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 September 30, 1999
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, November 2, 1999: 113,104,566. In addition, as of such
date, there were outstanding 60,614,679 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 months ended September 30, 1999 and 1998
Condensed Consolidated Balance Sheets
September 30, 1999 and June 30, 1999
Condensed Consolidated Statements of Cash Flows
Three months ended September 30, 1999 and 1998
Notes to Condensed Consolidated Financial
Statements
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Liquidity and Capital Resources
Risks
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
September 31,
---------------------
1999 1998
---------- ----------
Net sales................................ $230.1 $57.4
Cost of sales............................ 125.2 28.9
---------- ----------
Gross profit........................... 104.9 28.5
---------- ----------
Operating expenses:
Research and development............... 17.2 5.6
Selling, general and administrative.... 27.9 7.1
Amortization of purchased intangibles.. 172.9 3.9
---------- ----------
Total operating expenses................. 218.0 16.6
---------- ----------
Income (loss) from operations............ (113.1) 11.9
Interest and other income, net........... 5.5 0.9
---------- ----------
Income (loss) before income taxes...... (107.6) 12.8
Income tax expense....................... 6.3 4.7
---------- ----------
Net income (loss)........................ ($113.9) $8.1
========== ==========
Basic earnings (loss) per share.......... ($0.68) $0.10
========== ==========
Dilutive earnings (loss) per share....... ($0.68) $0.10
========== ==========
Weighted average common shares
Outstanding............................ 168.5 78.2
Dilutive effect of stock options
Outstanding............................ -- 6.3
---------- ----------
Weighted average common shares
Outstanding, assuming dilution......... 168.5 84.5
========== ==========
See accompanying notes.
JDS Uniphase Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
September 30, June 30,
1999 1999
------------ ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents......................... 495.6 75.4
Short-term investments............................ 463.6 158.5
Accounts receivable, less allowances for returns
and doubtful accounts of $1.3 at September 30,
1999 and $1.1 at June 30, 1999.................. 140.2 120.9
Inventories....................................... 98.0 87.9
Deferred income taxes............................. 11.6 7.9
Other current assets.............................. 9.7 13.0
------------ ------------
Total current assets........................... 1,218.7 463.6
Property, plant, and equipment, net.................. 209.2 181.1
Intangible assets, including goodwill................ 3,311.3 3,444.2
Long-term deferred income taxes and other assets..... 6.2 7.2
------------ ------------
Total assets................................... 4,745.4 4,096.1
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. 51.7 38.1
Accrued payroll and related expenses.............. 21.1 27.2
Income taxes payable.............................. 17.8 37.2
Other accrued expenses............................ 58.2 46.3
------------ ------------
Total current liabilities...................... 148.8 148.8
Deferred income taxes................................ 304.0 318.2
Accrued pension and other non-current liabilities.... 8.3 9.8
Commitments and contingencies
Stockholders' equity:
Preferred stock................................... -- --
Common stock and additional paid-in capital....... 4,593.7 3,822.8
Accumulated deficit............................... (311.8) (197.8)
Accumulated other comprehensive income (loss)..... 2.4 (5.7)
------------ ------------
Total stockholders' equity..................... 4,284.3 3,619.3
------------ ------------
Total liabilities and stockholders' equity..... 4,745.4 4,096.1
============ ============
See accompanying notes.
JDS Uniphase Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
Three Months Ended
September 30,
----------------------
1999 1998
---------- ----------
Operating activities
Net income (loss)..................................... ($113.9) $8.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense............... 180.2 8.5
Deferred income taxes............................... (15.9) --
Change in operating assets and liabilities:
Accounts receivable.............................. (18.6) 1.9
Inventories...................................... (9.9) (2.1)
Other current assets............................. 3.6 1.2
Accounts payable, accrued liabilities and
other accrued expenses......................... 13.9 (2.2)
---------- ----------
Net cash provided by operating activities............... 39.4 15.4
---------- ----------
Investing activities
Purchase of short-term investments.................... (819.8) (75.6)
Proceeds from sale of short-term investments.......... 514.9 55.1
Acquisition of businesses............................. (21.6) (0.1)
Purchase of property, plant and equipment............. (34.9) (8.6)
Increase in other assets.............................. (0.1) (0.1)
---------- ----------
Net cash used in investing activities................... (361.5) (29.3)
---------- ----------
Financing activities
Proceeds from issuance of common stock and private
placement of exchangeable shares................ 713.9 --
Proceeds from issuance of common stock under
stock option and stock purchase plans........... 28.4 5.0
Pre-merger dividends paid on BCP stock................ -- (0.1)
---------- ----------
Net cash provided by (used in) financing activities..... 742.3 4.9
---------- ----------
Increase (decrease) in cash and cash equivalents........ 420.2 (9.0)
Cash and cash equivalents at beginning of period........ 75.4 40.5
---------- ----------
Cash and cash equivalents at end of period.............. $495.6 $31.5
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Tax benefits from stock option and stock
purchase plans.................................. $12.0 $4.5
Issuance of notes payable.......................... $-- $1.9
See accompanying notes.
JDS Uniphase Corporation
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Business Activities and Basis of Presentation
The financial information at September 30, 1999 and for the three-month
period ended September 30, 1999 and 1998 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 for the fiscal year ended June 30,
1999.
The results for the three-month period ended September 30, 1999 may not
be indicative of results for the fiscal year ending June 30, 2000 or any future
period.
Impact of Recently Issued Accounting Standards
The Company intends to adopt Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended by Statement of Financial
Accounting Standard No. 137 "Deferral of Effective Date of FASB Statement
133," as of the beginning of its fiscal year 2001. The Standard will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivatives will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The change in a derivative's fair value related
to the ineffective portion of a hedge, if any, will be immediately recognized in
earnings. The effect of adopting the Standard is currently being evaluated but
is not expected to have a material effect on the Company's financial position or
overall trends in results of operations.
Note 2. Lines of Credit
The Company has a U.S. $10.0 million revolving bank line of credit that
expires in May 2000. Advances under the line of credit bear interest at the
bank's prime rate (8.25% at September 30, 1999) and are unsecured. Under the
terms of the line of credit agreement, the Company is required to maintain
certain minimum working capital, net worth, profitability levels and other
specific financial ratios. In addition, the agreement prohibits the payment of
cash dividends and contains certain restrictions on the Company's ability to
borrow money or purchase assets or interests in other entities without the prior
written consent of the bank.
Note 3. Comprehensive Income (loss)
The components of comprehensive income (loss), net of tax, are as
follows (in millions):
Three Months Ended
September 30,
1999 1998
--------- ---------
Net income (loss)...................... ($113.9) $8.1
Change in unrealized gain on
available-for-sale investments....... 0.3 0.2
Change in foreign currency translation. 7.8 3.5
--------- ---------
Comprehensive income................... ($105.8) $11.8
========= =========
Note 4. Inventories
The components of inventory consist of the following (in millions):
September 30, June 30,
1999 1999
------------ ----------
Raw materials and purchased parts........... $39.8 $41.6
Work in process............................. 43.5 35.9
Finished goods.............................. 14.7 10.4
------------ ----------
$98.0 $87.9
============ ==========
Note 5. Earnings (loss) per Share
On July 8, 1999, the Company's Board of Directors approved a 100% stock
dividend on all Common stock and a stock split on the Exchangeable shares for
holders of record as of July 23, 1999. Fiscal 1999 share and per share amounts
have been restated to reflect this stock dividend and stock split.
As the Company incurred a loss in fiscal 2000, the effect of dilutive
securities totaling 11.0 million equivalent shares has been excluded from the
computation as they are antidilutive.
Note 6. Stock Split
On September 28, 1999, the Board of Directors approved a second two-for-
one stock split on all common stock and Exchangeable shares. This split is
subject to stockholder approval of an increase in authorized capital that will
be sought at the Company's annual meeting scheduled for December 16, 1999.
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 of these segments 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 operating
segments 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, 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:
Three Months Ended
September 30,
-----------------------
1999 1999
------------ ----------
Components:
Shipments................................. $159.9 $34.5
Intersegment sales........................ (18.7) (1.0)
------------ ----------
Net sales to external customers........... 141.2 33.5
Operating income.......................... 54.9 9.4
Module Products:
Net sales to external customers........... $76.3 $9.3
Intersegment sales........................ -- --
------------ ----------
Net sales to external customers........... 76.3 9.3
Operating income.......................... 16.8 1.8
Total:
Net sales to external customers from
reportable segments..................... $217.5 $42.8
All other net sales....................... 12.6 14.6
------------ ----------
Total net sales........................ $230.1 $57.4
============ ==========
Operating income from reportable segments... $71.7 $11.2
All other operating income (loss)........... (0.5) 4.6
Unallocated amounts:
Acquisition related charges............... (184.3) (3.9)
Interest and other income, net............ 5.5 0.9
------------ ----------
Income (loss) before income taxes........... ($107.6) $12.8
============ ==========
Note 8. Acquisitions
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. AFC designs, develops and manufactures fiber amplifiers for
telecommunications applications. The preliminary purchase price allocation
included net tangible assets of approximately $1.3 million and intangible assets
(including goodwill) of $38.2 million that are expected to be amortized over a
five-year period.
Note 9. Subsequent Events
On October 1, 1999, the Company acquired Ramar Corporation
("Ramar") of Northborough, Massachusetts for approximately $5 million
in cash and notes. Ramar designs, develops and manufactures lithium niobate-
based products for telecommunications applications.
On October 5, 1999 the Company announced its intention to acquire
Epitaxx, Inc. ("Epitaxx") for approximately $400 million in stock and
$5 million cash. Epitaxx designs, develops, manufactures and markets detector
and receiver products for the telecommunications industry. Closing of the
transaction, which the Company expects to occur in November, is subject to
regulatory approval and other conditions. As a result, it cannot be assumed
that our acquisition of Epitaxx will be consummated.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Sales. Net sales of $230.1 million represented an increase of
$172.6 million or 301% compared to the first quarter of 1999. 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.
First quarter net sales are not considered indicative of the results to
be expected 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. Gross profit of $104.8 million represents an increase of
$76.3 million or 268% compared to the first quarter of 1999. Strong demand for
all our WDM products combined with the JDS merger contributed to the increases
in gross profit. As a percent of net sales, gross profit declined to 46% in the
first quarter from 50% during the same period in 1999. The decline reflects the
impact of the purchase accounting adjustment which increased JDS inventory at
June 30, 1999, by $11.4 million and this flowed through to cost of sales in the
first quarter.
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 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. Research and development (R&D)
expense of $17.2 million or 7.5% of net sales represented an increase of $11.6
million or 205% compared to the first quarter of 1999. The increase in R&D
expenses is primarily due to the continued development and enhancement of our
fiber optic product lines and the inclusion of JDS. As a percent of net sales,
R&D expense declined to 7.5% in the first quarter from 9.9% during the same
period in 1999. Due to the rapidly growing business as it is difficult to scale
R&D programs as fast as our sales are growing.
We are committed to continuing our significant R&D expenditures and
expect that the absolute dollar amount of R&D expenses will increase as we
invest in developing new products in expanding and enhancing our existing
product lines, although R&D expenses may vary as a percentage of net sales
in future periods. In addition, 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. Selling, general and
administrative (SG&A) expense of $27.9 million or 12.1% of net sales
represents an increase of $20.8 million or 294% as compared to the first quarter
of 1999. The increase is primarily due to higher SG&A costs to support
telecommunications and CATV products, and the inclusion of JDS. As a percentage
of net sales, SG&A remained relatively flat, 12.1% and 12.3% in the first
quarters 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, to reflect costs associated with integrating
Uniphase and JDS operations. We may also incur cost associated with the
integration of other acquired operations.
Amortization of Purchased Intangibles. Amortization of purchased
intangibles ("API") of $172.9 million represents a $169.0 million
increase from the first quarter of 1999. The increase in API expense is
primarily due to the intangible assets generated from our merger in June 1999
with JDS in a transaction accounted for as a purchase.
Our API expense will continue to generate net losses for the foreseeable
future. Goodwill and other intangibles arising from the JDS merger totaled $3.4
billion, including the related deferred tax effect. In addition, we have
recorded goodwill in connection with acquisitions of other business. API
expense could change because of other acquisitions or impairment of existing
identified intangible assets and goodwill in future periods.
Interest and Other Income. Net interest and other income of $5.5
million represents an increase of $4.6 million from the first quarter of 1999.
The increase in interest and other income was the result of higher investment
balances obtained from our merger with JDS 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 $6.3 million in the
first quarter of 2000 as compared to $4.7 million in the same period of 1999.
Our effective tax rates were (5.8)% and 36.5% in the first quarters of 2000 and
1999, respectively. Our effective tax rate is negative and differed from the
combined federal, state and foreign statutory rates primarily due to
acquisition-related charges that were non-deductible for tax purposes.
Operating Segment Information
Components. Net sales increased 322 % compared to the first
quarter of 1999 primarily because of the inclusion of JDS and continued demand
for active products used in WDM applications. Operating income increased 488%
because of these same factors. Sales of components also increased because of
significantly higher use of our components in the modules we build.
Modules. Net sales increased 724% compared to the first quarter of
1999 primarily because of the inclusion of JDS and continued demand for
transmitters, amplifiers and transceivers for CATV and telecommunications.
Operating income improved 825% because of these same factors.
Liquidity and Capital Resources
At September 30, 1999, our combined balance of cash,
cash equivalents and short-term investments was $959.2 million. During the first
quarter of 2000 we met our liquidity needs through cash generated from operating
activities. Net cash provided by operating activities was $39.4 million in 2000,
compared with $15.4 million for the comparable period in 1999.
Cash provided by operating activities during the first quarter was
primarily generated from net income before noncash charges of $180.2 million.
Higher levels of operating activity resulted in increases in accounts
receivable, inventories and other liabilities utilizing $14.6 million (net).
Cash flow from operating activities also benefited from a
decrease to other current assets of $3.6 million, offset by a decrease in
deferred tax liabilities of $15.9 million.
Cash used in investing activities was $361.5 million in the first quarter
of 2000 compared with $29.3 million during the same period of 1999. The
majority of this higher activity level was a result of increased short term
investments (net increase $309.9 million) following completion of a public sale
of our common stock during the quarter. The Company's acquisition of AFC used
$21.6 million. In addition, the Company incurred capital expenditures of $34.9
million for facility improvements in Ottawa and equipment purchases to expand
our manufacturing capacity worldwide. We expect to continue to expand our
worldwide manufacturing capacity, primarily for telecommunications products, by
making approximately $140 million in additional capital expenditures during the
remainder of 2000.
Cash of $742.3 million was generated from financing activities in the
first quarter of 2000 as compared to $4.9 million in the same period of 1999.
Substantially all the additional cash was attributable to our sale of common
stock in a public offering in August, 1999.
The Company has an unsecured $10 million revolving line of credit.
Advances under the line of credit bear interest at the bank's prime rate (8.25%
at September 30, 1999). There were no borrowings as of September 30, 1999.
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 and available lines of credit 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:
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 15 months at a cost of
approximately $1.0 million ratably until its completion. Solid State Switch
development will continue for approximately nine months at a cost of $2.0
million incurred ratably over the period. WDM development is expected to
continue for another three months at a cost of approximately $4.0 million, while
the development of the EDFA is 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 6 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 6 months
behind schedule and is expected to take a higher level of development effort to
bring the technology to market. We have incurred post-acquisition research and
development expenses of approximately $6.0 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 ultimately impact the expected return on
investment from the acquisition of UNL or our results of operations and
financial position.
Uniphase Fiber Components
The initial products developed from 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
$3.0 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
ultimately impact the expected return on investment from the acquisition of UFC
or 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 $7.0 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 ultimately impact the expected return on investment from the
acquisition of ULE or 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 impacted 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 September 30, 1999, hedge positions totaled U.S. dollar $65.5 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 of the local operating bank.
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 impacted because of 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 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 "will continue to be," "will
be," "continue to," "expect to," "anticipates
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 Epitaxx, (ii) the amount (both in absolute
dollars and as a percentage of net sales) of our research and development
expenditures, (iii) 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, (iv) 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 (v) future acquisitions. 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 Epitaxx acquistion 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
acquititions may not be completed as expected, or at all. Further, our future
business, financial condition and results of operations are subject to risks and
uncertainties including the risks set forth below.
RISK FACTORS
Difficulties We May Encounter Managing Our Growth Could Adversely Affect
Our
Results of Operations
Both JDS and Uniphase have historically achieved their growth through a
combination of internally developed new products and acquisitions. As part of
our strategy to sustain growth, we expect to continue to pursue acquisitions of
other companies, technologies and complementary product lines. We also expect to
continue developing new components, modules and other products for our customer
base, seeking to further penetrate these markets. 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 Uniphase and JDS Could Adversely Affect Our
Business
Uniphase combined its operations with JDS effective on June 30, 1999 in a
merger of equals. If we fail to successfully integrate the businesses of JDS and
Uniphase, the combined business will suffer. Uniphase and JDS have complementary
business operations located principally in the United States, Canada and Europe.
Our success depends in large part on the successful integration of these
geographically diverse operations and the technologies and personnel of the two
companies. As part of this integration, we need to combine and improve our
computer systems to centralize and better automate processing of our financial,
sales and manufacturing data. Our management came from the prior management
teams of both companies and many members of management did not previously work
with other members of management. The integration of the two businesses may
result in unanticipated operational problems, expenses and liabilities and the
diversion of management attention. The integration may not be successful, and,
if so, our operating results would suffer as a result.
If We Fail to Efficiently Combine Uniphase's and JDS Sales and Marketing
Forces, Our Sales Could Suffer
We may experience disruption in sales and marketing in connection with
our efforts to integrate Uniphase's and JDS sales channels, and we may be unable
to efficiently or effectively correct such disruption or achieve our sales and
marketing objectives after integration. In addition, sales cycles and sales
models for Uniphase's and JDS various products may vary significantly from
product to product. 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
Uniphase's and JDS respective sales approaches and distribution channels may be
ineffective in promoting the other entity's products, which may have a material
adverse effect on our business, financial condition or operating results.
Integration Costs and Expenses Associated with Uniphase's Combination with
JDS Have Been Substantial and We May Incur Additional Related Expenses in the
Future
JDS Uniphase has incurred direct costs associated with the combination of
approximately $12.0 million, which were included as a part of the total purchase
cost for accounting purposes. We may incur additional material charges in
subsequent quarters to reflect additional costs associated with the combination
which will be expensed as incurred.
Difficulties in Integrating Other Acquisitions Could Adversely Affect Our
Business
In March 1997, Uniphase acquired Uniphase Laser Enterprise, which produces
our 980-nanometer pump laser products. In June 1998, Uniphase acquired Uniphase
Netherlands. In the case of both acquisitions, Uniphase 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 has not yet been completed at Uniphase Netherlands, which
continues to operate at higher expense levels and lower gross margins than those
required to meet our profitability goals. In addition, in November 1998, we
acquired Uniphase Broadband, which manufactures test instruments, transmitter
cards and transceivers for telecommunications applications and in August 1999 we
acquired AFC Technologies, which produces amplifiers for telecommunications
applications. We may not successfully manufacture and sell our products or
successfully manage our growth, and failure to do so could have a material
adverse effect on our business, financial condition and operating results.
Difficulties in Commercializing 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. 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. Uniphase commenced operations at Uniphase Telecommunications
Products in 1996 to penetrate the cable television markets, and at Uniphase
Network Components in 1998 to develop and market a line of complementary optical
components for our telecommunications customers. In each case, Uniphase hired
development, manufacturing and other staff 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.
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.
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. In
addition, 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. In addition, Uniphase Fiber Components is establishing a
production facility in Sydney, Australia for fiber Bragg grating products. This
facility may not manufacture grating products to customers' specifications at
the volumes, cost and yield levels required. 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, our ability to increase
our manufacturing volumes to meet these needs and satisfy customer demand will
have a material effect on 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. As noted above, we are currently
completing a new manufacturing facility in Australia. We may experience delays
in obtaining customer qualification of this facility and our new facility at
Uniphase Netherlands. 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
Relating to Our Combination with JDS FITEL
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 and JDS.
Under purchase accounting, we recorded the market value of our common shares and
the Exchangeable Shares issued in connection with Uniphase's combination with
JDS, the fair value of the options to purchase JDS common shares which became
options to purchase our common shares and the amount of direct transaction costs
as the cost of acquiring the business of JDS. That cost was 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. We expensed in-process
research and development of $210.4 million as of June 30, 1999. Goodwill and
other intangible assets are being amortized over a five year period. The amount
of purchase cost allocated to goodwill and other intangibles was $3.4 billion,
including the related deferred tax effect. The amortization of goodwill and
other intangible assets in equal quarterly amounts over a five year period will
result in an accounting charge attributable to these items of $168 million per
quarter and $672 million per year. Additionally, in the first quarter of 2000
our gross profit was adversely impacted by $11.4 million due to purchase
accounting adjustments to products sold in the period. As a result, purchase
accounting treatment of Uniphase's combination with JDS will result 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
components 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.
See, for example, "Item 1. Business - Risk Factors - Our Operating Results May
Suffer as a Result of Purchase Accounting Treatment, the Impact of Amortization
of Goodwill and Other Intangibles Relating to Our Combination with JDS.''
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 Uniphase's and JDS's net sales from telecommunications products. Two
customers, Lucent and Nortel, each accounted for over 10% of our net sales for
the quarter ended September 30, 1999. 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.
We also depend on a single source for filters for our passive products which we
obtain exclusively through a joint venture with Optical Coating Laboratory, Inc.
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.
See "Item 1. Business - Competition.''
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.
Uniphase and JDS 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 Successfully Develop and Market Solid State Lasers to
Replace the Declining
Markets for Our Gas Lasers, Our Operating Results Could Suffer
The market for gas lasers is mature and expected to decline as customers
replace conventional lasers, including gas lasers, with solid state lasers.
Solid state lasers are currently expected to be the primary commercial laser
technology in the future. Consequently, Uniphase has devoted substantial
resources to developing and commercializing its solid state laser products. We
believe that some companies are further advanced than us in solid state laser
development and are competing with us for many of the same opportunities. To be
competitive in our laser markets, we believe continued manufacturing cost
reductions and enhanced performance of our laser products will be required on a
continuing basis as these markets further mature. However, our solid state laser
products may not be competitive with products of other companies as to cost or
performance in the future.
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. 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.
Our Participation in International Markets Creates Risks to Our Business
Not Faced by Companies That Sell Their Products in the United States
International sales are subject to inherent risks, including:
- unexpected changes in regulatory requirements,
- tariffs and other trade barriers,
- political and economic instability in foreign markets,
- difficulties in staffing and management,
- integration of foreign operations,
- greater difficulty in accounts receivable collection,
- currency fluctuations, and
- potentially adverse tax consequences.
International sales accounted for approximately 40%, 38% and 32% of
Uniphase'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'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.
The Year 2000 Problem May Disrupt Our and Our Customers' and Suppliers'
Businesses
We are aware of the risks associated with the operation of information
technology and non-information technology systems as the Year 2000 approaches.
The problem is pervasive and complex and may affect many information technology
and non-information technology systems. The Year 2000 problem results from the
rollover of the two digit year value from "99'' to "00.'' Systems that do not
properly recognize such date-sensitive information could generate erroneous data
or fail. In addition to our own systems, we rely on external systems of our
customers, suppliers, creditors, financial organizations, utilities providers
and government entities, both domestic and international (which we collectively
refer to as "third parties''). Consequently, we could be affected by disruptions
in the operations of third parties with which we interact. Furthermore, as
customers expend resources to correct their own systems, they may reduce their
purchasing frequency and volume of our products.
We are using both internal and external resources to assess:
- our state of readiness (including the readiness of third parties with which
we interact) concerning the Year 2000 problem,
- our costs to correct material Year 2000 problems related to our internal
information technology and non-information technology systems,
- the known risks related to any failure to correct any Year 2000 problems we
identify, and
- the contingency plan, if any, that we should adopt should any identified
Year 2000 problems not be corrected.
To date, we have incurred costs not exceeding $2.0 million to upgrade our
information technology and non-information technology systems to, among other
things, make such systems Year 2000 ready. We continue to evaluate the estimated
costs associated with the efforts to prepare for Year 2000 based on actual
experience. While the efforts will involve additional costs, we believe, based
on (1) available information, (2) amounts spent to date and (3) the fact that
our information technology and non-information technology systems depend on
third-party software which, we believe, has been or is being updated to address
the Year 2000 problem, that we will manage our total Year 2000 transition
without any material adverse effect on our business operations, financial
condition, products or financial prospects. The actual outcomes and results
could be affected by future factors including, but not limited to:
- the continued availability of skilled personnel,
- the ability to locate and remediate software code problems,
- critical suppliers and subcontractors meeting their Year 2000 compliance
commitments, and
- timely actions by customers.
We believe that our systems are Year 2000 ready, with minor exceptions which
we expect to resolve by November 30, 1999. Therefore, we anticipate that all
systems will be corrected for the Year 2000 problem prior to December 31, 1999.
We are working with third parties to identify any Year 2000 problems affecting
such third parties that could have a material adverse affect on our business,
financial condition or results of operations. However, it would be impracticable
for us to attempt to address all potential Year 2000 problems of third parties
that have been or may in the future be identified. Specifically, Year 2000
problems have arisen or may arise regarding the information technology and non-
information technology systems of third parties having widespread national and
international interactions with persons and entities generally (for example,
certain information technology and non-information technology systems of
governmental agencies, utilities and information and financial networks) that,
if uncorrected, could have a material adverse impact on our business, financial
condition or results of operations. We are still assessing the effect the Year
2000 problem will have on our suppliers and, at this time, cannot determine such
impact. However, we have identified alternative suppliers and, in the event that
any significant supplier suffers unresolved material Year 2000 problems, we
believe that we would only experience short term disruptions in supply, not
exceeding 90 days, while such supplier is replaced.
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, Uniphase and JDS 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 Uniphase and JDS 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 150 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 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.
Certain 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
Reference is made to Item 3. Legal Proceedings, in the
Registrant's Annual Report on Form 10-K for the year ended June 30, 1999 and PartII, Item 1.
Item 2. Changes in Securities
On August 4, 1999, the Company completed an underwritten public offering
of shares of common stock and a concurrent private offering of Exchangeable
Shares of its wholly-owned subsidiary, JDS Uniphase Canada Ltd. The offerings
related to 9.3 million shares of common stock at a price of US $82.625 per share
of which 7.0 million shares were sold by the Company and 2.2 million shares were
sold by certain stockholders of JDS Uniphase. The Exchangeable Share offering
consisted of 0.5 million Exchangeable Shares sold by JDS Uniphase Canada Ltd.
and 0.2 million Exchangeable Shares sold by certain stockholders of JDS Uniphase
Canada Ltd. The net proceeds to the Company from both offerings, which will be
used for general corporate purposes, aggregated approximately $600 million. On
August 25, 1999, the Company received additional proceeds of approximately $110
million from the sale of an additional 1.4 million shares of common stock as a
result of the underwriters exercising their over-allotment option in the public
offering.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On September 28, 1999, 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 200,000,000 shares to 300,000,000 shares. The stockholders
approved the amendment by a vote of 135,034,310 shares for, 1,273,758 shares
against and 112,812 shares abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Form of Executive Officers Employment Agreement.
27. Financial Data Schedule
b) Reports on Form 8-K
Report on Form 8-K as filed on July 12, 1999.
JDS Uniphase Corporation
SIGNATURES
Pursuant to the requirement of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 3, 1999
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By: |
/s/ Anthony R. Muller
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Anthony R. Muller
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Senior Vice President
of Finance and Chief Financial Officer
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(Principal Financial and Accounting Officer)
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Dated: November 3, 1999
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By: |
/s/ Kevin N. Kalkhoven
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Kevin N. Kalkhoven
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Chairman and Chief Executive Officer
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(Principal Executive Officer)
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