[JDS UNIPHASE LOGO]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 29, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-22874
JDS Uniphase Corporation
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(Exact name of registrant as specified in its charter)
Delaware 94-2579683
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1768 Automation Parkway
San Jose, CA 95131
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(Address of principal executive offices) (Zip Code)
(408) 546-5000
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(Registrant's telephone number, including area code)
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(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 such 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 January 25, 2002 was
1,357,311,581, including 153,546,653 Exchangeable Shares of JDS Uniphase Canada
Ltd. Each Exchangeable share is exchangeable at any time into Common Stock on a
one-for-one basis, entitles a holder to dividend and other rights economically
equivalent to those of the Common Stock, and through a voting trust, votes at
meetings of stockholders of the Registrant.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JDS UNIPHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
December 31, June 30,
2001 2001
------------ ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 215.3 $ 762.8
Short-term investments 1,437.6 1,049.4
Accounts receivable, less allowance for
doubtful accounts of $51.5 at December 31,
2001 and $40.3 at June 30, 2001 191.6 477.6
Inventories 181.0 287.6
Deferred income taxes 313.0 340.2
Refundable income taxes 77.1 31.2
Other current assets 39.4 87.5
---------- ----------
Total current assets 2,455.0 3,036.3
Property, plant and equipment, net 957.6 1,173.0
Deferred income taxes 301.6 806.3
Goodwill and other intangible assets, net 5,142.6 7,045.6
Long-term investments 111.1 169.0
Other assets 10.8 15.2
---------- ----------
Total assets $ 8,978.7 $ 12,245.4
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 92.7 $ 190.6
Accrued payroll and related expenses 93.8 133.0
Income taxes payable 39.3 30.6
Restructuring accrual 134.7 105.2
Deferred income taxes 57.3 63.0
Warranty accrual 83.8 49.7
Other current liabilities 200.7 276.4
---------- ----------
Total current liabilities 702.3 848.5
Deferred income taxes 566.2 672.4
Other non-current liabilities 4.6 5.2
Long-term debt 5.7 12.8
Stockholders' equity:
Preferred stock -- --
Common stock and additional paid-in capital 68,293.3 67,955.3
Accumulated deficit (60,579.3) (57,224.4)
Accumulated other comprehensive loss (14.1) (24.4)
---------- ----------
Total stockholders' equity 7,699.9 10,706.5
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Total liabilities and stockholders' equity $ 8,978.7 $ 12,245.4
========== ==========
See accompanying notes to condensed consolidated financial statements
2
JDS UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 286.1 $ 925.1 $ 614.7 $ 1,711.6
Cost of sales 335.6 449.8 678.9 886.4
--------- --------- --------- ---------
Gross profit (loss) (49.5) 475.3 (64.2) 825.2
Operating expenses:
Research and development 64.1 71.2 133.3 133.6
Selling, general and administrative 98.4 105.7 204.7 221.9
Amortization of purchased intangibles 441.3 1,104.1 884.6 2,211.6
Acquired in-process research and development 22.1 -- 22.1 8.9
Reduction of goodwill and other long-lived assets 1,267.6 -- 1,309.6 --
Restructuring charges -- -- 243.0 --
--------- --------- --------- ---------
Total operating expenses 1,893.5 1,281.0 2,797.3 2,576.0
--------- --------- --------- ---------
Loss from operations (1,943.0) (805.7) (2,861.5) (1,750.8)
Interest and other income, net 9.7 12.2 24.8 25.8
Gain on sale of investments 6.4 -- 6.4 --
Activity related to equity method investments (25.8) (52.3) (45.1) (93.5)
Reduction in fair value of investments -- -- (106.5) --
--------- --------- --------- ---------
Loss before income taxes (1,952.7) (845.8) (2,981.9) (1,818.5)
Income tax expense 177.8 49.6 373.0 93.5
--------- --------- --------- ---------
Net loss $(2,130.5) $ (895.4) $(3,354.9) $(1,912.0)
========= ========= ========= =========
Basic and dilutive net loss per share $ (1.60) $ (0.93) $ (2.53) $ (2.00)
========= ========= ========= =========
Shares used in per share calculation:
Basic and dilutive 1,330.1 963.3 1,326.8 953.7
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements
3
JDS UNIPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Six Months Ended
----------------------------
December 31, December 31,
2001 2000
------------ -------------
OPERATING ACTIVITIES
Net loss ....................................................................... $(3,354.9) $(1,912.0)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation expense ........................................................ 174.2 69.8
Amortization expense ........................................................ 884.6 2,211.6
Acquired in-process research and development ................................ 22.1 8.9
Amortization of deferred compensation ....................................... 53.4 --
Reduction of goodwill and other long-lived assets ........................... 1,309.6 --
Non-cash restructuring costs ................................................ 141.3 --
Activity related to equity method investments ............................... 45.1 93.5
Gain on sale of investments ................................................. (6.4) --
Reduction in fair value of investments ...................................... 106.5 --
Change in deferred income taxes, net ........................................ 403.8 (24.7)
Loss on disposal of fixed assets ............................................ 22.2 --
Changes in operating assets and liabilities:
Accounts receivable ...................................................... 286.0 (248.7)
Inventories .............................................................. 122.2 (111.8)
Other current assets ..................................................... (31.8) (21.3)
Income taxes payable ..................................................... 8.7 (20.3)
Accounts payable, accrued liabilities, warranty accrual and
other current liabilities ............................................. (124.4) 111.0
--------- ---------
Net cash provided by operating activities ........................................ 62.2 156.0
--------- ---------
INVESTING ACTIVITIES
Sale (purchase) of available-for-sale investments, net ......................... (429.7) 86.8
Acquisitions of businesses, net of cash acquired ............................... (114.7) (68.4)
Purchase of property, plant and equipment ...................................... (86.7) (347.7)
Sale of non-marketable investments ............................................. 29.8 --
Purchase of non-marketable investments ......................................... (30.7) (8.8)
Other assets, net .............................................................. 4.4 (10.5)
--------- ---------
Net cash used in investing activities ............................................ (627.6) (348.6)
--------- ---------
FINANCING ACTIVITIES
Repayment of debt .............................................................. (27.5) (16.8)
Proceeds from issuance of common stock ......................................... 46.0 319.7
--------- ---------
Net cash provided by financing activities ........................................ 18.5 302.9
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ..................... (0.6) 0.8
--------- ---------
Increase (decrease) in cash and cash equivalents ................................. (547.5) 111.1
Cash and cash equivalents at beginning of period ................................. 762.8 319.0
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 215.3 $ 430.1
========= =========
See accompanying notes to condensed consolidated financial statements
4
JDS UNIPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS ACTIVITIES AND BASIS OF PRESENTATION
The financial information at December 31, 2001 and for the three and six months
ended December 31, 2001 and 2000 is unaudited, but includes all adjustments
(consisting only of normal recurring adjustments) that JDS Uniphase Corporation
("JDS Uniphase" or the "Company") considers necessary for a fair presentation of
the financial information set forth herein, in accordance with generally
accepted accounting principles ("GAAP") 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
GAAP 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 year ended June 30, 2001.
The balance sheet at June 30, 2001 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by GAAP for complete financial statements.
The results for the three and six months ended December 31, 2001 may not be
indicative of results for the year ending June 30, 2002 or any future periods.
The Company operates and reports financial results on a fiscal year ending on
the Saturday closest to June 30. The second quarters of fiscal 2002 and 2001
ended on December 29, 2001 and December 30, 2000, respectively. For ease of
discussion and presentation, all accompanying financial statements have been
shown as ending on the last day of the calendar month.
Certain amounts in the comparative financial statements for prior periods and
notes thereto have been reclassified to conform to current quarter presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. In addition, SFAS 141 further clarifies the criteria to
recognize intangible assets separately from goodwill. Specifically, SFAS 141
requires that an intangible asset may be separately recognized only if such an
asset meets the contractual-legal criterion or the separability criterion. The
requirements of SFAS 141 are effective for any business combinations accounted
for by the purchase method that is completed after June 30, 2001. The Company is
currently evaluating the impact of SFAS 141 and has not yet determined the
impact that adopting SFAS 141 will have on its financial statements. On
adoption, the Company will be required to reassess the goodwill and intangible
assets previously recorded in acquisitions prior to July 1, 2001 to determine if
the new recognition criteria for an intangible asset to be recognized apart from
goodwill are met. As of December 31, 2001, the Company has approximately $39.1
million of separately recognized intangible assets that do not meet the new
recognition criteria for an intangible asset to be recognized apart from
goodwill and the unamortized balance as of June 30, 2002 will be reclassified to
goodwill.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. For intangible assets with indefinite useful lives, the impairment
review will involve a comparison of fair value to carrying value, with any
excess of carrying value over fair value being recorded as an impairment loss.
For goodwill, the impairment test shall be a two-step process, consisting of a
comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to each reporting unit. If the carrying amount
is in excess of the fair value, the implied fair value of the reporting unit
goodwill is compared to the carrying amount of the reporting unit goodwill. Any
excess of the carrying value of the reporting unit goodwill over the implied
fair value of the reporting unit goodwill will be recorded as an impairment
loss. Separable intangible assets that are deemed to have a finite life will
continue to be amortized over their useful lives (but with no maximum life).
Intangible assets with finite useful lives will continue to be reviewed for
impairment in accordance with Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company will apply the new accounting rules beginning July 1, 2002 and will
reassess the useful lives of its separately recognized intangible assets in the
first quarter of
5
fiscal 2003. The Company will review for impairment previously recognized
intangible assets that are deemed to have indefinite lives upon the completion
of this analysis in the first quarter of fiscal 2003. Additionally, upon the
adoption of SFAS 142, the Company will perform a transitional impairment review
related to the carrying value of goodwill as of July 1, 2002 by the end of the
second quarter of fiscal 2003. Because of the different transition dates for
goodwill and intangible assets acquired on or before June 30, 2001 and those
acquired after that date, pre-existing goodwill and intangibles will be
amortized during this transition period until adoption whereas new goodwill and
indefinite lived intangible assets acquired after June 30, 2001 will not. The
Company is currently in the process of determining its reporting units for the
purpose of applying the impairment test, analyzing how fair value will be
determined for purposes of applying SFAS 142 and quantifying the anticipated
impact of adopting the provisions of SFAS 142. The adoption of SFAS 142 is
expected to have a material impact on the Company's results of operations
primarily because goodwill will no longer be amortized subsequent to the
adoption of SFAS 142. Amortization of goodwill was $331.6 million and $664.3
million for the three and six months ended December 31, 2001, respectively.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supercedes SFAS 121 and the provisions of Accounting Principles
Board Opinion No. 30 ("APB 30"), "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," with regard to
reporting the effects of a disposal of a segment of a business. SFAS 144 retains
many of the provisions of SFAS 121, but significantly changes the criteria that
would have to be met to classify an asset as held for disposal such that
long-lived assets to be disposed of other than by sale are considered held and
used until disposed of. In addition, SFAS 144 retains the basic provisions of
APB 30 for presentation of discontinued operations in the statement of
operations but broadens that presentation to a component of an entity. The
Company will apply SFAS 144 beginning July 1, 2002. The Company is currently
evaluating the potential impact, if any, the adoption of SFAS 144 will have on
its financial position and results of operations.
NOTE 2. COMPREHENSIVE LOSS
Accumulated other comprehensive loss presented in the accompanying consolidated
balance sheets consists of the accumulated net unrealized gains or losses on
available-for-sale investments and foreign currency translation adjustments, net
of the related tax effect for all periods presented. The tax effect was $16.3
million for the three months ended December 31, 2001 and immaterial for all
other periods presented. At December 31, 2001 and June 30, 2001, the Company had
a balance of unrealized gains on available-for-sale investments of $34.4 million
and $5.8 million, respectively. Additionally, at December 31, 2001 and June 30,
2001, the Company had $48.5 million and $30.2 million, respectively, of foreign
currency translation losses. The components of comprehensive loss are as follows
(in millions):
Three Months Ended Six Months Ended
----------------------------- -----------------------------
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net loss $ (2,130.5) $ (895.4) $ (3,354.9) $ (1,912.0)
Change in unrealized gain or loss
on available-for-sale investments, net 23.3 2.1 28.6 0.5
Change in foreign currency translation (0.3) (3.2) (18.3) (18.5)
---------- ---------- ---------- ----------
Comprehensive loss $ (2,107.5) $ (896.5) $ (3,344.6) $ (1,930.0)
========== ========== ========== ==========
NOTE 3. FINANCIAL INSTRUMENTS
Investments:
At December 31, 2001, the Company had 24.7 million shares of Nortel Networks
Corporation ("Nortel") common stock with a fair value of $179.3 million. During
the three months ended September 30, 2001, the Company recognized a reduction in
market value of $84.5 million associated with the 24.7 million shares held by
the Company, as the Company has determined the decline in the market value of
the shares of Nortel common stock to be other-than-temporary. The reduction in
the market value of $84.5 million has been included in the line item "Reduction
in fair value of investments" in the Statements of Operations. No reduction was
recognized for the three months ended December 31, 2001. The Company recorded an
6
unrealized gain of $24.5 million, net of tax, for the three months ended
December 31, 2001 and included it in the line item "Accumulated other
comprehensive loss" in the Balance Sheets.
During the three months ended September 30, 2001, the Company recorded a charge
of $9.6 million related to a decline in the market value of other
available-for-sale investments that was deemed to be other-than-temporary. The
reduction in market value has been included in the line item "Reduction in fair
value of investments" in the Statements of Operations. No reduction was
recognized for the three months ended December 31, 2001.
Additionally, during the three months ended September 30, 2001, the Company
recorded a charge of $12.4 million related to a decline in the fair value of the
Company's non-marketable equity securities accounted for under the cost method
that was deemed to be other-than-temporary. The reduction in fair value has been
included in the line item "Reduction in fair value of investments" in the
Statements of Operations. No reduction was recognized for the three months ended
December 31, 2001.
On October 29, 2001, the Company entered into an automation development alliance
agreement with Adept Technology ("Adept") for optical component and module
manufacturing. In connection with this alliance, the Company invested $25.0
million in Adept convertible preferred stock.
Equity Method Investments:
ADVA: At December 31, 2001, the Company had a 28 percent ownership stake in
ADVA. For the three and six months ended December 31, 2001, the Company recorded
$0 and $0.7 million, respectively, in amortization expense related to the
difference between the cost of the investment and the underlying equity in the
net assets of ADVA. The significant decline in the market value of ADVA, as of
September 30, 2001, which the Company determined was other-than-temporary,
required that its carrying value be written down to market value and the amount
of the write-down was included in the Statements of Operations. As a result, the
Company recognized a $13.9 million charge to write down the basis of its
investment in ADVA for the three months ended September 30, 2001. No reduction
in the fair value of ADVA was recognized for the three months ended December 31,
2001.
For the three months ended September 30, 2001, under the equity method, the
Company recorded a net loss of $4.4 million as its pro rata share of ADVA's net
loss. For the three months ended December 31, 2001, the Company's pro rata share
of ADVA's net loss exceeded the carrying amount of its investment in ADVA at
December 31, 2001. Of its pro rata share of ADVA's net loss of $23.4 million,
the Company recorded $22.1 million to reduce its investment in ADVA to $0. As
the Company has no future commitment to fund ADVA, no further pro rata share of
ADVA's net loss will be recorded in subsequent quarters. Should ADVA report net
income in future periods, the Company will resume applying the equity method
after its pro rata share of ADVA's net income exceeds the pro rata share of
ADVA's net losses not recognized during the periods the equity method is
suspended.
The Photonics Fund, LLP: At December 31, 2001, the Company had a 40 percent
stake in The Photonics Fund, LLP, a California limited liability partnership
(the "Partnership"), which emphasizes privately negotiated venture capital
equity investments. For the three and six months ended December 31, 2001, under
the equity method, the Company recorded a net loss of $3.1 million and $2.7
million, respectively, as its pro rata share of the Partnership's net loss.
For the three and six months ended December 31, 2001, the Company's other equity
method investments resulted in an aggregate net loss of $0.6 million and $1.3
million, respectively.
NOTE 4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's objectives and strategies for holding and issuing derivatives are
to minimize the transaction and translation risks associated with non-functional
currency transactions.
The Company conducts its business in a number of foreign countries and sells its
products directly to customers in Australia, Canada, China, France, Germany,
Hong Kong, Japan, Netherlands, Taiwan, Singapore and the United Kingdom through
its foreign subsidiaries. These sales are often denominated in the local
country's currency. Therefore, in the normal course of business, the Company's
financial position is routinely subjected to market risk associated with foreign
currency rate fluctuations. The Company's policy is to ensure that business
exposures to foreign exchange risks are identified, measured
7
and minimized using the most effective and efficient methods to eliminate or
reduce such exposures. The Company has entered into a number of foreign currency
forward contracts, but has not designated such contracts as hedges for
accounting purposes. The foreign currency forward contracts generally expire
within 30 to 90 days. The change in fair value of these foreign currency forward
contracts is recorded as income (loss) in the Company's Statements of Operations
as a component of "Interest income and other, net." The notional amount
associated with these foreign currency forward contracts at December 31, 2001
was approximately $70.0 million and the fair value of such contracts is not
material to the Company's financial statements. The Company does not use
derivatives for trading purposes.
NOTE 5. INVENTORIES
The components of inventories consist of the following (in millions):
December 31, June 30,
2001 2001
------------ --------
Raw materials and purchased parts $ 73.5 $ 56.1
Work in process 44.3 99.2
Finished goods 63.2 132.3
------- -------
$ 181.0 $ 287.6
======= =======
During the three and six months ended December 31, 2001, the Company recorded
inventory write-downs of $79.8 million and $142.2 million, respectively,
primarily as a result of reduced sales forecasts and the Company's new product
introductions rendering certain products obsolete. These charges were partially
offset by the sale during the three and six months ended December 31, 2001 of
inventory with an original cost of approximately $29.0 million that had
previously been written down.
NOTE 6. INTANGIBLE ASSETS, INCLUDING GOODWILL
The components of intangible assets are as follows (in millions):
December 31, June 30,
2001 2001
----------- ----------
Goodwill $ 9,909.6 $ 10,985.6
Purchased intangibles 2,409.1 2,353.6
Licenses and other intellectual property 4.5 4.5
---------- ----------
12,323.2 13,343.7
Less: accumulated amortization (7,180.6) (6,298.1)
---------- ----------
$ 5,142.6 $ 7,045.6
========== ==========
The Company recorded a reduction of goodwill and other intangible assets of
$1,267.6 million and $1,309.6 million during the three and six months ended
December 31, 2001, respectively (see Note 10).
NOTE 7. LOSS PER SHARE
As the Company incurred a loss for the three and six months ended December 31,
2001, the effect of dilutive securities totaling 21.4 million and 24.0 million
equivalent shares, respectively, has been excluded from the computation of loss
per share as their impact would be anti-dilutive. As the Company incurred a loss
for the three and six months ended December 31, 2000, the effect of dilutive
securities totaling 48.9 million and 57.6 million equivalent shares,
respectively, has been excluded from the computation of loss per share as their
impact would be anti-dilutive.
The following table sets forth the computation of basic and diluted loss per
share (in millions, except per share data):
Three Months Ended Six Months Ended
------------------------------ ------------------------------
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Denominator for basic and dilutive loss
per share -- weighted average shares 1,330.1 963.3 1,326.8 953.7
Net loss $ (2,130.5) $ (895.4) $ (3,354.9) $ (1,912.0)
=========== =========== =========== ===========
Basic and dilutive loss per share $ (1.60) $ (0.93) $ (2.53) $ (2.00)
=========== =========== =========== ===========
8
NOTE 8. INCOME TAX EXPENSE
The Company recorded a tax provision of $177.8 million for the three months
ended December 31, 2001, as compared to $49.6 million for the same period of the
prior year. For the six months ended December 31, 2001, the Company recorded a
tax provision of $373.0 million as compared to $93.5 million for same period of
the prior year. The tax provision recorded for the three and six months ended
December 31, 2001 differs from the expected tax benefit that would be calculated
by applying the federal statutory rate to the loss before income taxes primarily
because of non-deductible acquisition-related charges, write-offs of deferred
tax assets recorded in prior business combinations relating to assumed employee
stock options that either expired unexercised or were exercised during the
quarter when the market value of the underlying stock was less than the
previously recorded value at the business combination date, and increases in the
valuation allowance for deferred tax assets recorded in prior periods due to
reductions in the Company's forecasts of future domestic taxable income.
Although realization of the Company's net domestic deferred tax assets of $90.0
million as of December 31, 2001 is not assured, management believes it is more
likely than not that these deferred tax assets will be realized. The amount of
deferred tax assets considered realizable, however, could be reduced in the near
term resulting in additional income tax expense if forecasts of future domestic
taxable income are reduced.
The Company's tax provision or (benefit) for income taxes recorded in subsequent
quarters of fiscal 2002 may be adversely affected by write-offs of deferred tax
assets recorded for employee stock options assumed in prior business
combinations that either expire unexercised or are exercised in subsequent
quarters when the market value of the underlying stock is less than the
previously recorded value at the business combination date.
NOTE 9. OPERATING SEGMENTS
During the first quarter of 2002, the Company changed the structure of its
internal organization. Segment information for the prior years has been restated
to conform to the current year's presentation.
The Chief Executive Officer has been identified as the Chief Operating Decision
Maker as defined by Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related Information."
The Chief Executive Officer 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 reportable segments are each
managed separately because they manufacture and distribute distinct products
with different production processes. The Company views its business as having
two principal operating segments: (i) Transmission and Network Components Group,
and (ii) Thin Film Filters and Instrumentation Group. The Transmission and
Network Components Group consists primarily of source lasers, pump lasers, pump
modules, external modulators, transmitters, transceivers, optical photodetectors
and receivers, isolators, wavelength division multiplexing (WDM) couplers,
monitor tap couplers, gratings, circulators, optical switches, tunable filters,
micro-electro-mechanical-systems, waveguides, switches, and optical amplifier
products used in telecommunications and cable television ("CATV") applications.
The Thin Film Filters and Instrumentation Group includes thin film filters,
instruments, industrial lasers, and optical display and projection products. 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
certain unallocated corporate-level operating expenses. All of the Company's
products are sold directly to original equipment manufacturers and industrial
distributors throughout the world.
Where practicable, the Company allocates corporate sales, marketing, finance and
administration expenses to operating segments, primarily as a percentage of net
sales. Certain corporate-level operating expenses (primarily charges originating
from purchased intangibles, activity related to equity method investments, loss
on sale of investments, other expenses and acquired-in process research and
development expenses) are not allocated to operating segments. In addition, the
Company does not allocate income taxes, non-operating income and expenses or
specifically identifiable assets to its operating segments.
Intersegment sales are recorded at fair market value less an agreed upon
discount on intersegment sales. Information on reportable segments is as follows
(in millions):
9
Three Months Ended Six Months Ended
----------------------------- -----------------------------
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Transmission and Network Components:
Net sales $ 212.8 $ 770.7 $ 455.6 $ 1,468.7
Intersegment sales -- -- -- --
---------- ---------- ---------- ----------
Net sales to external customers 212.8 770.7 455.6 1,468.7
Operating income (loss) (216.0) 250.3 (539.8) 465.3
Thin Film Products and Instrumentation:
Net sales 73.6 202.2 162.5 330.4
Intersegment sales (3.1) (47.8) (8.2) (87.5)
---------- ---------- ---------- ----------
Net sales to external customers 70.5 154.4 154.3 242.9
Operating income (loss) (3.8) 78.4 (21.8) 137.1
Net sales by reportable segments 283.3 925.1 609.9 1,711.6
All other net sales 2.8 -- 4.8 --
---------- ---------- ---------- ----------
286.1 925.1 614.7 1,711.6
---------- ---------- ---------- ----------
Operating income (loss) by reportable
segment (219.8) 328.7 (561.6) 602.4
All other operating income (loss) 37.7 (26.3) (29.4) (45.2)
Unallocated amounts:
Acquisition related charges & payroll
taxes on stock option exercises (1,760.9) (1,108.1) (2,270.5) (2,308.0)
Interest and other income, net 9.7 12.2 24.8 25.8
Gain on sale of investments 6.4 -- 6.4 --
Activity related to equity method (25.8) (52.3) (45.1) (93.5)
investments
Reduction in fair value of investments -- -- (106.5) --
---------- ---------- ---------- ----------
Loss before income taxes $ (1,952.7) $ (845.8) $ (2,981.9) $ (1,818.5)
========== ========== ========== ==========
10
NOTE 10. SPECIAL CHARGES
Since the beginning of calendar 2001, the Company and its industry have
experienced a dramatic downturn, the primary direct cause of which has been a
precipitous decrease in network deployment and capital spending by
telecommunications carriers. This decrease can be attributable to, among other
things: (a) network overcapacity, as bandwidth demand, while continuing to grow,
did not reach levels sufficient to sustain the pace of network deployment; (b)
constrained capital markets; and (c) other factors, including the general
inability of the competitive local exchange carriers ("CLECs") to obtain
sufficient access to established telecommunications infrastructures and
consolidation among the telecommunications carriers. The result was a decrease
in the overall demand for new fiber optic networks and capacity increases on
existing networks. In response, carriers dramatically slowed their purchases of
systems from the Company's customers, which in turned slowed purchases of
components and modules from the Company's competitors and the Company. Moreover,
as their sales declined, the Company's customers moved to reduce their component
and module inventory levels. Consequently, the impact of the slowdown on the
Company's business is magnified, as it faces declining sales as the result of
its customers' declining business and the resulting adjustment to their
inventory levels.
In April 2001, the Company initiated the Global Realignment Program, under which
it is restructuring its business in response to the changes in its industry and
customer demand and as part of its continuing overall integration program.
Consequently, the Company recorded $264.3 million and $243.0 million of
restructuring charges in the fourth quarter of fiscal 2001 (Phase 1) and first
quarter of fiscal 2002 (Phase 2), respectively.
As a result of the Phase 1 and Phase 2 restructuring activities, the Company is
consolidating and reducing the manufacturing, sales and administrative
facilities by approximately 2.0 million square feet. The total number of sites
closed under both Phase 1 and Phase 2 is seventeen. Total workforce will be
reduced by approximately 14,200 employees. As of December 31, 2001,
approximately 13,400 employees have been terminated.
Restructuring Activities - Phase 1 (Fourth Quarter of Fiscal 2001):
The following table summarizes the Company's Phase 1 restructuring activities
through the end of the second quarter of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitments Total
-------- -------------- ----------- --------
Total restructuring charges -- Phase 1 $ 79.1 $ 122.2 $ 63.0 $ 264.3
Cash payments (24.9) -- (0.9) (25.8)
Non-cash charges (11.1) (122.2) -- (133.3)
-------- -------- -------- --------
Balance as of June 30, 2001 43.1 -- 62.1 105.2
Cash payments (20.9) -- (1.7) (22.6)
-------- -------- -------- --------
Balance as of September 30, 2001 22.2 -- 60.4 82.6
Cash payments (8.7) -- (2.5) (11.2)
-------- -------- -------- --------
Balance as of December 31, 2001 $ 13.5 $ -- $ 57.9 $ 71.4
======== ======== ======== ========
During the three months ended June 30, 2001, the Company completed and approved
plans to close nine operations located in North America, Europe and Asia, vacate
approximately 25 buildings or 1.2 million square feet of manufacturing and
office space at operations to be closed, as well as at continuing operations,
and reduce its workforce by approximately 9,000 employees.
Worldwide workforce reduction
During the three months ended June 30, 2001, the Company recorded a charge of
approximately $79.1 million primarily related to severance and fringe benefits
associated with the reduction of 9,000 employees. In addition, the Company
incurred non-cash severance charges of $11.1 million related to the modification
of a former executive's stock options. Of the 9,000 terminations for which costs
have been accrued prior to June 30, 2001, approximately 8,200 were engaged in
manufacturing activities and approximately 7,100, 1,200, and 700 were from sites
located in North America, Europe and Asia, respectively. As of December 31,
2001, approximately 8,700 employees have been terminated in connection with
Phase 1 of the restructuring activities. The Company expects to complete its
workforce reduction within the next six months.
11
Consolidation of excess facilities and equipment
The consolidation of excess facilities includes the closure of certain
manufacturing, research and development facilities, and administrative and sales
offices throughout North America, Europe and Asia for business activities that
have been restructured as part of the Program. The operations closed as of June
30, 2001 were in Asheville, North Carolina; Bracknell, United Kingdom; Freehold,
New Jersey; Hillend, United Kingdom; Oxford, United Kingdom; Richardson, Texas;
Rochester, New York; Shunde, China and Taipei, Taiwan.
Property and equipment that was disposed of or removed from operations resulted
in a charge of $122.2 million of which $29.4 million, $89.3 million and $3.5
million, related to the Thin Film Products and Instrumentation Group,
Transmission and Network Components Group, and other operating segments,
respectively. The property and equipment write-down consisted primarily of
leasehold improvements, computer equipment and related software, production and
engineering equipment, and office equipment, furniture, and fixtures. In
addition, the Company incurred a charge of $63.0 million for exiting and
terminating leases primarily related to excess or closed facilities with planned
exit dates. The Company estimated the cost of exiting and terminating the
facility leases based on the contractual terms of the agreements and then
current real estate market conditions. The Company determined that it would take
approximately three to twenty-one months to sublease the various properties that
will be vacated in connection with Phase 1 of the restructuring activities.
Amounts related to the lease expense (net of anticipated sublease proceeds) will
be paid over the respective lease terms through 2015. The Company anticipates
completing implementation of its Phase 1 restructuring program during the next
six months.
Restructuring Activities - Phase 2 (First Quarter of Fiscal 2002):
The following table summarizes the Company's Phase 2 restructuring activities
through the end of the second quarter of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitment Total
--------- -------------- ---------- --------
Total restructuring charges -- Phase 2 $ 55.8 $ 141.3 $ 45.9 $ 243.0
Cash payments (19.2) -- -- (19.2)
Non-cash charges -- (141.3) -- (141.3)
-------- -------- -------- --------
Balance as of September 30, 2001 36.6 -- 45.9 82.5
Cash payments (18.8) -- (0.4) (19.2)
-------- -------- -------- --------
Balance as of December 31, 2001 $ 17.8 $ -- $ 45.5 $ 63.3
======== ======== ======== ========
During the first quarter of fiscal 2002, the Company completed and approved
plans to close eight operations located in North America, Europe and Asia,
vacate approximately eleven buildings or 0.8 million square feet of
manufacturing and office space at operations to be closed, as well as at
continuing operations, and reduce its workforce by approximately 5,200
employees.
Worldwide workforce reduction
During the three months ended September 30, 2001, the Company recorded a charge
of approximately $55.8 million primarily related to severance and fringe
benefits associated with the reduction of approximately 5,200 employees. Of the
5,200 terminations for which costs have been accrued during the three months
ended September 30, 2001, approximately 4,200 were engaged in manufacturing
activities and 4,850, 300, and 50 were from sites located in North America,
Europe and Asia, respectively. As of December 31, 2001, approximately 4,700
employees have been terminated under Phase 2 of the restructuring activities.
The Company expects to complete the workforce reduction in the next nine months.
In addition, because the Company restructured certain of its businesses and
realigned its operations to focus on high growth markets and core opportunities,
the Company reduced the workforce that had been valued in previous acquisitions.
In accordance with SFAS 121, the Company wrote the related intangible assets
down to their fair value and recorded charges of $10.8 million related to the
reduction in purchased intangibles and $31.2 million related to goodwill
associated with these assets. The charge was included in the "Reduction of
goodwill and other long-lived assets" caption in the Statements of Operations
for the six months ended December 31, 2001.
12
Consolidation of excess facilities and equipment
The consolidation of excess facilities includes the closure of certain
manufacturing, research and development facilities, and administrative and sales
offices throughout North America, Europe and Asia for business activities that
have been restructured as part of the Program. The operations subject to closure
as Phase 2 of the restructuring program at September 30, 2001 are in Arnhem,
Netherlands; Plymouth, United Kingdom; Witham, United Kingdom; Manteca,
California; Gloucester, Massachusetts; Victoria, British Columbia; and two
operations in Ottawa, Ontario.
Property and equipment that was disposed or removed from operations resulted in
a charge of $141.3 million of which $11.8 million, $129.5 million and $0 related
to the Thin Film Products and Instrumentation Group, Transmission and Network
Components Group, and other operating segments, respectively. The property and
equipment write-down consisted primarily of leasehold improvements, computer
equipment and related software, production and engineering equipment, and office
equipment, furniture, and fixtures. In addition, the Company incurred a charge
of $45.9 million for exiting and terminating leases primarily related to excess
or closed facilities with planned exit dates. The Company estimated the cost of
exiting and terminating the facility leases based on the contractual terms of
the agreements and then current real estate market conditions. The Company
determined that it would take approximately three to twenty-four months to
sublease the various properties that will be vacated in connection with the
Phase 2 of the restructuring activities.
Amounts related to the lease expense (net of anticipated sublease proceeds) will
be paid over the respective lease terms through 2020. The Company anticipates
completing implementation of its Phase 2 restructuring program during the next
nine months.
Reduction of Goodwill and Other Long-Lived Assets:
The Company, as part of its review of financial results for three months ended
December 31, 2001, performed an assessment of the carrying value of the
Company's long-lived assets to be held and used including significant amounts of
goodwill and other intangible assets recorded in connection with its various
acquisitions. The assessment was performed pursuant to SFAS 121 because of the
significant negative industry and economic trends affecting both the Company's
current operations and expected future sales as well as the general decline of
technology valuations. The conclusion of that assessment was that the decline in
market conditions within the Company's industry was significant and other than
temporary. As a result, the Company recorded a charge of $1,267.6 million to
reduce goodwill and other long-lived assets during the three months ended
December 31, 2001, based on the amount by which the carrying amount of these
assets exceeded their fair value. Of the total write down, $1,265.1 million is
related to the goodwill associated with the acquisitions of SDL and OCLI with
the balance of $2.5 million relating to other long-lived assets. The charge is
included in the caption "Reduction of goodwill and other long-lived assets" on
the Statements of Operations. Fair value was determined based on discounted
future cash flows for the operating entities that had separately identifiable
cash flows. The cash flow periods used were five years using annual growth rates
of 5 percent to 60 percent, the discount rate used was 14 percent, and the
terminal values were estimated based upon terminal growth rates of 5 percent to
7 percent. The assumptions supporting the estimated future cash flows, including
the discount rate and estimated terminal values, reflect management's best
estimates. The discount rate was based upon our weighted average cost of capital
as adjusted for the risks associated with our operations.
NOTE 11. ACQUISITION
On December 28, 2001, the Company acquired the optical transceiver business of
IBM Corporation ("IBM"). The acquisition extends the Company's product portfolio
to provide optical solutions beyond its existing telecommunications markets to
the growing enterprise data communications markets. Under the terms of the
acquisition, the Company paid IBM $100.0 million in cash and issued 26.9 million
shares of the Company's common stock valued at $232.3 million using an average
market price of $8.65 per share. The average market price was based on the
average closing price for a range of trading days around the announcement date
of the acquisition (December 19, 2001). The Company also incurred an estimated
$6.3 million in direct transaction costs. In addition, the Company may be
required to make an additional payment of up to $85.0 million in cash or the
Company's common stock in the first half of calendar year 2003 based on the
financial performance of the optical transceiver business.
The total purchase cost of the acquisition is summarized as follows (in
millions):
Value of common stock issued $ 232.3
Cash consideration 100.0
--------
Total consideration 332.3
Estimated transaction costs 6.3
--------
Total purchase price $ 338.6
========
13
The purchase price allocation is as follows (in millions):
Tangible net assets:
Inventory $ 15.6
Fixed assets 13.5
Intangible assets acquired:
Existing technology 45.1
Core technology 15.4
Supply / contract manufacturing agreements 6.4
Non-competition agreement 1.7
Distribution agreements 1.7
Real estate license agreement 0.6
Goodwill 216.5
In-process research and development 22.1
--------
Total purchase price: $ 338.6
========
The purchase price allocation is preliminary and is dependent on receiving the
final valuation of the intangible assets acquired and the Company's final
analysis, which is expected to be completed during the third quarter of fiscal
2002.
The acquisition was accounted for as a purchase transaction in accordance with
SFAS 141, and accordingly, the assets acquired were recorded at their estimated
fair value at the date of the acquisition. The tangible assets acquired include
inventories and fixed assets (including an adjustment of $3.8 million to write
up inventory and an adjustment of $16.5 million to write down fixed assets). No
liabilities were assumed from the acquisition. The results of operations of the
optical transceiver business will be included in the Company's financial
statements beginning in the third quarter of fiscal 2002.
A portion of the purchase price has been allocated to developed technology and
acquired in-process research and development ("IPR&D"). Developed technology and
IPR&D were identified and valued through analysis of data provided by IBM
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 IPR&D.
Developmental projects that had reached technological feasibility were
classified as developed technology, and the value assigned to developed
technology was capitalized. Those developmental projects that had not reached
technological feasibility and had no future alternative uses were classified as
IPR&D and expensed in the second quarter of fiscal 2002. The nature of the
efforts required to develop the purchased IPR&D 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 IPR&D, the Company considered the importance of each project to
the overall development plan, estimating costs to develop the purchased IPR&D
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 sales estimates used to value the purchased IPR&D were based on
estimates or relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the optical transceiver business and its competitors.
The rates utilized to discount the net cash flows to their present value are
based on the optical transceiver business' weighted average cost of capital.
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 14 percent and 38 percent were deemed appropriate for the developed
technology and IPR&D, respectively.
14
The estimates used in valuing IPR&D were based upon assumptions believed to be
reasonable but which are inherently uncertain and unpredictable. 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 the optical transceiver business' financial condition and results of
operations.
The acquired existing technology, which is comprised of products that are
already technologically feasible, includes products in most of the optical
transceiver business' product lines. These products include small form factor
transceivers and gigabit interface converters using optical fibre channel and
gigabit Ethernet protocols. The Company is amortizing the acquired existing
technology of approximately $45.1 million on a straight-line basis over an
average estimated remaining useful life of five years. The acquired core
technology represents the optical transceiver business' trade secrets and
patents developed through years of experience in design, package and manufacture
of optical transceiver products for the storage area networks and local area
networks. The optical transceiver business' products are designed to expand the
Company's product lines beyond the existing markets for submarine, long haul and
metro applications to the enterprise data communications markets. This
proprietary know-how can be leveraged by the Company to develop new and improved
products and manufacturing processes. The Company is amortizing the acquired
core technology of approximately $15.4 million on a straight-line basis over an
average estimated remaining useful life of five years.
The Company is amortizing the supply/contract manufacturing agreements and the
distribution agreements of approximately $6.4 million and $1.7 million,
respectively, on a straight-line basis over an estimated remaining useful life
of five years.
The non-competition agreement disallows IBM to compete with the Company in
certain optical transceiver products for a specified period of time. The Company
is amortizing the non-competition agreement of approximately $1.7 million on a
straight-line basis over an estimated remaining useful life of three years.
The real estate agreement provides the Company with rent-free facilities in
several locations for a limited period. The Company is amortizing the real
estate agreement of approximately $0.6 million on a straight-line basis over an
estimated remaining useful life of one year.
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 not amortized but will be reviewed annually (or more frequently if
impairment indicators arise) for impairment in accordance with SFAS 142.
NOTE 12. RELATED PARTY TRANSACTIONS
On June 30, 1999, Furukawa Electric Co., LTD. ("Furukawa") and its subsidiaries,
in conjunction with the Company's acquisition of JDS FITEL, acquired 24 percent
of the Company's outstanding common stock and exchangeable shares. Subsequent to
June 30, 2001, Furukawa owned less than 10 percent of the Company's outstanding
common stock and exchangeable shares. Furukawa does not have control over or
cannot significantly influence the management or operating policies of the
Company.
Two members of the Company's Board of Directors were officers at Cisco Systems,
one of the Company's largest customers, during portions of fiscal 2001.
Subsequent to June 30, 2001, no members of the Company's Board of Directors were
officers at Cisco Systems.
NOTE 13. LEASE COMMITMENTS
The Company leases all of its facilities and certain equipment under operating
leases. The operating facilities leases contain renewal options. Certain of the
Company's facility leases provide for periodic rent increases based on general
rate of inflation.
As part of certain lease transactions, the Company has an option to purchase the
property (land or ground lease interest) and improvements for $37.9 million or,
at the end of the lease, to arrange for the sale of the property to a third
party with the Company retaining an obligation to the owner for the difference
between the sales price and the guaranteed residual value of $32.2 million if
the sales price is less than this amount, subject to certain provisions of the
lease. Additionally, the Company restricted $37.9 million of its investment
securities as collateral for specified obligations of the lessors under the
leases. These investment securities are restricted as to withdrawal and are
managed by a third party subject to certain limitations under the Company's
investment policy. In addition, the Company must maintain a minimum consolidated
tangible net worth, as defined, of $500.0 million.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT EVENTS
Global Realignment Program
Since the beginning of calendar 2001, our industry and we have experienced a
dramatic downturn, the primary direct cause of which has been a precipitous
decrease in network deployment and capital spending by telecommunications
carriers. This decrease can be attributable to, among other things: (a) network
overcapacity, as bandwidth demand, while continuing to grow, did not reach
levels sufficient to sustain the pace of network deployment; (b) constrained
capital markets; and (c) other factors, including the general inability of the
competitive local exchange carriers ("CLECs") to obtain sufficient access to
established telecommunications infrastructures and consolidation among the
telecommunications carriers. The result was a decrease in the overall demand for
new fiber optic networks and capacity increases on existing networks. In
response, carriers dramatically slowed their purchases of systems from our
customers, which in turned slowed purchases of components and modules from our
competitors and us. Moreover, as our customers' sales declined, they moved to
reduce their component and module inventory levels. Consequently, the impact of
the slowdown on our business is magnified, as we face declining sales as the
result of our customers' declining business and the resulting adjustment to
their inventory levels.
In response to the current market environment, in April 2001, we initiated the
Global Realignment Program, under which we are restructuring our business in
response to the changes in our industry and customer demand and as part of our
continuing overall integration program:
- - Beginning in the fourth quarter of fiscal 2001 and continuing through the
second quarter of fiscal 2002, we recorded costs of approximately $851
million related to the implementation of the Global Realignment Program. The
charges recorded included $507 million of restructuring charges, $299 million
of non-recurring costs charged to cost of goods sold, and $45 million of
non-recurring costs charged to operating expenses. Included in the total
costs of the Global Realignment Program are charges for obsolete inventory
write-downs related to product platform consolidation, accelerated
depreciation, and moving and employee costs related to the phasing out of
certain facilities and equipment.
- - We reduced our workforce from approximately 29,000 employees to approximately
11,000 employees. Of the 18,000 reductions in workforce, approximately 13,400
were related to our Phase 1 and Phase 2 restructuring activities.
- - As of December 31, 2001, seventeen sites have been closed or scheduled for
closure as part of our Phase 1 and 2 restructuring activities. In addition,
we announced the closure of our site at Piscataway, New Jersey, in the second
quarter of fiscal 2002.
The Global Realignment Program has reduced our annual spending rates by
approximately $800 million since its inception in April 2001. The Global
Realignment Program is expected to reduce our costs by approximately $900
million annually after its complete implementation, which is expected by the end
of fiscal 2002.
The Global Realignment Program represents our concerted efforts to respond to
the current demands of our industry. However, these efforts may be inappropriate
or insufficient. The Global Realignment Program may not be successful in
achieving the cost reductions or other benefits expected, may be insufficient to
align our operations with customer demand and the changes affecting our
industry, or may be more costly or extensive than currently anticipated.
Acquisition
On December 28, 2001, we acquired the optical transceiver business of IBM
Corporation ("IBM"). The acquisition extends our product lines beyond the
existing markets for submarine, long haul and metro applications to the growing
enterprise data communications markets. The products of the optical transceiver
business include small form factor transceivers and gigabit interface converters
for storage area networks and local area networks using optical fibre channel
and gigabit Ethernet protocols.
Under the terms of the acquisition, we paid IBM $100.0 million in cash and
issued 26.9 million shares of our common stock valued at $232.3 million using an
average market price of $8.65 per share. The average market price was based on
the
16
average closing price for a range of trading days around the announcement date
of the acquisition (December 19, 2001). We also incurred an estimated $6.3
million in direct transaction costs. In addition, we may be required to make an
additional payment of up to $85.0 million in cash or common stock in the first
half of calendar year 2003 based on the financial performance of the optical
transceiver business.
Changes in Board of Directors
On November 9, 2001, we appointed two new non-employee directors, Kevin Kennedy
and Richard Liebhaber, to our Board of Directors. The seats were vacated by John
MacNaughton and Donald Listwin, who did not seek re-election. Mr. Kennedy is the
chief operating officer of Openwave Systems, and Mr. Liebhaber is a retired
executive vice president and chief technology officer of MCI Communications.
Impact of Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. In addition, SFAS 141 further clarifies the criteria to
recognize intangible assets separately from goodwill. Specifically, SFAS 141
requires that an intangible asset may be separately recognized only if such an
asset meets the contractual-legal criterion or the separability criterion. The
requirements of SFAS 141 are effective for any business combination accounted
for by the purchase method that is completed after June 30, 2001. We are
currently evaluating the impact of SFAS 141 and have not yet determined the
impact that adopting SFAS 141 will have on our financial statements. On
adoption, we will be required to reassess the goodwill and intangible assets
previously recorded in acquisitions prior to July 1, 2001 to determine if the
new recognition criteria for an intangible asset to be recognized apart from
goodwill are met. As of December 31, 2001, we have approximately $39.1 million
of separately recognized intangible assets that do not meet the new recognition
criteria for an intangible asset to be recognized apart from goodwill and the
unamortized balance as of June 30, 2002 will be reclassified to goodwill.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets." Under SFAS 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. For intangible assets with indefinite useful lives, the impairment
review will involve a comparison of fair value to carrying value, with any
excess of carrying value over fair value being recorded as an impairment loss.
For goodwill, the impairment test shall be a two-step process, consisting of a
comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to each reporting unit. If the carrying amount
is in excess of the fair value, the implied fair value of the reporting unit
goodwill is compared to the carrying amount of the reporting unit goodwill. Any
excess of the carrying value of the reporting unit goodwill over the implied
fair value of the reporting unit goodwill will be recorded as an impairment
loss. Separable intangible assets that are deemed to have a finite life will
continue to be amortized over their useful lives (but with no maximum life).
Intangible assets with finite useful lives will continue to be reviewed for
impairment in accordance with Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, we
will apply the new accounting rules beginning July 1, 2002 and will reassess the
useful lives of our separately recognized intangible assets in the first quarter
of fiscal 2003. We will review for impairment previously recognized intangible
assets that are deemed to have indefinite lives upon the completion of this
analysis in the first quarter of fiscal 2003. Additionally, upon the adoption of
SFAS 142, we will perform a transitional impairment review related to the
carrying value of goodwill as of July 1, 2002 by the end of the second quarter
of fiscal 2003. Because of the different transition dates for goodwill and
intangible assets acquired on or before June 30, 2001 and those acquired after
that date, pre-existing goodwill and intangibles will be amortized during this
transition period until adoption whereas new goodwill and indefinite lived
intangible assets acquired after June 30, 2001 will not. We are currently in the
process of determining our reporting units for the purpose of applying the
impairment test, analyzing how fair value will be determined for purposes of
applying SFAS 142 and quantifying the anticipated impact of adopting the
provisions of SFAS 142. The adoption of SFAS 142 is expected to have a material
impact on our results of operations primarily because goodwill will no longer be
amortized subsequent to the adoption of SFAS 142. Amortization of goodwill was
$331.6 million and $664.3 million for the three and six months ended December
31, 2001, respectively.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which supercedes SFAS 121 and the provisions of Accounting Principles
17
Board Opinion No. 30 ("APB 30"), "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," with regard to
reporting the effects of a disposal of a segment of a business. SFAS 144 retains
many of the provisions of SFAS 121, but significantly changes the criteria that
would have to be met to classify an asset as held for disposal such that
long-lived assets to be disposed of other than by sale are considered held and
used until disposed of. In addition, SFAS 144 retains the basic provisions of
APB 30 for presentation of discontinued operations in the statement of
operations but broadens that presentation to a component of an entity. We will
apply SFAS 144 beginning July 1, 2002. We are currently evaluating the potential
impact, if any, the adoption of SFAS 144 will have on our financial position and
results of operations.
RESULTS OF OPERATIONS -- SECOND QUARTER OF FISCAL 2002 COMPARED TO SECOND
QUARTER OF FISCAL 2001
Net Sales. For the three months ended December 31, 2001, net sales of $286.1
million represented a decrease of $639.0 million or 69 percent compared to the
same period of the prior year. The decline in our net sales was due to: (i)
lower demand across all telecommunication products due to the severe industry
downturn; (ii) price declines in our products; and (iii) a generally weaker
global economy. The impact of acquisitions completed subsequent to December 31,
2000 provided approximately $40.5 million of net sales for the three months
ended December 31, 2001. 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.
We had no customer representing more than 10 percent of net sales during the
three months ended December 31, 2001. During the three months ended December 31,
2000, Nortel and Lucent represented 20 percent and 13 percent of net sales,
respectively. Sales to our leading customers vary significantly from quarter to
quarter and we do not have the ability to predict future sales to these
customers.
Net sales to customers outside North America represented 25 percent of net sales
for the three months ended December 31, 2001 compared to 32 percent in the
comparable prior year period.
Gross Margin. Gross margin decreased to negative 17 percent of net sales for the
three months ended December 31, 2001 from 51 percent in the comparable prior
year period. The decrease in gross margin was primarily due to the following:
(i) a $79.8 million write-down of excess and obsolete inventory for the three
months ended December 31, 2001 as compared to $30.5 million for the comparable
prior year period; (ii) product yields adversely affected by product relocations
and other changes in connection with the Global Realignment Program; (iii) a
change in product mix due to higher sales of modules that were not yet fully
integrated with our components; (iv) non-recurring costs associated with the
Global Realignment Program of $53.1 million, consisting of accelerated
depreciation, and moving and employee costs related to the phasing out of
certain facilities and equipment; and (v) non-cash stock compensation expenses
of $9.8 million. These factors were partially offset by the sale during the
three months ended December 31, 2001 of inventory with an original cost of
approximately $29.0 million that had previously been written down.
Our gross margin can generally be affected by a number of factors, including
product mix, customer mix, applications mix, product demand, pricing pressures,
manufacturing constraints, warranty costs, higher costs resulting from new
production facilities, product yield, non-cash stock compensation expenses, and
acquisitions of businesses that may have different margins than ours. If actual
orders do not match our forecasts, as we experienced in the second half of
fiscal 2001 and the first half of fiscal 2002, we may have excess or shortfalls
of some materials and components as well as excess inventory purchase
commitments. Furthermore, we could experience reduced or delayed product
shipments or incur additional inventory write-downs and cancellation charges or
penalties, which would increase our costs and could seriously harm our business.
Considering these factors, gross margin fluctuations are difficult to predict
and there can be no assurance that we will surpass or maintain gross margin
percentages at historical or projected levels in future periods.
Research and Development. Research and development ("R&D") expense was $64.1
million or 22 percent of net sales for the three months ended December 31, 2001
compared to $71.2 million or 8 percent of net sales for the three months ended
December 31, 2000. The decrease in R&D spending reflected the cost savings
resulting from our Global Realignment Program, primarily the elimination of
overlapping product development programs as well as the reduction of workforce.
The decrease in R&D spending was partially offset by (i) non-cash stock
compensation expenses of $7.4 million; (ii) non-recurring costs associated with
our Global Realignment Program of $5.1 million, consisting of accelerated
depreciation, and moving and employee costs related to the phasing out of
certain facilities and equipment; and (iii) the inclusion of acquisitions
completed subsequent to December 31, 2000. The increase in R&D as a percentage
of net sales was due to our net sales declining faster than our R&D spending.
18
Due to our recently announced Global Realignment Program, we expect our level of
R&D expenses to decline in future quarters. However, we expect to spend at least
15 percent of net sales over the remainder of fiscal 2002 on R&D. There can be
no assurance that expenditures for R&D will continue at expected levels or that
such expenditures 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 was $98.4 million or 34 percent of net sales for the three
months ended December 31, 2001 compared to $105.7 million or 11 percent of net
sales for the three months ended December 31, 2000. The decrease in SG&A
spending was due to the following: (i) lower expenses resulting from our Global
Realignment Program; and (ii) lower payroll tax expenses related to the lower
value of non-qualified stock option exercises. These cost reductions were offset
by (i) non-cash stock compensation expenses of $12.4 million; (ii) non-recurring
costs associated with our Global Realignment Program of $14.4 million,
consisting of accelerated depreciation, and moving and employee costs related to
the phasing out of certain facilities and equipment; (iii) the inclusion of
acquisitions completed subsequent to December 31, 2000; and (iv) higher
depreciation charges resulting from the implementation of our Enterprise
Resource Planning system, the acquisition of SDL, and other information
technology capital assets. The increase in SG&A expense as a percentage of net
sales was due to our net sales declining faster than our SG&A spending.
Due to our Global Realignment Program, we expect our SG&A expenses to decline in
future quarters. We also expect to continue incurring charges to operations,
which to date have been within management's expectations, associated with
integrating recent acquisitions. There can be no assurance however as to the
amount or nature of our future SG&A expenses.
Amortization of Purchased Intangibles. For the three months ended December 31,
2001, amortization of purchased intangibles expense of $441.3 million, or 154
percent of net sales, represented a decrease of $662.8 million or 60 percent
compared to the same period of the prior year. The decrease in amortization
expense was due to the intangible assets written off during the third and fourth
quarters of fiscal 2001.
We expect that our amortization expense of purchased intangibles will continue
to contribute or cause net losses, at least through the end of fiscal 2002 at
which time new accounting rules will apply. The balance of goodwill and other
intangibles arising from acquisition activities was $5.1 billion at December 31,
2001 (see Note 6 of Notes to Consolidated Condensed Financial Statements).
Acquired In-Process Research and Development. During December 2001, we acquired
IBM's optical transceiver business and this resulted in the write-off of
acquired in-process research and development ("IPR&D") of $22.1 million. This
amount was expensed on the acquisition date because the acquired technology had
not yet reached technological feasibility and had no future alternative use.
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 IPR&D that may cause fluctuations in our quarterly or annual operating
results.
A description of the IPR&D for our acquisition of IBM's optical transceiver
business, as well as the current status of IPR&D projects for prior
acquisitions, can be found later in this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Reduction of Goodwill and Other Long-lived Assets. For the three months ended
December 31, 2001, we recorded a reduction of goodwill and other long-lived
assets of $1,267.6 million. As part of our review of financial results, we
performed an assessment of the carrying value of the our long-lived assets to be
held for use including significant amounts of goodwill and other intangible
assets recorded in connection with our various acquisitions. The assessment was
performed pursuant to SFAS 121 because of the significant negative industry and
economic trends affecting our current operations and expected future sales as
well as the general decline of technology valuations. The conclusion of that
assessment was that the decline in market conditions within our industry was
significant and other than temporary. As a result, we recorded a charge of
$1,267.6 million to reduce goodwill and other long-lived assets during the three
months ended December 31, 2001, based on the amount by which the carrying amount
of these assets exceeded their fair value. Of the total write down, $1,265.1
million is related to the goodwill associated with the acquisitions of SDL and
OCLI with the balance of $2.5 million relating to other long-lived assets. Fair
value was determined based on discounted future cash flows for the operating
entities that had separately identifiable cash flows. The cash flow periods used
were five years using annual growth rates of 5 percent to 60 percent, the
discount rate used was 14 percent, and the terminal values were estimated based
upon terminal growth rates of 5 percent to 7 percent. The assumptions supporting
the estimated future cash flows, including the discount rate and estimated
terminal values,
19
reflect management's best estimates. The discount rate was based upon our
weighted average cost of capital as adjusted for the risks associated with our
operations.
It is possible that the estimates and assumptions used (e.g., interest rates,
growth rates and future sales) under a SFAS 121 assessment may change in the
near term resulting in the need to write down our goodwill and other long-lived
assets further. In addition, it is possible we may incur additional reductions
in goodwill if our market capitalization declines to a level that is less than
our net assets in future periods.
Interest and Other Income, Net. Interest and other income decreased $2.5 million
during the three months ended December 31, 2001 over that of the comparable
period during fiscal 2001. The decrease was primarily attributable to a decline
in interest income earned as a result of lower average daily cash balances and
interest rates during the second quarter of fiscal 2002, as well as realized
losses on foreign exchange transactions.
Gain on Sale of Investments. For the three months ended December 31, 2001, we
realized a gain of $6.4 million on sale of investments. The gain resulted
primarily from sale of certain non-marketable securities, as well as fixed
income investments to fund the $100.0 million in cash for our acquisition of
IBM's optical transceiver business.
Activity Related to Equity Method Investments. For the three months ended
December 31, 2001, activity related to equity method investments was $25.8
million, which was primarily related to our share of the net loss of ADVA. Our
investment in ADVA has been reduced to $0 at December 31, 2001, and no further
pro rata share of ADVA's net loss will be recorded in subsequent quarters.
Should ADVA report net income in future periods, we will resume applying the
equity method after our pro rata share of ADVA's net income exceeds our pro rata
share of ADVA's net losses not recognized during the periods the equity method
is suspended.
Income Tax Expense. We recorded a tax provision of $177.8 million for the three
months ended December 31, 2001, as compared to $49.6 million for the same period
of the prior year. The tax provision recorded for the three months ended
December 31, 2001 differs from the expected tax benefit that would be calculated
by applying the federal statutory rate to the loss before income taxes primarily
because of non-deductible acquisition-related charges, write-offs of deferred
tax assets recorded in prior business combinations relating to assumed employee
stock options that either expired unexercised or were exercised during the
quarter when the market value of the underlying stock was less than the
previously recorded value at the business combination date, and increases in the
valuation allowance for deferred tax assets recorded in prior periods due to
reductions in our forecasts of future domestic taxable income. Although
realization of our net domestic deferred tax assets of $90.0 million as of
December 31, 2001 is not assured, management believes it is more likely than not
that these deferred tax assets will be realized. The amount of deferred tax
assets considered realizable, however, could be reduced in the near term
resulting in additional income tax expense if forecasts of future domestic
taxable income are reduced.
Our tax provision or (benefit) for income taxes recorded in subsequent quarters
of fiscal 2002 may be adversely affected by write-offs of deferred tax assets
recorded for employee stock options assumed in prior business combinations that
either expire unexercised or are exercised in subsequent quarters when the
market value of the underlying stock is less than the previously recorded value
at the business combination date.
Operating Segment Information
Transmission and Network Components. Net sales for the Transmission and Network
Components Group decreased 72 percent in the three months ended December 31,
2001 compared to the comparable period in the prior year. The decline in our net
sales was due to: (i) lower demand across all telecommunication products due to
the severe industry downturn; (ii) price declines in our products; and (iii) a
generally weaker global economy. Net sales for the three months ended December
31, 2001 also include a full quarter's contribution of net sales from the
acquisition of SDL. Operating loss as a percentage of net sales was 102 percent
during the current quarter as compared to operating income of 32 percent of net
sales for the comparable period in the prior year. The decrease in operating
income as a percentage of net sales was due to the significant decline in sales
during the current period resulting in a higher fixed cost base, inventory
write-downs, and the costs associated with the Global Realignment Program
implemented during April 2001.
Thin Film Products and Instrumentation. Net sales for the Thin Film Products and
Instrumentation Group decreased 54 percent in the three months ended December
31, 2001 compared to the comparable period in the prior year. The decline in our
net sales was due to: (i) lower demand across all telecommunication products due
to the severe industry downturn; (ii) price declines in our products; and (iii)
a generally weaker global economy. Operating loss as a percentage of net sales
was 5
20
percent during the current quarter as compared to operating income of 51 percent
of net sales for the comparable period in the prior year. The decrease in
operating income as a percentage of net sales was due to the decline in sales
during the current period resulting in a higher fixed cost base, inventory
write-downs, and the costs associated with the Global Realignment Program
implemented during April 2001.
RESULTS OF OPERATIONS -- FIRST HALF OF FISCAL 2002 COMPARED TO FIRST HALF OF
FISCAL 2001
Net Sales. For the six months ended December 31, 2001, net sales of $614.7
million represented a decrease of $1,096.9 million or 64 percent compared to the
same period of the prior year. The decline in our net sales was due to: (i)
lower demand across all telecommunication products due to the severe industry
downturn; (ii) price declines in our products; and (iii) a generally weaker
global economy. The impact of acquisitions completed subsequent to December 31,
2000 provided approximately $83.8 million of net sales for the six months ended
December 31, 2001. 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.
We had no customer representing more than 10 percent of net sales during the six
months ended December 31, 2001. During the six months ended December 31, 2000,
Nortel and Lucent represented 19 percent and 14 percent of net sales,
respectively. Sales to our leading customers vary significantly from quarter to
quarter and we do not have the ability to predict future sales to these
customers.
Net sales to customers outside North America represented 28 percent of net sales
for the first half of fiscal 2002 compared to 31 percent for the comparable
fiscal 2001 period.
Gross Margin. Gross margin decreased to negative 10 percent of net sales for the
six months ended December 31, 2001 from 48 percent in the comparable fiscal 2001
period. The decrease in gross margin was primarily due to the following: (i) a
$142.2 million write-down of excess and obsolete inventory for the six months
ended December 31, 2001 as compared to $76.7 million for the comparable fiscal
2001 period; (ii) product yields adversely affected by product relocations and
other changes in connection with the Global Realignment Program; (iii) a change
in product mix due to higher than expected sales of modules that were not yet
fully integrated with our components; (iv) higher warranty costs; (v)
non-recurring costs associated with the Global Realignment Program of $79.0
million, consisting of accelerated depreciation, and moving and employee costs
related to the phasing out of certain facilities and equipment; and (vi)
non-cash stock compensation expenses of $18.4 million. These factors were
partially offset by the sale during the six months ended December 31, 2001 of
inventory with an original cost of approximately $29.0 million that had
previously been written down.
Our gross margin can generally be affected by a number of factors, including
product mix, customer mix, applications mix, product demand, pricing pressures,
manufacturing constraints, warranty costs, higher costs resulting from new
production facilities, product yield, non-cash stock compensation expenses, and
acquisitions of businesses that may have different margins than ours. If actual
orders do not match our forecasts, as we experienced in the second half of
fiscal 2001 and the first half of fiscal 2002, we may have excess or shortfalls
of some materials and components as well as excess inventory purchase
commitments. Furthermore, we could experience reduced or delayed product
shipments or incur additional inventory write-downs and cancellation charges or
penalties, which would increase our costs and could seriously harm our business.
Considering these factors, gross margin fluctuations are difficult to predict
and there can be no assurance that we will surpass or maintain gross margin
percentages at historical or projected levels in future periods.
Research and Development. R&D expense was $133.3 million or 22 percent of net
sales for the six months ended December 31, 2001 compared to $133.6 million or 8
percent of net sales for the six months ended December 31, 2000. R&D spending
for the six months ended December 31, 2001 reflected the cost savings resulting
from our Global Realignment Program, primarily the elimination of overlapping
product development programs as well as the reduction of workforce. The decrease
in R&D spending was partially offset by (i) non-cash stock compensation expense
of $12.3 million; (ii) non-recurring costs associated with our Global
Realignment Program of $5.6 million, consisting of accelerated depreciation, and
moving and employee costs related to the phasing out of certain facilities and
equipment; and (iii) the inclusion of acquisitions completed subsequent to
December 31, 2000. The increase in R&D as a percentage of net sales is due to
our net sales declining faster than our R&D spending.
Due to our recently announced Global Realignment Program, we expect our level of
R&D expenses to decline in future quarters. However, we expect to spend at least
15 percent of net sales over the remainder of fiscal 2002 on R&D. There can
21
be no assurance that expenditures for R&D will continue at expected levels or
that such expenditures will be successful or that improved processes or
commercial products will result from these projects.
Selling, General and Administrative Expense. SG&A expense was $204.7 million, or
33 percent of net sales for the six months ended December 31, 2001 compared to
$221.9 million or 13 percent of net sales for the six months ended December 31,
2000. The decrease in SG&A spending was due to the following: (i) lower expenses
resulting from the Global Realignment Program; (ii) lower payroll tax expenses
related to the lower value of non-qualified stock option exercises; and (iii)
lower sales commissions. These cost reductions were offset by (i) non-cash stock
compensation expenses of $22.7 million; (ii) non-recurring costs associated with
the Global Realignment Program of $23.3 million, consisting of accelerated
depreciation, and moving and employee costs related to the phasing out of
certain facilities and equipment; (iii) the inclusion of acquisitions completed
subsequent to December 31, 2000; and (iv) higher depreciation charges resulting
from the implementation of our Enterprise Resource Planning system, the
acquisition of SDL and other information technology capital assets.
Due to our Global Realignment Program, we expect our SG&A expenses to decline in
future quarters. We also expect to continue incurring charges to operations,
which to date have been within management's expectations, associated with
integrating recent acquisitions. There can be no assurance however as to the
amount or nature of our future SG&A expenses.
Amortization of Purchased Intangibles. For the six months ended December 31,
2001, amortization of purchased intangibles expense of $884.6 million, or 144
percent of net sales, represented a decrease of $1,327.0 million or 60 percent
compared to the same period of the prior year. The decrease in amortization
expense was due to the intangible assets written off during the third and fourth
quarters of fiscal 2001.
We expect that our amortization expense of purchased intangibles will continue
to contribute or cause net losses, at least through the end of fiscal 2002 at
which time new accounting rules will apply. The balance of goodwill and other
intangibles arising from acquisition activities was $5.1 billion at December 31,
2001 (see Note 6 of Notes to Consolidated Condensed Financial Statements).
Acquired In-process Research and Development. During December 2001, we acquired
IBM's optical transceiver business and this resulted in the write-off of IPR&D
of $22.1 million. This amount was expensed on the acquisition date because the
acquired technology had not yet reached technological feasibility and had no
future alternative use. 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 IPR&D that may cause fluctuations in our
quarterly or annual operating results.
A description of the IPR&D for our acquisition of IBM's optical transceiver
business, as well as the current status of IPR&D projects for prior
acquisitions, can be found later in this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Reduction of Goodwill and Other Long-lived Assets. For the six months ended
December 31, 2001, we recorded a reduction of goodwill and other long-lived
assets of $1,309.6 million. As part of our review of financial results, we
performed an assessment of the carrying value of the our long-lived assets to be
held for use including significant amounts of goodwill and other intangible
assets recorded in connection with our various acquisitions. The assessment was
performed pursuant to SFAS 121 because of the significant negative industry and
economic trends affecting our current operations and expected future sales as
well as the general decline of technology valuations. The conclusion of that
assessment was that the decline in market conditions within our industry was
significant and other than temporary. As a result, we recorded a charge of
$1,267.6 million to reduce goodwill and other long-lived assets during the three
months ended December 31, 2001, based on the amount by which the carrying amount
of these assets exceeded their fair value. Of the total write down, $1,265.1
million is related to the goodwill associated with the acquisitions of SDL and
OCLI with the balance of $2.5 million relating to other long-lived assets. Fair
value was determined based on discounted future cash flows for the operating
entities that had separately identifiable cash flows. The cash flow periods used
were five years using annual growth rates of 5 percent to 60 percent, the
discount rate used was 14 percent, and the terminal values were estimated based
upon terminal growth rates of 5 percent to 7 percent. The assumptions supporting
the estimated future cash flows, including the discount rate and estimated
terminal values, reflect management's best estimates. The discount rate was
based upon our weighted average cost of capital as adjusted for the risks
associated with our operations.
In addition, pursuant to our Global Realignment Program, we restructured certain
of our businesses and realigned our operations to focus on profit contribution,
high growth markets, and core opportunities, we reduced the workforce that had
22
been valued in previous acquisitions. In accordance with SFAS 121, we wrote the
related intangible assets down to their fair value and recorded a charge of
$10.8 million related to the reduction in purchased intangibles and $31.2
million related to goodwill associated with these assets for the six months
ended December 31, 2001.
It is possible that the estimates and assumptions used (e.g., interest rates,
growth rates and future sales) under a SFAS 121 assessment may change in the
near term resulting in the need to write down our goodwill and other long-lived
assets further. In addition, it is possible we may incur additional reductions
in goodwill if our market capitalization declines to a level that is less than
our net assets in future periods.
Restructuring Charges. In April 2001, we initiated the Global Realignment
Program, under which we are restructuring our business in response to the
changes in our industry and customer demand and as part of our continuing
overall integration program. Consequently, this resulted in $264.3 million and
$243.0 million of restructuring charges recorded in the fourth quarter of fiscal
2001 and first quarter of fiscal 2002, respectively. During the six months ended
December 31, 2001, we incurred non-cash charges and cash payments related to the
Global Realignment Program of $141.3 million and $72.2 million, respectively.
Restructuring Activities - Phase 1 (Fourth Quarter of Fiscal 2001):
The following table summarizes our Phase 1 restructuring activities through the
end of the second quarter of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitments Total
--------- -------------- ----------- --------
Total restructuring charges -- Phase 1 $ 79.1 $ 122.2 $ 63.0 $ 264.3
Cash payments (24.9) -- (0.9) (25.8)
Non-cash charges (11.1) (122.2) -- (133.3)
-------- -------- -------- --------
Balance as of June 30, 2001 43.1 -- 62.1 105.2
Cash payments (20.9) -- (1.7) (22.6)
-------- -------- -------- --------
Balance as of September 30, 2001 22.2 -- 60.4 82.6
Cash payments (8.7) -- (2.5) (11.2)
-------- -------- -------- --------
Balance as of December 31, 2001 $ 13.5 $ -- $ 57.9 $ 71.4
======== ======== ======== ========
During the three months ended June 30, 2001, we completed and approved plans to
close nine operations located in North America, Europe and Asia, vacate
approximately 25 buildings or 1.2 million square feet of manufacturing and
office space at operations to be closed, as well as at continuing operations,
and reduce our workforce by approximately 9,000 employees.
Worldwide workforce reduction
During the three months ended June 30, 2001, we recorded a charge of
approximately $79.1 million primarily related to severance and fringe benefits
associated with the reduction of 9,000 employees. In addition, we incurred
non-cash severance charges of $11.1 million related to the modification of a
former executive's stock options. Of the 9,000 terminations for which costs have
been accrued prior to June 30, 2001, approximately 8,200 were engaged in
manufacturing activities and approximately 7,100, 1,200, and 700 were from sites
located in North America, Europe and Asia, respectively. As of December 31,
2001, approximately 8,700 employees had been terminated in connection with Phase
1 of the restructuring activities. We expect to complete the Phase 1 workforce
reduction within the next six months.
Consolidation of excess facilities and equipment
The consolidation of excess facilities includes the closure of certain
manufacturing, research and development facilities, and administrative and sales
offices throughout North America, Europe and Asia for business activities that
have been restructured as part of the Program. The operations closed as of June
30, 2001 were in Asheville, North Carolina; Bracknell, United Kingdom; Freehold,
New Jersey; Hillend, United Kingdom; Oxford, United Kingdom; Richardson, Texas;
Rochester, New York; Shunde, China and Taipei, Taiwan. The total number of sites
closed under the Global Realignment Program, including both Phase 1 and Phase 2,
is seventeen.
Property and equipment that was disposed of or removed from operations resulted
in a charge of $122.2 million of which $29.4 million, $89.3 million and $3.5
million, related to the Thin Film Products and Instrumentation Group,
Transmission and
23
Network Components Group, and other operating segments, respectively. The
property and equipment write-down consisted primarily of leasehold improvements,
computer equipment and related software, production and engineering equipment,
and office equipment, furniture, and fixtures. In addition, we incurred a charge
of $63.0 million for exiting and terminating leases primarily related to excess
or closed facilities with planned exit dates. We estimated the cost of exiting
and terminating the facility leases based on the contractual terms of the
agreements and then current real estate market conditions. We determined that it
would take approximately three to twenty-one months to sublease the various
properties that will be vacated in connection with Phase 1 of the restructuring
activities.
Amounts related to the lease expense (net of anticipated sublease proceeds) will
be paid over the respective lease terms through 2015. We anticipate completing
implementation of our Phase 1 restructuring program during the next six months.
Restructuring Activities - Phase 2:
The following table summarizes our Phase 2 restructuring activities through the
end of the second quarter of fiscal 2002 (in millions):
Workforce Facilities and Lease
Reduction Equipment Commitment Total
--------- -------------- ---------- --------
Total restructuring charges -- Phase 2 $ 55.8 $ 141.3 $ 45.9 $ 243.0
Cash payments (19.2) -- -- (19.2)
Non-cash charges -- (141.3) -- (141.3)
-------- -------- -------- --------
Balance as of September 30, 2001 36.6 -- 45.9 82.5
Cash payments (18.8) -- (0.4) (19.2)
-------- -------- -------- --------
Balance as of December 31, 2001 $ 17.8 $ -- $ 45.5 $ 63.3
======== ======== ======== ========
During the three months ended September 30, 2001, we completed and approved
plans to close eight operations located in North America, Europe and Asia,
vacate approximately eleven buildings or 0.8 million square feet of
manufacturing and office space at operations to be closed, as well as at
continuing operations, and reduce our workforce by approximately 5,200
employees.
Worldwide workforce reduction
During the three months ended September 30, 2001, we recorded a charge of
approximately $55.8 million primarily related to severance and fringe benefits
associated with the reduction of approximately 5,200 employees. Of the 5,200
terminations for which costs have been accrued prior to September 30, 2001,
approximately 4,200 were engaged in manufacturing activities and 4,850, 300, and
50 were from sites located in North America, Europe and Asia, respectively. As
of December 31, 2001, approximately 4,700 employees had been terminated under
Phase 2 of the restructuring activities. We expect to complete our Phase 2
workforce reduction within the next nine months.
Consolidation of excess facilities and equipment
The consolidation of excess facilities includes the closure of certain
manufacturing, research and development facilities, and administrative and sales
offices throughout North America, Europe and Asia for business activities that
have been restructured as part of the Program. The operations being closed as of
September 30, 2001 under Phase 2 of the Restructuring Program are in Arnhem,
Netherlands; Plymouth, United Kingdom; Witham, United Kingdom; Manteca,
California; Gloucester, Massachusetts; Victoria, British Columbia; and two
operations in Ottawa, Ontario.
Property and equipment that was disposed or removed from operations resulted in
a charge of $141.3 million of which $11.8 million, $129.5 million and $0 related
to the Thin Film Products and Instrumentation Group, Transmission and Network
Components Group, and other operating segments, respectively. The property and
equipment write-down consisted primarily of leasehold improvements, computer
equipment and related software, production and engineering equipment, and office
equipment, furniture, and fixtures. In addition, we incurred a charge of $45.9
million for exiting and terminating leases primarily related to excess or closed
facilities with planned exit dates. We estimated the cost of exiting and
terminating the facility leases based on the contractual terms of the agreements
and then current real estate market conditions. We determined that it would take
approximately three to twenty-four months to sublease the various properties
that will be vacated in connection with Phase 2 of the restructuring activities.
24
Amounts related to the lease expense (net of anticipated sublease proceeds) will
be paid over the respective lease terms through 2020. We anticipate completing
implementation of our Phase 2 restructuring program during the next nine months.
Interest and Other Income, Net. Net interest and other income decreased $1.0
million during the six months ended December 31, 2001 over that of the
comparable period during fiscal 2001. The decrease was primarily attributable to
a decline in interest income earned as a result of lower average daily cash
balances and interest rates, as well as realized losses on foreign exchange
transactions.
Reduction in Value of Investments. At December 31, 2001, we had 24.7 million
shares of Nortel common stock at a market value of $179.3 million. During the
first half of fiscal 2002, we recognized a reduction in market value of $84.5
million associated with the 24.7 million shares held by us, as we determined the
decline in the market value of the shares of Nortel common stock to be
other-than-temporary. We also recorded a charge of $9.6 million in connection
with other available-for-sale investments because of an other-than-temporary
decline in market value. In addition, we recorded a charge of $12.4 million
related to a decline the market value of our non-marketable equity securities
accounted for under the cost method that was deemed to be other-than-temporary.
Gain on Sale of Investments. For the six months ended December 31, 2001, we
realized a gain of $6.4 million on sale of investments. The gain resulted
primarily from sale of certain non-marketable securities, as well as fixed
income investments to fund the $100.0 million in cash for our acquisition of
IBM's optical transceiver business.
Activity Related to Equity Method Investments. For the six months ended December
31, 2001, activity related to equity method investments was $45.1 million. This
includes: (i) a $13.9 million charge to write down the carrying value of our
investment in ADVA due to a other-than-temporary decline in its market value;
(ii) $0.7 million of amortization expense related to the difference between the
cost of the investment and the underlying equity in the net assets of ADVA; and
(iii) $30.5 million related to our share of the net loss of ADVA and other
equity method investments. Our investment in ADVA has been reduced to $0 at
December 31, 2001, and no further pro rata share of ADVA's net loss will be
recorded in subsequent quarters. Should ADVA report net income in future
periods, we will resume applying the equity method after our pro rata share of
ADVA's net income exceeds our pro rata share of ADVA's net losses not recognized
during the periods the equity method is suspended.
Income Tax Expense. We recorded a tax provision of $373.0 million for the six
months ended December 31, 2001 as compared to $93.5 million for same period of
the prior year. The tax provision recorded for six months ended December 31,
2001 differs from the expected tax benefit that would be calculated by applying
the federal statutory rate to the loss before income taxes primarily because of
non-deductible acquisition-related charges, write-offs of deferred tax assets
recorded in prior business combinations relating to assumed employee stock
options that either expired unexercised or were exercised during the quarter
when the market value of the underlying stock was less than the previously
recorded value at the business combination date, and increases in the valuation
allowance for deferred tax assets recorded in prior periods due to reductions in
our forecasts of future domestic taxable income. Although realization of our net
domestic deferred tax assets of $90.0 million as of December 31, 2001 is not
assured, management believes it is more likely than not that these deferred tax
assets will be realized. The amount of deferred tax assets considered
realizable, however, could be reduced in the near term resulting in additional
income tax expense if forecasts of future domestic taxable income are reduced.
Our tax provision or (benefit) for income taxes recorded in subsequent quarters
of fiscal 2002 may be adversely affected by write-offs of deferred tax assets
recorded for employee stock options assumed in prior business combinations that
either expire unexercised or are exercised in subsequent quarters when the
market value of the underlying stock is less than the previously recorded value
at the business combination date.
Operating Segment Information
Transmission and Network Components. Net sales for the Transmission and Network
Components Group decreased 69 percent in the six months ended December 31, 2001
compared to the comparable period in the prior year. The decline in our net
sales was due to: (i) lower demand across all telecommunication products due to
the severe industry downturn; (ii) price declines in our products; and (iii) a
generally weaker global economy. Net sales for the six months ended December 31,
2001 also include contribution of net sales from the acquisition of SDL.
Operating loss as a percentage of net sales was 118 percent during the first
half as compared to operating income of 32 percent of net sales for the
comparable period in the prior year. The decrease in operating income as a
percentage of net sales was due to the significant decline in sales during the
six-month
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period resulting in a higher fixed cost base, inventory write-downs, and the
costs associated with the Global Realignment Program implemented during April
2001.
Thin Film Products and Instrumentation. Net sales for the Thin Film Products and
Instrumentation Group decreased 36 percent in the six months ended December 31,
2001 compared to the comparable period in the prior year. The decline in our net
sales was due to: (i) lower demand across all telecommunication products due to
the severe industry downturn; (ii) price declines in our products; and (iii) a
generally weaker global economy. Operating loss as a percentage of net sales was
14 percent during the first half of fiscal 2002 as compared to operating income
of 56 percent of net sales for the comparable period in the prior year. The
decrease in operating income as a percentage of net sales was due to the
significant decline in sales during the six-month period resulting in a higher
fixed cost base, inventory write-downs, and the costs associated with the Global
Realignment Program implemented during April 2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, our combined balance of cash, cash equivalents and
short-term investments was $1,652.9 million, a decrease of $159.3 million from
June 30, 2001. Operating activities generated $62.2 million during the six
months ended December 31, 2001, primarily resulting from: (i) net loss adjusted
for non-cash accounting charges for depreciation, stock-based compensation,
write-off of the acquired in-process technology from our acquisition of the
optical transceiver business of IBM, loss on disposal of fixed assets, reduction
of goodwill and other long-lived assets, non-cash restructuring costs associated
with our Global Realignment Program, reduction in the fair value of investments,
activity related to equity method investments and amortization of intangibles;
(ii) a decrease in accounts receivable; and (iii) a decrease in net deferred
income taxes. These items were partially offset by a decrease in current
liabilities.
Cash used by investing activities was $627.6 million during the six months ended
December 31, 2001. We incurred capital expenditures of $86.7 million for
facilities expansion that had begun in prior periods and capital equipment
purchases during the first half of fiscal 2002. We currently expect to spend
approximately $100 million for capital equipment purchases and leasehold
improvements during the remainder of fiscal 2002, although there can be no
assurance as to the actual level and nature of our future capital expenditures.
During the first half of fiscal 2002, we invested an additional net $429.7
million in available-for-sale investments.
Our financing activities for the six months ended December 31, 2001 provided
cash of $18.5 million. The exercise of stock options and the sale of common
stock through our employee stock purchase plans provided $46.0 million in cash
offset by the repayment of $27.5 million in debt.
We had $7.6 million of debt outstanding as of December 31, 2001, of which $5.0
million was paid in full as of February 8, 2002. This debt was assumed from
entities we acquired. In addition, we have two standby letter of credit
facilities totaling approximately $11.0 million. We also had an unsecured
operating U.S. dollar line of credit totaling $25.0 million. We had no
outstanding borrowings under this facility at December 31, 2001.
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 foreseeable future. However, possible
investments in or acquisitions of complementary businesses, products or
technologies, such as our acquisition of IBM's optical transceiver business in
the second quarter of fiscal 2002, may require additional financing prior to
such time. In addition, if the current economic downturn prolongs, we may need
to expend our cash reserves to fund our operations. 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.
In general, our investment policy requires that our securities purchases be
rated A1/P1, MIG-1, AA-/Aa3 or better. No securities may have a maturity that
exceeds 36 months, and the average duration of our investment portfolio may not
exceed 18 months. At any time, no more than 25% of the investment portfolio may
be insured by a single insurer other than the US government.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT PROJECTS -- OPTICAL TRANSCEIVER
BUSINESS
An independent valuation specialist performed an allocation of the total
purchase price of IBM's optical transceiver business to its individual assets.
Of the total purchase price, $22.1 million has been allocated to IPR&D and was
charged to expense
26
for the three months ended December 31, 2001. The remaining purchase price has
been allocated specifically to identifiable assets acquired.
After allocating value to the IPR&D projects and the optical transceiver
business' tangible assets, specific intangible assets were then identified and
valued. The identifiable intangible assets include existing technology, core
technology, distribution agreements, supply/contract manufacturing agreements,
real estate license agreement and non-competition agreement. The IPR&D is
comprised of two main categories: gigabit interface converters and small form
factors transceivers for storage area networks and local area networks using
optical fibre channel and gigabit Ethernet protocols.
The optical transceiver business has incurred $15.9 million to date and
estimates that an additional investment of approximately $18.5 million in
research and development will be required to complete the IPR&D by the second
quarter of fiscal 2004. The nature of the efforts required to develop the
purchased IPR&D 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.
CURRENT STATUS OF OTHER ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT PROJECTS
We periodically review the stage of completion and likelihood of success of each
of the IPR&D projects. The current status of the IPR&D projects for all
significant mergers and acquisitions during the past three years are as follows:
SDL
The products under development at the time of acquisition included: (1) pump
laser chips; (2) pump laser modules; (3) Raman chips and amplifiers; (4)
external modulators and drivers; and (5) industrial laser products. The pump
laser chips and industrial laser products have been completed at a cost
consistent with our expectations. The micro amplifier development has been
terminated at SDL and transferred to another division within the Company. Thin
film dispersion compensator research has been cancelled. The pump laser modules
and Raman chips are expected to be completed by the fourth quarter of fiscal
2002. We have incurred costs of $31.9 million through the end of the second
quarter of fiscal 2002, with estimated costs to complete of $1.1 million. 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.
Epion
The products under development at the time of acquisition included Gas Cluster
Ion Beam technology used for atomic scale surface smoothing and cleaning where
surface or film quality is of great importance. Epion has incurred $3.3 million
to date and estimates that a total investment of approximately $3.6 million in
research and development over the next 24 months will be required to complete
the IPR&D. The nature of the efforts required to develop the purchased IPR&D
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. 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.
E-TEK
The products under development at the time of acquisition included: (1)
wavelength division multiplexers (WDM's); (2) submarine products; and (3) other
component products and modules. The WDM and submarine products have been
completed at a cost consistent with our expectations. Our development efforts
for other components and modules include attenuators, circulators, switches,
dispersion equalization monitors and optical performance monitors. Our
development efforts fell behind schedule on some of these products but are now
complete at a cost of $7.7 million. The differences between the actual outcome
noted above and the assumptions used in the original valuation of the technology
have not significantly impacted our results of operations and financial
position.
27
OCLI
The products under development at the time of the acquisition included: (1) thin
film filters and switches, (2) optical display and projection products, and (3)
light interference pigments. Thin film filters includes switches and dispersion
compensators. The MEMS 2x2 Switch development has been terminated at OCLI and
transferred to another division within the Company. Thin film dispersion
compensator research has been cancelled. We incurred post acquisition costs of
approximately $4.9 million. The optical display and projection products
development has been terminated due to the uncertainty of current market
conditions. Light interference pigments are currently in the commercial stage of
the development cycle for this product family and these projects were completed
in the first quarter of calendar year 2002. We have incurred post-acquisition
research and development expenses of approximately $16.4 million and estimate
that cost to complete these projects will be another $0.2 million. 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.
SIFAM
The products under development at the time of the acquisition included: (1)
miniature couplers; (2) combined components; and (3) micro-optic devices.
Miniature coupler development and combined components development are complete
at a cost consistent with our expectations. Micro-optic device development is
currently being evaluated relative to similar efforts already underway within
our organization. The costs incurred post-acquisition for micro-optic device
development has been consistent with our expectations.
EPITAXX
The products under development at the time of the acquisition included (1)
high-speed receivers and (2) an optical spectrum analyzer product. The
high-speed receiver and optical spectrum analyzer have been completed at costs
consistent with our expectations.
JDS FITEL
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"). Thermo Optic Waveguide Attenuator
development was discontinued in the first quarter of 2001, due to lower than
expected demands for this product, and higher demands for other products. Solid
State Switch, WDM and EDFA developments are complete at a cost consistent with
our expectations.
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 enter into foreign exchange forward contracts to offset the impact of
currency fluctuations on certain nonfunctional currency assets and liabilities,
primarily denominated in the Australian dollar, Canadian dollar, Euro and
British pound.
The foreign exchange forward contracts we enter into generally have original
maturities ranging from one to three months. We do not enter into foreign
exchange forward contracts for trading purposes. We do not expect gains or
losses on these contracts to have a material impact on our financial results.
INTEREST RATES
28
We invest our cash in a variety of financial instruments, including fixed and
floating rate bonds, municipal bonds, auction instruments and money market
instruments. These investments are denominated in U.S. and Canadian dollars.
Cash balances in foreign currencies overseas are operating balances and are
primarily invested in short-term deposits of a 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 to these factors, our future investment income may fall short
of expectations because of changes in interest rates or we may suffer losses in
principal if forced to sell securities that 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. In general, our investment policy requires that our
securities purchases be rated A1/P1, MIG-1, AA-/Aa3 or better. No securities may
have a maturity that exceeds 36 months, and the average duration of our
investment portfolio may not exceed 18 months. At any time, no more than 25% of
the investment portfolio may be insured by a single insurer other than the US
government.
LEASES
We are exposed to interest rate risk associated with leases on our facilities
where payments are tied to the London Interbank Offered Rate ("LIBOR"). We have
evaluated the hypothetical change in lease obligations held at December 31, 2001
due to changes in the LIBOR. The modeling technique used measures hypothetical
changes in lease obligations arising from selected hypothetical changes in
LIBOR. The hypothetical market changes reflected immediate parallel shifts in
the LIBOR curve of plus or minus 50 BPS, 100 BPS, and 150 BPS over a 12-month
period. The results of this analysis were not material in comparison to our
financial results.
29
RISK FACTORS
OUR OPERATING RESULTS AND STOCK PRICE FLUCTUATE SUBSTANTIALLY
Operating results for future periods are never perfectly predictable even in the
most certain of economic times, and we expect to continue to experience
fluctuations in our quarterly results and in our guidance, when provided, for
financial performance in future periods. These fluctuations, which in the future
may be significant, could cause substantial variability in the market price of
our stock. In addition to those concerns discussed below, all of the concerns we
have discussed under "Risk Factors" could affect our operating results from time
to time.
Our operating results and stock price are affected by fluctuations in our
customers' businesses
Our business is dependent upon product sales to telecommunications network
system providers, who in turn are dependent for their business upon orders for
fiber optic systems from telecommunications carriers. Any downturn in the
business of any of these parties affects us. Moreover, our sales often reflect
orders shipped in the same quarter in which they are received, which makes our
sales vulnerable to short-term fluctuations in customer demand and difficult to
predict. In general, customer orders may be cancelled, modified or rescheduled
after receipt. Consequently, the timing of these orders and any subsequent
cancellation, modification or rescheduling of these orders have affected and
will in the future affect our results of operations from quarter to quarter.
Also, as our customers typically order in large quantities, any subsequent
cancellation, modification or rescheduling of an individual order may alone
affect our results of operations.
We are experiencing decreased sales and increased difficulty in predicting
future operating results
As a result of currently unfavorable economic and market conditions, (a) our
sales are declining, (b) we are unable to predict future sales accurately, and
(c) we are currently unable to provide long-term guidance for future financial
performance. The conditions contributing to this difficulty include:
- - uncertainty regarding the capital spending plans of the major
telecommunications carriers, upon whom our customers, and ultimately we,
depend for sales;
- - the telecommunications carriers' current limited access to the capital
required for expansion;
- - our customers decreasing inventory levels, which, in turn, reduces our sales;
- - lower near term sales visibility; and
- - general market and economic uncertainty.
Based on these and other factors, many of our major customers have reduced,
modified, cancelled or rescheduled orders for our products and have expressed
uncertainty as to their future requirements. As a result, we currently
anticipate that our net sales in future periods may decline. In addition, our
ability to meet financial expectations for future periods may be harmed.
We have incurred, and may in the future incur, inventory-related charges, the
amounts of which are difficult to predict accurately
As a result of the business downturn, we have incurred charges to align our
inventory with actual customer requirements over the near term. We use a rolling
six-month forecast based on anticipated product orders, product order history,
forecasts and backlog to assess our inventory requirements. As discussed above,
our ability to forecast our customers' needs for our products in the current
economic environment is very limited. We have incurred, and may in the future
incur, significant inventory-related charges. In the first half of fiscal 2002,
we incurred charges related to inventory write-downs of $142.2 million. These
charges were partially offset by the sale of approximately $29.0 million in
inventory that had previously been written down. We may incur significant
similar charges in future periods. Moreover, because of our current difficulty
in forecasting sales, we may in the future revise our previous forecasts. While
we believe, based on current information, that the inventory-related charges
recorded in fiscal 2002 are appropriate, subsequent changes to our forecast may
indicate that these charges were insufficient or even excessive.
30
As a result of these and other factors, our stock price has declined
substantially over the past year. Despite this decline, the market price of our
stock and the stocks of many of the other companies in the optical components,
modules and systems industries continue to trade at high multiples of earnings.
An outgrowth of these multiples and market volatility is the significant
vulnerability of our stock price and the stock prices of our customers and
competitors to any actual or perceived fluctuation in the strength of the
markets we serve, no matter how minor in actual or perceived consequence.
Consequently, these multiples and, hence, market prices may not be sustainable.
These broad market and industry factors have caused and may in the future cause
the market price of our stock to decline, regardless of our actual operating
performance or the operating performance of our customers.
IF WE FAIL TO MANAGE OR ANTICIPATE OUR FUTURE GROWTH, OUR BUSINESS WILL SUFFER
The optical networking business has historically grown, at times rapidly, and we
have grown accordingly. We have made and, although we are currently in an
industry downturn, expect to continue to make significant investments to enable
our future growth through, among other things, internal expansion programs,
internal product development and acquisitions and other strategic relationships.
If we fail to effectively manage or anticipate our future growth effectively,
particularly during periods of industry decline, our business will suffer.
Difficulties associated with integrating our acquired businesses could harm our
overall business operations
Our growth strategy includes acquisitions of other companies, technologies and
product lines to complement our internally developed products. In fact, we are
the product of several substantial acquisitions, including, among others, JDS
FITEL on June 30, 1999, OCLI on February 4, 2000, E-TEK on June 30, 2000 and SDL
on February 13, 2001. We expect to continue this strategy. Critical to the
success of this strategy and, ultimately, our business as a whole, is the
ordered, efficient integration of acquired businesses into our organization. If
our integration efforts are unsuccessful, our businesses will suffer. Successful
integration depends upon:
- - our ability to integrate the manufacture, sale and marketing of the products
of the businesses acquired with our existing products;
- - our ability to complete product development programs and consolidate research
and development efforts;
- - our ability to retain key personnel of the acquired business and effectively
organize the acquired business' personnel with our own;
- - our ability to consolidate and reorganize operations with those of the
acquired business; and
- - our ability to expand our information technology systems (including
accounting and financial systems, management controls and procedures).
Our integration efforts, which are ongoing, may not be successful and may result
in unanticipated operations problems, expenses and liabilities and the diversion
of management attention.
Our acquisition strategy is costly
Our acquisition strategy is costly. For example, we have incurred direct costs
of $12.0 million associated with the combination of Uniphase and JDS FITEL, $8.2
million associated with the acquisition of OCLI, $32.3 million associated with
the acquisition of E-TEK and $44.6 million associated with the acquisition of
SDL. In addition, we paid certain SDL executives $300.9 million in consideration
of their agreement to amend their change of control agreements and enter into
non-compete agreements with us. 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. Moreover, to
the extent an acquired business does not perform as expected, we have and may
continue to incur substantial additional unforeseen costs to develop,
restructure or dispose of such business. Nonperforming or underperforming
acquired businesses may also divert management attention, dilute the value of
our common stock and exchangeable shares and weaken our financial condition.
Our Global Realignment Program may not be successful
31
As part of our continuing integration efforts and in response to the current
economic slowdown, we commenced a Global Realignment Program in April 2001,
under which we are, among other things:
- - consolidating our product development programs and eliminating overlapping
programs;
- - consolidating our manufacturing of several products from multiple sites into
specific locations around the world; and
- - realigning our sales organization to offer customers a single point of
contact within the company, and creating regional and technical centers to
streamline customer interactions with product line managers.
Implementation of the Global Realignment Program involves reductions in our
workforce and facilities and, in certain instances, the relocation of products,
technologies and personnel. We have incurred and will incur significant expenses
to implement the program and we expect to realize significant future cost
savings as a result. As with our other integration efforts, the Global
Realignment Program may not be successful in achieving the cost savings and
other benefits within the expected timeframes, may be insufficient to align our
operations with customer demand and the changes affecting our industry, may
disrupt our operations, or may be more costly than currently anticipated. Even
if the Global Realignment Program is successful, our sales must increase
substantially for us to be profitable.
If we fail to commercialize new product lines, our business will suffer
We intend to continue to develop new product lines and to improve existing
product lines to meet our customers' diverse and changing needs. However, our
development of new products and improvements to existing products may not be
successful, as:
- - we may fail to complete the development of a new product or product
improvement; or
- - our customers may not purchase the new product or improved product because,
among other things, the product is too expensive, is defective in design,
manufacture or performance, or is uncompetitive, or because the product has
been superceded by another product or technology.
Nonetheless, if we fail to successfully develop and introduce new products and
improvements to existing products, our business will suffer.
Furthermore, new products require increased sales and marketing, customer
support and administrative functions to support anticipated increased levels of
operations. We may not be successful in creating this infrastructure, nor may we
realize any increased 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 harm our business
We rely upon the capacity, reliability and security of our information
technology hardware and software infrastructure and our ability to expand and
update this infrastructure in response to our growth and changing needs. In
connection with our growth, we are constantly updating our current information
technology infrastructure and expect to incur significant costs and expend
significant management and other resources relating to our upgrade efforts.
Among other things, we are currently unifying our manufacturing, accounting,
sales and human resource data systems using an Oracle platform, expanding and
upgrading our networks and integrating our voice communications systems. Any
failure to manage, expand and update our information technology infrastructure
could harm our business.
WE HAVE MANUFACTURING AND PRODUCT QUALITY CONCERNS
If we do not achieve acceptable manufacturing volumes, yields and costs, our
business will suffer
Our success depends upon our ability to timely deliver products to our customers
at acceptable volume and cost levels. 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 inadvertent use of defective or contaminated materials by us or by
our suppliers, could significantly hurt our ability to meet our customers'
product volume
32
and quality needs. Moreover, in some cases, existing manufacturing techniques,
which involve substantial manual labor, may not achieve the volume or cost
targets of our customers. In these cases, we will need to develop new
manufacturing processes and techniques, which are anticipated to involve higher
levels of automation, to achieve these targets, and we will need to undertake
other efforts to reduce manufacturing costs. Currently, we are devoting
significant funds and other resources to (a) the development of advanced
manufacturing techniques to improve product volumes and yields and reduce costs,
and (b) realign some of our product manufacturing to locations offering optimal
labor costs. These efforts may not be successful. If we fail to achieve
acceptable manufacturing yields, volumes and costs, our business will be harmed.
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. Moreover, under our Global Realignment Program
we are consolidating our worldwide manufacturing operations. Among other things,
we are moving the manufacturing of some of our products to other facilities. The
manufacturing lines for these products at the consolidated facilities must
undergo qualification with our customers before commercial manufacture of these
products can recommence. The qualification process, whether for new products or
in connection with the relocation of manufacturing of current products,
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 sales opportunities over the term of that program. We may experience delays
in obtaining customer qualification of our manufacturing lines and, as a
consequence, our operating results and customer relationships would be harmed.
If our products fail to perform, our business will suffer
Our business depends on our producing excellent products of consistently high
quality. To this end, our products are rigorously tested for quality both by our
customers and us. Nevertheless, our products are highly complex and our
customers testing procedures are limited to evaluating our products under likely
and foreseeable failure scenarios. For various reasons (including, among others,
the occurrence of performance problems unforeseeable in testing), our products
may fail to perform as expected. Failures could result from faulty design or
problems in manufacturing. In either case, we could incur significant costs to
repair and/or replace defective products under warranty, particularly when such
failures occur in installed systems. We have experienced such failures in the
past and remain exposed to such failures, as our products are widely deployed
throughout the world in multiple demanding environments and applications. In
some cases, product redesigns or additional capital equipment may be required to
correct a defect. In addition, any significant or systemic product failure could
result in lost future sales of the affected product and other products, as well
as customer relations problems.
ACCOUNTING TREATMENT OF OUR ACQUISITIONS HAS IMPACTED OUR OPERATING RESULTS
Our operating results are adversely impacted by purchase accounting treatment,
primarily due to the impact of amortization of and other reductions in the
carrying value of goodwill and other intangibles originating from acquisitions
Under GAAP, we accounted for most of our acquisitions using the purchase method
of accounting. Under purchase accounting, we recorded the market value of our
common shares and the exchangeable shares of our subsidiary, JDS Uniphase Canada
Ltd., issued in connection with acquisitions, the fair value of the stock
options assumed 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 identifiable assets to goodwill.
The impact of purchase accounting on our operating results is significant. For
fiscal 2001 and the first half of fiscal 2002, we recorded $5,387.0 million and
$884.6 million, respectively, of amortization expense.
Additionally, we also incur other purchase accounting related costs and expenses
in the period a particular transaction closes to reflect purchase accounting
adjustments adversely affecting gross profit and the costs of integrating new
businesses or curtailing overlapping operations. Purchase accounting treatment
of our mergers and acquisitions, at least through the end of fiscal 2002 at
which time new accounting rules will apply, will result in a net loss, which
will have a material and adverse effect on our results of operations.
33
The downturn in telecommunications equipment and financial markets created
unique circumstances with regard to the assessment of certain of our long-lived
assets and acquired equity investments. Beginning in the second half of fiscal
2001 and through the end of the second quarter of fiscal 2002, we evaluated the
carrying value of certain long-lived assets and acquired equity investments,
consisting primarily of goodwill and other intangible assets and our investment
in ADVA. We were carrying a large amount of goodwill on our balance sheet
because of our significant acquisitions as accounting rules require that
goodwill be recorded based on stock prices at the time merger agreements are
executed and announced, and our merger agreements were negotiated and announced
at times when market valuations were considerably higher than at present.
During the fourth quarter of fiscal 2001, under applicable accounting rules, we
began to evaluate the carrying value of our goodwill and certain other
long-lived assets. As a result of this evaluation, we recorded reductions of
$50.1 billion in goodwill and other intangible assets, and a $744.7 million
charge to write down the value of our investment in ADVA in fiscal 2001. During
the first half of fiscal 2002, we recorded reductions of $1.3 billion in
goodwill and other intangible assets, and a $13.9 million write-down of our
investment in ADVA. It is possible that our operating results would be adversely
affected by additional write-downs of our goodwill and other long-lived assets
and acquired equity investments.
Our operating results could be adversely affected by SFAS 141 and SFAS 142
In July 2001, the Financial Accounting Standards Board issued SFAS 141 and SFAS
142. Upon adoption of SFAS 142 on July 1, 2002, we will no longer amortize our
goodwill. Instead, goodwill will be reviewed for impairment annually, or more
frequently if impairment indicators arise. As of December 31, 2001, our balance
of goodwill was $3.6 billion. In addition, we had approximately $39.1 million of
separately recognized intangible assets that will be reclassified to goodwill on
July 1, 2002 because they do not meet the new recognition criteria for an
intangible asset under SFAS 141. If general macroeconomic conditions continue to
deteriorate, affecting our business and operating results over the long term, we
could be required to record additional impairment charges related to goodwill,
which could adversely affect our financial results.
OUR SALES ARE DEPENDENT UPON A FEW KEY CUSTOMERS
Our customer base is highly concentrated. Historically, orders from a relatively
limited number of optical system providers accounted for a substantial portion
of our net sales. During fiscal 2000, two customers, Lucent and Nortel,
accounted for 21 percent and 15 percent of net sales, respectively. During
fiscal 2001, three customers, Nortel, Alcatel and Lucent, accounted for 14
percent, 12 percent and 10 percent of net sales, respectively. During the first
half of fiscal 2002, no customer accounted for more than ten percent of net
sales. However, we expect that, for the foreseeable future, sales to a limited
number of customers will continue to account, alone or in the aggregate, 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 industry, 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, the failure of those
customers to be selected as the primary suppliers for an overall system
installation could adversely affect us. Such fluctuations could materially harm
our business.
INTERRUPTIONS AFFECTING OUR KEY SUPPLIERS COULD DISRUPT PRODUCTION, COMPROMISE
OUR PRODUCT QUALITY AND ADVERSELY AFFECT OUR SALES
We 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 materially harm our
results of operations, product quality and customer relationships. In addition,
we currently utilize a sole source for the crystal semiconductor chip sets
incorporated in our solid-state microlaser products 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 some lasers
used in our telecommunications products primarily from Crystal Technology,
Fujikura, Ltd., Philips Key Modules and Sumitomo, respectively. These materials
are important components of certain of our products and we currently do not have
alternative sources for such materials. Also, we do not have long-term or volume
purchase agreements with any of these suppliers, and these components may not in
the future be available in the quantities required by us, if at all, in which
case our business could be materially harmed.
ANY FAILURE TO REMAIN COMPETITIVE IN OUR INDUSTRY WOULD HARM OUR OPERATING
RESULTS
If our business operations are insufficient to remain competitive in our
industry, our operating results could suffer
34
The telecommunications markets in which we sell our products are highly
competitive and characterized by rapidly changing and converging technologies.
We face intense competition from established competitors and the threat of
future competition from new and emerging companies in all aspects of our
business. Among our current competitors are our customers, who are vertically
integrated and either manufacture and/or are capable of manufacturing some or
all of the products we sell to them. In addition to our current competitors, we
expect that new competitors providing niche, and potentially broad, product
solutions will increase in the future. While the current economic downturn has
reduced the overall level of business in our industry, the competition for that
business remains fierce. To remain competitive in both the current and future
business climates, we believe we must maintain a substantial commitment to
focused research and development, improve the efficiency of our manufacturing
operations, and streamline our marketing and sales efforts, and attendant
customer service and support. Under our Global Realignment Program, we have
ongoing initiatives in each of these areas. However, our efforts to remain
competitive, under the Global Realignment Program and otherwise, may be
unsuccessful. Among other things, we may not have sufficient resources to
continue to make the investments necessary to remain competitive, or we may not
make the technological advances necessary to remain competitive. In addition,
notwithstanding our efforts, technological changes, manufacturing efficiencies
or development efforts by our competitors may render our products or
technologies obsolete or uncompetitive.
Our industry is consolidating
Our industry is consolidating and we believe it will continue to consolidate in
the future as companies attempt to strengthen or hold their market positions in
an evolving industry. We anticipate that consolidation will accelerate as a
result of the current industry downturn. We believe that industry consolidation
may result in stronger competitors that are better able to compete as
sole-source vendors for customers. This could lead to more variability in
operating results as we compete to be a single vendor solution and could harm
our business.
Fiber-optic component average selling prices are declining
Prices for telecommunications fiber-optic products generally decline over time
as new and more efficient components and modules with increased functionality
are developed, manufacturing processes improve and competition increases. The
current economic downturn has exacerbated the general trend, as declining sales
have forced telecommunications carriers and their systems provider suppliers to
reduce costs, leading to increasing pricing pressure on our competitors and us.
Weakened demand for optical components and modules has created an oversupply of
these products, which has increased pressure on us to reduce our prices. To the
extent this oversupply is not corrected in subsequent periods, we anticipate
continuing pricing pressure. Moreover, currently, fiber-optic networks have
significant excess capacity. Industry participants disagree as to the amount of
this excess capacity. However, to the extent that there is significant
overcapacity and this capacity is not profitably utilized in subsequent periods,
we expect to face additional pricing pressure.
In response to pricing pressure, we must continue to (1) timely develop and
introduce new products that incorporate features that can be sold at higher
selling prices, (2) increase the efficiency of our manufacturing operations, and
(3) generally reduce costs. Failure to do so could cause our net sales and gross
margins to decline, which would harm our business.
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 key personnel.
In addition, our research and development efforts depend on hiring and retaining
qualified engineers. Competition for highly skilled engineers is extremely
intense, and, the current economic downturn notwithstanding, we continue to face
difficulty identifying and hiring 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. We do not maintain a key person life insurance policy on our chief
executive 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
materially harm our business.
As a consequence of the current economic downturn and as part of our Global
Realignment Program, we have reduced our global workforce to the current level
of approximately 11,000 employees. To date, we have not lost the services of any
personnel (either through the announced reduction or otherwise) that have had or
which we expect will have a material adverse
35
effect on our business or financial condition. However, we cannot predict the
impact our recent workforce reductions and any reductions we are compelled to
make in the future will have on our ability to attract and retain key personnel
in the future.
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 operations outside North America include
facilities in the United Kingdom, the Netherlands, Germany, Australia and the
People's Republic of China.
Our international presence exposes us to risks not faced by wholly North
American companies. Specifically, we face the following risks, among others:
- - our ability to comply with the customs, import/export and other trade
compliance regulations of the countries in which we do business, together
with any unexpected changes in such regulations;
- - 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;
- - language and cultural barriers;
- - seasonal reductions in business activities in the summer months in Europe and
some other countries;
- - integration of foreign operations;
- - longer payment cycles;
- - greater difficulty in accounts receivable collection;
- - currency fluctuations; and
- - potentially adverse tax consequences.
Net sales to customers outside the United States and Canada accounted for
$1,043.4 million and $326.7 million, or 32 percent and 23 percent of net sales,
for the years ended June 30, 2001 and 2000, respectively. For the first half of
fiscal 2002, net sales to customers outside the United States and Canada
accounted for $170.0 million, or 28 percent of net sales. We expect that sales
to customers outside of North America will continue to account for a significant
portion of our net sales. We continue to expand our operations outside of the
United States and enter additional international markets, both of which will
require significant management attention and financial resources.
Since a significant portion of our foreign sales is 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. Lower sales levels that
typically occur during the summer months in Europe and some other overseas
markets may also materially and adversely affect our business. Furthermore, the
sales of many of our optical system provider customers depend on international
sales and consequently further exposes us to the risks associated with such
international sales.
The international dimensions of our operations and sales subject us to a myriad
of domestic and foreign trade regulatory requirements. As part of our ongoing
integration program, we are evaluating our current trade compliance practices
and implementing improvements, where necessary. Among other things, we are
auditing our product export classification and customs procedures and are
installing company-wide trade information and compliance systems using our
global enterprise software platforms. We do not currently expect the cost of
such evaluation or the implementation of any resulting improvements to have a
material adverse effect on our finances or business, nor do we expect our
failure to comply in all
36
respects with applicable regulations to have a material adverse effect on our
business, but our evaluation and related implementation are not yet complete.
We have significant and increasing operations in the People's Republic of China
and those operations are subject to greater political, legal and economic risks
than those faced by our other international operations. In particular, the
political, legal and economic climate in China is extremely fluid and
unpredictable. Among other things, the legal system in China, both at the
national and regional levels, remains highly underdeveloped and subject to
change, with little or no prior notice, for political or other reasons.
Moreover, the enforceability of applicable existing Chinese laws and regulations
is uncertain. These concerns are exacerbated for foreign businesses, such as
ours, operating in China. Our business could be materially harmed by any
modifications to the political, legal or economic climate in China or the
inability to enforce applicable Chinese laws and regulations.
IF WE HAVE INSUFFICIENT PROPRIETARY RIGHTS OR IF WE FAIL TO PROTECT THOSE WE
HAVE, OUR BUSINESS WOULD BE MATERIALLY HARMED
We may not obtain the intellectual property rights we require
Others, including academic institutions and our competitors, hold numerous
patents in the industries in which we operate. 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 of our
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 properties rights and are required to pay royalties to these
third-party licensors on some of our telecommunications products and laser
subsystems.
Our products may be subject to claims that they infringe the intellectual
property rights of others
The industry in which we operate experiences periodic claims of patent
infringement or other intellectual property rights. We have received 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. We
are currently subject to various claims regarding third party intellectual
property rights. Based on the current information, these claims are not expected
to have a material adverse effect on our business.
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
numerous U.S. patents on products or processes and corresponding foreign patents
and have applications for some 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 is
similar to our own. 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 some 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 WORLDWIDE FINANCIAL MARKETS,
OUR OPERATING RESULTS COULD SUFFER
37
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 mitigate currency risks of investments
denominated in foreign currencies with forward currency contracts. If we
designate such contracts as hedges and they are determined to be effective,
depending on the nature of the hedge, changes in the fair value of derivatives
will be offset against the change in fair value of assets, liabilities or firm
commitments through earnings (fair value hedges) or recognized in other
comprehensive income until the hedged item is recognized in earnings (cash flow
hedges). The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. A substantial portion of our sales, 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 enter into
foreign currency forward contracts. The contracts 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 have devoted substantial resources for new facilities and equipment to the
production of our products. Currently we are incurring substantial costs
associated with restructuring our business and operations under our Global
Realignment Program. Although we believe existing cash balances, cash flow from
operations, available lines of credit, and proceeds from the realization of
investments in other businesses 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 HARM THE RIGHTS OF OUR COMMON STOCKHOLDERS
In connection with the acquisition of Uniphase Netherlands in June 1998, we
issued 100,000 shares of non-voting, non-cumulative Series A Preferred Stock to
Philips Electronics having a par value of $0.001 per share. The Series A
Preferred Stock is generally convertible into additional shares of common stock
based on an agreed upon formula for annual and cumulative shipments of certain
products during the four-year period ending June 30, 2002. The number of shares
of common stock to be issued upon conversion of this preferred stock is tied to
unit shipments of certain products by UNL during the four-year period ending
June 30, 2002 and our stock price at the date the contingency attributable to
the unit shipments is removed. During the fourth quarter of 2001, Uniphase
Netherlands achieved cumulative shipments of certain products that will require
us to issue at least $90.8 million of the Company's common stock to Philips. The
number of common shares to be issued is based on the stock price at the end of
the earn-out period and cannot currently be calculated.
In June 1998, we adopted a Stockholder Rights Agreement, as amended and declared
a dividend distribution of one right per share of common stock for stockholders
of record as of July 6, 1998. As adjusted for stock splits and dividends by us,
each outstanding share of our common stock currently includes one-eighth of a
right. Each right entitles stockholders to purchase 1/1000 share of our Series B
Preferred Stock at an exercise price of $3,600. The rights only become
exercisable in certain limited circumstances following the tenth day after a
person or group announces acquisitions of or tender offers for 15 percent or
more of our common stock. For a limited period of time following the
announcement of any such acquisition or offer, the rights are redeemable by us
at a price of $0.01 per right. If the rights are not redeemed, each right will
then entitle the holder to purchase common stock having the value of twice the
then-current exercise price. For a limited period of time after the
exercisability of the rights, each right, at the discretion of our board of
directors, may be exchanged for either 1/1000 share of Series B Preferred Stock
or one share of common stock per right. The rights expire on June 22, 2008.
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.
38
The issuance of Series B Preferred Stock or any preferred stock subsequently
issued by our board of directors, under some circumstances, could have the
effect of delaying, deferring or preventing a change in control.
Some provisions contained in the rights plan, and in the equivalent rights plan
that our subsidiary, JDS Uniphase Canada Ltd., has adopted with respect to our
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.
SOME ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR CHARTER AND UNDER DELAWARE LAWS
COULD HINDER A TAKEOVER ATTEMPT
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law prohibiting, under some circumstances, publicly held Delaware
corporations from engaging in business combinations with some stockholders for a
specified period of time without the approval of the holders of substantially
all of our 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 some 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.
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," "intend," "expect to,"
"anticipate that," " to be" or "can impact" or similar words. These
forward-looking statements include any statements we make, or implications
suggested by statements we make, as to:
- - the impact on our business and financial condition of new Statements of
Financial Accounting Standards ("SFAS") -- SFAS 141, SFAS 142 and SFAS 144;
- - our future levels of R&D and SG&A expenses;
- - the amount of and our ability to realize our deferred tax assets and the
effect of deferred tax assets recorded for assumed employee stock options on
our tax provision or benefit for income taxes recorded in future periods;
- - the value of our tax provision for income taxes;
- - the future prospects for and growth of us and our industry, including,
without limitation, (a) the extent and duration of the current economic
downturn, (b) the timing and extent of any recovery from such downturn, (c)
the viability, development and growth of new fiber optic telecommunications
markets, including the metro and fiber to the curb markets, and (d) the
benefits and opportunities for us and others in our industry provided by such
new markets;
- - the implementation of our Global Realignment Program, the timing and level of
cost reductions and other benefits we expect to receive as a result of the
Program, and the expected cost to complete the Program, including, without
limitation, (a) the level of the expected workforce reductions, (b) the
benefits we expect to receive from the elimination and consolidation of
research and development programs and manufacturing facilities, and (c) the
benefits we expect to receive from integrating our sales force and
restructuring our customer service program;
- - 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 for future periods; and
- - the cost to complete our acquired in-process research and development and the
expected amortization of such costs.
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, among other things, the risk that (1) the current
economic downturn may be more severe and long-lasting than we can anticipate,
and, notwithstanding our projections, beliefs and expectations for our business,
may cause our business and financial condition to suffer, (2) due to the current
economic slowdown, in general, and setbacks in our customers' businesses, in
particular, our ability to predict our financial performance, in particular, and
our future success, in general, for future periods is far more
39
difficult than in previous periods; (3) our ongoing integration and
restructuring efforts, including, among other things, the Global Realignment
Program, may not be successful in achieving their expected benefits, may be
insufficient to align our operations with customer demand and the changes
affecting our industry, or may be more costly or extensive than currently
anticipated; (4) increasing pricing pressure, as the result of the economic
downturn and competitive factors, may harm our revenues and profit margins; (5)
our research and development programs may be insufficient or too costly or may
not produce new products, with performance, quality, quantity and price levels
satisfactory to our customers; and (6) our ongoing efforts to reduce product
costs to our customers, through, among other things, automation, improved
manufacturing processes and product rationalization may be unsuccessful.
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 above, and those described under the heading "Risk Factors" above. 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.
40
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
N/A
ITEM 2. CHANGES IN SECURITIES
During the second quarter of fiscal 2002, the Company issued 0.1 million shares
of the Company's common stock, valued at $0.8 million, in connection with the
acquisition of OPA. These shares were issued as a result of milestones achieved
as part of the initial purchase agreement. The issuance of the common stock was
exempt from registration pursuant to Section 3(a)(10) of the Securities Act of
1933, as amended.
During the second quarter of fiscal 2002, the Company issued 26.9 million shares
of the Company's common stock, valued at $232.2 million, to IBM in connection
with the acquisition of IBM's optical transceiver business. The issuance of the
common stock was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Annual Meeting") was held on
November 9, 2001. At the Annual Meeting, three items were voted upon:
1. The election of two Class I directors to serve until the 2004 Annual
Meeting and until their successors are elected and qualified:
Bruce Day
Martin Kaplan
The terms of the following directors continued after the Annual Meeting:
Robert Enos
Peter Guglielmi
Donald Scifres
Casimir Skrzypczak
Jozef Straus
2. An amendment to the Company's 1998 Employee Stock Purchase Plan ("ESPP")
increasing the number of shares of common stock reserved for issuance from
25,000,000 shares to 50,000,000 shares.
3. The appointment of Ernst & Young LLP as the Company's independent auditors
for the fiscal year ending June 30, 2002.
The voting results were:
Broker
For Against Abstained Non-Votes
------------- ------------- ------------- -------------
1. Directors:
Bruce Day 997,635,458 -- 9,062,820 0
Martin Kaplan 997,495,940 -- 9,202,338 0
2. Increase number of shares
reserved for the ESPP 989,989,732 31,804,979 5,603,336 0
3. Appointment of Ernst & Young LLP 1,011,437,398 11,342,302 4,618,347 0
41
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit No. Exhibit Description
----------- -------------------
3.5 Restated Bylaws of JDS Uniphase Corporation, a Delaware
Corporation, as of November 16, 2001.
10.1 Amended and Restated 1993 Flexible Stock Incentive Plan
(Amended and Restated as of November 9, 2001).
10.4 1998 Employee Stock Purchase Plan, as Amended November
9, 2001.
10.15 Amended and Restated 1999 Canadian Employee Stock
Purchase Plan, as Amended November 9, 2001.
b) Reports on Form 8-K:
The Company filed five reports on Form 8-K during the three months ended
December 31, 2001. Information regarding the items reported on is as follows:
DATE OF REPORT ITEM REPORTED ON
- -------------- ----------------
December 19, 2001 Regulation FD disclosure in connection with the
Company's acquisition of the optical transceiver
business of IBM.
December 10, 2001 Regulation FD disclosure in connection with sales
guidance for future periods.
December 3, 2001 The plan of certain Board of Directors and Executive
Officers under Rule 10b5-1 of the Securities Exchange
Act of 1934, as amended, for trading in shares of the
Company's common stock.
October 31, 2001 Regulation FD disclosure in connection with a
stockholder update to be delivered by the officers of
the Company on November 1, 2001 that included written
communication comprised of slides.
October 25, 2001 Regulation FD disclosure in connection with a conference
call delivered by the officers of the Company on October
25, 2001.
42
SIGNATURES
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: February 11, 2002 /s/ Anthony R. Muller
-------------------------------------
Anthony R. Muller, Executive Vice
President and CFO (Principal Financial
and Accounting Officer
43
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ----------- -------------------
3.5 Restated Bylaws of JDS Uniphase Corporation, a Delaware
Corporation, as of November 16, 2001.
10.1 Amended and Restated 1993 Flexible Stock Incentive Plan
(Amended and Restated as of November 9, 2001).
10.4 1998 Employee Stock Purchase Plan, as Amended November 9,
2001.
10.15 Amended and Restated 1999 Canadian Employee Stock Purchase
Plan, as Amended November 9, 2001.
44