we had a net payable position of $1.5 million subject to
foreign currency exchange risk between the Japanese yen and the U.S. dollar. We are
also exposed to foreign currency exchange fluctuations on intercompany sales
transactions involving the Japanese yen and the U.S. dollar. At March 31, 2010, we
had six foreign currency exchange contracts in place with an aggregate nominal value
of $12.0 million and expiration dates of 90 days or less to hedge a portion of this
risk. At March 31, 2009, we had three foreign currency exchange contracts in place
with an aggregate nominal value of $6.0 million and expiration dates of 90 days. We
do not enter into foreign currency exchange forward contracts for trading purposes,
but rather as a hedging vehicle to minimize the impact of foreign currency
fluctuations. Gains or losses on these derivative instruments are not anticipated to
have a material impact on financial results.
We have entered into short-term yen-denominated loan with The Sumitomo
Trust Bank, which is due monthly unless renewed. At March 31, 2010 and 2009, the loan
balance was $21.4 million and $20.2 million, respectively. The increase of $1.2
million was due to changes in foreign currency exchange rates. Interest is paid
monthly at TIBOR plus a premium that ranged from 1.26% to 1.57% and 1.42% to 1.81%
during the years ended March 31, 2010 and 2009, respectively.
To the extent we maintain significant cash balances in money market
accounts, our interest income will be affected by interest rate fluctuations. As of
March 31, 2010, 2009 and 2008, we had $132.6 million, $168.9 million and $221.7
million cash balances invested primarily in traded institutional money market funds
or money market deposit accounts at banking institutions. Interest income earned on these
accounts was $0.4 million, $3.7 million and $8.5 million for the years ended March
31, 2010, 2009 and 2008, respectively.
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Table of Contents
Item 8. Financial Statements and Supplementary Data.
OPNEXT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
48 | ||||
49 | ||||
50 | ||||
51 | ||||
52 | ||||
53 |
47
Table of Contents
Report of Independent Registered Public Accounting Firm on Financial Statements
The Board
of Directors and Shareholders of
Opnext, Inc.
We have audited the accompanying consolidated balance sheets of Opnext,
Inc. (the Company) as of March 31, 2010 and 2009, and the related consolidated
statements of operations, shareholders equity and comprehensive income (loss), and
cash flows for each of the three years in the period ended March 31, 2010. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Opnext, Inc. at
March 31, 2010 and 2009, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended March 31, 2010, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Opnext, Inc.s internal control
over financial reporting as of March 31, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated June 14, 2010 expressed
an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
MetroPark,
New Jersey
June 14, 2010
June 14, 2010
48
Table of Contents
March 31, | ||||||||
2010 | 2009 | |||||||
(in thousands, except share and | ||||||||
per share amounts) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents, including $1,205
and $6,328 of restricted cash at March 31,
2010 and 2009, respectively |
$ | 132,643 | $ | 168,909 | ||||
Trade receivables, net, including $4,509
and $3,483 due from related parties at
March 31, 2010 and 2009, respectively |
54,849 | 63,961 | ||||||
Inventories |
93,018 | 101,610 | ||||||
Prepaid expenses and other current assets |
4,755 | 3,708 | ||||||
Total current assets |
285,265 | 338,188 | ||||||
Property, plant, and equipment, net |
60,322 | 71,966 | ||||||
Purchased intangibles |
24,220 | 39,239 | ||||||
Other assets |
491 | 371 | ||||||
Total assets |
$ | 370,298 | $ | 449,764 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Trade payables, including $4,707 and $6,052
due to related parties at March 31, 2010
and 2009, respectively |
$ | 44,040 | $ | 38,356 | ||||
Accrued expenses |
22,101 | 33,190 | ||||||
Short-term debt |
21,430 | 20,243 | ||||||
Capital lease obligations |
12,515 | 11,388 | ||||||
Total current liabilities |
100,086 | 103,177 | ||||||
Capital lease obligations |
11,202 | 21,402 | ||||||
Other long-term liabilities |
5,470 | 4,648 | ||||||
Total liabilities |
116,758 | 129,227 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Preferred stock, par value $0.01 per share: 15,000,000
authorized, no shares issued and
outstanding |
| | ||||||
Common stock, par value $0.01 per share: authorized
150,000,000 shares; issued
91,192,937, outstanding 89,857,936, net of
58,630 shares of treasury stock at March
31, 2010; issued 91,130,377, outstanding
88,656,447, net of 51,508 shares of
treasury stock at March 31, 2009 |
725 | 730 | ||||||
Additional paid-in capital |
716,315 | 708,588 | ||||||
Accumulated deficit |
(473,145 | ) | (394,632 | ) | ||||
Accumulated other comprehensive income |
9,645 | 5,851 | ||||||
Total shareholders equity |
253,540 | 320,537 | ||||||
Total liabilities and shareholders equity |
$ | 370,298 | $ | 449,764 | ||||
See accompanying notes to consolidated financial statements.
49
Table of Contents
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands, except per share amounts) | ||||||||||||
Sales, including $14,659, $19,470 and
$8,925 to related parties for the years
ended March 31, 2010, 2009 and 2008,
respectively |
$ | 319,132 | $ | 318,555 | $ | 283,498 | ||||||
Cost of sales |
252,490 | 242,782 | 187,123 | |||||||||
Amortization of acquired developed technology |
5,780 | 1,321 | | |||||||||
Gross margin |
60,862 | 74,452 | 96,375 | |||||||||
Research and development expenses, including
$4,368, $6,077 and $5,225 from related
parties for the years ended March 31, 2010,
2009 and 2008, respectively |
74,145 | 54,043 | 38,324 | |||||||||
Selling, general and administrative
expenses, including $3,832, $5,493 and
$5,515 from related parties for the years
ended March 31, 2010, 2009 and 2008,
respectively |
54,829 | 63,483 | 48,291 | |||||||||
Impairment of goodwill |
| 67,681 | | |||||||||
Acquired in-process research and development |
| 15,700 | | |||||||||
Amortization of purchased intangibles |
9,240 | 5,540 | | |||||||||
Loss on disposal of property and equipment |
159 | 122 | 502 | |||||||||
Operating (loss) income |
(77,511 | ) | (132,117 | ) | 9,258 | |||||||
Interest (expense) income, net |
(615 | ) | 2,748 | 8,534 | ||||||||
Other expense, net |
(472 | ) | (187 | ) | (744 | ) | ||||||
(Loss) income before income taxes |
(78,598 | ) | (129,556 | ) | 17,048 | |||||||
Income tax benefit (expense) |
85 | (16 | ) | | ||||||||
Net (loss) income |
$ | (78,513 | ) | $ | (129,572 | ) | $ | 17,048 | ||||
Net (loss) income per share: |
||||||||||||
Basic |
$ | (0.88 | ) | $ | (1.86 | ) | $ | 0.26 | ||||
Diluted |
$ | (0.88 | ) | $ | (1.86 | ) | $ | 0.26 | ||||
Weighted average number of shares used in
computing net (loss) income per share: |
||||||||||||
Basic |
88,952 | 69,775 | 64,598 | |||||||||
Diluted |
88,952 | 69,775 | 64,633 |
See accompanying notes to consolidated financial statements.
50
Table of Contents
Opnext, Inc.
Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
Years ended March 31, 2010, 2009 and 2008
Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
Years ended March 31, 2010, 2009 and 2008
Retained | Accumulated | ||||||||||||||||||||||||||||
Number | Additional | Earnings | Other | ||||||||||||||||||||||||||
Of | Par | Paid-In | (Accumulated | Comprehensive | Shareholders | Comprehensive | |||||||||||||||||||||||
Shares | Value | Capital | Deficit) | Income (Loss) | Equity | Income (Loss) | |||||||||||||||||||||||
(in thousands, except share and per share amounts) | |||||||||||||||||||||||||||||
Balance at March 31, 2007 |
64,549,100 | $ | 645 | $ | 577,257 | $ | (282,108 | ) | $ | (5,137 | ) | $ | 290,657 | ||||||||||||||||
Stock-based compensation, net
of forfeitures |
70,177 | 4,160 | 4,160 | ||||||||||||||||||||||||||
Stock options exercised |
21,573 | 1 | 22 | 23 | |||||||||||||||||||||||||
Amendment of stock
appreciation rights |
2,432 | 2,432 | |||||||||||||||||||||||||||
Restricted shares repurchased |
(20,937 | ) | (94 | ) | (94 | ) | |||||||||||||||||||||||
Initial public offering costs |
(105 | ) | (105 | ) | |||||||||||||||||||||||||
Net income |
17,048 | 17,048 | $ | 17,048 | |||||||||||||||||||||||||
Unrealized gain on foreign
currency forward contracts |
85 | 85 | 85 | ||||||||||||||||||||||||||
Defined benefit plan costs, net |
(254 | ) | (254 | ) | (254 | ) | |||||||||||||||||||||||
Foreign currency translation
adjustment |
9,126 | 9,126 | 9,126 | ||||||||||||||||||||||||||
Total comprehensive income |
$ | 26,005 | |||||||||||||||||||||||||||
Balance at March 31, 2008 |
64,619,913 | 552 | 583,766 | (265,060 | ) | 3,820 | 323,078 | ||||||||||||||||||||||
Stock-based compensation, net
of forfeitures |
5,705 | 5,705 | |||||||||||||||||||||||||||
Stock options exercised |
3,934 | 6 | 6 | ||||||||||||||||||||||||||
Restricted shares forfeited |
(8,333 | ) | | ||||||||||||||||||||||||||
Restricted shares repurchased |
(30,571 | ) | (63 | ) | (63 | ) | |||||||||||||||||||||||
Equity offering to StrataLight
shareholders, net |
22,298,161 | 223 | 113,336 | 113,559 | |||||||||||||||||||||||||
StrataLight Employee Liquidity
Bonus Plan |
1,773,343 | 18 | 5,775 | 5,793 | |||||||||||||||||||||||||
Net loss |
(129,572 | ) | (129,572 | ) | $ | (129,572 | ) | ||||||||||||||||||||||
Unrealized loss on foreign
currency forward contracts |
(145 | ) | (145 | ) | (145 | ) | |||||||||||||||||||||||
Defined benefit plan costs, net |
65 | 65 | 65 | ||||||||||||||||||||||||||
Foreign currency translation
adjustment |
2,111 | 2,111 | 2,111 | ||||||||||||||||||||||||||
Total comprehensive loss |
$ | (127,541 | ) | ||||||||||||||||||||||||||
Balance at March 31, 2009 |
88,656,447 | 730 | 708,588 | (394,632 | ) | 5,851 | 320,537 | ||||||||||||||||||||||
Stock-based compensation,
net of forfeitures |
6,630 | 6,630 | |||||||||||||||||||||||||||
Stock options exercised |
11,053 | 16 | 16 | ||||||||||||||||||||||||||
Restricted shares repurchased |
(7,122 | ) | (17 | ) | (17 | ) | |||||||||||||||||||||||
StrataLight Employee Liquidity
Bonus Plan, net of cancellations |
1,197,558 | 12 | 1,081 | 1,093 | |||||||||||||||||||||||||
Net loss |
(78,513 | ) | (78,513 | ) | $ | (78,513 | ) | ||||||||||||||||||||||
Unrealized loss on foreign
currency forward contracts |
(191 | ) | (191 | ) | (191 | ) | |||||||||||||||||||||||
Defined benefit plan costs, net |
125 | 125 | 125 | ||||||||||||||||||||||||||
Foreign currency translation
adjustment |
3,860 | 3,860 | 3,860 | ||||||||||||||||||||||||||
Total comprehensive loss |
$ | (74,719 | ) | ||||||||||||||||||||||||||
Balance at March 31, 2010 |
89,857,936 | $ | 725 | $ | 716,315 | $ | (473,145 | ) | $ | 9,645 | $ | 253,540 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
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Table of Contents
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(in thousands) | ||||||||||||
Cash flows from operating activities |
||||||||||||
Net (loss) income |
$ | (78,513 | ) | $ | (129,572 | ) | $ | 17,048 | ||||
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities: |
||||||||||||
Impairment of goodwill |
| 67,681 | | |||||||||
Acquired in-process research and development |
| 15,700 | | |||||||||
Depreciation and amortization |
22,312 | 14,385 | 10,615 | |||||||||
Amortization of purchased intangibles |
15,019 | 6,861 | | |||||||||
Stock-based compensation expense associated with the StrataLight
Employee Liquidity Bonus Plan |
1,216 | 5,766 | | |||||||||
Stock-based compensation expense associated with equity awards |
6,632 | 5,644 | 3,337 | |||||||||
Loss on disposal of property and equipment |
159 | 122 | 502 | |||||||||
Changes in assets and liabilities, net of acquisition of business: |
||||||||||||
Trade receivables, net |
9,073 | (4,374 | ) | 3,134 | ||||||||
Inventories |
12,397 | 23,046 | (18,741 | ) | ||||||||
Prepaid expenses and other current assets |
(492 | ) | (454 | ) | (452 | ) | ||||||
Other assets |
(167 | ) | (163 | ) | (2 | ) | ||||||
Trade payables |
4,523 | (16,939 | ) | (2,492 | ) | |||||||
Accrued expenses and other liabilities |
(10,742 | ) | 1,871 | (1,424 | ) | |||||||
Net cash (used in) provided by operating activities |
(18,583 | ) | (10,426 | ) | 11,525 | |||||||
Cash flows from investing activities |
||||||||||||
Capital expenditures |
(7,877 | ) | (4,157 | ) | (5,071 | ) | ||||||
Acquisition of business, net of cash acquired |
| (28,425 | ) | | ||||||||
Net cash used in investing activities |
(7,877 | ) | (32,582 | ) | (5,071 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Short-term debt borrowings, net |
| | 20,060 | |||||||||
Payments on capital lease obligations |
(10,602 | ) | (9,105 | ) | (5,452 | ) | ||||||
Exercise of stock options |
16 | 6 | 23 | |||||||||
Net proceeds from initial public offering |
| | (105 | ) | ||||||||
Restricted shares repurchased |
(17 | ) | (63 | ) | (94 | ) | ||||||
Net cash (used in) provided by financing activities |
(10,603 | ) | (9,162 | ) | 14,432 | |||||||
Effect of foreign currency exchange rates on cash and cash equivalents |
797 | (607 | ) | 1,014 | ||||||||
(Decrease) increase in cash and cash equivalents |
(36,266 | ) | (52,777 | ) | 21,900 | |||||||
Cash and cash equivalents at beginning of year |
168,909 | 221,686 | 199,786 | |||||||||
Cash and cash equivalents at end of year |
$ | 132,643 | $ | 168,909 | $ | 221,686 | ||||||
Supplemental cash flow information |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest paid |
$ | 980 | $ | 965 | $ | 435 | ||||||
Income tax refund, net |
$ | (129 | ) | $ | | $ | | |||||
Supplemental investing activities |
||||||||||||
Net cash paid for acquisition of StrataLight |
$ | | $ | 21,593 | $ | | ||||||
Payments for acquisition and equity registration costs |
| 6,832 | | |||||||||
Acquisition of StrataLight, net of cash acquired |
$ | | $ | 28,425 | $ | | ||||||
Non-cash financing activities |
||||||||||||
Capital lease obligations incurred |
$ | (109 | ) | $ | (15,384 | ) | $ | (11,825 | ) |
See accompanying notes to consolidated financial statements.
52
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Opnext, Inc.
Notes to Consolidated Financial Statements
(in thousands, except per share amounts)
(in thousands, except per share amounts)
1. Background and Basis of Presentation
Opnext, Inc. and subsidiaries (OPI, Opnext or the Company) is a
leading designer and manufacturer of optical subsystems, modules and components that
enable high-speed telecommunications and data communications networks, as well as
lasers and infrared LEDs for industrial and commercial applications.
On June 4, 2003, the Company acquired 100% of the outstanding shares of
Pine Photonics Communications, Inc. (Pine) in exchange for 1,672 shares of Opnext
Class B common stock. Each share of the Companys Class B common stock had one voting
right. At March 31, 2007, 84 of the aforementioned outstanding shares were held in
escrow as security for potential breach by Pine of certain terms and conditions of
the acquisition agreement. These shares were released from escrow on June 4, 2007.
On January 25, 2007, all Class A common stock was converted into Class B
common stock. On January 26, 2007, the Company declared a one for one-third reverse
stock split of the Companys outstanding Class B common stock effective for all
shareholders of record on January 26, 2007. The financial statements have been
retroactively adjusted for the reverse split. In addition, the reverse stock split
proportionately reduced the number of issued and outstanding stock-based awards,
including restricted stock, stock options and stock appreciation rights. On
January 26, 2007, the Company converted all Class B common stock into a single class
of common stock.
In February 2007, the Company completed its initial public offering of
19,446 common shares at $15.00 per share. Net proceeds to the Company from the
offering were $170,983. The offering included 12,536 newly issued shares as well as
6,667 and 243 shares previously owned by Hitachi and Clarity Opnext Holdings II, LLC,
respectively.
On January 9, 2009, the Company completed its acquisition of StrataLight
Communications, Inc. (StrataLight), a leading supplier of 40Gbs optical subsystems
for use in long-haul and ultra-long-haul communication networks. The aggregate
consideration consisted of approximately 26,545 shares of the Companys common stock
and $47,946 in cash, including the impact of net purchase price adjustments pursuant
to the merger agreement.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The financial statements reflect the consolidated results of Opnext and its
subsidiaries. All intercompany transactions and balances between and among the
Companys businesses have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and sales and expenses during the
periods reported. These estimates are based on historical experience and on
assumptions that are believed to be reasonable under the circumstances. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected in
the period that they are determined to be necessary. These estimates include
assessments of the ability to collect accounts receivable, the use and recoverability
of inventory, the realization of deferred tax assets, expected warranty costs, fair
value of stock awards, purchased tangible and intangible assets and liabilities in
business combinations, estimated useful lives for depreciation, and amortization
periods of tangible and intangible assets, among others. Actual results may differ
from these estimates, and the estimates will change under different assumptions or
conditions.
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Table of Contents
Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Revenue Recognition
Revenue is derived principally from sales of products. Revenue is
recognized when persuasive evidence of an arrangement exists (usually in the form of
a purchase order), delivery has occurred or services have been rendered, title and
risk of loss have passed to the customer, the price is fixed or determinable and
collection is reasonably assured based on the creditworthiness of the customer and
certainty of customer acceptance. These conditions generally exist upon shipment or
upon notice from certain customers in Japan that they have completed their inspection
and have accepted the product.
The Company participates in vendor managed inventory (VMI) programs
with certain of its customers, whereby the Company maintains an agreed upon quantity
of certain products at a customer-designated warehouse. Revenue pursuant to the VMI
programs is recognized when the products are physically pulled by the customer, or
its designated contract manufacturer, and put into production. Simultaneous with the
inventory pulls, purchase orders are received from the customer, or its designated
contract manufacturer, as evidence that a purchase request and delivery have occurred
and that title has passed to the customer at a previously agreed upon price.
Warranties
The Company sells certain of its products to customers with a product
warranty that provides repairs at no cost to the customer or the issuance of a credit
to the customer. The length of the warranty term depends on the product being sold,
but generally ranges from one year to five years. In addition to accruing for
specific known warranty exposures, the Company accrues its estimated exposure to
warranty claims based upon historical claim costs as a percentage of sales multiplied
by prior sales still under warranty at the end of any period. Management reviews
these estimates on a regular basis and adjusts the warranty provisions as actual
experience differs from historical estimates or other information becomes available.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Shipping and Handling Costs
Outbound shipping and handling costs are included in selling, general
and administrative expenses in the accompanying consolidated statements of
operations. Shipping and handling costs for the years ended March 31, 2010, 2009 and
2008 were $2,123, $4,577 and $5,161, respectively.
Foreign Currency Transactions and Translation
Gains and losses resulting from foreign currency transactions
denominated in a currency other than the entitys functional currency are included in
the consolidated statements of operations. Balance sheet accounts of the Companys
foreign operations for which the local currency is the functional currency are
translated into U.S. dollars at period-end exchange rates, while sales and expenses
are translated at weighted average exchange rates. Translation gains or losses
related to net assets of such operations are shown as components of shareholders
equity. Transaction gains and losses have been included in other (expense)
income, net for the period in which the exchange rates change. The Company recorded
transaction losses of $549, $241 and $982 for the years ended March 31, 2010, 2009
and 2008, respectively.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
All derivative financial instruments utilized for hedging purposes are
recorded as either an asset or liability on the balance sheet at fair value and
changes in the derivative fair value are recorded in earnings for those classified as
fair value hedges and in other comprehensive income (loss) for those classified as
cash flow hedges.
As of March 31, 2010, the Company had a net receivable position of
$1,178, and as of March 31, 2009, a net payable position of $1,512, subject to
foreign currency exchange risk between the Japanese yen and the U.S. dollar. At
times, the Company mitigates a portion of the exchange rate risk by utilizing forward
contracts to cover the net receivable positions. The Company also utilizes forward
contracts to mitigate foreign exchange currency risk between the Japanese yen and the
U.S. dollar on forecasted intercompany sales transactions between its subsidiary
units. These foreign currency exchange forward contracts generally have expiration
dates of 90 days or less to hedge a portion of this future risk and did not exceed
$12.0 million in aggregate at any point in time during the year ended March 31, 2010.
At March 31, 2010, there were six foreign currency exchange forward contracts in
place with an aggregate nominal value of $12,000, and at March 31, 2009, there were
three foreign currency exchange forward contracts in place with an aggregate nominal
value of $6,000, all of which have expiration dates of 90 days or less, to hedge a
portion of this future risk. The total realized benefit from the foreign currency
exchange forward contracts was $491 and $1,460 for the years ended March 31, 2010 and
2009, respectively, and was included in cost of goods sold. The Company does not
enter into foreign currency exchange forward contracts for trading purposes, but
rather as a hedging vehicle to minimize the effect of foreign currency fluctuations.
Net (Loss) Income per Common Share
Basic net (loss) income per share has been computed using the
weighted-average number of shares of common stock outstanding during the period.
Diluted net (loss) income per share has been computed using the weighted-average
number of shares of common stock outstanding during the period and dilutive common
shares potentially issuable from stock-based incentive plans using the treasury stock
method.
Cash and Cash Equivalents
The Company considers all investments with an original maturity of
three months or less at the time of purchase to be cash equivalents. As of March 31,
2010, cash and cash equivalents included $991 of restricted cash held in
escrow to guarantee value added taxes and domestic facility lease
obligations
and $214 of restricted cash held in escrow pending resolution of claim for indemnification associated with the
acquisition of StrataLight. As of March 31, 2009, cash and cash equivalents included
$933 of restricted cash held in escrow to guarantee value added taxes and
domestic facility lease obligations and $5,395 of restricted cash held in escrow to be distributed pursuant to
the agreement and plan of merger and the Employee Liquidity Bonus Plan associated
with the StrataLight acquisition.
Trade Receivables
The Company estimates allowances for doubtful accounts based upon
historical payment patterns, aging of accounts receivable and actual write-off
history, as well as assessments of customers creditworthiness. Changes in the
financial condition of customers could have an effect on the allowance balance
required and result in a related charge or credit to earnings. As a policy, the
Company does not require collateral from its customers. The allowance for doubtful
accounts was $900 and $1,022 at March 31, 2010 and 2009, respectively.
Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. Inventories consist of raw materials, work-in-process and
finished goods, including inventory consigned to our customers and our contract
manufacturers. Inventory valuation and firm, committed purchase order assessments are
performed on a
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
quarterly basis and those which are identified to be obsolete or in excess of
forecasted usage are written down to their estimated realizable value. Estimates of
realizable value are based upon managements analyses and assumptions, including, but
not limited to, forecasted sales levels by product, expected product lifecycle,
product development plans and future demand requirements. The Company typically uses
a 12 month rolling forecast based on factors including, but not limited to,
production cycles, anticipated product orders, marketing forecasts, backlog, shipment
activities and inventories owned by us but part of VMI programs and held at customer
locations. If market conditions are less favorable than forecasted or actual demand
from customers is lower than estimated, additional inventory write-downs may be
required. If demand is higher than expected, inventories that had previously been
written down may be sold.
Certain of the Companys more significant customers have implemented a
supply chain management tool called VMI programs that require suppliers, such as the
Company, to assume responsibility for maintaining an agreed upon level of consigned
inventory at the customers location or at a third-party logistics provider, based on
the customers demand forecast. Notwithstanding the fact that the Company builds and
ships the inventory, the customer does not purchase the consigned inventory until the
inventory is drawn or pulled by the customer or third-party logistics provider to be
used in the manufacture of the customers product. Though the consigned inventory may
be at the customers or third-party logistics providers physical location, it
remains inventory owned by the Company until the inventory is drawn or pulled, which
is the time at which the sale takes place.
Property, Plant, and Equipment and Internal Use Software
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is determined using the straight-line method over the
estimated useful lives of the various asset classes. Estimated useful lives for
building improvements range from three to fifteen years. Estimated useful lives for
machinery, electronic and other equipment range from three to seven years. Property,
plant and equipment include those assets under capital lease and the associated
accumulated amortization.
Major renewals and improvements are capitalized and minor replacements,
maintenance, and repairs are charged to current operations as incurred. Upon
retirement or disposal of assets, the cost and related accumulated depreciation are
removed from the consolidated balance sheets and any gain or loss is reflected in
other operating expenses.
Certain costs of computer software obtained for internal use are
capitalized and amortized on a straight-line basis over three to seven years. Costs
for maintenance and training, as well as the cost of software that does not add
functionality to an existing system, are expensed as incurred.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, are reviewed for
impairment in connection with the Companys annual budget and long-term planning
process and whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized in the amount by which the carrying amount of the
asset exceeds the fair value of the asset. In estimating future cash flows, assets
are grouped at the lowest level of identifiable cash flows that are largely
independent of cash flows from other groups. Assumptions underlying future cash flow
estimates are subject to risks and uncertainties. The Companys evaluations for the
years ended March 31, 2010, 2009 and 2008 indicated that there were no impairments.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Goodwill and Business Combinations
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. The Company accounts for acquisitions using the purchase method of
accounting. Amounts paid for each acquisition are allocated to the assets acquired
and liabilities assumed based on their fair values at the date of acquisition. The
Company then allocates the purchase price in excess of tangible assets acquired to
identifiable intangible assets based on valuations that use information and
assumptions provided by management. Any excess purchase price over the fair value of
net tangible and intangible assets acquired and liabilities assumed is allocated to
goodwill.
The Company uses a two-step impairment test to identify potential goodwill
impairment and measure the amount of the goodwill impairment loss, if any, to be
recognized. In the first step, the fair value of each reporting unit is compared to
its carrying value to determine if the goodwill is impaired. If the fair value of the
reporting unit exceeds the carrying value of the net assets assigned to that unit,
then the goodwill is not impaired and no further testing is required. If the carrying
value of the net assets assigned to the reporting unit exceeds its fair value, then a
second step is performed in order to determine the implied fair value of the
reporting units goodwill and an impairment loss is recorded in an amount equal to
the difference between the implied fair value and the carrying value of the goodwill.
Based upon impairment analyses performed during the year ended March 31,
2009, the Company recorded aggregate goodwill impairment charges of $67,681
attributable to the acquisitions of StrataLight and Pine. Goodwill was $0 at March
31, 2010 and 2009, and $5,698 at March 31, 2008.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in the
consolidated statements of operations in the period that includes the enactment date.
A valuation allowance is recorded to reduce the carrying amounts of deferred tax
assets if it is more likely than not that such assets will not be realized.
Fair Value Measurements
Fair value is defined as an exit price, representing the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants based on the highest and best use of the
asset or liability. The Company uses valuation techniques to measure fair value that
maximizes the use of observable inputs and minimizes the use of unobservable inputs.
Observable inputs are inputs that market participants would use in pricing the asset
or liability and are based on market data obtained from sources independent of the
Company. Unobservable inputs reflect assumptions market participants would use in
pricing the asset or liability based on the best information available in the
circumstances. The hierarchy is broken down into three levels based on the
reliability of inputs as follows:
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
| Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Because valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. | ||
| Level 2 Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Valuations for Level 2 assets are prepared on an individual asset basis using data obtained from recent transactions for identical securities in inactive markets or pricing data from similar assets in active and inactive markets. | ||
| Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The following tables summarize the valuation of the Companys financial
instruments as of March 31, 2010 and 2009:
Significant | ||||||||||||||||||
Quoted Market | Other | Significant | ||||||||||||||||
Value as of | Prices in Active | Observable | Unobservable | |||||||||||||||
March 31, | Markets | Inputs | Inputs | |||||||||||||||
2010 | (Level 1) | (Level 2) | (Level 3) | Balance Sheet Classification | ||||||||||||||
Assets: |
||||||||||||||||||
Money market funds |
$ | 82,487 | $ | 82,487 | $ | | $ | | Cash and cash equivalents | |||||||||
Liabilities: |
||||||||||||||||||
Forward foreign
currency exchange
contracts |
$ | 251 | $ | | $ | 251 | $ | | Accrued expenses | |||||||||
Significant | ||||||||||||||||||
Quoted Market | Other | Significant | ||||||||||||||||
Value as of | Prices in | Observable | Unobservable | |||||||||||||||
March 31, | Active Markets | Inputs | Inputs | |||||||||||||||
2009 | (Level 1) | (Level 2) | (Level 3) | Balance Sheet Classification | ||||||||||||||
Assets: |
||||||||||||||||||
Money market funds |
$ | 134,774 | $ | 134,774 | $ | | $ | | Cash and cash equivalents | |||||||||
Liabilities: |
||||||||||||||||||
Forward foreign
currency exchange
contracts |
$ | 60 | $ | | $ | 60 | $ | | Accrued expenses |
The Companys investments in money market funds are recorded at fair value based
on quoted market prices. The forward foreign currency exchange contracts are
primarily measured based on the foreign currency spot and forward rates quoted by
banks or foreign currency dealers.
Stock-Based Incentive Plans
All equity-based payments, including grants of employee stock options, are
recognized in the financial statements based on their grant-date fair value. The
Company estimates the fair value of stock-based awards utilizing the Black-Scholes
pricing model. The fair value of the awards is amortized as compensation expense on a
straight-line basis over the requisite service period of the award, which is
generally the vesting period. The fair value calculations involve significant
judgments, assumptions, estimates and complexities that impact the amount of
compensation expense to be recorded in current and future periods. The factors
include:
| The time period that stock-based awards are expected to remain outstanding has been determined based on the average of the original award period and the remaining vesting period. |
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
| Since December 31, 2007, the Company has estimated volatility based on the Companys historical stock prices. Until December 31, 2007, the future volatility of the Companys stock was estimated based on the median calculated value of the historical volatility of companies believed to have similar market performance characteristics as those of the Company. Use of comparable companies was necessary during this period since the Company did not possess a sufficient stock price history. | ||
| A dividend yield of zero has been assumed for all issued awards based on the Companys actual past experience and the fact that Company does not anticipate paying a dividend on its shares in the near future. | ||
| The Company has based its risk-free interest rate assumption for awards on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the award. | ||
| The forfeiture rate for awards was based on the Companys actual historical forfeiture trend. |
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board, (FASB) issued SFAS No.
168, The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principlesa replacement of FASB Statement No. 162 (SFAS 168).
The statement confirmed that the FASB Accounting Standards Codification (the
Codification) would become the single official source of authoritative U.S. GAAP
(other than guidance issued by the SEC) and would supersede existing non-SEC
accounting and reporting standards resulting in only one level of authoritative U.S.
GAAP. All other literature would be considered non-authoritative. Following this
Statement, the Board would not issue new standards in the form of Statements, FASB
Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it would issue
Accounting Standards Updates. The Codification does not change U.S. GAAP; instead, it
introduces a new structure that is organized in an easily accessible, user-friendly
online research system. The Codification, which changes the referencing of financial
standards, became effective for interim and annual periods ending on or after
September 15, 2009
In May 2009, the FASB issued ASC 855, Subsequent Events (ASC 855). ASC 855
establishes general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. In February 2010, the FASB issued Accounting Standards Update
(ASU) 2010-09, Subsequent Events (Topic 855), an amendment of ASC 855, to eliminate
the requirement for SEC filers to disclose the date through which an entity has
evaluated subsequent events. ASU 2010-09 also clarifies the intended scope of the
reissuance disclosure provisions. ASU 2010-09 is effective upon issuance and had no
impact on the Companys consolidated financial statements. Refer to Note 20 to these
consolidated financial statements for the relevant disclosure.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
3. Business Combinations
On January 9, 2009, the Company completed its acquisition of StrataLight.
The acquisition expanded the Companys portfolio of 40Gbps products and subsystems
expertise. Pursuant to the agreement and plan of merger (the Merger Agreement), the
aggregate consideration consisted of approximately 26,545 shares of the Companys
common stock and $47,946 in cash, including the impact of net purchase price
adjustments to the Merger Agreement.
Pursuant to the Merger Agreement, eighty-four percent (84%) of the
aggregate consideration was allocated to the former StrataLight shareholders,
consisting of 22,298 shares of the Companys common stock and $40,275 in cash. Of the
total cash consideration, $37,755 was paid to the former shareholders on the closing
date with the remaining $2,520 held in escrow through January 9, 2010 to satisfy the
former StrataLight shareholders indemnification obligations under the Merger
Agreement. Also on January 9, 2009, 20,068 shares of Opnext common stock were
distributed to the former shareholders with the remaining 2,230 shares held in
escrow through January 9, 2010. As of March 31, 2010, $214 of cash consideration and
118 shares remained in escrow pending final resolution indemnification claims.
Pursuant to the Merger Agreement, sixteen percent (16%) of the aggregate
merger consideration was allocated in accordance with the terms of a bonus plan
established for the benefit of the StrataLight employees and certain other designees
(the Employee Liquidity Bonus Plan). During the years ended March 31, 2010 and
2009, the Company recorded $7,346 and $10,951, respectively, of expense related to
the Employee Liquidity Bonus Plan.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
The Company has accounted for the acquisition under the purchase
method and has included the operating results of StrataLight in its consolidated
financial results since January 9, 2009. The following table summarizes the
components of the total purchase price as determined under the purchase method of
accounting:
Fair Value of Opnext shares |
$ | 114,167 | ||
Cash consideration |
40,275 | |||
Acquisition related transaction costs |
6,224 | |||
Acquisition related employee bonus costs |
27 | |||
Total purchase price |
$ | 160,693 | ||
The $114,167 fair value of the 22,298 shares distributed on the closing
date was based upon the $5.12 average per share closing price of Opnext common shares
for the period beginning two trading days before and ending two trading days after
the July 9, 2008 signing date of the Merger Agreement. Acquisition related
transaction costs include investment banking, legal and accounting fees and other
external costs directly related to the merger.
The purchase price allocation based on the estimated fair value of assets
acquired and liabilities assumed was as follows:
Tangible assets acquired and liabilities assumed: |
||||
Cash and short-term investments |
$ | 18,682 | ||
Inventories |
30,400 | |||
Other current assets |
6,707 | |||
Fixed assets |
10,635 | |||
Other non-current assets |
59 | |||
Accounts payable and accrued liabilities |
(29,518 | ) | ||
Other non-current liabilities |
(55 | ) | ||
Net tangible assets |
36,910 | |||
Identifiable intangible assets |
46,100 | |||
In-process research and development |
15,700 | |||
Goodwill |
61,983 | |||
Total purchase price |
$ | 160,693 | ||
The following unaudited pro forma financial information combines the
consolidated results of operations as if the acquisition of StrataLight had occurred
as of April 1, 2007. Pro forma adjustments include only the effects of events
directly attributable to transactions that are supportable and expected to have a
continuing impact, including pro forma adjustments for amortization of acquired
intangibles.
Pro Forma Basis for Fiscal Years | ||||||||
Ended March 31, | ||||||||
2009 | 2008 | |||||||
Sales |
$ | 409,416 | $ | 378,714 | ||||
Net loss |
(52,517 | ) | (107,971 | ) | ||||
Net loss per share-basic |
$ | (0.58 | ) | $ | (1.23 | ) | ||
Net loss per share-diluted |
$ | (0.58 | ) | $ | (1.23 | ) |
Pro forma net loss for the year ended March 31, 2009 included $7,147 of
purchased intangible asset amortization expense and $346 of Employee Liquidity Bonus
Plan expense. Pro forma net loss for the year ended March 31, 2008
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
included a $61,983 goodwill impairment charge, $38,534 of purchase intangible asset
amortization expense and $18,122 of Employee Liquidity Bonus Plan expense.
The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the acquisition been consummated
as of April 1, 2007 nor is it necessarily indicative of future operating results.
4. Restructuring Charges
On March 31, 2009, in connection with the acquisition of StrataLight,
the Company recorded liabilities of $1,055, which included severance and related
benefit charges of $331 resulting from workforce reductions across the Company and
facility charges of $724 for the Eatontown, New Jersey location in connection with
the relocation of the Companys headquarters to Fremont, California. These cost
reduction measures rationalized the Companys cost structure and were enabled by
synergies resulting from the StrataLight acquisition.
As of March 31, 2010, the Company has recorded liabilities for severance and
related benefit charges of $121 and facility consolidation charges of $502. During
the year-ended March 31, 2010, the Company recorded $1,379 of charges related to
workforce reductions. The remaining lease payments will reduce the facility accrual,
with associated interest accretion, through August 2011.
Workforce | ||||||||
Reduction | Facilities | |||||||
Accrual balance as of March 31, 2009 |
$ | 331 | $ | 724 | ||||
Restructuring charges: |
||||||||
Manufacturing expense |
359 | | ||||||
Research and development expense |
276 | | ||||||
Marketing and sales expense |
136 | | ||||||
General and administrative expense |
608 | 95 | ||||||
Cash payments |
(1,589 | ) | (317 | ) | ||||
Accrual balance as of March 31, 2010 |
$ | 121 | $ | 502 | ||||
5. Inventories
Components of inventories are summarized as follows:
March 31, | ||||||||
2010 | 2009 | |||||||
Raw materials |
$ | 49,859 | $ | 61,132 | ||||
Work-in-process |
14,810 | 10,791 | ||||||
Finished goods |
28,349 | 29,687 | ||||||
Inventories |
$ | 93,018 | $ | 101,610 | ||||
Inventories included $23,599 and $28,554 of inventory consigned to
customers and contract manufacturers at March 31, 2010 and 2009, respectively.
6. Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
March 31, | ||||||||
2010 | 2009 | |||||||
Machinery, electronic, and other equipment |
$ | 245,154 | $ | 224,854 | ||||
Computer software |
17,928 | 16,815 | ||||||
Building improvements |
6,093 | 5,830 | ||||||
Construction-in-progress |
5,755 | 9,489 | ||||||
Total property, plant, and equipment |
274,930 | 256,988 | ||||||
Less accumulated depreciation and amortization |
(214,608 | ) | (185,022 | ) | ||||
Property, plant, and equipment, net |
$ | 60,322 | $ | 71,966 | ||||
Property, plant and equipment included capitalized leases of $56,682 and
$53,710 at March 31, 2010 and 2009, respectively, and related accumulated
depreciation of $28,782 and $17,621 at March 31, 2010 and 2009, respectively.
Amortization associated with capital leases is recorded in depreciation expense.
Amortization of computer software costs was $959, $2,156 and $1,972 for the years
ended March 31, 2010, 2009 and 2008, respectively.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
7. Intangible Assets and Goodwill
Intangible Assets other than Goodwill
As a result of the StrataLight acquisition, the Company recorded $61,800 of
intangible assets, including $15,700 of in-process research and development costs
that were expensed in the year ended March 31, 2009. The in-process research and
development costs represented incomplete StrataLight projects that had not reached
technological feasibility and had no alternative future use as of the date of the
merger. The value assigned to these projects was determined by using the excess
earnings method under the income approach by discounting forecasted cash flows
directly related to the products expecting to result from the projects, net of
returns on contributory assets, including working capital, fixed assets, customer
relationships, and assembled workforce. The remaining acquired intangible assets
included $21,799 of developed product research with a weighted average remaining life
of four years and $2,421 assigned to customer relationships with a weighted average
remaining life of two years as of March 31, 2010.
The components of the intangible assets at March 31, 2010 were as follows:
Gross Carrying | Accumulated | Net Carrying | ||||||||||
Amount | Amortization | Amount | ||||||||||
Developed product research |
$ | 28,900 | $ | (7,101 | ) | $ | 21,799 | |||||
Order backlog |
13,100 | (13,100 | ) | | ||||||||
Customer relationships |
4,100 | (1,679 | ) | 2,421 | ||||||||
Total intangible assets |
$ | 46,100 | $ | (21,880 | ) | $ | 24,220 | |||||
Amortization expense related to intangible assets was $15,019 and $22,561
for the fiscal years ended March 31, 2010 and 2009, respectively. The following table
outlines the estimated future amortization expense related to intangible assets as of
March 31, 2010:
Year Ended March 31, | Amount | |||
2011 |
$ | 7,147 | ||
2012 |
6,834 | |||
2013 |
5,780 | |||
2014 |
4,459 | |||
Total |
$ | 24,220 | ||
Goodwill
As a result of the StrataLight acquisition, the Company recorded $61,983 of
goodwill, none of which was tax-deductible. The Company performs its annual
assessment of goodwill during the fourth quarter of the fiscal year unless events
suggest an impairment may have been incurred in an interim period. Application of the
goodwill impairment test requires the exercise of judgment, including the
determination of the fair value of each reporting
unit. The Company estimates the fair value of reporting units using an income
approach based on the present value of estimated future cash flows.
As part of the annual assessment of goodwill completed during the fourth
quarter ended March 31, 2009, there were significant indicators to conclude that an
impairment of the goodwill associated with the acquisition of StrataLight on
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
January 9, 2009 may have occurred. This conclusion was based on the
significant decrease in the Companys market capitalization and a significant
deterioration in the macroeconomic environment from the time of the acquisition
announcement on July 9, 2008 through March 31, 2009. The Company concluded in the
impairment analysis that the carrying value of the goodwill associated with the
StrataLight acquisition exceeded its fair value. As a result, the Company recorded an
impairment charge of $61,983 in the quarter ended March 31, 2009, which represented
the full amount of goodwill recorded in connection with the acquisition.
During the three-month period ended December 31, 2008, there were
sufficient indicators to require an interim goodwill impairment analysis, including a
significant decrease in the Companys market capitalization and a significant
deterioration in the macroeconomic environment largely caused by the widespread
unavailability of business and consumer credit. Based upon the interim goodwill
analysis conducted, an impairment was indicated and the Company recorded a $5,698
charge, which represented the full amount of goodwill recorded in connection with the
Pine acquisition.
The following table reflects changes in the carrying amount of goodwill:
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Beginning balance |
$ | | $ | 5,698 | $ | 5,698 | ||||||
Acquisition of StrataLight |
| 61,983 | | |||||||||
Impairment of goodwill |
| (67,681 | ) | | ||||||||
Ending balance |
$ | | $ | | $ | 5,698 | ||||||
8. Income Taxes
The following table presents the United States and foreign components of
income (loss) before income taxes:
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
United States |
$ | (52,113 | ) | $ | (120,665 | ) | $ | (5,873 | ) | |||
Foreign |
(26,485 | ) | (8,891 | ) | 22,921 | |||||||
(Loss) income before income taxes |
$ | (78,598 | ) | $ | (129,556 | ) | $ | 17,048 | ||||
Provision for income taxes: |
||||||||||||
Current: |
||||||||||||
Federal |
$ | (228 | ) | $ | | $ | | |||||
State and local |
87 | | | |||||||||
Foreign |
56 | 16 | | |||||||||
Subtotal |
$ | (85 | ) | $ | 16 | $ | | |||||
Deferred: |
||||||||||||
Federal |
$ | | $ | | $ | | ||||||
State and local |
| | | |||||||||
Foreign |
| | | |||||||||
Subtotal |
$ | | $ | | $ | | ||||||
Provision for income taxes |
$ | (85 | ) | $ | 16 | $ | | |||||
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
The following table presents the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate:
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
U.S. federal statutory income tax rate |
(35.0 | )% | (35.0 | )% | 35.0 | % | ||||||
State and local income taxes, net of federal income tax effect |
(3.2 | ) | (5.0 | ) | (1.8 | ) | ||||||
Foreign earnings taxed at different rates |
(1.7 | ) | (0.3 | ) | 7.5 | |||||||
Change in valuation allowance |
(12.6 | ) | (1.6 | ) | (45.0 | ) | ||||||
Goodwill impairment |
| 21.2 | | |||||||||
Expired net operating loss carryforwards |
52.0 | 15.6 | | |||||||||
Other |
0.4 | 5.1 | 4.3 | |||||||||
Effective income tax rate |
(0.1 | )% | 0.0 | % | 0.0 | % | ||||||
At March 31, 2010 and 2009, the Company did not have any material
unrecognized tax benefits and the Company does not anticipate that its unrecognized
tax benefits will significantly change within the next twelve months.
The Company recognizes interest and penalties on unrecognized tax
benefits as a component of income tax expense. The Company did not
have any accrued interest or penalties associated with any
unrecognized tax benefits as of March 31, 2010 and 2009.
The Company is subject to taxation in the United States, Japan and various
state, local and other foreign jurisdictions. During the year ended March 31, 2010,
the Internal Revenue Service completed an examination of the Companys U.S. Income
Tax Returns for the years ended March 31, 2007 and March 31, 2008, the State of New
Jersey completed an examination of the Companys New Jersey Corporate Business Tax
Returns for the years ended March 31, 2004 through March 31, 2007, and the German tax
authorities completed an examination of the Companys German tax returns for the
years ended March 31, 2005 through March 31, 2007. There were no adjustments
proposed and all returns were accepted as filed. The Companys Japan tax returns
have been examined by the Japan tax authorities through the year ended March 31,
2006.
The
components of deferred tax assets (liabilities) are as follows:
March 31, | ||||||||
2010 | 2009 | |||||||
Net operating loss, capital loss and credit carryforwards |
$ | 204,042 | $ | 208,277 | ||||
Inventory and other reserves |
29,851 | 36,029 | ||||||
Non-employee stock option expense to related parties |
9,387 | 9,387 | ||||||
Stock-based compensation |
5,844 | 4,191 | ||||||
Purchased intangibles and goodwill |
(9,868 | ) | (15,988 | ) | ||||
Capital leases and property, plant, and equipment |
(431 | ) | (2,605 | ) | ||||
Other |
(2,398 | ) | (1,027 | ) | ||||
Valuation allowance |
(236,427 | ) | (238,264 | ) | ||||
Total deferred tax assets (liabilities) |
$ | | $ | | ||||
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. At March 31, 2010 and 2009, management considered recent
operating results, near-term earnings expectations, and the highly competitive nature
of the high-technology market in making this assessment. At the end of each of the
respective years, management determined that it was more likely than not that the
full tax benefit of the deferred tax assets would not be realized. Accordingly, full
valuation allowances have been
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
provided against the net deferred tax assets. There can be no assurances that
the deferred tax assets subject to valuation allowances will ever be realized.
On February 8, 2010, Marubeni Corporation filed a Schedule 13G/A reporting that,
as of December 31, 2009, it beneficially owned 6,350,000 shares of Opnext common
stock, and amending the Schedule 13G it had previously filed on February 8, 2008,
which reported that as of September 18, 2007, it beneficially owned 7,500,000 shares
of the Companys common stock. The events reported in such filing, when taken
together with other changes in ownership of the Companys common stock by its five
percent or greater stockholders during the prior three-year period, constitute an
ownership change for the Company as that term is defined in Section 382 of the
Code, with the result of limiting the availability of the Companys net operating
loss carryforwards and other related tax attributes (NOLs) for future use.
As a result of the ownership change that occurred as of December 31, 2009, the
Companys U.S. federal and state NOLs have been reduced by $29,629 and $37,119,
respectively. The Companys U.S. federal and state NOLs had been previously reduced
by $15,837 and $41,528, respectively, as a result of prior acquisitions. After giving
effect to such reductions, the Company had U.S. federal, state and foreign NOLs of
$148,996, $54,845 and $312,670, respectively, at March 31, 2010. Of the NOLs at
March 31, 2010, $131,886 of U.S. federal NOLs and
$44,939 of state NOLs are subject to annual limitations in the amounts of $6,514
and $2,255, respectively, while the remaining NOLs may be carried forward to offset
future taxable income without limitation.
The U.S. federal, state and foreign NOLs will expire between 2020 and 2030, 2011
and 2030, and 2011 and 2017, respectively. During the year ended March 31, 2010, state and foreign NOLs of $4,780 and $100,074, respectively, expired unused.
During the year ending March 31, 2011, state and foreign NOLs of approximately
$5,591 and $89,850, respectively, will expire if unused.
The Company does not provide for U.S. federal income taxes on undistributed
earnings of its foreign subsidiaries as it intends to permanently reinvest such
earnings. At March 31, 2010, there were no undistributed earnings.
9. Stockholders Equity
The Company is authorized to issue 150,000 shares of $0.01 par value common
stock and 15,000 shares of $0.01 par value preferred stock. Each share of the
Companys common stock entitles the holder to one vote per share on all matters to be
voted upon by the shareholders. The board of directors has the authority to issue
preferred stock in one or more classes or series and to fix the designations, powers,
preferences and rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number of
shares constituting any class or series, without further vote or action by the
stockholders. As of March 31, 2010, no shares of preferred stock had been issued.
During the years ended March 31, 2010, 2009 and 2008, the Company
repurchased 7, 31 and 21 shares of common stock at weighted average per shares prices
of $2.49, $2.07 and $4.05, respectively, in connection with the payment of the tax
withholding obligation related to the vesting of certain restricted common shares
held by certain executives.
In connection with the acquisition of StrataLight on January 9, 2009, the
Company issued 22,298 shares of common stock, all of which were outstanding as of
March 31, 2010. In addition, the Company issued 4,247 common shares in connection
with the StrataLight Employee Liquidity Bonus Plan, of which 2,971 shares were issued
to participants, and 1,158 shares that would otherwise have been issued to
participants were withheld by the Company from issuance in satisfaction of
participant tax withholding obligations. 118 shares issued in connection with the
acquisition were held in an escrow account as of March 31, 2010 pending final
resolution of indemnification claims.
Rights Agreement
On June 18, 2009, the Companys board of directors adopted a shareholder rights
plan (the Rights Plan) designed to protect the Companys NOLs that the board of
directors considered to be a valuable asset that could be used to reduce future
potential federal and state income tax obligations. The rights were designed to deter
stock accumulations made without prior approval from the Companys board of directors
that would trigger an ownership change, as that term is defined in Section 382 of
the Code, with the result of
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
limiting the availability of future use of the NOLs to the Company. The Rights Plan
was not adopted in response to any known accumulation of shares of the Companys
stock.
On June 22, 2009, the Company distributed a dividend of one preferred stock
purchase right on each outstanding share of the Companys common stock to holders of
record on such date. Subject to limited exceptions, the rights will be exercisable if
a person or group acquires 4.99% or more of the Companys common stock or announces a
tender offer for 4.99% or more of the common stock. Under certain circumstances, each
right will entitle stockholders to buy one one-hundredth of a share of newly created
series A junior participating preferred stock of the Company at an exercise price of
$17.00. The Companys board of directors will be entitled to redeem the rights at a
price of $0.01 per right at any time before a person has acquired 4.99% or more of
the outstanding common stock.
The Rights Plan includes a procedure whereby the board of directors will
consider requests to exempt certain proposed acquisitions of common stock from the
applicable ownership trigger if the board of directors determines that the requested
acquisition will not limit or impair the availability of future use of the NOLs to
the Company. The rights will expire on June 22, 2012 or earlier, upon the closing of
a merger or acquisition transaction that is approved by the board of directors prior
to the time at which a person or group acquires 4.99% or more of the Companys common
stock or announces a tender offer for 4.99% or more of the common stock, or if the
board of directors determines that the NOLs have been fully utilized or are no longer
available under Section 382 of the Code.
If a person acquires 4.99% or more of the outstanding common stock of the
Company, each right will entitle the right holder to purchase, at the rights
then-current exercise price, a number of shares of common stock having a market value
at that time of twice the rights exercise price. The person who acquired 4.99% or
more of the outstanding common stock of the Company is referred to as the acquiring
person. Existing stockholders of the Company who already own 4.99% or more of the
Companys common stock would only be an acquiring person if they acquired
additional shares of common stock. Rights held by the acquiring person will become
void and will not be exercisable. If the Company is acquired in a merger or other
business combination transaction that has not been approved by the board of
directors, each right will entitle its holder to purchase, at the rights
then-current exercise price, a number of shares of the acquiring companys common
stock having a market value at that time of twice the rights exercise price.
On February 8, 2010, Marubeni Corporation filed a Schedule 13G/A reporting that,
as of December 31, 2009, it beneficially owned 6,350,000 shares of Opnext common
stock, and amending the Schedule 13G it had previously filed on February 8, 2008,
which reported that as of September 18, 2007, it beneficially owned 7,500,000 shares
of the Companys common stock. The events reported in such filing, when taken
together with other changes in ownership of the Companys common stock by its five
percent or greater stockholders during the prior three-year period, constitute an
ownership change for the Company as that term is defined in Section 382 of the
Code, with the result of limiting the availability of the Companys NOLs for future
use.
10. Net (Loss) Income Per Share
Basic net (loss) income per share is computed by dividing net (loss) income
by the weighted average number of common shares outstanding during the periods
presented. Diluted net (loss) income per share includes dilutive common stock
equivalents, using the treasury method, if dilutive.
The following table presents the calculation of basic and diluted net
(loss) income per share:
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Numerator: |
||||||||||||
Net (loss) income, basic and diluted |
$ | (78,513 | ) | $ | (129,572 | ) | $ | 17,048 | ||||
Denominator: |
||||||||||||
Weighted average shares outstanding basic |
88,952 | 69,775 | 64,598 | |||||||||
Effect of potentially dilutive options |
| | 35 | |||||||||
Weighted average shares outstanding diluted |
88,952 | 69,775 | 64,633 | |||||||||
Basic net (loss) income per share |
$ | (0.88 | ) | $ | (1.86 | ) | $ | 0.26 | ||||
Diluted net (loss) income per share |
$ | (0.88 | ) | $ | (1.86 | ) | $ | 0.26 | ||||
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
The following table summarizes the shares of common stock of the Company
issuable at the end of each period but that have been excluded from the computation
of diluted net loss per share as their effect is anti-dilutive.
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Stock options |
13,355 | 9,029 | 5,548 | |||||||||
Stock appreciation rights |
525 | 543 | 546 | |||||||||
Restricted stock units and other |
321 | 133 | | |||||||||
Total |
14,201 | 9,705 | 6,094 | |||||||||
11. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) as of March
31, 2010 and 2009 were as follows:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Unrealized loss on foreign currency forward contract |
$ | (251 | ) | $ | (60 | ) | ||
Defined benefit plan costs, net |
(64 | ) | (189 | ) | ||||
Foreign currency translation adjustment |
9,960 | 6,100 | ||||||
Accumulated other comprehensive income |
$ | 9,645 | $ | 5,851 | ||||
12. Employee Benefits
The Company sponsors the Opnext Corporation 401(k) Plan (the Plan)
to provide retirement benefits for its U.S. employees. As allowed under Section
401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions
for eligible employees. Employees may contribute from one percent to 60 percent of
their annual compensation to the Plan, subject to an annual limit as set periodically
by the Internal Revenue Service. The Company matches employee contributions at a
ratio of two-thirds of one dollar for each dollar an employee contributed up to a
maximum of two-thirds of the first six percent of compensation an employee
contributes. All matching contributions vest immediately. On April
1, 2009, the Company
suspended its matching contribution to the Plan in order to reduce the Companys
cost structure and operating expenses. Accordingly, the Company made no matching
contribution to the Plan for the year ended March 31, 2010. The Companys
matching contributions to the Plan totaled $383 and $388 in the years ended
March 31, 2009 and 2008, respectively. In addition, the Plan
provides for discretionary contributions as determined by the board of directors.
Such contributions to the Plan, if made, are allocated among eligible participants in
the proportion of their salaries to the total salaries of all participants. No discretionary contributions were made in
the years ended March 31, 2010, 2009 and 2008.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
The Company sponsors a defined contribution plan and a defined benefit
plan to provide retirement benefits for its employees in Japan. Under the defined
contribution plan, contributions are provided based on grade level and totaled $857,
$784 and $661 in the years ended March 31, 2010, 2009 and 2008, respectively. In
addition, the employee can elect to receive the benefit as additional salary or
contribute the benefit to the plan on a tax-deferred basis.
Under the defined benefit plan, the Company calculates benefits based
on employee individual grade level and years of service. Employees are entitled to a
lump sum benefit upon retirement or upon certain instances of termination. As of
March 31, 2010 and 2009, there were no plan assets. Net periodic benefit plan costs
for the fiscal years ended March 31, 2010, 2009 and 2008 were as follows:
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Pension benefit: |
||||||||||||
Service cost |
$ | 946 | $ | 834 | $ | 620 | ||||||
Interest cost |
82 | 59 | 33 | |||||||||
Amortization of prior service cost |
83 | 76 | 60 | |||||||||
Net pension plan cost |
$ | 1,111 | $ | 969 | $ | 713 | ||||||
Weighted average assumptions
used to determine net pension
plan cost: |
||||||||||||
Discount rate |
2.00 | % | 2.00 | % | 2.00 | % | ||||||
Salary increase rate |
2.8 | % | 3.1 | % | 3.1 | % | ||||||
Expected residual active life |
15.8 years | 15.9 years | 15.9 years |
The reconciliation of the actuarial present value of the projected benefit
obligations for the defined benefit plan follows:
Year Ended March 31, | ||||||||
2010 | 2009 | |||||||
Change in benefit obligation: |
||||||||
Benefit obligation at beginning of period |
$ | 3,828 | $ | 2,942 | ||||
Service cost |
946 | 831 | ||||||
Interest cost |
82 | 58 | ||||||
Realized actuarial (gain) loss |
(44 | ) | 28 | |||||
Benefits paid |
(75 | ) | (67 | ) | ||||
Foreign currency translation |
220 | 36 | ||||||
Benefit obligation at end of period |
$ | 4,957 | $ | 3,828 | ||||
Amount recognized in the consolidated balance sheet: |
||||||||
Accrued liabilities |
$ | 85 | $ | 57 | ||||
Other long-term liabilities |
4,872 | 3,771 | ||||||
Net amount recognized at end of fiscal year |
$ | 4,957 | $ | 3,828 | ||||
Amounts recognized in accumulated other comprehensive loss: |
||||||||
Net unrealized actuarial gain |
$ | 258 | $ | 190 | ||||
Prior service cost |
(322 | ) | (379 | ) | ||||
Accumulated other comprehensive loss at end of fiscal year |
$ | (64 | ) | $ | (189 | ) | ||
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
As of March 31, 2010 and 2009, the accumulated benefit obligation was
$4,481 and $3,419, respectively. The Company estimates the future benefit payments
for the defined benefit plan will be as follows: $85 in 2011, $154 in 2012, $105 in
2013, $323 in 2014, $205 in 2015 and $2,658 in total over the five years 2016 through
2020.
13. Stock-Based Incentive Plans
The Companys Second Amended and Restated 2001 Long-Term Stock Incentive
Plan provides for the grant of restricted common shares, restricted stock units,
stock options and stock appreciation rights to eligible employees, consultants and
directors of the Company and its affiliates. As of March 31, 2010, this plan had
4,651 common shares of stock available for future grants.
Restricted Stock Units and Restricted Common Shares
Restricted stock units represent the right to receive a share of Opnext
stock at a designated time in the future, provided that the stock unit is vested at
the time. Restricted stock units granted to non-employee directors generally vest
over a one-year period from the grant date. The restricted stock units are
convertible into common shares on a one-for-one basis on or within 15 days following
the earliest to occur of the date of the directors separation from service, the date
of the directors death or the date of a change in control of the Company. Recipients
of restricted stock units do not pay any cash consideration for the restricted stock
units or the underlying shares and do not have the right to vote or have any other
rights of a shareholder until such time as the underlying shares of stock are
distributed.
The following table presents a summary of restricted stock unit activity:
Weighted | Average | |||||||||||||||
Restricted | Average | Aggregate | Remaining | |||||||||||||
Stock | Grant Date | Intrinsic | Vesting | |||||||||||||
Units | Fair Value | Value | Period | |||||||||||||
(per share) | (in years) | |||||||||||||||
Non-vested balance at March 31, 2007 |
| $ | | |||||||||||||
Granted |
22 | 8.99 | ||||||||||||||
Forfeited |
(6 | ) | 10.14 | |||||||||||||
Non-vested balance at March 31, 2008 |
16 | 9.46 | ||||||||||||||
Granted |
126 | 2.16 | ||||||||||||||
Vested |
(16 | ) | 8.51 | |||||||||||||
Non-vested balance at March 31, 2009 |
126 | 2.16 | ||||||||||||||
Granted |
179 | 1.86 | ||||||||||||||
Vested |
(157 | ) | 2.07 | |||||||||||||
Non-vested balance at March 31, 2010 |
148 | $ | 1.89 | $ | 1,003 | 0.7 | ||||||||||
Vested balance at March 31, 2010 |
173 | $ | 2.65 | $ | 362 | |||||||||||
During the year ended March 31, 2010, the Company issued an aggregate of
179 restricted stock units to non-employee members of the board of directors as
compensation for services to be performed. The awards generally vest in full on the
one-year anniversary of grant. Total compensation expense to be recognized over the
vesting period for the non-forfeited awards is $334 based on a weighted average fair
value of $1.86 per share as of the grant date, of which $132 was recognized in the
year ended March 31, 2010.
As of March 31, 2009, there were 20 restricted common shares outstanding.
The 20 restricted common shares outstanding at March 31, 2009 fully vested on
November 1, 2009. No restricted common shares were awarded during the years ended
March 31, 2010 and 2009. Total compensation expense for restricted common shares was
$111, $1,251 and $1,542 for the years ended March 31, 2010, 2009 and 2008,
respectively. Total grant-date fair value of restricted common shares that vested
during the years ended March 31, 2010, 2009 and 2008 was $178, $1,458 and $1,376,
respectively.
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Table of Contents
Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Stock Options
Stock option awards to employees generally become exercisable with respect
to one quarter or one third of the shares awarded on each one-year anniversary of the
date of grant and have a ten- or seven-year life. Fair value of the awards is
calculated on the grant date using the Black-Scholes option pricing valuation model.
Options issued to non-employees are also measured at fair value on the grant date and
are revalued at each financial statement date until fully vested. At March 31, 2010
and 2009, the Company had 1,010 and 1,000 outstanding options that were granted to
Hitachi and Clarity Partners, L.P., respectively, in connection with the appointment
of their employees as directors of the Company. The non-employee options expire ten
years from the grant date and were fully vested as of November 2004. Accordingly, no
costs were incurred in connection with non-employee options during the years ended
March 31, 2010, 2009 and 2008.
The fair value of each option award is estimated on the date of grant using
the Black-Scholes option valuation model and the assumptions noted in the following
table:
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Expected term (in years) |
4.50 | 4.90 | 6.25 | |||||||||
Volatility |
86.2 | % | 83.5 | % | 88.1 | % | ||||||
Risk-free interest rate |
2.1 | % | 2.3 | % | 4.5 | % | ||||||
Dividend yield |
| | | |||||||||
Forfeiture rate |
10.0 | % | 10.0 | % | 10.0 | % |
Compensation expense for employee stock option awards was $6,096, $4,142
and $1,689 for the years ended March 31, 2010, 2009 and 2008, respectively. At March
31, 2010, the total compensation costs related to unvested stock option awards
granted under the Companys stock-based incentive plan but not recognized was
$14,911 and will be recognized over the remaining weighted average vesting period of
2.6 years. The weighted average fair value of options granted during the years ended
March 31, 2010, 2009 and 2008 was $1.41, $2.37 and $8.37 per share, respectively.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
A summary of stock option activity follows:
Weighted | Average | |||||||||||||||
Average | Aggregate | Remaining | ||||||||||||||
Exercise | Intrinsic | Contractual | ||||||||||||||
Shares | Price | Value | Life | |||||||||||||
(per share) | (in years) | |||||||||||||||
Balance at March 31, 2007 |
4,471 | $ | 14.81 | |||||||||||||
Granted |
1,165 | 10.91 | ||||||||||||||
Forfeited |
(217 | ) | 14.52 | |||||||||||||
Exercised |
(21 | ) | 0.99 | |||||||||||||
Balance at March 31, 2008 |
5,398 | 14.04 | ||||||||||||||
Granted |
5,093 | 3.69 | ||||||||||||||
Forfeited |
(218 | ) | 10.33 | |||||||||||||
Expired |
(1,240 | ) | 14.96 | |||||||||||||
Exercised |
(4 | ) | 3.93 | |||||||||||||
Balance at March 31, 2009 |
9,029 | 8.17 | ||||||||||||||
Granted |
4,746 | 2.16 | ||||||||||||||
Forfeited |
(350 | ) | 2.54 | |||||||||||||
Expired |
(59 | ) | 13.28 | |||||||||||||
Exercised |
(11 | ) | 1.51 | |||||||||||||
Balance at March 31, 2010 |
13,355 | $ | 6.16 | $ | 2,165 | 5.5 | ||||||||||
Options exercisable at March 31, 2010 |
5,035 | $ | 10.88 | $ | 487 | 3.7 | ||||||||||
The following table summarizes information concerning outstanding and
exercisable options at March 31, 2010:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Number | Remaining | Exercise | Number | Remaining | Exercise | |||||||||||||||||||
Range of Exercise Prices | Outstanding | Life | Price | Exercisable | Life | Price | ||||||||||||||||||
(in years) | (in years) | |||||||||||||||||||||||
$0.78 - $1.68 |
1,674 | 7.6 | $ | 1.67 | 663 | 5.6 | $ | 1.65 | ||||||||||||||||
$1.74 - $2.73 |
5,409 | 6.3 | 2.17 | 229 | 8.2 | 2.30 | ||||||||||||||||||
$4.47 - $8.89 |
2,680 | 6.0 | 5.94 | 874 | 5.8 | 6.00 | ||||||||||||||||||
$11.34 - $15.00 |
3,592 | 2.9 | 14.41 | 3,269 | 2.5 | 14.66 | ||||||||||||||||||
Total |
13,355 | 5,035 | ||||||||||||||||||||||
Stock Appreciation Rights (SAR) Plan
The Company has awarded stock appreciation rights to its employees in
Japan. The awards generally vest with respect to one-third or one-quarter of the
shares on each of the first three or four anniversaries of the date of grant,
have a
ten-year life and the related exercise was contingent upon the completion of a
qualified public offering by the Company. Prior to June 15, 2007, all SARs required
cash settlement and were accounted for as liability instruments. On May 17, 2007, the
Company commenced an exchange offer pursuant to which those employees located in
Japan who held stock appreciation rights were offered an opportunity to exchange
those stock appreciation rights for
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
amended stock appreciation rights. The amended stock appreciation
rights require settlement in the Companys common stock, rather than cash, upon
exercise. All other terms and conditions remain unchanged. The exchange offer expired
on June 14, 2007 and approximately 83 percent of the stock appreciation rights
eligible for exchange were accepted on June 15, 2007. The SARs were revalued on June
15, 2007. This revaluation resulted in a $400 reversal of compensation expense
previously recorded, based on a stock price of $12.56, an exercise price of $15.00, a
weighted average expected term of 3.4 years, and a corresponding Black-Scholes
valuation of $6.10. The Company transferred $2,432 from other long-term liabilities
to additional paid-in capital for the pro rata portion of those awards requiring
settlement in the Companys stock. As of March 31, 2010, the Company had 564 SARs
outstanding, 525 requiring settlement in the Companys stock with average remaining
lives of 4.2 years and 39 requiring settlement in cash with average remaining lives
of 4.2 years.
Compensation expense for vested stock appreciation rights requiring
settlement in the Companys stock was $72, $166 and $883 for the years ended March
31, 2010, 2009 and 2008, respectively. At March 31, 2010, the total compensation cost
related to these stock appreciation rights to be recognized over the remaining
weighted average vesting period of one-half year was approximately $24, net of
estimated forfeitures.
Stock appreciation rights requiring cash settlement are revalued at the end
of each reporting period and resulted in $2 of compensation expense for the year
ended March 31, 2010 and a reversal of $61 and $423 of compensation expense for the
years ended March 31, 2009 and 2008, respectively. Other long-term liabilities
associated with these awards were $6 and $4 at March 31, 2010 and 2009, respectively.
These awards will continue to be re-measured at each financial statement date until
settlement.
A summary of stock appreciation right activity follows:
Cash Settlement | Stock Settlement | Total SARs | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Exercise | Exercise | Exercise | ||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Balance at March 31, 2007 |
664 | $ | 15.00 | | $ | | 664 | $ | 15.00 | |||||||||||||||
Amended stock appreciation rights |
(553 | ) | 15.00 | 553 | 15.00 | | | |||||||||||||||||
Forfeited |
(22 | ) | 15.00 | (7 | ) | 15.00 | (29 | ) | 15.00 | |||||||||||||||
Balance at March 31, 2008 |
89 | 15.00 | 546 | 15.00 | 635 | 15.00 | ||||||||||||||||||
Forfeited |
(50 | ) | 15.00 | (3 | ) | 15.00 | (53 | ) | 15.00 | |||||||||||||||
Balance at March 31, 2009 |
39 | 15.00 | 543 | 15.00 | 582 | 15.00 | ||||||||||||||||||
Forfeited |
| 15.00 | (18 | ) | 15.00 | (18 | ) | 15.00 | ||||||||||||||||
Balance at March 31, 2010 |
39 | $ | 15.00 | 525 | $ | 15.00 | 564 | $ | 15.00 | |||||||||||||||
14. Short-Term Debt
The Company entered into a $20,060 short-term yen-denominated loan with The
Sumitomo Trust Bank on March 28, 2008, which is due monthly unless renewed. As of
March 31, 2010 and 2009, the outstanding balance was $21,397 and $20,243,
respectively. Interest is paid monthly on the loan at TIBOR plus a premium. The
interest rate ranged from 1.26% to 1.57% and 1.42% to 1.81% during the fiscal years
ended March 31, 2010 and 2009, respectively, and was 1.55% at March 31, 2008.
Total interest expense for the years ended March 31, 2010, 2009 and 2008 was
$980, $965 and $435, respectively.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
15. Concentrations of Risk
At March 31, 2010 and 2009, cash and cash equivalents consisted primarily
of investments in overnight money market funds with several major financial
institutions in the United States.
The Company sells primarily to customers involved in the application of
laser technology and the manufacture of data and telecommunications products. For the
year ended March 31, 2010, sales to two customers in aggregate, Cisco Systems, Inc.
(Cisco) and Nokia Siemens Networks (NSN), represented 44.8% of total revenues. For
the years ended March 31, 2009 and 2008, sales to two customers in aggregate, Cisco
and Alcatel-Lucent, represented 48.2% and 60.0% of total revenues, respectively. No
other customer accounted for more than 10% of total revenues in any of these periods
and at March 31, 2010, Alcatel-Lucent and NSN accounted for 26.0% of accounts
receivable. At March 31, 2009, Cisco, Alcatel-Lucent and NSN accounted for 50.2% of
accounts receivable.
16. Commitments and Contingencies
The Company leases buildings and certain other property. Rental expense
under these operating leases was $3,594, $2,914 and $2,581 for the years ended March
31, 2010, 2009 and 2008, respectively. Operating leases associated with leased
buildings include escalating lease payment schedules. Expense associated with these
leases is recognized on a straight-line basis. In addition, the Company has entered
into capital leases with Hitachi Capital Corporation for certain equipment. The table
below shows the future minimum lease payments due under non-cancelable capital leases
with Hitachi Capital Corporation and operating leases at March 31, 2010:
Capital | Operating | |||||||
Leases | Leases | |||||||
Year ending March 31: |
||||||||
2011 |
$ | 12,793 | $ | 3,594 | ||||
2012 |
7,452 | 882 | ||||||
2013 |
4,491 | 364 | ||||||
2014 |
246 | 248 | ||||||
Total minimum lease payments |
24,982 | $ | 5,088 | |||||
Less amount representing interest |
(1,265 | ) | ||||||
Present value of capitalized payments |
23,717 | |||||||
Less current portion |
(12,515 | ) | ||||||
Long-term portion |
$ | 11,202 | ||||||
As of March 31, 2010, the Company had outstanding purchase commitments of
$66,766 primarily for the purchase of raw materials expected to be transacted within
the next fiscal year.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
The Companys accrual for and the change in its product warranty
liability, which is included in accrued expenses, are as follows:
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Beginning balance |
$ | 11,922 | $ | 1,655 | $ | 610 | ||||||
Acquisition of StrataLight |
| 11,253 | | |||||||||
Warranty expense |
1,604 | 3,482 | 1,812 | |||||||||
Claims processed |
(6,060 | ) | (4,613 | ) | (1,003 | ) | ||||||
Foreign currency translation and other |
117 | 145 | 236 | |||||||||
Ending balance |
$ | 7,583 | $ | 11,922 | $ | 1,655 | ||||||
On February 20, 2008, a putative class action captioned Bixler v. Opnext,
Inc., et al. (D.N.J. Civil Action # 3:08-cv-00920) was filed in the United States District Court for the District of New Jersey (the Court) against
the Company and certain of the Companys present and former directors and officers (the Individual Defendants), alleging, inter alia, that the registration
statement and prospectus issued in connection with Opnexts initial public offering
contained material misrepresentations in violation of federal securities laws. On
March 7 and March 20, 2008, two additional putative class actions were filed in the
Court with similar allegations. Those complaints, captioned Coleman v. Opnext, Inc.,
et al. (D.N.J. Civil Action # 3:08-cv-01222) and Johnson v. Opnext, Inc., et al.
(D.N.J. Civil Action No. 3:08-cv-01451), respectively, named Opnext, the Individual
Defendants, Opnexts independent auditor and the underwriters of the initial public
offering as defendants.
On May 22, 2008, the Court issued an order consolidating Bixler, Coleman, and
Johnson under Civil Action No. 08-920 (JAP) and, on July 30, 2008, a consolidated
complaint was filed on behalf of all persons who purchased Opnext common stock on or
before February 13, 2008 pursuant to or traceable to Opnexts initial public offering
on February 14, 2007 (the Consolidated Complaint). On October 21, 2008, the
defendants in the consolidated action, which include Opnext and the Individual
Defendants, responded to the Consolidated Complaint, denying the material allegations
and asserting various affirmative defenses. On November 6, 2008, Opnexts auditor was
voluntarily dismissed from the action by plaintiff without prejudice.
On September 8, 2009, the parties, including Opnext and the Individual
Defendants, entered into the Settlement, which the Court preliminary approved on
October 6, 2009. On January 6, 2010, the Court granted final approval of the
Settlement, which approval is no longer subject to appeal. Opnext and the Individual
Defendants have denied and continue to deny the claims asserted in the consolidated
action and entered into the Settlement solely to avoid the costs and risks associated
with further litigation. Under the terms of the Settlement, Opnexts insurer paid
$2.0 million to a settlement fund which was used to pay eligible claimants and
plaintiffs counsel, plaintiff dismissed the consolidated action with prejudice and
all defendants (including Opnext and the Individual Defendants) were released from
any claims that were brought or could have been brought in the consolidated
action.
On March 27, 2008, Furukawa Electric Co. (Furukawa) filed a complaint against Opnext Japan, Inc., our wholly owned subsidiary (Opnext
Japan), in the
Tokyo District Court, alleging that certain laser diode modules sold by us infringe Furukawas Japanese
Patent No. 2,898,643 (the Furukawa Patent). The complaint sought an injunction as
well as 300 million yen in royalty damages. Opnext Japan filed its answer on May
7, 2008 stating therein its belief that it does not infringe the Furukawa Patent and
that the Furukawa Patent is invalid. On February 24, 2010, the Tokyo District Court
entered judgment in favor of Opnext Japan, which judgment was appealed by Furukawa to
the Intellectual Property High Court on March 9, 2010. We intend to defend ourselves
vigorously in this litigation.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
17. Related-Party Transactions
OPI was incorporated on September 18, 2000 (date of inception) in Delaware
as a wholly owned subsidiary of Hitachi, Ltd. (Hitachi), a corporation organized
under the laws of Japan. Opnext Japan, Inc. (OPJ or Opnext Japan) was established
on September 28, 2000 and on January 31, 2001, Hitachi contributed the fiber optic
components business of its telecommunications system division (the Predecessor
Business) to OPJ. On July 31, 2001, Hitachi contributed 100% of the shares of OPJ to
OPI in exchange for 100% of OPIs capital stock. In a subsequent transaction on July
31, 2001, Clarity Partners, L.P., Clarity Opnext Holdings I, LLC, and Clarity Opnext
Holdings II, LLC together purchased a 30% interest in OPIs capital stock.
Opto Device, Ltd. (OPD) was established on February 8, 2002 and on
October 1, 2002, OPD acquired the opto device business (the OPD Predecessor
Business) from Hitachi. Also on October 1, 2002, OPI acquired 100% of the shares of
OPD from Hitachi. Effective March 1, 2003, OPD was merged into OPJ.
The Company enters into transactions with Hitachi and its subsidiaries in
the normal course of business. Sales to Hitachi and its subsidiaries were $14,659,
$19,470 and $8,925 for the years ended March 31, 2010, 2009 and 2008, respectively.
Purchases from Hitachi and its subsidiaries were $19,755, $40,165 and $44,959 for the
years ended March 31, 2010, 2009 and 2008, respectively. Services and certain
facility leases provided by Hitachi and its subsidiaries were $2,304, $2,822 and
$2,714 for the years ended March 31, 2010, 2009 and 2008, respectively. At March 31,
2010 and 2009, the Company had accounts receivable from Hitachi and its subsidiaries
of $4,509 and $3,483, respectively. In addition, at March 31, 2010 and 2009, the
Company had accounts payable to Hitachi and its subsidiaries of $4,707 and $6,052,
respectively. The Company has also entered into capital equipment leases with Hitachi
Capital Corporation as described in Note 16.
Opnext Japan, Inc. Related Party Agreements
In connection with the transfer of the Predecessor Business from Hitachi to
OPJ and the contribution of the stock of OPJ to the Company, the following
related-party agreements were entered into:
Sales Transition Agreement
Under the terms and conditions of the Sales Transition Agreement, Hitachi,
through a wholly-owned subsidiary, provides certain logistic services to Opnext in
Japan. Specific charges for such services were $1,447, $2,598 and $2,739 for the
years ended March 31, 2010, 2009 and 2008, respectively.
Intellectual Property License Agreements
Opnext Japan and Hitachi are parties to an intellectual property license
agreement pursuant to which Hitachi licenses certain intellectual property rights to
Opnext Japan on the terms and subject to the conditions stated therein on a fully
paid-up, nonexclusive basis and Opnext Japan licenses certain intellectual property
rights to Hitachi on a fully paid-up, nonexclusive basis. Hitachi has also agreed to
sublicense certain intellectual property to Opnext Japan to the extent that Hitachi
has the right to make available such rights to Opnext Japan in accordance with the
terms and subject to the conditions stated therein.
In October 2002, Opnext Japan and Hitachi Communication Technologies, Ltd.,
a wholly owned subsidiary of Hitachi, entered into an intellectual property license
agreement pursuant to which Hitachi Communication licenses certain intellectual
property rights to Opnext Japan on a fully paid-up, nonexclusive basis, and Opnext
Japan licenses certain intellectual property rights to Hitachi Communication on a
fully paid-up, nonexclusive basis, in each case on the terms and subject to the
conditions stated therein.
Opnext Japan Research and Development Agreement
Opnext Japan and Hitachi are parties to a research and development
agreement, pursuant to which Hitachi provides certain research and development
support to Opnext Japan in accordance with the terms and conditions of the Opnext
Japan Research and Development Agreement. Intellectual property resulting from
certain research and development projects is
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
owned by Opnext Japan and licensed to Hitachi on a fully paid, nonexclusive basis.
Intellectual property resulting from certain other research and development projects
is owned by Hitachi and licensed to Opnext Japan on a fully paid, nonexclusive basis.
Certain other intellectual property is jointly owned. This agreement was amended on
October 1, 2002 to include OPD under the same terms and conditions as OPJ, and to
expand the scope to include research and development support related to the OPD
Predecessor business. The term of agreement expires on February 20, 2012. The
research and development expenditures relating to this agreement are
generally negotiated semi-annually on a fixed-fee project basis and were $4,062,
$5,799 and $4,983 for the years ended March 31, 2010, 2009 and 2008, respectively.
Opnext Research and Development Agreement
Opnext and Hitachi are parties to a research and development agreement
pursuant to which Hitachi provides certain research and development support to Opnext
and/or its affiliates other than Opnext Japan. Opnext is charged for research and
development support on the same basis that Hitachis wholly-owned subsidiaries are
allocated research and development charges for their activities. Additional fees may
be payable by Opnext to Hitachi if Opnext desires to purchase certain intellectual
property resulting from certain research and development projects.
Intellectual property resulting from certain research and development
projects is owned by Opnext and licensed to Hitachi on a fully paid, nonexclusive
basis and intellectual property resulting from certain other research and development
projects is owned by Hitachi and licensed to Opnext on a fully paid, nonexclusive
basis in accordance with the terms and conditions of the Opnext Research and
Development Agreement. Certain other intellectual property is jointly owned. The term
of agreement expires on February 20, 2012.
Preferred Provider and Procurement Agreements
Pursuant to the terms and conditions of the Preferred Provider Agreement,
subject to Hitachis product requirements, Hitachi agreed to purchase all of its
optoelectronics component requirements from Opnext, subject to product availability,
specifications, pricing, and customer needs as defined in the agreement. Pursuant to
the terms and conditions of the Procurement Agreement, Hitachi agreed to provide
Opnext each month with a rolling three-month forecast of products to be purchased,
the first two months of such forecast be a firm and binding commitment to purchase.
By mutual agreement of the parties, each of the agreements was terminated on July 31,
2008.
Raw Materials Supply Agreement
Pursuant to the terms and conditions of the Raw Materials Supply Agreement,
Hitachi agreed to continue to make available for purchase by Opnext laser chips,
other semiconductor devices and all other raw materials that were provided by Hitachi
to the business prior to or as of July 31, 2001 for the production of Opnext
optoelectronics components. By mutual agreement of the parties, the agreement was
terminated on July 31, 2008.
Outsourcing Agreement
Pursuant to the terms and conditions of the Outsourcing Agreement, Hitachi
agreed to provide on an interim, transitional basis various data processing services,
telecommunications services, and corporate support services, including: accounting,
financial management, information systems management, tax, payroll, human resource
administration, procurement and other general support. By mutual agreement of the
parties, the agreement was terminated on July 31, 2008. However, Hitachi has
continued to make various services available to Opnext under the arrangements
established pursuant to the Outsourcing Agreement. Specific charges for such services
amounted to $1,860, $1,882 and $1,707 for the years ended March 31, 2010, 2009 and
2008, respectively.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Secondment Agreements
Opnext Japan and Hitachi entered into a one-year secondment agreement
effective February 1, 2001 with automatic annual renewals. Per the agreement, Opnext
may offer employment to any seconded employee, however, approval must be obtained
from Hitachi in advance. All employees listed in the original agreement have either
been employed by Opnext or have returned to Hitachi. In addition to the original
agreement, additional secondment agreements have been entered into with terms that
range from two to three years, however, Hitachi became entitled to terminate these
agreements after July 31, 2005. The seconded employees are covered by the Hitachi,
Ltd. Pension Plan. There were five and seven seconded employees at March 31, 2010 and
2009, respectively.
Lease Agreements
Opnext Japan leases certain manufacturing and administrative premises from
Hitachi located in Totsuka, Japan. The term of the original lease agreement was
annual and began on February 1, 2001. The lease was amended effective October 1, 2006
to extend the term until September 30, 2011, and will be renewable annually
thereafter provided neither party notifies the other of its contrary intent. The
annual lease payments for these premises were $751, $689 and $593 for the years ended
March 31, 2010, 2009 and 2008, respectively.
Trademark Indication Agreements
Opnext and Opnext Japan, on the one hand, and Hitachi, on the other
hand, were parties to two trademark indication agreements pursuant to which Hitachi
granted to Opnext and Opnext Japan the right to use the trademark indication Powered
by Hitachi on a royalty-free basis in connection with the advertising, marketing,
and labeling of certain products and related services in accordance with the terms
and conditions set forth in the Trademark Indication Agreements. The agreements
expired on February 20, 2008 and Opnext and Opnext Japan have ceased to use the
trademark indications.
OPD Related Party Agreements
In connection with the transfer of the OPD Predecessor Business from
Hitachi to OPD and the acquisition of OPD by the Company, the following related party
agreements were entered into:
Intellectual Property License Agreement
OPD and Hitachi are parties to an intellectual property license agreement,
pursuant to which Hitachi licenses certain intellectual property rights to OPD on the
terms and subject to the conditions stated therein on a fully paid, nonexclusive
basis and OPD licenses certain intellectual property rights to Hitachi on a fully
paid, nonexclusive basis. Hitachi has also agreed to sublicense certain intellectual
property to OPD, to the extent that Hitachi has the right to make available such
rights to OPD, in accordance with the terms and conditions of the Intellectual
Property License Agreement.
Secondment Agreements
OPD, Hitachi and one of Hitachis wholly-owned subsidiaries entered into
one-year secondment agreement effective October 1, 2002 with automatic annual
renewals. Per the agreement, Opnext may offer employment to any seconded employee,
however, approval must be obtained from Hitachi in advance. All employees listed in
the original agreement have either been employed by Opnext or have returned to
Hitachi. In addition to the original agreement, additional secondment agreements have
been entered into with individuals with terms that range from two to three years,
however, Hitachi became entitled to terminate these agreements after September 30,
2006. The seconded employees are covered by the pension plans of Hitachi and its
subsidiary. There was one seconded employee at both March 31, 2010 and 2009.
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Lease Agreement
OPD leases certain manufacturing and administrative premises from an entity
in which Hitachi is a joint venture partner. The lease expires on March 31, 2011,
with a five-year extension, subject to either party notifying the other of its
contrary intent. The lease payments for these properties were $98, $65 and $60 for
the years ended March 31, 2010, 2009 and 2008, respectively.
18. Operating Segments and Geographic Information
Operating Segments
The Company operates in one business segment optical subsystems,
modules and components. Optical subsystems, modules and components transmit and
receive data delivered via light in telecom, data communication, industrial and
commercial applications.
Geographic Information
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Sales: |
||||||||||||
North America |
$ | 144,799 | $ | 158,530 | $ | 166,386 | ||||||
Europe |
97,572 | 86,019 | 64,501 | |||||||||
Japan |
30,015 | 42,996 | 35,194 | |||||||||
Asia Pacific, excluding Japan |
46,746 | 31,010 | 17,417 | |||||||||
Total |
$ | 319,132 | $ | 318,555 | $ | 283,498 | ||||||
Sales attributed to geographic areas are based on the bill to location of
the customer.
March 31, | ||||||||
2010 | 2009 | |||||||
Assets: |
||||||||
North America |
$ | 230,851 | $ | 304,029 | ||||
Japan |
121,122 | 126,503 | ||||||
Europe |
18,325 | 19,232 | ||||||
Total |
$ | 370,298 | $ | 449,764 | ||||
The geographic designation of assets represents the country in which title is held.
19. Valuation and Qualifying Accounts
Allowance for Doubtful Accounts
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Beginning balance |
$ | 1,022 | $ | 335 | $ | 491 | ||||||
Charge (reduction) to expense |
(66 | ) | 718 | (175 | ) | |||||||
Deduction and write offs |
(61 | ) | | (23 | ) | |||||||
Foreign currency translation and other |
5 | (31 | ) | 42 | ||||||||
Ending balance |
$ | 900 | $ | 1,022 | $ | 335 | ||||||
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Opnext, Inc.
Notes to Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)
(in thousands, except per share amounts)
Tax Valuation Allowance
Year Ended March 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Beginning balance |
$ | 238,264 | $ | 228,461 | $ | 208,495 | ||||||
Changes in valuation allowance |
(11,556 | ) | 8,442 | (9,519 | ) | |||||||
Foreign currency translation |
9,719 | 1,361 | 29,485 | |||||||||
Ending balance |
$ | 236,427 | $ | 238,264 | $ | 228,461 | ||||||
20. Subsequent Events
The Company has determined that there are no material recognized or unrecognized
subsequent events.
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Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer, after evaluating
with management the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this report, have concluded that, as of such date, our disclosure controls
and procedures were effective based on their evaluation of these controls and
procedures required by paragraph (b) of Exchange Act Rules 13(a)-15 and 15d-15.
Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no matter
how well-conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, have been detected
within the Company.
Managements Annual Report on Internal Controls Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal controls over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Because of their inherent limitations, internal
controls over financial reporting may fail to adequately prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies and procedures may
deteriorate. Management conducted an assessment of our internal control over
financial reporting based on the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control Integrated Framework.
Based on that assessment, our management concluded that our internal control over
financial reporting was effective as of March 31, 2010. Ernst & Young LLP, our
independent registered public accounting firm, has audited our financial statements
and has issued an attestation report on our internal control over financial
reporting.
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Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of Opnext, Inc.
We have audited Opnext, Inc.s internal control over financial reporting as
of March 31, 2010, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Opnext, Inc.s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included
in the accompanying Managements Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, Opnext, Inc. maintained, in all material respects,
effective internal control over financial reporting as of March 31, 2010, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance sheets
of Opnext, Inc. as of March 31, 2010 and 2009, and the related consolidated
statements of operations, shareholders equity and comprehensive income (loss), and
cash flows for each of the three years in the period ended March 31, 2010 of Opnext,
Inc. and our report dated June 14, 2009, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP | ||||
MetroPark,
New Jersey
June 14, 2010
June 14, 2010
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Changes in internal control over financial reporting
There were no changes in our internal controls over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fourth
quarter ended March 31, 2010 that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.
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Item 9B Other Information.
The following matters were submitted to a vote of security holders at the Companys
annual meeting of stockholders held on January 27, 2010:
Proposal 1: To (a) elect Mr. William L. Smith, an independent director, and Mr. Shinjiro Iwata
to the Opnext board of directors as Class III directors each for a three-year term of office
expiring at the 2012 annual meeting of stockholders, (b) elect Mr. Gilles Bouchard to the Opnext
board of directors as a Class II director for a two-year term of office expiring at the 2011 annual
meeting of stockholders, (c) re-elect Mr. John F. Otto, Jr., an independent director, and Mr. Harry
L. Bosco to the Opnext board of directors as Class III directors each for a three-year term of
office expiring at the 2012 annual meeting of stockholders and (d) re-elect Dr. Isamu Kuru, an
independent director, to the Opnext board of directors as a Class II director for a two-year term
of office expiring at the 2011 annual meeting of stockholders:
FOR | WITHHELD | BROKER NON-VOTES | ||||||||||
Mr. William L. Smith |
69,277,722 | 385,068 | 4,356,434 | |||||||||
Mr. Shinjiro Iwata |
68,438,888 | 1,223,902 | 4,356,434 | |||||||||
Mr. Gilles Bouchard |
68,416,214 | 1,246,576 | 4,356,434 | |||||||||
Mr. John F. Otto, Jr. |
68,094,552 | 1,568,238 | 4,356,434 | |||||||||
Mr. Harry L. Bosco |
68,416,214 | 1,246,576 | 4,356,434 | |||||||||
Dr. Isamu Kuru |
69,274,092 | 388,698 | 4,356,434 |
The following directors terms of office continued after the Companys annual meeting of
stockholders held on January 27, 2010: Mr. Kendall Cowan, Mr. Ryuichi Otsuki, Mr. Charles J. Abbe,
Dr. David Lee and Mr. Philip F. Otto.
Proposal 2: To consider and approve the Rights Agreement entered into by and between Opnext
and American Stock Transfer & Trust Company, LLC:
FOR | AGAINST | ABSTAIN | BROKER NON-VOTES | |||||||||||
47,106,126 | 22,548,337 | 8,327 | 4,356,434 |
Proposal 3: To ratify the selection of Ernst & Young LLP as Opnexts independent registered
public accounting firm to examine the annual financial statements of Opnext for the fiscal year
ending March 31, 2010:
FOR | AGAINST | ABSTAIN | ||||||||
73,889,983 | 112,926 | 16,315 |
84
Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information relating to directors and officers of Opnext is incorporated by reference to our
proxy statement for our annual stockholders meeting.
Item 11. Executive Compensation.
Information regarding compensation of officers and directors of Opnext is incorporated by
reference to our proxy statement for our annual stockholders meeting.
Item 12. Security Ownership of Certain Beneficial Owners, Management and Related Stockholders
Matters.
Information regarding ownership of Opnext common stock is incorporated by reference to our
proxy statement for our annual stockholders meeting.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships, related transactions with Opnext, and director
independence is incorporated by reference to our proxy statement for our annual stockholders
meeting.
Item 14. Principal Accountant Fees and Services.
Information regarding principal accountant fees and services is incorporated by reference to
our proxy statement for our annual stockholders meeting.
PART IV
Item 15. | Exhibits and Financial Statement Schedules. |
(a)(1) All financial statements. The information required by this item is incorporated herein
by reference to the financial statements and notes thereto listed in Item 8 of Part II and included
in this Annual Report on Form 10-K.
(a)(2) Financial statement schedules. All financial statement schedules are omitted because
the required information is included in the financial statements and notes thereto listed in Item 8
of Part II and included in this Annual Report on Form 10-K.
(a)(3) Exhibits.
85
Table of Contents
Exhibit Index
Exhibit | ||
No. | Description of Document | |
3.1
|
Form of Amended and Restated Certificate of Incorporation of Opnext, Inc.(1) | |
3.2
|
Form of Amended and Restated Bylaws of Opnext, Inc.(1) | |
3.3
|
Specimen of stock certificate for common stock.(1) | |
4.1
|
Pine Stockholder Agreement, dated as of June 4, 2003, by and among Opnext, Inc. and the Stockholders of Pine Photonics Communications, Inc.(1) | |
4.2
|
Registration Rights Agreement, entered into as of July 31, 2001, by and among Opnext, Inc., Clarity Partners, L.P., Clarity Opnext Holdings I, LLC, Clarity Opnext Holdings II, LLC, and Hitachi, Ltd.(1) | |
4.3
|
Stockholders Agreement, dated as of July 31, 2001, between Opnext, Inc. and each of Hitachi, Ltd., Clarity Partners, L.P., Clarity Opnext Holdings I, LLC and Clarity Opnext Holdings II, LLC, as amended.(1) | |
10.1+
|
Pine Photonics Communications, Inc. 2000 Stock Plan.(1) | |
10.2+
|
Form of Pine Photonics Communications, Inc. 2000 Stock Plan: Stock Option Agreement.(1) | |
10.3+
|
Opnext, Inc. 2001 Long-Term Stock Incentive Plan.(1) | |
10.4+
|
Form of Opnext, Inc. 2001 Long-Term Stock Incentive Plan, Nonqualified Stock Option Agreement.(1) | |
10.4a+
|
Form of Opnext, Inc. 2001 Long-Term Stock Incentive Plan, Nonqualified Stock Option Agreement for Senior Executives.(1) | |
10.4b+
|
Form of Opnext, Inc. 2001 Long-Term Stock Incentive Plan, Stock Appreciation Right Agreement.(1) | |
10.4c+
|
Form of Amendment to Stock Appreciation Right Agreement.(4) | |
10.5
|
Form of Hitachi, Ltd. and Clarity Management, L.P. Nonqualified Stock Option Agreement.(1) | |
10.6+
|
Opnext, Inc. Amended and Restated 2001 Long-Term Stock Incentive Plan.(1) | |
10.7+
|
Form of Opnext, Inc. Restricted Stock Agreement.(1) | |
10.8
|
Research and Development Agreement, dated as of July 31, 2001, by and among Hitachi, Ltd., Opnext Japan, Inc. and Opto Device, Ltd. as amended.(1) | |
10.9
|
Research and Development Agreement, dated as of July 31, 2002, by and between Hitachi, Ltd. and Opnext, Inc., as amended.(1) | |
10.10
|
Intellectual Property License Agreement, dated as of July 31, 2001, by and between Hitachi, Ltd. and Opnext Japan, Inc., as amended.(1) | |
10.11
|
Intellectual Property License Agreement, dated as of October 1, 2002, by and between Hitachi, Ltd. and Opnext Japan, Inc., as amended.(1) | |
10.12
|
Intellectual Property License Agreement, effective as of October 1, 2002, by and between Hitachi Communication Technologies, Ltd. and Opnext Japan, Inc.(1) | |
10.13
|
Trademark Indication Agreement, dated as of October 1, 2002, by and between Hitachi, Ltd. and Opnext Japan,
Inc., as amended.(1) |
|
10.14
|
Trademark Indication Agreement, dated as of July 31, 2001, by and between Hitachi, Ltd., Opnext, Inc. and Opnext Japan, Inc., as amended.(1) | |
10.15
|
Lease Agreement, made as of July 31, 2001, between Hitachi Communication Technologies, Ltd. and Opnext Japan, Inc., as amended.(1) | |
10.16
|
Lease Agreement, made as of October 1, 2002, between Renesas Technology Corp. and Opnext Japan, Inc., as amended.(1) | |
10.17
|
Agreement on Bank Transactions between Opnext Japan, Inc. and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as amended.(1) |
86
Table of Contents
Exhibit | ||
No. | Description of Document | |
10.18
|
Software User License Agreement, dated as of October 20, 2003, by and between Renesas Technology Corp. and Opnext Japan, Inc.(1) | |
10.19
|
Logistics Agreement, effective as of April 1, 2002, between Opnext, Inc. and Hitachi Transport System, Ltd.(1) | |
10.20
|
Distribution Agreement, dated April 1, 2001, between Hitachi Electronic Devices Sales, Inc. and Opnext Japan, Inc.(1) | |
10.21
|
Distribution Agreement, dated April 1, 2003, between Opnext Japan, Inc. and Renesas Technology Sale Co., Ltd.(1) | |
10.22
|
Distribution Agreement, dated July 1, 2003, between Opnext Japan, Inc. and Hitachi High-Technologies Corp.(1) | |
10.23+
|
Employment Agreement, dated as of November 1, 2007, between Opnext, Inc. and Gilles Bouchard, together with the form of the Nonqualified Stock Option Agreement and Restricted Stock Agreement to be entered into between the Company and Mr. Bouchard.(2) | |
10.24+
|
Non-Competition Agreement, dated as of November 1, 2007, between Opnext, Inc. and Gilles Bouchard.(2) | |
10.25+
|
Indemnification Agreement, dated as of November 1, 2007, between Opnext, Inc. and Gilles Bouchard.(2) | |
10.26+
|
Amended and Restated Employment Agreement, dated as of July 29, 2008, between Opnext, Inc. and Michael C. Chan.(4) | |
10.27+
|
Amended and Restated Employment Agreement, dated as of December 31, 2008, between Opnext, Inc. and Robert J. Nobile.(5) | |
10.28+
|
Amended and Restated Employment Agreement, dated as of May 15, 2009, between Opnext, Inc. and Gilles Bouchard.(6) | |
10.29+
|
Opnext, Inc. Second Amended and Restated 2001 Long-Term Stock Incentive Plan, dated as of January 6, 2009.(7) | |
10.30
|
Lease Agreement, made as of September 15, 2008, between Fremont Ventures LLC and Opnext, Inc.(7) | |
10.31
|
Lease Agreement, made as of March 14, 2006 , between Los Gatos Business Park and StrataLight Communications, Inc.(7) | |
10.32
|
Lease Agreement, made as of February 1, 2008, and amended June 2, 2008, between Los Gatos Business Park and StrataLight Communications, Inc.(7) | |
10.33+
|
Employment Agreement, dated as of February 18, 2009, between Opnext, Inc. and Shrichand Dodani.(7) | |
10.34+
|
First Amendment to Employment Agreement, dated as of May 15, 2009, between Opnext, Inc. and Michael Chan.(6) | |
21
|
List of Subsidiaries.(7) | |
23.1*
|
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | |
24*
|
Power of Attorney (set fourth on the signature page of this Form 10-K) | |
31.1*
|
Certification of Principal Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of Principal Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1**
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2**
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Filed as an exhibit to the Form S-1 Registration Statement (No. 333-138262) declared effective on February 14, 2007 and incorporated herein by reference. | |
(2) | Filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on November 1, 2007 and incorporated herein by reference. | |
(3) | Filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 12, 2007 and incorporated herein by reference. | |
(4) | Filed as an exhibit to Form 10-K/A (Amendment No. 1) as filed with the Securities and Exchange Commission on July 29, 2008 |
87
Table of Contents
and incorporated herein by reference. | ||
(5) | Filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on January 7, 2009 and incorporated herein by reference. | |
(6) | Filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 19, 2009 and incorporated herein by reference. | |
(7) | Filed as an exhibit to Form 10-K/A (Amendment No. 1) as filed with the Securities and Exchange Commission on July 29, 2009 and incorporated herein by reference. | |
* | Filed herewith. | |
** | Furnished herewith and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. | |
+ | Management contract or compensatory plan or arrangement. |
88
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OPNEXT, INC. |
||||
By: | /s/ Gilles Bouchard | |||
Gilles Bouchard, President and Chief Executive Officer | ||||
By: | /s/ Robert J. Nobile | |||
Robert J. Nobile, Chief Financial Officer and | ||||
Dated: June 14, 2010 | Senior Vice President, Finance |
89
Table of Contents
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints Gilles Bouchard and
Robert J. Nobile as attorneys-in-fact and agents, each acting alone, with full powers of
substitution to sign on his behalf, individually and in the capacities stated below, and to file
any and all amendments to this Annual Report on Form 10-K and other documents in connection with
this Annual Report with the Securities and Exchange Commission, granting to those attorneys-in-fact
and agents full power and authority to perform any other act on behalf of the undersigned required
to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature | Title | |
/s/ Gilles Bouchard
|
Director, President and Chief Executive Officer (principal executive officer) |
|
/s/ Robert J. Nobile
|
Chief Financial Officer and Senior Vice President, Finance (principal financial and accounting officer) |
|
/s/ Harry L. Bosco
|
Director and Chairman of the Board | |
/s/ Dr. David Lee
|
Director and Co-Chairman of the Board | |
/s/ Charles J. Abbe
|
Director | |
/s/ Kendall Cowan
|
Director | |
/s/ Shinjiro Iwata
|
Director | |
/s/ Dr. Isamu Kuru
|
Director | |
/s/ Ryuichi Otsuki
|
Director | |
/s/ John F. Otto, Jr.
|
Director | |
/s/ Philip F. Otto
|
Director | |
/s/ William L. Smith
|
Director |
90
Table of Contents
Exhibit Index
Exhibit | ||
No. | Description of Document | |
3.1
|
Form of Amended and Restated Certificate of Incorporation of Opnext, Inc.(1) | |
3.2
|
Form of Amended and Restated Bylaws of Opnext, Inc.(1) | |
3.3
|
Specimen of stock certificate for common stock.(1) | |
4.1
|
Pine Stockholder Agreement, dated as of June 4, 2003, by and among Opnext, Inc. and the Stockholders of Pine Photonics Communications, Inc.(1) | |
4.2
|
Registration Rights Agreement, entered into as of July 31, 2001, by and among Opnext, Inc., Clarity Partners, L.P., Clarity Opnext Holdings I, LLC, Clarity Opnext Holdings II, LLC, and Hitachi, Ltd.(1) | |
4.3
|
Stockholders Agreement, dated as of July 31, 2001, between Opnext, Inc. and each of Hitachi, Ltd., Clarity Partners, L.P., Clarity Opnext Holdings I, LLC and Clarity Opnext Holdings II, LLC, as amended.(1) | |
10.1+
|
Pine Photonics Communications, Inc. 2000 Stock Plan.(1) | |
10.2+
|
Form of Pine Photonics Communications, Inc. 2000 Stock Plan: Stock Option Agreement.(1) | |
10.3+
|
Opnext, Inc. 2001 Long-Term Stock Incentive Plan.(1) | |
10.4+
|
Form of Opnext, Inc. 2001 Long-Term Stock Incentive Plan, Nonqualified Stock Option Agreement.(1) | |
10.4a+
|
Form of Opnext, Inc. 2001 Long-Term Stock Incentive Plan, Nonqualified Stock Option Agreement for Senior Executives.(1) | |
10.4b+
|
Form of Opnext, Inc. 2001 Long-Term Stock Incentive Plan, Stock Appreciation Right Agreement.(1) | |
10.4c+
|
Form of Amendment to Stock Appreciation Right Agreement.(4) | |
10.5
|
Form of Hitachi, Ltd. and Clarity Management, L.P. Nonqualified Stock Option Agreement.(1) | |
10.6+
|
Opnext, Inc. Amended and Restated 2001 Long-Term Stock Incentive Plan.(1) | |
10.7+
|
Form of Opnext, Inc. Restricted Stock Agreement.(1) | |
10.8
|
Research and Development Agreement, dated as of July 31, 2001, by and among Hitachi, Ltd., Opnext Japan, Inc. and Opto Device, Ltd. as amended.(1) | |
10.9
|
Research and Development Agreement, dated as of July 31, 2002, by and between Hitachi, Ltd. and Opnext, Inc., as amended.(1) | |
10.10
|
Intellectual Property License Agreement, dated as of July 31, 2001, by and between Hitachi, Ltd. and Opnext Japan, Inc., as amended.(1) | |
10.11
|
Intellectual Property License Agreement, dated as of October 1, 2002, by and between Hitachi, Ltd. and Opnext Japan, Inc., as amended.(1) | |
10.12
|
Intellectual Property License Agreement, effective as of October 1, 2002, by and between Hitachi Communication Technologies, Ltd. and Opnext Japan, Inc.(1) | |
10.13
|
Trademark Indication Agreement, dated as of October 1, 2002, by and between Hitachi, Ltd. and Opnext Japan,
Inc., as amended.(1) |
|
10.14
|
Trademark Indication Agreement, dated as of July 31, 2001, by and between Hitachi, Ltd., Opnext, Inc. and Opnext Japan, Inc., as amended.(1) | |
10.15
|
Lease Agreement, made as of July 31, 2001, between Hitachi Communication Technologies, Ltd. and Opnext Japan, Inc., as amended.(1) | |
10.16
|
Lease Agreement, made as of October 1, 2002, between Renesas Technology Corp. and Opnext Japan, Inc., as amended.(1) | |
10.17
|
Agreement on Bank Transactions between Opnext Japan, Inc. and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as amended.(1) |
91
Table of Contents
Exhibit | ||
No. | Description of Document | |
10.18
|
Software User License Agreement, dated as of October 20, 2003, by and between Renesas Technology Corp. and Opnext Japan, Inc.(1) | |
10.19
|
Logistics Agreement, effective as of April 1, 2002, between Opnext, Inc. and Hitachi Transport System, Ltd.(1) | |
10.20
|
Distribution Agreement, dated April 1, 2001, between Hitachi Electronic Devices Sales, Inc. and Opnext Japan, Inc.(1) | |
10.21
|
Distribution Agreement, dated April 1, 2003, between Opnext Japan, Inc. and Renesas Technology Sale Co., Ltd.(1) | |
10.22
|
Distribution Agreement, dated July 1, 2003, between Opnext Japan, Inc. and Hitachi High-Technologies Corp.(1) | |
10.23+
|
Employment Agreement, dated as of November 1, 2007, between Opnext, Inc. and Gilles Bouchard, together with the form of the Nonqualified Stock Option Agreement and Restricted Stock Agreement to be entered into between the Company and Mr. Bouchard.(2) | |
10.24+
|
Non-Competition Agreement, dated as of November 1, 2007, between Opnext, Inc. and Gilles Bouchard.(2) | |
10.25+
|
Indemnification Agreement, dated as of November 1, 2007, between Opnext, Inc. and Gilles Bouchard.(2) | |
10.26+
|
Amended and Restated Employment Agreement, dated as of July 29, 2008, between Opnext, Inc. and Michael C. Chan.(4) | |
10.27+
|
Amended and Restated Employment Agreement, dated as of December 31, 2008, between Opnext, Inc. and Robert J. Nobile.(5) | |
10.28+
|
Amended and Restated Employment Agreement, dated as of May 15, 2009, between Opnext, Inc. and Gilles Bouchard.(6) | |
10.29+
|
Opnext, Inc. Second Amended and Restated 2001 Long-Term Stock Incentive Plan, dated as of January 6, 2009.(7) | |
10.30
|
Lease Agreement, made as of September 15, 2008, between Fremont Ventures LLC and Opnext, Inc.(7) | |
10.31
|
Lease Agreement, made as of March 14, 2006 , between Los Gatos Business Park and StrataLight Communications, Inc.(7) | |
10.32
|
Lease Agreement, made as of February 1, 2008, and amended June 2, 2008, between Los Gatos Business Park and StrataLight Communications, Inc.(7) | |
10.33+
|
Employment Agreement, dated as of February 18, 2009, between Opnext, Inc. and Shrichand Dodani.(7) | |
10.34+
|
First Amendment to Employment Agreement, dated as of May 15, 2009, between Opnext, Inc. and Michael Chan.(6) | |
21
|
List of Subsidiaries.(7) | |
23.1*
|
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | |
24*
|
Power of Attorney (set fourth on the signature page of this Form 10-K) | |
31.1*
|
Certification of Principal Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of Principal Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1**
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2**
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(1) | Filed as an exhibit to the Form S-1 Registration Statement (No. 333-138262) declared effective on February 14, 2007 and incorporated herein by reference. | |
(2) | Filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on November 1, 2007 and incorporated herein by reference. | |
(3) | Filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 12, 2007 and incorporated herein by reference. | |
(4) | Filed as an exhibit to Form 10-K/A (Amendment No. 1) as filed with the Securities and Exchange Commission on July 29, 2008 |
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and incorporated herein by reference. | ||
(5) | Filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on January 7, 2009 and incorporated herein by reference. | |
(6) | Filed as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 19, 2009 and incorporated herein by reference. | |
(7) | Filed as an exhibit to Form 10-K/A (Amendment No. 1) as filed with the Securities and Exchange Commission on July 29, 2009 and incorporated herein by reference. | |
* | Filed herewith. | |
** | Furnished herewith and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. | |
+ | Management contract or compensatory plan or arrangement. |
93