UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-22874
JDS Uniphase Corporation
(Exact name of Registrant as Specified in its Charter)
|
Delaware
|
94-2579683
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(IRS Employer Identification Number)
|
163 Baypointe Parkway
San Jose, California 95134
(Address of Principal Executive Offices including Zip Code)
(408) 434-1800
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed
since last report)
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 reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Number of shares of Common Stock outstanding as of the latest practicable
date, April 30, 2000: 596,445,645. In addition, as of such
date, there were outstanding 185,606,098 Exchangeable Shares of JDS Uniphase
Canada Ltd. which are exchangeable at any time into Common Stock on a one-for-
one basis, entitle their holders to dividend and other rights economically
equivalent to those of the Common Stock, and through a voting trust, vote at
meetings of stockholders of the Registrant.
JDS UNIPHASE CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations
Three and Nine months ended March 31, 2000 and 1999
Condensed Consolidated Balance Sheets
March 31, 2000 and June 30, 1999
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 2000 and 1999
Notes to Condensed Consolidated Financial
Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
ITEM 3. Quantitative and Qualitative Disclosure about Market Risks
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings
ITEM 2: Changes in Securities
ITEM 3: Defaults Upon Senior Securities
ITEM 4: Submission of Matters to a Vote of Security Holders
ITEM 5: Other Information
ITEM 6: Exhibits and Reports on Form 8-K
Signatures
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
JDS UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In millions, except per share data)
Three months ended Nine months ended
March 31, March 31,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales............................... $394.6 $74.5 $906.4 $195.7
Cost of sales........................... 202.1 36.3 466.6 98.7
--------- --------- --------- ---------
Gross profit.......................... 192.5 38.2 439.8 97.0
--------- --------- --------- ---------
Operating expenses:
Research and development.............. 33.3 7.3 72.1 18.8
Selling, general and administrative... 49.1 9.1 110.7 24.5
Amortization of purchased intangibles. 249.6 3.9 607.6 11.8
Acquired in-process research and
development......................... 84.1 -- 103.7 --
Other operating expenses.............. -- 0.5 -- 6.8
--------- --------- --------- ---------
Total operating expenses................ 416.1 20.8 894.1 61.9
--------- --------- --------- ---------
Income (loss) from operations........... (223.6) 17.4 (454.3) 35.1
Interest and other income, net.......... 10.0 0.9 26.2 2.6
--------- --------- --------- ---------
Income (loss) before income taxes..... (213.6) 18.3 (428.1) 37.7
Income tax expense...................... 27.3 5.5 57.8 14.4
--------- --------- --------- ---------
Net income (loss)....................... ($240.9) $12.8 ($485.9) $23.3
========= ========= ========= =========
Basic earnings (loss) per share......... ($0.32) $0.04 ($0.70) $0.07
========= ========= ========= =========
Dilutive earnings (loss) per share...... ($0.32) $0.04 ($0.70) $0.07
========= ========= ========= =========
Weighted average common shares
Outstanding........................... 747.6 320.3 696.1 316.4
Dilutive effect of stock options
Outstanding........................... -- 26.9 -- 24.9
--------- --------- --------- ---------
Weighted average common shares
Outstanding, assuming dilution........ 747.6 347.2 696.1 341.3
========= ========= ========= =========
See accompanying notes.
JDS UNIPHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions )
March 31, June 30,
2000 1999
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................... $138.2 $75.4
Short-term investments............................ 824.3 158.5
Accounts receivable, less allowances for returns
and doubtful accounts of $4.1 at March 31, 2000
and $1.1 at June 30, 1999....................... 261.9 120.9
Inventories....................................... 197.1 87.9
Deferred income taxes............................. 19.3 7.9
Other current assets.............................. 23.8 13.0
------------ ------------
Total current assets........................... 1,464.6 463.6
Property, plant, and equipment, net.................. 449.8 181.1
Intangible assets, including goodwill................ 5,827.6 3,444.2
Long-term deferred income taxes and other assets..... 201.5 7.2
------------ ------------
Total assets................................... $7,943.5 $4,096.1
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................. $79.5 $38.1
Accrued payroll and related expenses.............. 80.3 27.2
Income taxes payable.............................. 48.2 37.2
Accrued expenses and other current liabilities.... 99.8 46.3
------------ ------------
Total current liabilities...................... 307.8 148.8
Deferred income taxes................................ 457.6 318.2
Accrued pension and other non-current liabilities.... 19.8 9.8
Commitments and contingencies
Stockholders' equity:
Preferred stock................................... -- --
Common stock and additional paid-in capital....... 7,849.9 3,822.8
Accumulated deficit............................... (683.8) (197.8)
Accumulated other comprehensive loss.............. (7.8) (5.7)
------------ ------------
Total stockholders' equity..................... 7,158.3 3,619.3
------------ ------------
Total liabilities and stockholders' equity..... $7,943.5 $4,096.1
============ ============
See accompanying notes.
JDS UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
Nine months ended
March 31,
----------------------
2000 1999
---------- ----------
Operating activities
Net income (loss)..................................... ($486.0) $23.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Acquired in-process research and development........ 103.7 --
Depreciation and amortization expense............... 641.0 22.4
Deferred income taxes............................... (47.6) --
Write off of asset product line..................... -- 2.4
Change in operating assets and liabilities:
Accounts receivable.............................. (89.1) (9.8)
Inventories...................................... (55.5) (6.1)
Other current assets............................. 0.9 (1.1)
Accounts payable, accrued liabilities and
other accrued expenses......................... 125.7 9.3
---------- ----------
Net cash provided by operating activities............... 193.1 40.4
---------- ----------
Investing activities
Purchase of short-term investments.................... (2,196.8) (173.4)
Proceeds from sale of short-term investments.......... 1,528.5 146.7
Acquisition of businesses, net of cash acquired....... (91.6) (3.7)
Purchase of property, plant and equipment............. (153.9) (32.4)
Other investments..................................... (7.9) --
Decrease (increase) in other assets................... (0.1) (0.1)
---------- ----------
Net cash used in investing activities................... (921.8) (62.9)
---------- ----------
Financing activities
Proceeds from issuance of common stock and private
placement of exchangeable shares................ 713.5 --
Proceeds from issuance of common stock under
stock option and stock purchase plans........... 77.9 13.9
Pre-merger dividends paid on BCP stock................ 0.0 (0.6)
---------- ----------
Net cash provided by financing activities............... 791.4 13.3
---------- ----------
Increase (decrease) in cash and cash equivalents........ 62.8 (9.2)
Cash and cash equivalents at beginning of period........ 75.4 40.5
---------- ----------
Cash and cash equivalents at end of period.............. $138.2 $31.3
========== ==========
Supplemental Cash Flow Information
Tax benefits from stock option and stock
purchase plans.................................. $36.1 $14.2
See accompanying notes.
JDS UNIPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business Activities and Basis of Presentation
The financial information at March 31, 2000 and for the three and nine
month periods ended March 31, 2000 and 1999 is unaudited, but includes all
adjustments (consisting only of normal recurring adjustments) that the Company
considers necessary for a fair presentation of the financial information set
forth herein, in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, such information does not include all of the
information and footnotes required by generally accepted accounting principles
for annual financial statements. For further information, refer to the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-K/A for the year ended June 30, 1999.
The results for the three and nine month periods ended March 31, 2000 may
not be indicative of results for the year ending June 30, 2000 or any future
period.
Fiscal Calendar Change
The Company will change its fiscal calendar effective
July 1, 2000. Fiscal periods thereafter will end on the Saturday nearest the
calendar month end. The change will not result in any differences in fiscal
2001 financial results as compared to the Company's current fiscal calendar.
Impact of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", which provides guidance
on the recognition, presentation and disclosure of revenue in financial statements filed with
the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue
and provides guidance for disclosures related to revenue recognition policies. Although
the Company is still in the process of assessing the impact of adopting SAB 101 on our
financial position and results of operations in fiscal 2001 and thereafter, we do not expect
the effect, if any, to be material.
Note 2. Comprehensive Income (loss)
The components of comprehensive income (loss), net of tax, are as follows:
(in millions)
Three months ended Nine months ended
March 31, March 31,
2000 1999 2000 1999
------------------- -------------------
Net income (loss)...................... ($240.9) $12.8 ($485.9) $23.3
Change in unrealized gain on
available-for-sale investments....... (0.6) (0.1) (2.5) 0.2
Change in foreign currency translation. (1.2) (4.1) 0.3 (0.6)
--------- --------- --------- ---------
Comprehensive income................... ($242.7) $8.6 ($488.1) $22.9
========= ========= ========= =========
Note 3. Inventories
The components of inventory consist of the following: (in millions)
March 31, June 30,
2000 1999
---------- ----------
Raw materials and purchased parts........... $72.6 $41.6
Work in process............................. 98.9 35.9
Finished goods.............................. 25.6 10.4
---------- ----------
$197.1 $87.9
========== ==========
Note 4. Intangibles Assets, including Goodwill
The components of intangible assets are as follows: (in millions)
March 31, June 30,
2000 1999
---------- ----------
Goodwill.......................................... $5,037.4 $2,583.9
Purchased intangibles............................. 1,407.0 881.9
Licenses and other intellectual property.......... 9.2 1.9
---------- ----------
6,453.6 3,467.7
Less: accumulated amortization................... (626.0) (23.5)
---------- ----------
$5,827.6 $3,444.2
========== ==========
Note 5. Earnings (loss) per Share
On July 8, 1999, the Company's Board of Directors approved a two-for-one
stock split of the common stock and the Exchangeable shares effective for
holders of record as of July 23, 1999. On September 28, 1999, the Board of
Directors approved a second two-for-one stock split of the common stock and
Exchangeable shares that became effective for holders of record as of December
22, 1999. On January 3, 2000, the Board of Directors approved a third two-for-
one stock split of all common stock and Exchangeable shares for holders of
record as of March 2, 2000. All references to share and per-share data for all
prior periods presented have been restated to reflect these stock dividends and
stock splits.
As the Company incurred a loss for the three and nine month periods ended
March 31, 2000, the effect of dilutive securities totaling 66.6 million and 62.4
million equivalent shares, respectively, has been excluded from the computation
as they are antidilutive.
Note 6. Income Tax Expense
The Company recorded a tax provision of $27.3 million in the third
quarter of 2000 as compared to $5.5 million in the same period of the prior
year. For the nine months ended March 31, 2000, the Company recorded a tax provision
of $57.8 million as compared to $14.4 million for the same period of the prior year. The tax
provision recorded in each quarter differs from the tax provision (benefit) that
otherwise would be calculated by applying the federal statutory rate to income
(loss) before income taxes primarily because of non-deductible acquisition-
related charges.
Note 7. Operating Segments
During the first quarter of fiscal 2000, JDS Uniphase changed the
structure of its internal organization following the merger that became
effective on the close of business June 30, 1999.
The President and Chief Operating Officer has been identified as the Chief
Operating Decision Maker as defined by SFAS 131. The President allocates
resources to each segment based on their business prospects, competitive
factors, net sales and operating profits before interest, taxes, and certain
purchase accounting related costs.
JDS Uniphase designs, develops, manufactures and markets optical components
and modules at various levels of integration. The Company views its business as
having two principal operating segments: Components and Modules. The
Components Group consists primarily of source lasers, pump lasers, external
modulator products, packaged lasers for fiber-based data communications,
couplers, filters, isolators, circulators, switches, attenuators, fiber Bragg
gratings, and connector products used primarily in telecommunications
applications. The Modules Group includes transmitters, amplifiers, transceivers,
and test instruments used in telecommunications and cable TV. The Company's
other operating segments, which are below the quantitative threshold defined by
SFAS 131, are disclosed in the "all other" category and consist of gas
laser based products for industrial, biotechnology and semiconductor equipment
applications, optical display and projection products, light interference
pigments for security products and decorative surface treatments, certain
corporate-level operating expenses and the Ultrapointe product line that was
sold in 1999. All of the Company's products are sold directly to original
equipment manufacturers and industrial distributors throughout the world.
Information on reportable segments is as follows: (in millions)
Three months ended Nine months ended
March 31, March 31,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Components:
Shipments.............................. $264.6 $44.8 $626.2 $116.1
Intersegment sales..................... (35.0) (0.5) (81.7) (2.1)
--------- --------- --------- ---------
Net sales to external customers........ 229.6 44.3 544.5 114.0
Operating income....................... 94.9 14.1 216.4 33.4
Modules:
Shipments.............................. 116.5 17.6 286.8 39.6
Intersegment sales..................... -- -- -- --
--------- --------- --------- ---------
Net sales to external customers........ 116.5 17.6 286.8 39.6
Operating income....................... 25.5 4.1 62.5 9.6
Net sales by reportable segment........ 346.1 61.9 831.3 153.6
All other net sales.................... 48.5 12.6 75.1 42.1
--------- --------- --------- ---------
$394.6 $74.5 $906.4 $195.7
========= ========= ========= =========
Operating income by reportable segments.. $120.4 $18.2 $278.9 $43.0
All other operating income (loss)........ 2.3 3.6 2.2 10.6
Unallocated amounts:
Acquisition related charges............ (346.3) (3.9) (735.4) (11.8)
Interest and other income, net......... 10.0 0.4 26.2 (4.1)
--------- --------- --------- ---------
Income (loss) before income taxes........ ($213.6) $18.3 ($428.1) $37.7
========= ========= ========= =========
Note 8. Acquisitions
Optical Coating Laboratory, Inc.
On February 4, 2000, the Company acquired Optical Coating Laboratory, Inc.
("OCLI"), a leading manufacturer of optical thin film coatings and
components used to control and enhance light propagation to achieve specific
effects such as reflection, refraction, absorption and wavelength separation.
The transaction was accounted for as a purchase and accordingly, the
accompanying financial statements include the results of operations of OCLI
subsequent to the acquisition date. The total purchase price of $2.7 billion
included consideration of 54.0 million shares of JDS Uniphase common stock, the
issuance of 6.4 million stock options valued at $267.2 million in exchange for
OCLI options and estimated direct transaction costs of $8.2 million.
The total purchase cost of OCLI is as follows (in millions):
Value of securities issued............... $2,432.1
Assumption of options.................... 267.2
---------
Total equity consideration.......... 2,699.3
Direct transactions costs and expenses... 8.2
---------
Total purchase cost $2,707.5
=========
The preliminary purchase price allocation is as follows (in millions):
Price Price Allocation:
Tangible net assets.......................... $253.20
Intangible assets acquired:
Developed technology:
Telecommunications....................... 115.1
Flex Products............................ 92.2
Applied Photonics........................ 1.0
Information Industries................... 23.9
Proprietary know-how....................... 161.9
Trademark and tradename.................... 38.5
Assembled workforce........................ 14.3
In-process research and development........ 84.1
Goodwill................................... 1,927.4
Deferred tax liabilities (4.1)
---------
Total purchase price allocation................ $2,707.5
=========
Tangible net assets acquired includes cash, accounts receivable, inventories
and fixed assets (including an adjustment to write-up property and equipment of
OCLI to fair value by $28.0 million). Liabilities assumed principally include accounts
payable, accrued compensation and accrued expenses. Goodwill and intangible assets
acquired are each being amortized on a straight-line basis over estimated useful
lives ranging from six to fifteen years.
A portion of the purchase price has been allocated to developed technology
and acquired in-process research and development ("IPRD"). Developed
technology and IPRD were identified and valued through extensive interviews,
analysis of data provided by OCLI concerning developmental products, their stage
of development, the time and resources needed to complete them, if applicable,
their expected income generating ability, target markets and associated risks.
The Income Approach, which includes an analysis of the markets, cash flows and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing the developed technology and IPRD.
Where developmental projects had reached technological feasibility, they were
classified as developed technology, and the value assigned to developed
technology was capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPRD and charged to expense upon closing of the merger. The Company
estimates that a total investment of $36.3 million in research and development
over the next 25 months will be required to complete the IPRD. The nature of the
efforts required to develop the purchased IPRD into commercially viable products
principally relate to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPRD, the Company considered, among other factors, the
importance of each project to the overall development plan, projected
incremental cash flows from the projects when completed and any associated
risks. The projected incremental cash flows were discounted back to their
present value using discount rates ranging from 18% to 25%. Discount rates were
determined after consideration of the Company's weighted average cost of capital
and the weighted average return on assets. Associated risks include the inherent
difficulties and uncertainties in completing each project and thereby achieving
technological feasibility, anticipated levels of market acceptance and
penetration, market growth rates and risks related to the impact of potential
changes in future target markets.
The acquired existing technology, which is comprised of products that are
already technologically feasible, includes products that are manufactured and
marketed by OCLI's Telecommunications, Flex Products, Applied Photonics, and
Information Industries groups. The Company is amortizing the acquired
existing technology of approximately $232.2 million on a straight-line basis
over an average estimated remaining useful life of 8.2 years.
The acquired proprietary know-how represents OCLI trade secrets and patents
developed through years of experience designing and manufacturing thin film
products. This know-how enables OCLI to develop new and improve existing thin
film products, processes and manufacturing equipment, thereby providing OCLI
with a distinct advantage over its competitors and a reputation for
technological superiority in the industry. The Company is amortizing the
proprietary know-how of approximately $161.9 million on a straight-line basis
over an average estimated remaining useful life of 10.4 years
The trademarks and trade names include the OCLI trademark and trade name as
well as all branded OCLI products such as GlareGuard® and processes such as
MetaMode®. The Company is amortizing the trademark and trade names of
approximately $38.5 million on a straight-line basis over an estimated remaining
useful life of 10 years.
The acquired assembled workforce is comprised of over 1,400 skilled employees
across OCLI's General and Administration, Science and Technology, Sales and
Marketing, and Manufacturing groups. The Company is amortizing the value
assigned to the assembled workforce of approximately $14.3 million on a
straight-line basis over an estimated remaining useful life of 6 years.
Goodwill, which represents the excess of the purchase price of an investment
in an acquired business over the fair value of the underlying net identifiable
assets, is being amortized on a straight-line basis over its estimated remaining
useful life of 7.2 years.
The following unaudited pro forma summary presents the consolidated results of operations
of the Company, excluding the charge for acquired in-process research and development, as if
the acquisition of OCLI had occurred at the beginning of fiscal 1999 and does not purport
to be indicative of what would have occurred had the acquisition been made as of the beginning
of fiscal 1999 or of results which may occur in the future. The pro forma 1999 results of
operations combines the consolidated results of operations of the Company, excluding the
charge for acquired in-process research and development attributable to OCLI, for the nine
months ended March 31, 1999 the historical results of operations of OCLI for the nine months
ended January 31, 1999.
(in millions, except per share data)
Nine months ended
March 31,
-------------------
2000 1999
--------- ---------
Net Sales .......................... $1,015.6 $348.9
- -------- --------- ---------
Net Loss............................ ($627.6) ($211.3)
- -------- --------- ---------
Loss per share...................... ($0.90) ($0.64)
- -------------- --------- ---------
Effective June 30, 1999, Uniphase Corporation combined its operations with JDS FITEL Inc. to
form JDS Uniphase Corporation ("the Company") in a transaction accounted for as a purchase.
Accordingly, the historical statement of operations of the Company for 1999 included above does
not include the financial results of JDS FITEL Inc. for that period. The following unaudited
pro forma summary is based on the Unaudited Pro Forma Condensed Combined Consolidated
Statement of Operations of Uniphase Corporation and JDS FITEL, Inc. included in Form 8-K/A
filed November 3, 1999. The pro forma 1999 results of operations combines the consolidated
results of operations of the Company, excluding the charge for acquired in-process research
and development attributable to OCLI, for the nine months ended February 28, 1999 and the
historical results of operations of OCLI for the nine months ended January 31, 1999.
(in millions, except per share data)
Nine months ended
March 31,
-------------------
2000 1999
--------- ---------
Net Sales............................... $1,015.6 $549.5
- --------- --------- ---------
Net Loss ............................... ($627.6) ($622.4)
- -------- --------- ---------
Loss per share ......................... ($0.90) ($0.95)
- -------------- --------- ---------
Integrierte Optik GmbH & Co. KG
In January 2000, the Company acquired the remaining 49% minority interest in
Integrierte Optik GmbH & Co. KG ("IOT"), a joint venture of JDS
Uniphase and the Schott Group, for $12.6 million in cash, in a transaction
accounted for as a purchase. Prior to the transaction, IOT's balance sheet and
results of operations were consolidated with the Company, with appropriate
adjustments to reflect minority interest of 49%. As a result of the
transaction, the Company's ownership interest increased to 100% and the minority
interest adjustments have been discontinued. IOT manufactures passive optical
splitters for fiberoptic network applications in cable plants and transmission
networks. The purchase price allocation included tangible net assets of $2.9
million and intangible assets (including goodwill) of $9.7 million that are
being amortized over a five-year period.
Oprel Technologies, Inc.
In December 1999, the Company acquired Oprel Technologies
Inc.("OPREL"), a developer of optical amplifiers, test equipment and
optoelectronic packaging, located in Nepean, Ontario. The transaction was
accounted for as a purchase and accordingly, the accompanying financial
statements include the results of operations of OPREL subsequent to the
acquisition date. The Company paid $9.3 million in cash and issued a total of
190,916 Exchangeable shares of its subsidiary, JDS Uniphase Canada Ltd., each of
which is exchangeable for one share of common stock. The total purchase cost was
$27.7 million. The purchase price allocation included net tangible assets of
$1.4 million and intangible assets (including goodwill) of $26.3 million that
are expected to be amortized over a five-year period.
SIFAM Limited
In December 1999, the Company acquired SIFAM Limited ("SIFAM"),
a supplier of fused components for fiberoptic telecommunications networks which
is based in the United Kingdom, for $97.6 million in cash. SIFAM products, which include
couplers, wavelength division multiplexers and gain flattening filters, are used for
advanced applications in optical amplifiers and network monitoring. The
transaction was accounted for as a purchase and accordingly, the accompanying
financial statements include the results of operations of SIFAM subsequent to
the acquisition date.
The preliminary allocation of the purchase price is as follows (in
millions):
Price Price Allocation:
Tangible nets assets............................. $4.3
Intangible assets acquired:
Developed technology........................... 27.0
Trade secrets and patents...................... 6.1
Assembled workforce............................ 0.6
Goodwill....................................... 56.6
In-process research and development............ 3.0
---------
Total purchase price allocation.................... $97.6
=========
Tangible net assets acquired includes cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally include accounts
payable, accrued compensation and accrued expenses. Goodwill and intangible
assets acquired are each being amortized on a straight-line basis over estimated
useful lives ranging from three to five years.
A portion of the purchase price has been allocated to developed
technology and acquired in-process research and development ("IPRD").
Developed technology and IPRD were identified and valued through extensive
interviews, analysis of data provided by SIFAM concerning developmental
products, their stage of development, the time and resources needed to complete
them, if applicable, their expected income generating ability, target markets
and associated risks. The Income Approach, which includes an analysis of the
markets, cash flows, and risks associated with achieving such cash flows, was
the primary technique utilized in valuing the developed technology and IPRD.
Where development projects had reached technological feasibility, they
were classified as developed technology and the value assigned to developed
technology was capitalized. Where the development projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPRD and charged to expense upon closing of the transaction. The
Company estimates that a total investment of $0.3 million in research and
development over the next 15 months will be required to complete the IPRD. The
nature of the efforts required to develop the purchased IPRD into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPRD, the Company considered, among other factors, the
importance of each project to the overall development plan projected incremental
cash flows from the projects when completed and any associated risks. The
projected incremental cash flows were discounted back to their present value
using discount rates ranging from 14% to 22%. Discount rates were determined
after consideration of the Company's weighted average cost of capital and the
weighted average return on assets. Associated risks include the inherent
difficulties and uncertainties in completing each project and thereby achieving
technological feasibility, anticipated levels of market acceptance and
penetration, market growth rates and risks related to the impact of potential
changes in future target markets.
The acquired existing technology, which is comprised of products that are
already technologically feasible, includes products in the following areas:
fused couplers and attenuators, pump/signal wavelength division multiplexers,
polished products (polarizers, variable ratio couplers), and gain flattening
filters. The Company is amortizing the acquired existing technology of
approximately $27.0 million on a straight-line basis over an average estimated
remaining useful life of 5 years.
The acquired core technology represents SIFAM trade secrets and patents
developed through years of experience designing and manufacturing fused
components for fiberoptic telecommunication networks. This knowledge can be
leveraged by SIFAM to develop new and improved products and manufacturing
processes. The Company is amortizing the acquired core technology of
approximately $6.1 million on a straight-line basis over an average estimated
remaining useful life of 5 years.
The acquired assembled workforce is comprised of approximately 50 skilled
employees across SIFAM's Sales and Marketing, Management, Supervision, Quality
& Training, General & Administrative, and Engineering groups. The
Company is amortizing the value assigned to the assembled workforce of
approximately $0.6 million on a straight-line basis over an estimated remaining
useful life of 3 years.
Goodwill, which represents the excess of the purchase price of an investment
in an acquired business over the fair value of the underlying net identifiable
assets, is being amortized on a straight-line basis over its estimated remaining
useful life of 5 years.
EPITAXX, INC.
In November 1999, the Company acquired EPITAXX, Inc. ("EPITAXX"), a
supplier of optical detectors and receivers for fiberoptic telecommunications
and cable televisions networks. The transaction was accounted for as a purchase
and accordingly, the accompanying financial statements include the results of
operations of EPITAXX subsequent to the acquisition date. The Company issued
cash in the amount of $9.3 million and a total of approximately 9.0 million
shares of common stock in exchange for all of the outstanding shares of EPITAXX
common stock. Outstanding options to acquire shares of EPITAXX common stock
were converted into options to purchase shares of the Company's common stock at
the same exchange ratio.
The total purchase cost of Epitaxx is as follows (in millions):
Value of securities issued............... $435.0
Assumption of options.................... 61.9
---------
Total equity consideration 496.9
Cash paid to seller...................... 9.3
Direct transaction costs and expenses.... 1.0
---------
Total purchase cost...................... $507.2
=========
The preliminary allocation of the purchase price is as follows (in millions):
Price Price Allocation:
Tangible nets assets.................... $14.2
Intangible assets acquired:
Developed technology.................. 63.4
Trademark and tradename............... 5.4
Assembled workforce................... 2.9
Goodwill.............................. 403.4
In-process research and development....... 16.7
Deferred tax asset, net................... 1.2
---------
Total purchase price allocation........... $507.2
=========
Tangible net assets acquired includes cash, accounts receivable,
inventories and fixed assets. Liabilities assumed principally include accounts
payable, accrued compensation accrued expenses, and Industrial Revenue Bonds.
Goodwill and intangible assets acquired are each being amortized on a straight-
line basis over estimated useful lives ranging from four to seven years.
A portion of the purchase price has been allocated to developed
technology and acquired in-process research and development ("IPRD").
Developed technology and IPRD were identified and valued through extensive
interviews, analysis of data provided by EPITAXX concerning developmental
products, their stage of development, the time and resources needed to complete
them, if applicable, their expected income generating ability, target markets
and associated risks. The Income Approach, which includes an analysis of the
markets, cash flows, and risks associated with achieving such cash flows, was
the primary technique utilized in valuing the developed technology and IPRD.
Where development projects had reached technological feasibility, they
were classified as developed technology and the value assigned to developed
technology was capitalized. Where the development projects had not reached
technological feasibility and had no future alternative uses, they were
classified as IPRD and charged to expense upon closing of the merger. The
Company estimates that a total investment of $0.8 million in research and
development over the next 13 months will be required to complete the IPRD. The
nature of the efforts required to develop the purchased IPRD into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
In valuing the IPRD, the Company considered, among other factors, the
importance of each project to the overall development plan projected incremental
cash flows from the projects when completed and any associated risks. The
projected incremental cash flows were discounted back to their present value
using discount rates ranging from 12% to 18%. Discount rates were determined
after consideration of the Company's weighted average cost of capital and the
weighted average return on assets. Associated risks include the inherent
difficulties and uncertainties in completing each project and thereby achieving
technological feasibility, anticipated levels of market acceptance and
penetration, market growth rates and risks related to the impact of potential
changes in future target markets.
The acquired existing technology, which is comprised of products that are
already technologically feasible, includes products in the following areas: high
speed receivers for the telecommunications market, optical network monitoring,
and optical detectors/receivers for access/datacom applications and cable
television fiberoptic networks. The Company is amortizing the acquired
existing technology of approximately $63.4 million on a straight-line basis over
an average estimated remaining useful life of 7 years.
The trademarks and trade names include the EPITAXX trademark and trade name.
The Company is amortizing the trademark and trade names of approximately
$5.4 million on a straight-line basis over an estimated remaining useful life of
7 years.
The acquired assembled workforce is comprised of approximately 400 skilled
employees across EPITAXX's Executive, Research and Development, Manufacturing,
Quality Assurance, Sales and Marketing, and General and Administrative groups.
The Company is amortizing the value assigned to the assembled workforce of
approximately $2.9 million on a straight-line basis over an estimated remaining
useful life of 4 years.
Goodwill, which represents the excess of the purchase price of an investment
in an acquired business over the fair value of the underlying net identifiable
assets, is being amortized on a straight-line basis over its estimated remaining
useful life of 7 years.
Ramar Corporation
In October 1999, the Company acquired Ramar Corporation ("Ramar")
of Northborough, Massachusetts for $1.0 million in cash and convertible debt as
described below, in a transaction accounted for as a purchase and accordingly,
the accompanying financial statements include the results of operations of Ramar
subsequent to the acquisition date. Ramar designs, develops and manufactures
lithium-niobate products for telecommunications applications. The convertible
debt is composed of $3.5 million in demand obligations and two performance-based
instruments totaling $1.0 million that become due upon achieving certain
milestones over the ensuing 12 to 24 months. The convertible debt bears interest
at 5.54% per annum and the principal can be exchanged for newly issued shares of
common stock at a price of $27.961 per share. The total purchase cost was $6.1
million. The purchase price allocation included net tangible assets of $0.2
million and intangible assets (including goodwill) of $4.3 million (net of
deferred tax) that are being amortized over a five year period.
Convertible debt of $3.5 million is included in other current liabilities.
Acquisition of AFC Technologies, Inc.
In August 1999, the Company acquired AFC Technologies, Inc. ("AFC")
of Ottawa, Canada for $22.0 million in cash and common stock of $17.5 million in
a transaction accounted for as a purchase and accordingly, the accompanying
financial statements include the results of operations of AFC subsequent to the
acquisition date. AFC designs, develops and manufactures fiber amplifiers for
telecommunications applications. The purchase price allocation included net
tangible assets of $1.3 million and intangible assets (including goodwill) of
$38.2 million that are being amortized over a five-year period.
Note 9. Pending Acquisitions
On January 17, 2000, the Company announced the signing of a definitive merger agreement
with E-TEK Dynamics, Inc. ("E-TEK") for approximately $15.5 billion in stock.
The merger agreement provides for the exchange of 2.2 shares of JDS Uniphase common stock
for each common share of E-TEK, subject to adjustment. E-TEK is a manufacturer of passive
components and modules for fiberoptic systems. Following completion of the merger, E-TEK
will operate as a wholly owned subsidiary of the Company. This transaction will be
accounted for as a purchase with goodwill of approximately $14.6 billion which is expected
to be amortized over its estimated useful life of five years. Concurrent with the
signing of the merger agreement, the Company and E-TEK signed a mutual supply agreement
under which E-TEK is to supply certain products to JDS Uniphase prior to completion
of the merger.
On March 31, 2000, the Company received requests for additional information
and other documentary material from the Antitrust Division of the U.S.
Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 ("HSR"), with respect to the Company's previously announced merger with E-
TEK Dynamics, Inc. This request, which was received late on March 31, 2000,
extends the waiting period under HSR for this transaction. The Company and E-TEK
are responding to the government requests.
Note 10. Subsequent Events
On April 29, 2000, the Company acquired Fujian Casix Laser Inc
("Casix"), a supplier of crystals, fiberoptic components and optics
for telecommunications networks. Casix is based in Fuzhou, Fujian, China.
Casix's key technologies consist principally of fiberoptic component processing
and precision assembly; optical design, fabrication and coating; and advanced
crystal growth and processing. The transaction will be accounted for
as a purchase.
On April 19, 2000, the Company acquired Cronos Integrated Microsystems, Inc.
("Cronos"), a provider of optical micro-electro-mechanical systems
("MEMS") components and component technology to the fiberoptic
communications market, in a transaction accounted for as a purchase. The Company
issued 6.3 million shares of common stock valued at approximately $550.0
million in exchange for all of the outstanding
shares of Cronos common stock. Outstanding options to acquire shares of Cronos
common stock were converted into options to purchase shares of the Company's
common stock at the same exchange ratio. The purchase price allocation will be
determined in the quarter ended June 30, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Events
On April 29, 2000, the Company acquired Fujian Casix Laser Inc
("Casix"), a supplier of crystals, fiberoptic components and optics
for telecommunications networks. Casix is based in Fuzhou, Fujian, China.
Casix's key technologies consist principally of fiberoptic component processing
and precision assembly; optical design, fabrication and coating; and advanced
crystal growth and processing. Casix was acquired in a transaction accounted for
as a purchase. The purchase price allocation will be determined in the quarter
ended June 30, 2000.
On April 19, 2000, the Company acquired Cronos Integrated Microsystems, Inc.
("Cronos"), a provider of optical micro-electro-mechanical systems
("MEMS") components and component technology to the fiberoptic
communications market, in a transaction accounted for as a purchase. The Company
issued 6.3 million shares of common stock valued at approximately $550.0
million in exchange for all of the outstanding
shares of Cronos common stock. Outstanding options to acquire shares of Cronos
common stock were converted into options to purchase shares of the Company's
common stock at the same exchange ratio. The purchase price allocation will be
determined in the quarter ended June 30, 2000.
On March 31, 2000, the Company received requests for additional information
and other documentary material from the Antitrust Division of the U.S.
Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 ("HSR"), with respect to the Company's previously announced merger with E-
TEK Dynamics, Inc. This request, which was received late on March 31, 2000,
extends the waiting period under HSR for this transaction. The Company and E-TEK
are responding to the government requests.
Results of Operations
Net Sales. For the quarter, net sales of $394.6 million represented an
increase of $320.1 million or 430% compared to the same period of the prior
year. For the nine months, net sales were $906.4 million, an increase of $710.7
million or 363% compared to the same period of the prior year. The increase in
net sales reflected growth in each of our major operating segments and the
inclusion of JDS FITEL ("JDS") sales. We merged with JDS in a
transaction accounted for as a purchase which became effective at the close of
business on June 30, 1999. Separate discussions with respect to net sales and
operating profits for each of our reportable operating segments can be found
under the heading Operating Segment Information.
Net sales for the three and nine month periods ended March 31, 2000 are
not indicative of the expected results for any future period. In addition,
there can be no assurance that the market for our products will grow in future
periods at its historical percentage rate or that certain market segments will
not decline. Further, there can be no assurance that we will be able to
increase or maintain our market share in the future or to achieve historical
growth rates.
Gross Profit. For the quarter, gross profit of $192.5 million
represented an increase of $154.3 million or 404% compared to the same period of
the prior year. For the nine months, gross profit was $439.8 million, an
increase of $342.8 million or 354% compared to the same period of the prior
year. Strong demand for virtually all our optical components and modules
products combined with the increased operations resulting from the JDS merger
contributed to the increases in gross profit.
As a percent of net sales, gross profit declined to 49% for the quarter, as compared
to 51% for the same period of the prior year. The decline reflects the impact of
$12.4 million in purchase accounting adjustments which increased OCLI inventories.
These adjustments flowed through to cost of sales during the current quarter. As a
percent of net sales, gross profit declined to 49% in the first nine month of 2000
from 50% during the same period in 1999.
The decline reflects the impact of $24.0 million in purchase
accounting adjustments which increased JDS, EPITAXX, SIFAM and OCLI inventories.
These adjustments flowed through to cost of sales during the first nine months.
There can be no assurance that we will be able to maintain gross profits
or gross margins at current levels in future periods. We expect that periodic
fluctuations in our gross margins will continue because of, among other things,
changes in our sales and product mix, manufacturing constraints, competitive
pricing pressures, higher costs resulting from new production facilities,
manufacturing yields, acquisitions of businesses that may have different margins
than ours and inefficiencies associated with new product introductions.
Research and Development Expense. For the quarter, research and
development (R&D) expense of $33.3 million or 8% of net sales represented an
increase of $26.0 million or 354% compared to the same period of the prior year.
R&D expense for the nine months was $72.1 million, an increase of $53.3
million or 284% compared to the same period of the prior year. The increase in
R&D expenses is primarily due to the continued development and enhancement
of our fiberoptic product lines and the inclusion of JDS operations in fiscal
2000. As a percent of net sales, R&D expense declined to 8% in the first
nine months from 10% during the same period in 1999. Due to the rapidly growing
business, it is difficult to scale R&D programs at the same ratio as our
sales growth.
We are committed to the continuation of making significant R&D
expenditures and expect that, while R& D expenses may vary as a percentage
of net sales in future periods, the absolute dollar amount of R&D expenses
will increase as we invest in developing new products and in expanding and
enhancing our existing product lines. However, there can be no assurance that
expenditures for R&D will be successful or that improved processes or
commercial products will result from these projects.
Selling, General and Administrative Expense. For the quarter, selling,
general and administrative (SG&A) expense of $49.1 million or 12% of net
sales represented an increase of $40.0 million or 441% as compared to the same
period of the prior year. For the nine months, SG&A expense was $110.7
million, an increase of $86.2 million or 351% compared to the same period of the
prior year. The increase is primarily due to higher SG&A costs to support
telecommunications products, and the inclusion of JDS. As a percentage of net
sales, SG&A remained between 12% and 13% during the first nine months of
2000 and 1999, respectively.
We expect the amount of SG&A expenses to increase in the future,
although such expenses may vary as a percentage of net sales in future periods.
We expect to continue incurring charges to operations, which to date have been
within management's expectations, associated with integrating recent
acquisitions.
Amortization of Purchased Intangibles. For the quarter, amortization
of purchased intangibles ("API") expense of $249.6 million or 63% of
net sales represented an increase of $245.7 million or 6,293% as compared to the
same period of the prior year. For the nine months, API expense of $607.6
million, an increase of $595.8 million or 5,047% compared to the same period of
the prior year. The increase in API expense is due to the intangible assets
recorded in connection with our acquisitions which were transactions accounted
for as purchases. See Note 8 of Notes to Condensed Consolidated Financial Statements for
disclosures of API relative to our acquisitions in fiscal 2000.
Our API expense will continue to generate net losses for the foreseeable
future. Goodwill and other intangibles arising from acquisition activity
totaled $6.4 billion, including the related deferred tax effect. In addition,
we will record a significant amount of additional goodwill in connection with
the pending E-TEK merger. API expense could change because of other acquisitions
or impairment of existing identified intangible assets and goodwill in future
periods.
Acquired In-process Research and Development. For the quarter, the
Company recorded $84.1 million of acquired in-process
research and development resulting from the acquisition of OCLI. For the nine
months, the Company recorded $103.7 million of acquired in-
process research and development resulting from the acquisitions of OCLI, SIFAM
and EPITAXX. See Note 8 of Notes to Condensed Consolidated Financial Statements. These
amounts were expensed on the acquisition dates because the acquired technology
had not yet reached technological feasibility and had no future alternative
uses. There can be no assurance that acquisitions of businesses, products or
technologies by us in the future will not result in substantial charges for
acquired in-process research and development that may cause fluctuations in our
quarterly or annual operating results.
A description of the acquired in-process technologies, stage of development,
estimated completion costs, and time to complete at the date of the
OCLI merger, as well as the current status of acquired in-process
research and development projects for each acquisition can be found at the end
of this Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Interest and Other Income. For the quarter, net interest and other
income of $10.0 million or 3% of net sales represented an increase of $9.1
million or 1,032% as compared to the same period of the prior year. For the
nine months, net interest and other income was $26.2 million, an increase of
$23.6 million or 891% compared to the same period of the prior year. The
increase in interest and other income was the result of higher investment
balances obtained through cash generated from operating activities, our mergers
with JDS and OCLI, and the completion of a public offering of our common stock
and a private placement of Exchangeable shares in August 1999 that generated
$713.9 million in cash, net of transaction costs.
Income Tax Expense. We recorded a tax provision of $27.3 million in
the third quarter of 2000 as compared to $5.5 million in the same period of the
prior year. For the nine months, we recorded a tax provision of $57.8 million as
compared to $14.4 million for the same period of the prior year. The tax
provision recorded in each quarter differs from the tax provision (benefit) that
otherwise would be calculated by applying the federal statutory rate to income
(loss) before income taxes primarily due to non-deductible acquisition-related
charges.
Operating Segment Information
Components. For the quarter and nine months, net sales of
components increased 418% and 378%, respectively, compared to the same period of
the prior year primarily because of the inclusion of JDS and increased demand
for active products used in optical communications applications. For the
quarter and nine months, operating income increased 575% and 548%, respectively,
compared to the same period of the prior year because of these same factors.
Sales of components also increased because of significantly higher use of our
components in the modules we build and a full quarter's contributions to net
sales by SIFAM and EPITAXX during the third quarter.
Modules. For the quarter and nine months, net sales increased 563%
and 624%, respectively, compared to the same period of the prior year primarily
because of the inclusion of JDS and increased demand for transmitters,
amplifiers and transceivers for CATV and telecommunications. For the quarter
and nine months, operating income increased 518% and 550%, respectively,
compared to the same period of the prior year because of these same factors.
Liquidity and Capital Resources
At March 31, 2000, our combined balance of cash, cash equivalents and
short-term investments was $962.5 million. For the nine months, we met our
liquidity needs through cash generated from operating activities. For the nine
months, net cash provided by operating activities was $193.1 million, compared
with $40.4 million for the same period of the prior year.
Cash provided by operating activities was primarily generated from net
income before non-cash charges of $211.2 million. Higher levels of operating
activity resulted in increases in accounts receivable, inventories and accounts payable
and other current liabilites using $18.9 million (net) of cash.
During the first nine months of 2000, cash used in investing activities
was $921.8 million compared with $62.9 million during the same period of the
prior year. The majority of this higher activity level was a result of
increased short term investments (net increase $668.3 million) following
completion of a public sale of our stock during the period. Acquisitions of OCLI,
EPITAXX, SIFAM, OPREL, AFC Technologies and Ramar used $91.6 million in cash,
net of cash acquired.
In addition, we incurred capital expenditures of $153.9 million for facility
expansions and equipment purchases to increase our manufacturing capacity
worldwide. We expect to continue to expand our worldwide manufacturing
capacity, primarily for telecommunications products, by making approximately $85
million in additional capital expenditures during the remainder of the year.
Cash of $791.4 million was generated from financing activities as
compared to $13.3 million in the same period of the prior year. The additional
cash was primarily attributable to our sale of common stock in a public offering
of common stock in August 1999. The exercise of stock options and the sale of
stock through our employee stock purchase plan generated $77.9 million in
cash.
We have an unsecured $10 million revolving line of credit. Advances under
the line of credit bear interest at the bank's prime rate (9.0% at March 31,
2000). There were no borrowings as of March 31, 2000. Under the terms of the
credit agreement, we are required to maintain certain minimum working capital,
net worth, profitability levels and other financial conditions. The agreement
also prohibits the payment of cash dividends and contains certain restrictions
on our ability to borrow money or purchase assets or interests in other entities
without the prior written consent of the bank. The line of credit expires in May
2000.
We believe that our existing cash balances and investments, together with
cash flow from operations will be sufficient to meet our liquidity and capital
spending requirements at least through the end of 2000. However, possible
investments in or acquisitions of complementary businesses, products or
technologies may require additional financing prior to such time. There can be
no assurance that additional debt or equity financing will be available when
required or, if available, can be secured on terms satisfactory to us.
Current Status of Acquired In-Process Research and
Development Projects
We periodically review the stage of completion and likelihood of success of
each of the in-process research and development projects. The current status of
the in-process research and development projects for all major mergers and
acquisitions during the past three years are as follows:
OCLI
An independent appraiser performed an allocation of the total
purchase price of OCLI to its individual assets. Of the total purchase price,
$84.1 million has been allocated to in-process research and development and was
charged to expense in the third quarter of fiscal 2000. The remaining purchase
price has been allocated to specifically identifiable tangible and intangible assets acquired,
including an adjustment to write up property and equipment of OCLI to fair value by $28.0
million.
The identifiable assets include existing technology, proprietary know-
how, trademarks and tradenames, and assembled workforce.
The in-process research and development relates to sophisticated optical
components, filters and materials that manage light propagation in today's most
advanced telecommunications systems, projection display engines and state of the
art optically variable security devices. The in-process research and development
is comprised of three main categories: (1) thin film filters and switches, (2)
optical display and projection products, and (3) light interference
pigments.
The following is a brief description of each acquired in-process research and
development project as of the date of the merger:
Thin film filters and switches. The main
application for these products is to control the reflection, refraction,
transmission and absorption of lightwave signals that are transmitted through
fiberoptic cables. OCLI's current development efforts are directed toward
improved spectral precision and enhanced wavelength division capability of the
filters and switches. Products in-process include switches, filter lock lasers,
add-drop multiplexers and dispersion compensators which are in the exploratory
through the prototype stages of the development cycle. OCLI expects the
development cycle to range between 3 and 25 months with expected completion
dates from the second quarter of calendar year 2000 through the first quarter of
calendar year 2002. Development costs incurred on those products to date are
approximately $7.6 million with estimated cost to complete of approximately
$22.0 million which OCLI expects to incur ratably for the remainder of the
development cycle. OCLI believes the associated risks of developing these
products to commercial viability include potential difficulties meeting customer
and market performance specifications and competition from products using
competing technologies that offer comparable functionality.
Optical display and projection products.
The main application for this product is to control the brightness, contrast and
resolution of next generation display products including computer displays,
digital image projectors, flat panel displays, scanners and personal digital
assistants (commonly known as PDAs). The performance of these products is highly
dependent upon optical components utilizing thin film filter technology coupled
with increasingly smaller size and weight requirements. OCLI is currently in the
prototype stage of the development cycle for this product family and expects the
development cycle to continue for approximately 9 months with completion
expected in the third quarter of calendar year 2000. Development costs incurred
to date are approximately $6.0 million with estimated cost to complete of
approximately $3.0 million which OCLI expects to incur ratably for the remainder
of the development cycle. OCLI believes the associated risks of developing these
products to commercial viability include potential difficulties meeting customer
and market performance specifications and competition from products using
competing technologies that offer comparable functionality.
Light interference pigments. The main application for
this product is to achieve unique color shifting characteristics in security
products and decorative surface treatments. Security related products include
bank notes, passports, credit cards, tax stamps and brand protection labels.
Decorative surface treatments include automotive paint, cosmetics, electronic
cases and apparel. OCLI is currently in the prototype stage of the development
cycle for this product family and expects the development cycle to continue for
approximately 12 months with completion expected in the first quarter of
calendar year 2001. Development costs incurred to date are approximately $8.2
million with estimated cost to complete of approximately $11.3 million which
OCLI expects to incur ratably for the remainder of the development cycle. OCLI
believes the associated risks of developing these products to commercial
viability include meeting customer and market performance specifications,
meeting customer and market volume requirements and competition from products
using competing technologies that offer comparable functionality.
Value Assigned to In-Process Research and Development
The value assigned to in-process research and development was determined by
considering the importance of each project to the overall development plan,
estimating costs to develop the purchased in-process research and development
into commercially viable products, estimating the resulting net cash flows from
the projects when completed and discounting the net cash flows to their present
value. The revenue estimates used to value the purchased in-process research and
development were based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by OCLI and its competitors.
The rates utilized to discount the net cash flows to their present value are
based on OCLI weighted average cost of capital and the weighted average return
on assets. Given the nature of the risks associated with the difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility, anticipated market acceptance and penetration, market growth rates
and risks related to the impact of potential changes in future target markets,
the weighted average cost of capital was adjusted. Based on these factors,
discount rates of 18 to 25%, 25% and 18% were deemed appropriate for thin film
filters, optical display and projection products and light interference
pigments, respectively. The estimates used in valuing in-process research and
development were based upon assumptions we believe to be reasonable but which
are inherently uncertain and unpredictable. Our assumptions may be incomplete
or inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may vary from the
projected results. Any such variance may result in a material adverse effect on
OCLI's financial condition and results of operations.
With respect to the acquired in-process technologies, the calculations of
value were adjusted to reflect the value creation efforts of OCLI prior to the
merger. Following are the estimated completion percentages and technology
lives:
Percent Expected
Completed Technology Life
Project --------- ---------------
- ----------
Thin film filters.............................. 26% 6-10 years
Optical display and projection products........ 67% 10 years
Light interference pigments.................... 42% 10-15 years
The value assigned to each acquired in-process research and development is as
follows (in millions):
Thin film filters.................................... $56.9
Optical display and projection products.............. 14.4
Light interference pigments.......................... 12.8
---------------
Total acquired in-process research and development... $84.1
===============
Developed technology and in-process
research and development were identified and valued through extensive
interviews, analysis of data provided by OCLI concerning developmental products,
their stage of development, the time and resources needed to complete them, if
applicable, their expected income generating ability, target markets and
associated risks. The Income Approach, which includes an analysis of the
markets, cash flows and risks associated with achieving such cash flows, was the
primary technique utilized in valuing the developed technology and in-process
research and development.
Where developmental projects had reached technological feasibility, they were
classified as developed technology, and the value assigned to developed
technology was capitalized. Where the developmental projects had not reached
technological feasibility and had no future alternative uses, they were
classified as in-process research and development and charged to expense upon
closing of the merger. OCLI estimates that a total investment of $36.3 million
in research and development over the next 25 months will be required to complete
the in-process research and development. The nature of the efforts required to
develop the purchased in-process research and development into commercially
viable products principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to establish
that the products can be produced to meet their design specifications, including
functions, features and technical performance requirements.
SIFAM
The products under development at the time of the merger included: (1)
miniature couplers; (2) combined components; and (3) micro-optic devices.
Combined components development is expected to continue for six months with an
estimated cost to complete this product of $0.3 million. Micro-optic device
development is currently being evaluated relative to similar efforts already underway
within the Company. The costs incurred post acquisition for micro-
optic device development has been consistent with our expectations. Miniature
coupler development is substantially complete at a cost consistent with our
expectations.
EPITAXX, Inc.
The products under development at the time of the merger included (1)
high speed receivers, and (2) an optical spectrum analyzer product. High-speed
receiver development is expected to continue for approximately three to nine months,
with expected cost to complete of approximately $0.4 million which EPITAXX
expects to incur ratably for the remainder of the development cycle. Optical
spectrum analyzer development is expected to continue approximately 10 months
with expected cost to complete of approximately $0.2 million which EPITAXX
expects to incur ratably for the remainder of the development cycle.
JDS
The products under development at the time of our merger included: (i)
Thermo Optic Waveguide Attenuators, (ii) Solid State Switch, (iii) 50 GHz WDM,
and (iv) Erbium Doped Fiber Amplifiers ("EDFA"). Attenuator
development is expected to continue for approximately nine months at a cost of
approximately $0.7 million ratably until its completion. Solid State Switch
development will continue for approximately three months at a cost of $0.7
million incurred ratably over the period. WDM and EDFA developments are
substantially complete at a cost consistent with our expectations.
Uniphase Netherlands
The product introductions for the WDM lasers - CW and direct modulation and
DFB/EA and modulator are either on schedule or are approximately six months behind
schedule. The WDM laser - direct modulation is expected to have a lower revenue
growth rate than originally anticipated. The development of the semiconductor
optical amplifier technology has been delayed because of market demand for other
products. The development of the telecom technology is on schedule but the
revenue growth rate in initial periods is expected to be lower than originally
anticipated. Development of the CATV technologies is approximately six months
behind schedule and is expected to take a higher level of development effort to
achieve technological feasibility. We have incurred post-acquisition research
and development expenses of approximately $8.0 million in developing the
acquired in-process technology and estimate the cost to complete this
technology, in combination with our other continuing research and development
expenses, will not be in excess of our historic expenditures for research and
development as a percentage of our net sales. The differences between the actual
outcome noted above and the assumptions used in the original valuation of the
technology are not expected to significantly impact our results of operations
and financial position.
Uniphase Fiber Components
The initial products developed for submarine and unpackaged technology
projects were completed approximately on schedule and post-acquisition research
and development expenses approximately equaled the estimated cost to complete at
the acquisition date. The Company is experiencing higher levels of demand for
the submarine products than anticipated in the original estimates. The
temperature compensation project is behind schedule because of unforeseen
technical difficulties in maintaining specifications at the harshest
environmental test points, although we are satisfied with the developments
achieved to date. The dispersion compensation project is significantly behind
schedule and the market does not appear to be developing as anticipated. The
Add-Drop projects were discontinued concurrent with the merger with JDS. We have
incurred post-acquisition research and development expenses of approximately
$3.5 million in developing the acquired in-process technology and
estimate the cost to complete this technology, in combination with our other
continuing research and development expenses, will not be in excess of our
historic expenditures for research and development as a percentage of our net
sales. The differences between the actual outcome noted above and the
assumptions used in the original valuation of the technology are not expected to
significantly affect our results of operations and financial position.
Uniphase Laser Enterprise
The submount and RWG series products were released on schedule and post-
acquisition research and development expenses approximately equaled the
estimated cost to complete at the acquisition date. Actual revenue for
these products has significantly exceeded the estimates used in the valuation of
the technology. We did not pursue development of the distributed feedback laser
because of resources being redirected to expand the submount and RWG series
development program in response to strong market demand. The high power project
is somewhat delayed because of shifting R&D resources to submount/RWG
because of RWG demand. We have incurred post-acquisition research and
development expenses of approximately $8.1 million in developing the acquired
in-process technology and estimate the cost to complete this technology, in
combination with our other continuing research and development expenses, will
not be in excess of our historic expenditures for research and development as a
percentage of our net sales. The differences between the actual outcome noted
above and the assumptions used in the original valuation of the technology are
not expected to significantly impact our results of operations and financial
position
Item 3. Quantitative and Qualitative Disclosure About Market Risks
Foreign Exchange
We generate a significant portion of our sales from sales to
customers located outside the United States, principally in Europe.
International sales are made mostly from our foreign subsidiaries in the local
countries and are typically denominated in either U.S. dollars or the local
currency of each country. These subsidiaries also incur most of their expenses
in the local currency. Accordingly, all foreign subsidiaries use the local
currency as their functional currency.
Our international business is subject to risks typical of an
international business including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely affected by changes in these or
other factors.
We use forward foreign exchange contracts as the vehicle for hedging
certain assets and liabilities denominated in foreign currencies. In general,
these forward foreign exchange contracts have three months or less to maturity.
Gains and losses on hedges are recorded in non-operating other income as offset
against losses and gains on the underlying exposures. Management of the foreign
exchange hedging program is done in accordance with corporate policy.
At March 31, 2000, hedge positions totaled U.S. dollar $83.4 million
equivalent. All hedge positions are carried at fair value and all hedge
positions had maturity dates within three months.
Interest Rates
We invest our cash in a variety of financial instruments, including
floating rate bonds, municipal bonds, auction instruments and money market
instruments. These investments are denominated in U.S. dollars and Canadian
dollars. Cash balances in foreign currencies overseas are operating balances and
are only invested in short term deposits in local banks.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely affected by a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part of these factors, the Company's future investment income may
fall short of expectations because of changes in interest rates or the Company
may suffer loses in principal if forced to sell securities which have seen a
decline in market value prior to their maturities because of changes in interest
rates.
Our investments are made in accordance with an investment policy
approved by the Board of Directors. No investment securities have maturities
exceeding three years, and the average duration of the portfolio does not exceed
eighteen months.
Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q which are not
historical facts are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. A forward-looking
statement may contain words such as "plans," "hopes,"
"believes," "estimates," "will continue to be,"
"will be," "continue to," "expect to,"
"anticipate that," " to be" or "can impact." These
forward-looking statements include statements relating to our expectations as to
(i) the timing of our proposed acquisition of E-TEK and the likelihood of
governmental or stockholder approval thereof, (ii) the cost to complete our
acquired in-process research and development projects, the expected amortization
of such costs and the development cycles and timing of completion of such
projects, (iii) the amount (both in absolute dollars and as a percentage of net
sales) of our expenditures for research and development, selling, general and
administrative and capital acquisitions and improvements, (iv) the sufficiency
of existing cash balances and investments, together with cash flow from
operations and available lines of credit to meet our liquidity and capital
spending requirements at least through the end of the calendar year 2000, (v)
the development costs, anticipated completion, introduction and projected
revenues from new and developing products and technologies including the Thermo
Optic Waveguide Attenuator, Solid State Switch, WDM EDFA, WDM laser direct
modulation, the Submount and RWG series products and CATV technologies, and (vi)
costs associated with prior, pending and future acquisitions and plans relating
thereto. Management cautions that forward-looking statements are subject to
risks and uncertainties that could cause our actual results to differ materially
from those projected in such forward-looking statements. These risks and
uncertainties include the risk that (i) the proposed E-TEK acquisition will not
be completed, (ii) R&D expenditures will be materially greater or less than
those expected, (iii) funds will be insufficient to meet our liquidity and
capital resources requirements through the end of the calendar year 2000, (iv)
development costs, anticipated completion, introduction and projected revenues
from new and developing products and technologies may be materially different
than anticipated and (v) future acquisitions may not be completed as expected,
or at all. Further, our future business, financial condition and results of
operations could differ materially from those anticipated by such forward-
looking statements and are subject to risks and uncertainties including the
risks set forth below. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking
statements after the date of this Quarterly Report on Form 10-Q to conform such
statements to actual results or to changes in our expectations.
Risk Factors
Difficulties We May Encounter Managing Our Growth Could Adversely Affect Our Results of
Operations
We have historically achieved growth through a combination of internally
developed new products and acquisitions. Our growth strategy depends on our
ability to continue developing new components, modules and other products for
our customer base. However, along with internal new product development
efforts, as part of this strategy, we expect to continue to pursue acquisitions
of other companies, technologies and complementary product lines. The success of
each acquisition will depend upon:
- our ability to manufacture and sell the products of the businesses
acquired,
- continued demand for these acquired products by our customers,
- our ability to integrate the acquired business' operations, products and
personnel,
- our ability to retain key personnel of the acquired businesses,
and
- our ability to expand our financial and management controls and reporting
systems and procedures.
Difficulties in Integrating New Acquisitions Could Adversely Affect Our
Business
Critical to the success of our growth is the ordered, efficient
integration of acquired businesses into or organization and, with this end, we
have in the past spent and continue to spend significant resources. If our
integration efforts are unsuccessful, our businesses will suffer. We are the
product of several substantial combinations, mergers and acquisitions,
including, among others, the combination of Uniphase Corporation and JDS FITEL
on June 30, 1999, and the acquisition of Optical Coating Laboratory, Inc. on
February 4, 2000. In addition, on January 17, 2000 we executed a definitive
merger agreement to acquire E-TEK Dynamics, Inc. Each combination, merger and
acquisition presents unique product, marketing, research and development,
facilities, information systems, accounting, personnel and other integration
challenges. In the case of several of our acquisitions, including Uniphase Laser
Enterprise, in March 1997, Uniphase Netherlands, in June 1998, and Cronos
Integrated Microsystems, Inc., in April 2000, we acquired businesses that had
previously been engaged primarily in research and development and that needed to
make the transition from a research activity to a commercial business with sales
and profit levels that are consistent with our overall financial goals. This
transition is in its genesis at Cronos and is not yet completed at Uniphase
Netherlands, which continues to operate at higher expense levels and lower gross
margins than those required to meet our profitability goals. Also, our
information systems and those of companies we acquire are often incompatible,
requiring substantial upgrades to one or the other. Further, our current senior
management is a combination of the prior senior management teams of Uniphase,
JDS FITEL and OCLI, several of whom have not previously worked with other
members of management.
The benefits to us of each combination, merger and acquisition and our
success, as a whole, depends upon our succeeding in each of these and other
integration challenges. Nevertheless, the integration of our business with
another may result in unanticipated operations problems, expenses and
liabilities and the diversion of management attention. Our integration efforts
may not be successful, and, if so, our operating results would suffer as a
result.
If We Fail to Efficiently Integrate Our Sales and Marketing Forces, Our
Sales Could Suffer
Our sales force is and will in the future be a combination of our sales
force and the sales forces of the businesses we acquire, which must be
effectively integrated for us to remain successful. Our combinations, mergers
and acquisitions (in particular, the June 30, 1999 combination of Uniphase
Corporation with JDS FITEL) often result in sales forces differing in products
sold, marketing channels used and sales cycles and models applied. Accordingly,
we may experience disruption in sales and marketing in connection with our
efforts to integrate our various sales and marketing forces, and we may be
unable to efficiently or effectively correct such disruption or achieve our
sales and marketing objectives if we fail in these efforts. Our sales personnel
not accustomed to the different sales cycles and approaches required for
products newly added to their portfolio may experience delays and difficulties
in selling these newly added products. Furthermore, it may be difficult to
retain key sales personnel. As a result, we may fail to take full advantage of
the combined sales forces' efforts, and one company's sales approaches and
distribution channels may be ineffective in promoting another entity's products,
all of which may have a material adverse effect on our business, financial
condition or operating results.
Integration Costs and Expenses Associated with Our Merger and Acquisition
Activities Have and May Continue to Be Substantial
We often incur substantial costs related to our combinations, mergers and
acquisitions. For example, we have incurred direct costs associated with the
combination of Uniphase Corporation and JDS FITEL of approximately $12 million
and incurred approximately $8 million associated with the acquisition of OCLI.
We may incur additional material charges in subsequent quarters to reflect
additional costs associated with these and other combinations and acquisitions
which will be expensed as incurred.
We May Fail to Efficiently Commercialize New Product Lines
We intend to continue to develop new product lines to address our
customers' diverse needs and the several market segments in which we
participate. If we fail, our business will suffer. As we target new product
lines and markets, we will further increase our sales and marketing, customer
support and administrative functions to support anticipated increased levels of
operations from these new products and markets as well as growth from our
existing products. We may not be successful in creating this infrastructure nor
may we realize any increase in the level of our sales and operations to offset
the additional expenses resulting from this increased infrastructure. In
connection with our recent acquisitions, we have incurred expenses in
anticipation of developing and selling new products. Our operations may not
achieve levels sufficient to justify the increased expense levels associated
with these new businesses.
Any Failure of Our Information Technology Infrastructure Could Materially
Harm Our Results of Operations
Our success depends upon, among other things, the capacity, reliability
and security of our information technology hardware and software infrastructure.
Any failure relating to this infrastructure could significantly and adversely
impact our results of operations. In connection with our growth, we have
identified the need to update our current information technology infrastructure
and expect to incur significant costs to complete this upgrade. We are
implementing a corporate-wide ERP solution (Oracle) with integrated product data
management and manufacturing execution systems, expanding and enhancing our wide
area network with higher bandwidth connections and redundant links, and
integrating our voice communication systems.
We must continue to expand and adapt our system infrastructure to keep pace
with our growth. Demands on infrastructure that exceed our current forecasts
could result in technical difficulties. Upgrading the network infrastructure
will require substantial financial, operational and management resources, the
expenditure of which could affect the results of our operations. We may not
successfully and in a timely manner upgrade and maintain our information
technology infrastructure and a failure to do so could materially harm our
business, results of operations and financial condition.
We are Subject to Manufacturing Difficulties
If We Do Not Achieve Acceptable Manufacturing Volumes, Yields or
Sufficient Product Reliability, Our Operating Results Could Suffer
The manufacture of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments.
Changes in our manufacturing processes or those of our suppliers, or their
inadvertent use of defective or contaminated materials, could significantly
reduce our manufacturing yields and product reliability. Because the majority of
our manufacturing costs are relatively fixed, manufacturing yields are critical
to our results of operations. Certain of our divisions have in the past
experienced lower than expected production yields, which could delay product
shipments and impair gross margins. These divisions or any of our other
manufacturing facilities may not maintain acceptable yields in the future.
For example, our existing Uniphase Netherlands facility has not achieved
acceptable manufacturing yields since the June 1998 acquisition, and there is
continuing risk attendant to this facility and its manufacturing yields and
costs. Moreover, we recently completed construction of a new laser fabrication
facility at Uniphase Netherlands, and this facility has not yet reached targeted
yields, volumes or costs levels. Uniphase Netherlands may not successfully
manufacture laser products in the future at volumes, yields or cost levels
necessary to meet our customers' needs. To the extent we do not achieve
acceptable manufacturing yields or experience product shipment delays, our
business, operating results and financial condition would be materially and
adversely affected.
As our customers' needs for our products increase, we must increase our
manufacturing volumes to meet these needs and satisfy customer demand. Failure
to do so may materially harm our business, operating results and financial
condition. In some cases, existing manufacturing techniques, which involve
substantial manual labor, may be insufficient to achieve the volume or cost
targets of our customers. As such, we will need to develop new manufacturing
processes and techniques, which are anticipated to involve higher levels of
automation, to achieve the targeted volume and cost levels. In addition, it is
frequently difficult at a number of our manufacturing facilities to hire
qualified manufacturing personnel in a timely fashion, if at all, when customer
demands increase over shortened time periods. While we continue to devote
research and development efforts to improvement of our manufacturing techniques
and processes, we may not achieve manufacturing volumes and cost levels in our
manufacturing activities that will fully satisfy customer demands.
If Our Customers Do Not Qualify Our Manufacturing Lines For Volume Shipments,
Our Operating Results Could Suffer
Customers will not purchase any of our products (other than limited numbers
of evaluation units) prior to qualification of the manufacturing line for the
product. Each new manufacturing line must go through varying levels of
qualification with our customers. This qualification process determines whether
the manufacturing line achieves the customers' quality, performance and
reliability standards. Delays in qualification can cause a product to be dropped
from a long term supply program and result in significant lost revenue
opportunity over the term of that program. We may experience delays in obtaining
customer qualification of our new facilities. If we fail in the timely
qualification of these or other new manufacturing lines, our operating results
and customer relationships would be adversely affected.
Our Operating Results Suffer as a Result of Purchase Accounting Treatment,
Primarily due to the Impact of Amortization of Goodwill and Other Intangibles
Originating from Acquisitions
Under U.S. generally accepted accounting principles that apply to us, we
accounted for a number of business combinations using the purchase method of
accounting, the most significant being the combination of Uniphase Corporation
and JDS FITEL. Under purchase accounting, we recorded the market value of our
common shares and the Exchangeable Shares issued in connection with mergers and
acquisition targets with the fair value of the stock options assumed which
became options to purchase our common shares and the amount of direct
transaction costs as the cost of acquiring these entities. That cost is
allocated to the individual assets acquired and liabilities assumed, including
various identifiable intangible assets such as in-process research and
development, acquired technology, acquired trademarks and trade names and
acquired workforce, based on their respective fair values. We allocated the
excess of the purchase cost over the fair value of the net assets to goodwill.
The impact of purchase accounting on our operating results over the past four
quarters attributable to our recent significant acquisitions is as follows (in
millions):
Quarterly Annual
In-process Amortization Amortization
Research and of Purchased of Purchased
Entity Development Intangibles Intangibles
- ------------- ------------ ------------ ------------
JDS FITEL, Inc. $210.4 $168.0 $672.0
EPITAXX, Inc. $14.8 $24.7 $98.8
OCLI $84.1 $79.8 $319.1
The impact of these mergers and acquisitions as well as other acquisitions
consummated in the past five years resulted in amortization expense of $249.6
million and $607.6 million for the three and nine months ended March 31, 2000.
Additionally, we also incur other purchase accounting related costs and expenses
in the period a particular transaction closes to reflect purchase accounting
adjustments adversely impacting gross profit and costs of integrating new
businesses or curtailing overlapping operations. Purchase accounting treatment
of our mergers and acquisitions results in a net loss for us in the foreseeable
future, which could have a material and adverse effect on the market value of
our stock.
Our Stock Price Could Fluctuate Substantially
The Unpredictability of Our Quarterly Operating Results Could Cause
Our Stock Price to be Volatile or Decline
We expect to continue to experience fluctuations in our quarterly
results, which in the future may be significant and cause substantial
fluctuations in the market price of our stock. All of the concerns we discuss
under Risk Factors could affect our operating results, including, among
others:
- the timing of the receipt of product orders from a limited number of major
customers,
- the loss of one or more of our major suppliers or customers,
- competitive pricing pressures,
- the costs associated with the acquisition or disposition of
businesses,
- our ability to design, manufacture and ship technologically advanced
products with satisfactory yields on a timely and cost-effective
basis,
- the announcement and introduction of new products by us, and
- expenses associated with any intellectual property or other
litigation.
In addition to concerns potentially affecting our operating results addressed
elsewhere under Risk Factors, the following factors may also influence our
operating results:
- the relative proportion of our domestic and international sales,
- the timing differences between when we incur expenses to increase our
marketing and sales capabilities and when we realize benefits, if any, from such
expenditures, and
- fluctuations in the foreign currencies of our foreign operations.
Furthermore, our sales often reflect orders shipped in the same quarter that
they are received, which makes our sales vulnerable to short term fluctuations
in customer demand and difficult to predict. Also, customers may cancel or
reschedule shipments, and production difficulties could delay shipments. In
addition, we sell our telecommunications equipment products to OEMs who
typically order in large quantities, and therefore the timing of such sales may
significantly affect our quarterly results. An OEM supplies system level network
products to telecommunications carriers and others and incorporates our products
in these system level products. The timing of such OEM sales can be affected by
factors beyond our control, such as demand for the OEMs' products and
manufacturing risks experienced by OEMs. In this regard, we have experienced
rescheduling of orders by customers in each of our markets and may experience
similar rescheduling in the future. As a result of all of these factors, our
results from operations may vary significantly from quarter to quarter.
In addition to the effect of ongoing operations on quarterly results,
acquisitions or dispositions of businesses, our products or technologies have in
the past resulted in, and may in the future, result in reorganization of our
operations, substantial charges or other expenses, which have caused and may in
the future cause fluctuations in our quarterly operating results and cash flows.
Finally, our net revenues and operating results in future quarters may be
below the expectations of public market securities analysts and investors. In
such event, the price of our common stock and the Exchangeable Shares would
likely decline, perhaps substantially.
Factors Other Than Our Quarterly Results Could Cause Our Stock Price to be
Volatile or Decline
The market price of our common stock has been and is likely to continue
to be highly volatile because of causes other than our historical quarterly
results, such as:
- announcements by our competitors and customers of technological innovations
or new products,
- developments with respect to patents or proprietary rights,
- governmental regulatory action, and
- general market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies, which may cause the price of our stock to decline.
Our Sales Would Suffer if One or More of Our Key Customers Substantially
Reduced Orders for Our Products
Our customer base is highly concentrated. Historically, orders from a
relatively limited number of OEM customers accounted for a substantial portion
of our net sales from telecommunications products. Two customers, Lucent and
Nortel, each accounted for over 10% of our net sales for the quarter ended March
31, 2000. We expect that, for the foreseeable future, sales to a limited number
of customers will continue to account for a high percentage of our net sales.
Sales to any single customer may vary significantly from quarter to quarter. If
current customers do not continue to place orders we may not be able to replace
these orders with new orders from new customers. In the telecommunications
markets, our customers evaluate our products and competitive products for
deployment in their telecommunications systems. Our failure to be selected by a
customer for particular system projects can significantly impact our business,
operating results and financial condition. Similarly, even if our customers
select us, if our customers are not selected as the primary supplier for an
overall system installation, we can be similarly adversely affected. Such
fluctuations could have a material adverse effect on our business, financial
condition and operating results.
Interruptions Affecting Our Key Suppliers Could Disrupt Production,
Compromise Our Product Quality and Adversely Affect Our Sales
We currently obtain various components included in the manufacture of our
products from single or limited source suppliers. A disruption or loss of
supplies from these companies or a price increase for these components would
have a material adverse effect on our results of operations, product quality and
customer relationships. We have a sole source supply agreement for a critical
material used in the manufacture of our passive products. This agreement may be
terminated by either party on six months prior notice. It is our objective to
maintain strategic inventory of the key raw material provided by this supplier.
In addition, we currently utilize a sole source for the crystal semiconductor
chip sets incorporated in our solid state microlaser products and acquire our
pump diodes for use in our solid state laser products from Opto Power
Corporation and GEC. We obtain lithium niobate wafers, gallium arsenide wafers,
specialized fiber components and certain lasers used in our telecommunications
products primarily from Crystal Technology, Inc., Fujikura, Ltd., Philips Key
Modules and Sumitomo, respectively. We do not have long-term or volume purchase
agreements with any of these suppliers (other than for our passive products
supplier described in this paragraph), and these components may not in the
future be available in the quantities required by us, if at all.
We May Become Subject to Collective Bargaining Agreements
Our employees who are employed at manufacturing facilities located in North
America are not bound by or party to any collective bargaining agreements with
us. These employees may become bound by or party to one or more collective
bargaining agreements with us in the future. Certain of our employees outside of
North America, particularly in the Netherlands and Germany, are subject to
collective bargaining agreements. If, in the future, any such employees become
bound by or party to any collective bargaining agreements, then our related
costs and our flexibility with respect to managing our business operations
involving such employees may be materially adversely affected.
Any Failure to Remain Competitive in Our Industry Would Impair Our Operating
Results
If Our Business Operations are Insufficient to Remain Competitive in
Our Industry, Our Operating Results Could Suffer
The telecommunications and laser subsystems markets in which we sell our
products are highly competitive. In each of the markets we serve, we face
intense competition from established competitors. Many of these competitors have
substantially greater financial, engineering, manufacturing, marketing, service
and support resources than do we and may have substantially greater name
recognition, manufacturing expertise and capability and longer standing customer
relationships than do we. To remain competitive, we believe we must maintain a
substantial investment in research and development, marketing, and customer
service and support. We may not compete successfully in all or some of our
markets in the future, and we may not have sufficient resources to continue to
make such investments, or we may not make the technological advances necessary
to maintain our competitive position so that our products will receive market
acceptance. In addition, technological changes or development efforts by our
competitors may render our products or technologies obsolete or uncompetitive.
Fiberoptic Component Average Selling Prices Are Declining
Prices for telecommunications fiberoptic components are generally declining
because of, among other things, increased competition and greater unit volumes
as telecommunications service providers continue to deploy fiberoptic networks.
We have in the past and we may in the future experience substantial period to
period fluctuations in average selling prices. We anticipate that average
selling prices will decrease in the future in response to product introductions
by competitors and us or to other factors, including price pressures from
significant customers. Therefore, we must continue to (1) timely develop and
introduce new products that incorporate features that can be sold at higher
selling prices and (2) reduce our manufacturing costs. Failure to achieve any or
all of the foregoing could cause our net sales and gross margins to decline,
which may have a material adverse effect on our business, financial condition
and operating results.
If We Fail to Attract and Retain Key Personnel, Our Business Could
Suffer
Our future depends, in part, on our ability to attract and retain certain key
personnel. In particular, our research and development efforts depend on hiring
and retaining qualified engineers. Competition for highly skilled engineers is
extremely intense, and we are currently experiencing difficulty in identifying
and hiring certain qualified engineers in many areas of our business. We may not
be able to hire and retain such personnel at compensation levels consistent with
our existing compensation and salary structure. Our future also depends on the
continued contributions of our executive officers and other key management and
technical personnel, each of whom would be difficult to replace. Continuing
uncertainty resulting from the JDS merger could further adversely affect our
ability to retain key employees. We do not maintain a key person life insurance
policy on our Chief Executive Officer, our Chief Operating Officer or any other
officer. The loss of the services of one or more of our executive officers or
key personnel or the inability to continue to attract qualified personnel could
delay product development cycles or otherwise have a material adverse effect on
our business, financial condition and operating results.
Market consolidation has created and continues to create companies that are
larger and have greater resources than us.
In the recent past, there have been a number of significant
acquisitions announced among our competitors and customers, including:
- Lucent Technologies, Inc./Ortel Corporation;
- Corning Incorporated/NetOptix Corporation;
- SDL, Inc./Veritech Microwave, Inc.;
- Nortel Networks Corp./Xros, Inc.;
- Nortel Networks Corp./Core Tek, Inc.;
- Corning Incorporated/NZ Applied Technologies Corp.; and
- Cisco Systems, Inc./ArrowPoint Communications, Inc.
The effect of these completed and pending acquisitions on us cannot be
predicted with accuracy, but some of these competitors are aligned with
companies that are larger or more well established than us. As a result, these
competitors may have access to greater financial, marketing and technical
resources than us. Also, consolidation of these and other companies may disrupt
our marketing and sales efforts.
We Face Risks Related to Our International Operations and Sales
Our customers are located throughout the world. In addition, we have
significant offshore operations, including manufacturing facilities, sales
personnel and customer support operations. Our offshore operations
include facilities in Great Britain, Switzerland, the Netherlands, Germany,
Australia and the Peoples Republic of China. Our international presence exposes
us to risks not faced by wholly-domestic companies. Specifically, we face the
following risks, among others:
- unexpected changes in regulatory requirements,
- tariffs and other trade barriers,
- political, legal and economic instability in foreign markets, particularly
in those markets in which we maintain manufacturing and research
facilities;
- difficulties in staffing and management,
- integration of foreign operations,
- language and cultural barriers,
- seasonal reductions in business activities in the summer months in Europe
and certain other countries,
- greater difficulty in accounts receivable collection,
- currency fluctuations, and
- potentially adverse tax consequences.
International sales accounted for approximately 40%, 38% and 32% of Uniphase
Corporation's net sales in 1999, 1998 and 1997, respectively. International
sales (excluding sales to the U.S.) accounted for approximately 21%, 25% and 20%
of JDS FITEL's net sales in 1999, 1998 and 1997, respectively. We expect that
international sales will continue to account for a significant portion of our
net sales. We may continue to expand our operations outside of the United States
and to enter additional international markets, both of which will require
significant management attention and financial resources.
Since a significant portion of our foreign sales are denominated in U.S.
dollars, our products may also become less price competitive in countries in
which local currencies decline in value relative to the U.S. dollar. Our
business and operating results may also be materially and adversely affected by
lower sales levels that typically occur during the summer months in Europe and
certain other overseas markets. Furthermore, the sales of many of our OEM
customers depend on international sales and consequently further exposes us to
the risks associated with such international sales.
If We Have Insufficient Proprietary Rights or if We Fail to Protect
Those We Have, Our Business Would be Materially Impaired
We May Not Obtain the Intellectual Property Rights We Require
The telecommunications and laser markets in which we sell our products
experience frequent litigation regarding patent and other intellectual property
rights. Numerous patents in these industries are held by others, including
academic institutions and our competitors. In the past, we have acquired and in
the future we may seek to acquire license rights to these or other patents or
other intellectual property to the extent necessary for our business. Unless we
are able to obtain such licenses on commercially reasonable terms, patents or
other intellectual property held by others could inhibit our development of new
products for our markets. While in the past licenses generally have been
available to us where third-party technology was necessary or useful for the
development or production their products, in the future licenses to third-party
technology may not be available on commercially reasonable terms, if at all.
Generally, a license, if granted, includes payments by us of up-front fees,
ongoing royalties or a combination thereof. Such royalty or other terms could
have a significant adverse impact on our operating results. We are a licensee of
a number of third party technologies and intellectual property rights and are
required to pay royalties to these third party licensors on certain of our
telecommunications products and laser subsystems.
Our Products May Infringe the Property Rights of Others
The industry in which we operate experiences periodic claims of patent
infringement or other intellectual property rights. We have in the past and may
from time to time in the future receive notices from third parties claiming that
our products infringe upon third party proprietary rights. Any litigation to
determine the validity of any third-party claims, regardless of the merit of
these claims, could result in significant expense to us and divert the efforts
of our technical and management personnel, whether or not we are successful in
such litigation. If we are unsuccessful in any such litigation, we could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology that is the subject of the litigation. We
may not be successful in such development or such licenses may not be available
on terms acceptable to us if at all. Without such a license, we could be
enjoined from future sales of the infringing product or products.
Our Intellectual Property Rights May Not Be Adequately Protected
Our future depends in part upon our intellectual property, including trade
secrets, know-how and continuing technological innovation. We currently hold
approximately 630 U.S. patents on products or processes and corresponding
foreign patents and have applications for certain patents currently pending. The
steps taken by us to protect our intellectual property may not adequately
prevent misappropriation or ensure that others will not develop competitive
technologies or products. Other companies may be investigating or developing
other technologies that are similar to ours. It is possible that patents may not
be issued from any application pending or filed by us and, if patents do issue,
the claims allowed may not be sufficiently broad to deter or prohibit others
from marketing similar products. Any patents issued to us may be challenged,
invalidated or circumvented. Further, the rights under our patents may not
provide a competitive advantage to us. In addition, the laws of certain
territories in which our products are or may be developed, manufactured or sold,
including Asia, Europe or Latin America, may not protect our products and
intellectual property rights to the same extent as the laws of the United
States.
If We Fail to Successfully Manage Our Exposure to the Worldwide Financial
Markets, Our Operating Results Could Suffer
We are exposed to financial market risks, including changes in interest
rates, foreign currency exchange rates and marketable equity security prices. We
utilize derivative financial instruments to mitigate these risks. We do not use
derivative financial instruments for speculative or trading purposes. The
primary objective of our investment activities is to preserve principal while at
the same time maximizing yields without significantly increasing risk. To
achieve this objective, a majority of our marketable investments are floating
rate and municipal bonds, auction instruments and money market instruments
denominated in U.S. dollars. We hedge currency risks of investments denominated
in foreign currencies with forward currency contracts. Gains and losses on these
foreign currency investments are generally offset by corresponding gains and
losses on the related hedging instruments, resulting in negligible net exposure
to us. A substantial portion of our revenue, expense and capital purchasing
activities are transacted in U.S. dollars. However, we do enter into these
transactions in other currencies, primarily Canadian and European currencies. To
protect against reductions in value and the volatility of future cash flows
caused by changes in foreign exchange rates, we have established hedging
programs. Currency forward contracts are utilized in these hedging programs. Our
hedging programs reduce, but do not always entirely eliminate, the impact of
foreign currency exchange rate movements. Actual results on our financial
position may differ materially.
If We Fail to Obtain Additional Capital at the Times, in the Amounts and
Upon the Terms Required, Our Business Could Suffer
We are devoting substantial resources for new facilities and equipment to
the production of source lasers, fiber Bragg gratings and modules used in
telecommunications and for the development of new solid state lasers. Although
we believe existing cash balances, cash flow from operations, available lines of
credit and the proceeds from the recently completed public offering of our
common stock and the private placement of Exchangeable Shares in Canada will be
sufficient to meet our capital requirements at least for the next 12 months, we
may be required to seek additional equity or debt financing to compete
effectively in these markets. We cannot precisely determine the timing and
amount of such capital requirements and will depend on several factors,
including our acquisitions and the demand for our products and products under
development. Such additional financing may not be available when needed, or, if
available, may not be on terms satisfactory to us.
Our Currently Outstanding Preferred Stock and Our Ability to Issue
Additional Preferred Stock Could Impair the Rights of Our Common
Stockholders
Our Board of Directors has the authority to issue up to 799,999 shares of
undesignated preferred stock and to determine the powers, preferences and rights
and the qualifications, limitations or restrictions granted to or imposed upon
any wholly unissued shares of undesignated preferred stock and to fix the number
of shares constituting any series and the designation of such series, without
the consent of our stockholders. The preferred stock could be issued with
voting, liquidation, dividend and other rights superior to those of the holders
of common stock. The issuance of preferred stock under certain circumstances
could have the effect of delaying, deferring or preventing a change in control.
Each outstanding share of our common stock includes one-eighth of a right. Each
right entitles the registered holder, subject to the terms of the Rights
Agreement, to purchase from us one unit, equal to one one-thousandth of a share
of Series B Preferred Stock, at a purchase price of $600 per unit, subject to
adjustment, for each share of common stock held by the holder. The rights are
attached to all certificates representing outstanding shares of our common
stock, and no separate rights certificates have been distributed. The purchase
price is payable in cash or by certified or bank check or money order payable to
our order. The description and terms of the rights are set forth in a Rights
Agreement between us and American Stock Transfer & Trust Company, as Rights
Agent, dated as of June 22, 1998, as amended from time to time.
Some provisions contained in the rights plan, and in the equivalent rights
plan our subsidiary, JDS Uniphase Canada Ltd., has adopted with respect to its
exchangeable shares ("Exchangeable Shares"), may have the effect of
discouraging a third party from making an acquisition proposal for us and may
thereby inhibit a change in control. For example, such provisions may deter
tender offers for shares of common stock or Exchangeable Shares which offers may
be attractive to the stockholders, or deter purchases of large blocks of common
stock or Exchangeable Shares, thereby limiting the opportunity for stockholders
to receive a premium for their shares of common stock or Exchangeable Shares
over the then-prevailing market prices.
Certain Anti-Takeover Provisions Contained in Our Charter and Under Delaware
Law Could Impair a Takeover Attempt
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law prohibiting, under certain circumstances, publicly-held Delaware
corporations from engaging in business combinations with certain stockholders
for a specified period of time without the approval of the holders of
substantially all of its outstanding voting stock. Such provisions could delay
or impede the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving us, even if such events could be
beneficial, in the short term, to the interests of the stockholders. In
addition, such provisions could limit the price that certain investors might be
willing to pay in the future for shares of our common stock. Our Certificate of
Incorporation and Bylaws contain provisions relating to the limitations of
liability and indemnification of our directors and officers, dividing our Board
of Directors into three classes of directors serving three-year terms and
providing that our stockholders can take action only at a duly called annual or
special meeting of stockholders. These provisions also may have the effect of
deterring hostile takeovers or delaying changes in control or management of
us.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
N/A
Item 2. Changes in Securities
In February 2000, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of Common Stock from 600,000,000 to
3,000,000,000 shares. On January 3, 2000, the Board of Directors approved a two-
for-one stock split of all common stock and Exchangeable shares for holders of
record as of March 2, 2000.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On February 25, 2000, the Company held a special stockholders
meeting, at which the stockholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 600,000,000 shares to 3,000,000,000 shares.
The voting results were as follows:
Broker
Item For Against Abstained Non-Votes
------------------------ ------------- ------------ ---------- ----------
1.Increase in authorized
share capital.......... 278,056,650 10,520,188 133,426 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
3.1(1)Amended and Restated Certificate of Incorporation.
3.2(2) Certificate of Amendment to Amended and Restated Certificate of
Incorporation.
3.3(3) Certificate of Amendment to Amended and Restated Certificate of
Incorporation.
3.4(4) Certificate of Amendment to Amended and Restated Certificate of
Incorporation.
3.5(4) Certificate of Designation.
3.6(2) Certificate of Designation.
3.7(5) Certificate of Designation.
3.8(6) Certificate of Amendment to Amended and Restated Certificate of
Incorporation.
3.9(6) Certificate of Amendment to Amended and Restated Certificate of
Incorporation.
3.10 Certificate of Amendment to Amended and Restated Certificate of
Incorporation.
27.1 Financial Data Schedule.
______________________
- Incorporated by reference to the exhibits filed with the Registrant's
registration statement on Form S-1, which was declared effective November 17,
1993.
- Incorporated by reference to exhibits 3.1 and 4.1 to the Company's
Registration Statement on Form S-3 filed July 14, 1999.
- Incorporated by reference to exhibit 3.(i)(b)(2) to the Company's Report on
Form 10-Q for the period ending December 31, 1998.
- Incorporated by reference to exhibits 3.(i)(c) and 3.(i)(d) to the Company's
Report of Form 10-K filed September 28, 1998.
- Incorporated by reference to exhibit 10.3 to the Company's current Report on
Form 8-K filed June 24, 1998.
- Incorporated by reference to exhibits 3.8 and 3.9 to the Company's Report of
Form 10-Q for the period ending December 31, 1999
b) Reports on Form 8-K
Report on Form 8-K as filed on January 18, 2000.
Report on Form 8-K as filed on January 28, 2000.
Report on Form 8-K/A as filed on February 10, 2000.
Report on Form 8-K as filed on February 17, 2000.
Pursuant to the requirements 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.
JDS UNIPHASE CORPORATION
------------------------------------------
(Registrant)
Date: May 15, 2000 /s/ Anthony R. Muller
------------------------------------------
Anthony R. Muller, Senior Vice President and CFO
(Principal Financial and Accounting Officer)
